STUDY OF MUTUAL FUNDS AN OFFSHORE

INVESTMENT

A report submitted to IIMT, Greater Noida as a partial fulfillment

of Full time
Postgraduate Diploma in Marketing Management

Submitted to:
Submitted by:
Director Academics Tiwari Deepak kumar
IIMT,

Enr. No.-1031
Greater Noida.
PGDMM ,1ST Batch

Ishan Institute of Management & Technology

A1, Knowledge Park-1, Greater Noida.
Gautam Buddh Nagar
Website:www.ishanfamily.com
E-mail: - ishan_corporate@yahoo.com

Reliance Money Limited

 DECLARATION

The summer project on “STUDY OF MUTUAL

FUNDS AND OFFSHORE INVESTMENT, from

Reliance Money Ltd is the original work done by me.

This is the property of the institute and use of this

report without prior permission of the institute will be

considered illegal and actionable.

Tiwari Deepak kumar

Enr no:1031
 CERTIFICATE

TO WHOM IT MAY CONCERN

This is to certify that the project entitled “Mutual

Fund and Offshore Investment”,presented by
Mr. Tiwari Deepak kumar, Student of PGDMM 1ST
Batch, bearing Enr. No. – 1031 (Session 2006-2008),
in partial fulfillment of the requirement for the award
of degree of PGDMM, is a bonafied work carried out
by his under my supervision.

In my knowledge, this work has not been submitted,

either in part or in full, to any other institute for the
award of degree or diploma.

DATE:
Name of
the Guide:
Seal/Stamp of the Organization Mr.
Sumeet chattwal
 PREFACE

Mutual funds have been around for a long time, dating back to the
early 19th century. The first modern American mutual fund opened
in 1924, yet it was only in the 1990's that mutual funds became
mainstream investments, as the number of households owning
them nearly tripled during that decade. With recent surveys
showing that over 88% of all investors participate in mutual funds,
you're probably already familiar with these investments, or perhaps
even own some. In any case, it's important that you know exactly
how these investments work and how you can use them to your
advantage.

A lone UTI with just one scheme in 1964 now competes with as
many as 400 odd products and 34 players in the market. In spite of
the stiff competition and losing market share, UTI still remains a
formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones
for the industry. New players have come in, while others have
decided to close shop by either selling off or merging with others.
Product innovation is now 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.

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. Funds collection, which averaged at
less than Rs.100bn per annum over five-year period spanning
1993-98 doubled to Rs.210bn in 1998-99. In the current year
mobilization till now have exceeded Rs.300bn. Total collection for
the current financial year ending March 2000 is expected to reach
Rs.450bn.

What is particularly noteworthy is that bulk of the mobilization has

been by the private sector mutual funds rather than public sector

mutual funds. Indeed private MFs saw a net inflow of Rs.7819.34

crore during the first nine months of the year as against a net
inflow of Rs.604.40 crore in the case of public sector funds.

Mutual funds are now also competing with commercial banks in

the race for retail investor’s 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.

The total assets under management of the mutual fund industry

increased by 7.1% from Rs 258031 crore as on April end to Rs
276342 crore as on May end. Growth Funds managing corpus of
Rs 93748 crore as on May end witnessed a downfall of 3.98%
compared to previous month. The total assets under management
of Balanced Fund also saw a decrease of 7% from Rs 7829 crore as
on April end to Rs 7279 crore as on May end. Income funds
reported marginal reduction in assets by Rs 110 crore with total
assets under management at Rs 57436 crore as on May end.
 ACKNOWLEDGEMENT

Enumerating and enlisting all the individuals whose contributions

went into the making of the project is a very difficult task…

I offer my great sense of gratitude and thanks to Late Mr.

Dhirubhai Ambani (great visionary), who gave me a chance to
work under him. I am obliged to him for encouraging me and for
providing me valuable knowledge.

I am highly indebted to Mr Sumeet Chhatwal “Central

manager” for giving his valuable time and advice regarding this
project.

I am extremely grateful to Dr. D.K. Garg, Chairman (I.I.M.T.)

for providing me an opportunity to undergo this project.

Last but not the least I am very obliged to the management and
member Reliance Money Ltd, Delhi who cooperated with me,
devoting their valuable time for working and preparing this project
report.

Finally I express my sincere thanks to all those who directly or

indirectly helped me in the success of this project.
Tiwari Deepak kumar
 TABLE OF CONTENTS

Topic : Mutual Fund and Offshore investment

Page No.
1. Executive Summary

2. Introduction

3. Objective

4. Company Profile 25

 About Reliance capital ltd

26

 About Reliance money ltd. 32

 Vision 38

 Founders and Promoters 43

 Why Reliance Money ltd

62

 Product and Services

  HR Policy

 Marketing Policies

6. Project Details

 Project Topic
 Capital Market
 Offshore investment
 Mutual Fund (Introduction)
 Fund structure and constituents
 Regulatory aspect of Mutual Fund
 Accounting and Valuation
 Tax aspect
 Performance measure
 Types of mutual fund
 Process of investing
 Asset allocation
 Benefits of mutual fund
 Myths about mutual fund
 Global Scenario and Market Trend
7. Feedback
  Competitors

 Limitation

8. Bibliography

9. Annexure

 What I learnt

 Work culture at Reliance money

10. Word of Thanks

 EXECUTIVE SUMMARY

Reliance Money Ltd. is one of the leading Brokerage House

recently started its IPO and Mutual Fund department . Mutual
Fund is one of the best investment alternative avilable in the the
market and make safer than other investment options.

The mutual fund 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 bank.
Funds have shifted their focus to the recession free sectors like
pharmaceuticals, FMCG and technology sector. Funds
performances are improving. Funds collection, which averaged at
less than Rs.100bn per annum over five-year period spanning
1993-98 doubled to Rs.210bn in 1998-99. In the current year
mobilization till now have exceeded Rs.300bn. Total collection for
the current financial year ending March 2000 is expected to reach
Rs.450bn.

What is particularly noteworthy is that bulk of the mobilization has

been by the private sector mutual funds rather than public sector
mutual funds. Indeed private MFs saw a net inflow of Rs.7819.34
crore during the first nine months of the year as against a net
inflow of Rs.604.40 crore in the case of public sector funds.

Reliance Money Ltd. provides professional portfolio management

which helps the investor to invest wisely. Reliance Money is the
Member of NSE, BSE, F&O, NCDEX, MCX. Company offer
large avenues of Investment Solutions, catering to all classes of
Investors.

Company have the most advanced, hi-tech in house R&D wing

equipped with some of the best people, process and technology
resources providing complete research solutions on Equity,
Commodities, IPO’s and Mutual Funds. SMC is contributing one
of the highest average daily turnovers in NSE, F&O, BSE,
NCDEX &MCX.

SMC Trading Platform offers online equity & derivative trading

facilities for investors who are looking for the ease and
convenience and hassle free trading experience. Company provides
ODIN Application, which is a high -end, integrated trading
application for fast, efficient and reliable execution of trades.
Investor can now trade in the NSE and BSE simultaneously from
any destination at your convenience. Investor can access a
multitude of resources like live quotes, charts, research, advice,
and online assistance helps you to take informed decisions.
Investor can also trade through our branch network by registering
with us as our client. Investor can also trade through company on
phone by calling company’s designated representatives in the
branches where investors are registered as a client.

Reliance Money Ltd. is a member of two major national level

commodity exchanges, i.e. National Commodity and Derivative
Exchange and Multi Commodity Exchange and offers you trading
platform of NCDEX; MCX & NMCE. You can get Real-Time
streaming quotes, place orders and watch the confirmation, all on a
single screen. We use technology using ODIN application to
provide you with live Trading Terminals. In this segment, we have
spread our wings globally by acquiring Membership of Dubai Gold
and Commodities Exchange. We provide trading platform to trade
in DGCX and also clear trades of trading members being a clearing
member.

. We are one of the leading DP and enjoy the trust of more than
75,000 investors. We offer a quick, secure and hassle free
alternative to holding the securities and commodities in physical
form. We are one of the few Depository Participants offering
depository facilities for commodities. We are empanelled with
both NCDEX, MCEX. &NMC.

Reliance money is a member of three major national level

commodity exchanges, i.e. National Commodity and Derivative
Exchange (NCDEX), Multi Commodity Exchange (MCX) and
Nation Multi Commodity Exchange (NMCE). Investor can get
Real-Time streaming quotes, place orders and watch the
confirmation, all on a single screen. Company uses technology
using ODIN application to provide you with live Trading
Terminals. In this segment, company has spread their wings
globally by acquiring Membership of Dubai Gold and
Commodities Exchange. Company provide trading platform to
trade in DGCX and also clear trades of trading members being a
clearing member.
 OBJECTIVE

Mutual fund and asset allocation is very vast topic and as well as
interesting also. Mutual Fund is one of the best investment
alternatives with minimum risk and fair returns among different
investment alternative available in the financial risk and asset
allocation is one of the financial technique for designing the
portfolio of the customer according to their profile and risk
appetite. Following are the main objective of the project.

 To know about the mutual fund industry in India

 Evolution of mutual fund industry and its global scenario
and market trend of mutual fund.
 To know about the mutual fund and its type.
 To understand the valuation method of the mutual fund and
its pricing
 To know about the Asset Management Company and it’s
functioning.
 Income and expenses of the mutual funds.
 Regulatory frame work of the Mutual Fund
 SEBI guidelines for the Mutual Fund and provisions.
 To understand different method of measuring risk and return
involved in mutual fund.
 Asset allocation and different theories of asset allocation and
its application.
 To understand the different strategies followed by the
portfolio manager for allocating the securities.
 Comparison between Mutual Fund and other investment
alternatives.
 To know about the risk and return grid of Mutual Fund.
 Benefits of the mutual fund
 To know about the myths about the mutual fund.
THE GROUP
 Reliance Money ltd
o Member : NSE (cash & derivative segment)
o Member :BSE (Equity & Derivative segment)
 Reliance Securities ltd.
o Member : BSE(cash & derivative segment)
o Member : NSE(equity 7 derivative segment)

 Reliance Commodities ltd.

o Member : NCDEX , MCX & NMCE

About Group

One of the top brokerage houses of India.

 A one stop shop for diversified financial services

customized for our vast clientele.

Headquartered in Mumbai

Offices at New Delhi & Kolkata and a mammoth network of

franchisees across
India.
Milestones

 Acquired membership of DSE in 2006.

 Became member of NSE in 2006.
 Became member of BSE & depository participant with
CDSL in 2006.
 Acquired Membership of NCDEX & MCX in 2007.

Mission

 To give value added and quality services to the investors and

enable them to maximize their returns on investment.
 To give risk management back up to clients through the
expertise of our technical analysts.
 To work together with customers, combining our skills,
technologies and experience, thereby giving entirely new
dimensions to online brokerage services.
Infrastructure
 Head office at 5th floor,Lexington Building ,Hiranandani
Estate , Ghodbandar Road ,Thane (West).
 Offices at Noida, Mumbai & Kolkata and presence at more
than 100 locations across India.
 A conglomerate consisting of many franchisees and sub-
brokers

Networking and Technology

 Technical tie-up with HCL Comnet,BSNL, Financial

Technologies
 Manned by skillful Technicians & hardware professionals
 Significant number of trading terminals in the Head Office.

Wired to Perfection

 VPN with state of the art networking facilities

 More than 250 VSATs/Leaselines
 1400 trading terminals of NSE, BSE, NCDEX and MCX
 21 Online Depository Branches
 41 Offline Branches connected through Back Office Software
 RELIANCE MONEY Ltd.

Reliance Money is an Endeavour to change the way India trades in

financial markets and avails of various financial services. Reliance
Money ensures maximum security with a unique security token to
keep your online account safe. It is driven by ethical and dynamic
process for wealth creation. Based on this, the company started its
Endeavour in the financial market.

Reliance money Limited (A Reliance Capital Company) through

Reliance money Limited, Reliance life insurance Limited, Reliance
Mutual Fund Limited and Reliance General Insurance Limited
provides integrated financial solutions to its corporate, retail and
wealth management clients. Today, we provide various financial
services which include Investment Banking, Corporate Finance,
Portfolio Management Services, Equity & Commodity Broking,
Insurance and Mutual Funds. Plus, there’s a lot more to come your
way.

Reliance Money is proud of being a truly professional financial

service provider managed by a highly skilled team, who have
proven track record in their respective domains. Reliance Money
operations are managed by more than 1500 highly skilled
professionals who subscribe to ADAG philosophy and are spread
across its country wide branches.

Today, we have a growing network of more than 100 branches and

more than 350 business partners spread across more than 250
cities/towns in India.
Unlike a traditional broking firm, Reliance Money works on the
philosophy of partnering for wealth creation. We not only execute
trades for our clients but also provide them critical and timely
investment advice. The growing list of financial institutions with
which Reliance Money is empanelled as an approved broker is a
reflection of the high level service standard maintained by the
company.
 BACKGROUND AND HISTORY

Late Mr. Dhirubhai Ambani (Founder) was a true leader --

practical and realist – and yet, talked the language of a visionary
and an idealist. For it was his vision to start integrated financial
services driven by the relationship of trust and confidence. From
here Reliance money Limited, a Reliance capital Company started
its operations.

To realize its vision, the Reliance money has taken one step ahead.
Today, Reliance money provides various financial services which
include broking (stocks & commodities), depository participant
services, portfolio management services, advisory on mutual fund
investments and many more.

Unlike a traditional broking firm, Reliance money works on the

philosophy of being “Financial Care Partner”. We not only execute
the trades for our clients but also provide them critical and timely
investment advice. The growing list of financial institutions with
which Reliance money is empanelled as an approved broker is a
reflection of the high level service standard maintained by the
company.

Reliance money is proud of being a truly professional financial

service provider managed by a highly skilled team, who have
proven track record in their respective domains. Through its
regional, zonal and branch offices, Reliance money has the widest
reach and is available to you across the length and breadth of the
country.
 GROUP OF COMPANIES

Reliance money Limited

1. Member of National Stock Exchange of India and Bombay

Stock Exchange of India.
2. Depository Participant with National Securities Depository
Limited and Central Depository Services (I) Limited
3. A SEBI approved Portfolio Manager

RSL serves a platform to all segments of investors to avail the

opportunities offered by investing in Indian equities either on their
own or through managed funds in Portfolio Management.

• RELIANCE MUTUAL FUND LIMIED

• RELIANCE LIFE INSURANCE LIMITED
• RELIANCE GENERAL INSURANCE LIMITED

• Reliance money is one of the leading and experienced

brokerage houses having its corporate office in Delhi ,
besides offices in Mumbai, Kolkata and a mammoth network
of more than 500 offices spread across the country.
• Member of NSE, BSE, F&O, NCDEX, MCX, NMCE
Clearing Member in NSE certified DP for shares and
commodities.
• We offer large avenues of Investment Solutions, catering to
all classes of Investor.
• Providers of one of the best trading platforms to trade in
NSE, BSE, NCDEX, MCX and NMCE.
• We have the most advanced, hitech in-house R&D wing
equipped with some of the best people, process and
technology resources providing complete research solutions
on Equity, Commodities, IPO’s and Mutual Funds.
• Reliance Money has expanded, globally by acquiring Trading
& Clearing Membership of Dubai Gold and Commodity
Exchange(DGCX).
• Reliance Money is contributing one of the highest average
daily turnover in NSE, F&O, BSE, NCDEX &MCX.
• Dedicated and highly motivated workforce of more than
1000 personnel drawn from diverse academic backgrounds,
such as CA, CS, ICWA, M.B.A and IT.
 VISION

Vision

To be a global major in providing complete investment solutions,

with relentless focus on investor care, through superior efficiency
and complete transparency.

• To build a global enterprise for all our stakeholders, and

• A great future for our country,
• To give millions of young Indians the power to shape their
destiny,
• The means to realize their full potential…
 PROMOTERS AND FOUNDERS

Mr. Anil Dhiru Bhai Ambani is the Chairman and Managing

Director of Reliance Money Ltd.. He is an embodiment of
professional excellence. They are the visionaries who planted the
sampling of the giant tree called Reliance Money. With rock solid
reserve and firm commitment, they have shaped their vision to
reality. They have a rich experience in the capital market. His
exceptional leadership skills and outstanding commitment has
made Reliance Money as one of the leading investment solutions
and services provider. Both of them are professionals to the core.
Their specialization in risk management and surveillance and their
disciplined style of working is an inspiration to the workforce of
Reliance Money. Their experience of the securities as well as the
commodity market and their leadership qualities has made
Reliance Money a force to reckon with.
Management

Mr. Anil Bhai Ambani Chairman and

Managing Director

Reliance money is led by individuals who are professional leaders

and are committed to reface the financial services industry in India.

Each of the individual works constantly towards Reliance

money’s objective of “India’s first truly MNC in financial
services”.

Reliance money team is led by a very eminent Board of

Directors who provide policy guidance and work under the
active leadership of its CEO & Managing Director and support
of its Central Guidance Team.

BOARD OF DIRECTORS

Following is the list of BOD of Reliance money Limited

Chairman Mr. Anil dhirubhai Ambani

Managing
Mr. Anil dhirubhai Ambani
Director
Mr. Sudip Bandyopadhyay
C.E.O.
Head H.R. Mr.Adrian Williams
 Mr. Bosco D'mello
Head Marketing

Marketing Division:-
Bosco D'mello 79203 9322193348
Zahid Gawandi 79238 9323609245
Dinesh (Vishram
Dhuri) 79231 9323609340
Nazish Ahmed 79236 9323135220
Mukesh Waje 79233 9322321006

HUMAN RESOURCES DIVISION:-

Adrian Williams 79201 9324951811
Jigesh 79221 9322424024
Faye 79398 9322144577
Vikas Master 79399 9322144575
Sumit Ghosh 79226 9322157455
Shruti C. Wali 79225 9322952419
Shweta Sant 79224 9322144580
Sunil Somrajan 79227 9322952421
Abhijeet 79228 9321044695
Alpesh 79229 9322955753

EQUITY DIVISION:-
Ravi Doshi 79204 9322933952
Anand
Krishnamoorthy 79242 9322655088
Ravi Jain 79243 9324714684

OFFSHORE DIVISION:-
Ravi Doshi 79204 9322933952
Anand 79242 9322655088
Krishnamoorthy
Ravi Jain 79243 9324714684

MANAGERIAL HIERARCHY

Reliance Money Ltd.

Promoters & Founders

Director Director

Vice President

Assistant Vice President

Manager
Franchise

Manager
Sub Broker
Manager
Co- ordinator

Senior Manager
Direct Channel

Senior Executive

Senior Executive

Senior Executive

Manager
Accounts
Company’s Approach

• Value for Investor's Trust: We value the trust reposed in us

by our clients and are committed to uphold it at all cost.
• Integrity and Honesty: We at Reliance Money are men of
integrity and believe in transparency and discipline.
• Personalized Attention: Our most valued asset is our
relationship with the clients, which we have built by giving
personalized attention to all our clients.
• Network Which Works: We have a vast network extending
to 130+cities but we ensure that it WORKS for the investors
in terms of accessibility, convenience and hassle free trading
experience.
• Research Based Advisory Services: We offer proactive and
timely world-class research based advice and guidance to our
clients so that they can take informed decisions.

Specialized Services

• Investor care is of paramount importance at Reliance Money.

• We offer large avenues of investment solutions for all classes
of investors under one roof.
 • Our experience is one of our prized possession. We have an
experience of more than 15 years wherein we have grown
phenomenally.
• Mammoth network of offices and our nation wide presence,
ensures personal touch and easy accessibility to investors
across the country.
• One of the most competitive brokerage structure.
• Hassle free trading experience.
• Timely advice along with research support to the clients
through SMS and E-Mails on Equities, Derivatives,
Commodities, IPO’s and Mutual Funds.

Product and services

• Equity Trading.
• Derivative Trading.
• Commodities Trading.
• Commodities Trading in International Markets through
DGCX.
• Mutual Fund & IPO Distribution.
• Depository Services for Shares & Commodities.
 • Real time Internet Trading.
• Research support to the clients through SMS
• Clearing Services for Trading Members in NSE F&O and
NMCE

Equity & Derivative Trading

Reliance Money Trading Platform offers online equity &

derivative trading facilities for investors who are looking for the
ease and convenience and hassle free trading experience. We
provide ODIN Application, which is a high -end, integrated
trading application for fast, efficient and reliable execution of
trades. You can now trade in the NSE and BSE simultaneously
from any destination at your convenience. You can access a
multitude of resources like live quotes, charts, research, advice,
and online assistance helps you to take informed decisions. You
can also trade through our branch network by registering with us as
our client. You can also trade through us on phone by calling our
designated representatives in the branches where you are registered
as a client.

Clearing Services

Being a clearing member in NSE (derivative) segment we are

clearing massive volumes of trades of our trading members in this
segment.
Commodity Trading

Reliance Money is a member of two major national level

commodity exchanges, i.e. National Commodity and Derivative
Exchange and Multi Commodity Exchange and offers you trading
platform of NCDEX , MCX &NMCE. You can get Real-Time
streaming quotes, place orders and watch the confirmation, all on a
single screen. We use technology using ODIN application to
provide you with live Trading Terminals. In this segment, we have
spread our wings globally by acquiring Membership of Dubai Gold
and Commodities Exchange. We provide trading platform to trade
in NMCE and also clear trades of trading members being a
clearing member.

Distribution of Mutual Funds & IPO’s

Reliance Money offers distribution and collection services of

various schemes of all Major Fund houses and IPO’s through its
mammoth network of branches across India . We are registered
with AMFI as an approved distributor of Mutual Funds. We assure
you a hassle free and pleasant transaction experience when you
invest in mutual funds and IPO’s through us. We are registered
with all major Fund Houses including Fidelity, Franklyn
Templeton etc. We have a distinction of being leading distributors
of IPOs.Shortly we will be providing the facility of online
investment in Mutual Funds and IPO’s

Online back office support

To provide robust back office support backed by excellent

accounting standards to our branches we have ensured connectivity
through FTP and Dotnet based Application. To ensure easy
accessibility to back office accounting reports to our clients, we
have offered facilities to view various user-friendly, easily
comprehendible back office reports using the link My SMC
Account.

Reliance money Depository

We are ISO 9001:2000 certified DP for shares and commodities.

We are one of the leading DP and enjoy the trust of more than
75,000 investors. We offer a quick, secure and hassle free
alternative to holding the securities and commodities in physical
form. We are one of the few Depository Participants offering
depository facilities for commodities. We are empanelled with
both NCDEX, MCX &NMCE..
Reliance money Research Based Advisory Services

Our massive R&D facility caters to the need of Investors, who are
continuously in need of opportunities for striking rich rewards on
their investment. We have one of the most advanced, hitech in-
house R&D wing with some of the best people, process and
technology resources providing complete research solutions on
Equity, Commodities, IPO’s and Mutual Funds. We offer proactive
and timely world class research based advice and guidance to our
clients so that they can take informed decisions. Click on Research
to unveil the treasure.

Reliance Money Investor Awareness Forum

Our dedicated team of professionals is conducting investor

meet/seminars across India . We believe that a well-informed
investor is an empowered investor. We also seek your feedback on
our services in these Investor meets.
 MARKETING POLICY

a] Basis of preparation

The financial statements have been prepared to comply with the

mandatory Accounting Standards issued by the Institute of
Chartered Accountants of India (`ICAI') and the relevant
provisions of the Companies Act, 1956 (the `Act'). The financial
statements have been prepared under the historical cost convention
on accrual basis. The accounting policies have been consistently
applied by the Company unless otherwise stated.

[b] Fixed assets

Fixed assets are stated at cost less accumulated depreciation and

impairment losses. Cost comprises the purchase price and any
attributable cost of bringing the asset to its working condition for
its intended use.

[c] Intangibles

Patents, Trademarks and Designs

Costs relating to patents, trademarks and designs, which are

acquired, are capitalized and amortized on a straight-line basis over
a period of 5 years.

Computer software

Pursuant to adoption of Accounting Standard 26 - Intangible

Assets, issued by the ICAI, software which is not an integral part
of the related hardware, is classified as an intangible asset and is
being amortised over a period of 6 years, being the estimated
useful life.
Non-compete

Costs relating to payment of non compete compensation is

capitalised and amortised on a straight-line basis over the life of
non-compete agreement.

[d] Depreciation

Depreciation is provided on straight-line method at the rates and in

the manner prescribed in Schedule XIV of the Act.

Premium paid on perpetual leasehold land is charged to revenue on

termination/renewal of lease agreements.

[e] Leases

Operating lease payments are recognized as an expense in the

Profit and Loss account on a straight-line basis over the lease term.

[f] Investments

Investments that are readily realisable and intended to be held for

not more than a year are classified as current investments. All other
investments are classified as long-term investments. Current
investments are carried at lower of cost and fair value determined
on an individual investment basis. Long-term investments are
carried at cost. However, provision for diminution in value is made
to recognise a decline other than temporary in the value of the
investments.

Profit/loss on sale of investments is computed with reference to

their average cost.

[g] Inventories

Inventories are valued as follows:

Raw materials, stores and spares and packing materials

Lower of cost and net realizable value. However, materials and

other items held for use in the production of inventories are not
written down below cost

if the finished products in which they will be incorporated are

expected to be sold at or above cost. Cost is determined on a
weighted average basis.

Finished goods

Lower of cost and net realizable value. Cost includes direct

materials and labour and a proportion of manufacturing overheads
based on normal operating capacity. Cost of finished goods
includes excise duty.

Work-in-process

At cost upto estimated stage of process. Cost includes direct

materials and labour and a proportion of manufacturing overheads
based on normal operating capacity.

Net realizable value is the estimated selling price in the ordinary

course of business, less estimated costs of completion and the
estimated costs necessary to make the sale.

Where duty paid/indigenous materials are consumed, prior to duty-

free import of materials under the Advance License Scheme, in
manufacture of products for export, the estimated excess cost of
such materials over that of duty free materials is carried forward in
the cost of raw materials and charged to revenue on consumption
of such duty-free materials.
[h] Revenue recognition

Revenue is recognized to the extent that it is probable that the

economic benefits will flow to the Company and the revenue can
be reliably measured.

Sale of Goods:

Revenue from sale of goods is recognised when the significant

risks and rewards of ownership of the goods are transferred to the
customer and is stated net of trade discounts, excise duty, sales
returns and sales tax.

Royalties, Technical Know-how and Licensing income:

Revenue is recognised on an accrual basis in accordance with the

terms of the relevant agreement.

Interest:

Revenue is recognised on a time proportion basis taking into

account the amount outstanding and the rate applicable.

Dividends:

Revenue is recognized when the right to receive the income is

established.

[i] Research and development costs

Revenue expenditure incurred on research and development is

charged to revenue in the year it is incurred. Capital expenditure is
included in the respective heads under fixed assets.

[j] Expenditure on regulatory approvals

Expenditure incurred for obtaining regulatory approvals and
registration of products for overseas markets and products
acquisition is charged to revenue.

[k] Employee stock option plan

The accounting value of stock options representing the excess of

the market price over the exercise price of the shares granted under
"Employees Stock Option Scheme" of the Company is amortized
on straight-line basis over the vesting period as "Deferred
employee’s compensation" in accordance with the SEBI
(Employee Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines, 1999.

[1] Foreign currency translation

Foreign currency translations

(i) Initial Recognition

Foreign currency transactions are recorded in the reporting

currency, by applying to the foreign currency amount the exchange
rate between the reporting currency and the foreign currency at the
date of the transaction.

(ii) Conversion

Foreign currency monetary items are reported using the closing

rate. Non-monetary items which are carried in terms of historical
cost denominated in a foreign currency are reported using the
exchange rate at the date of the transaction; and investments in
foreign companies are recorded at the exchange rates prevailing on
the date of making the investments.

(iii) Exchange Differences

Exchange differences arising on the settlement of monetary items
or on reporting company's monetary items at rates different from
those at which they were initially recorded during the year, or
reported in previous financial statements, are recognized as income
or as expenses in the year in which they arise, except for loans
denominated in foreign currencies utilized for acquisition of fixed
assets where the exchange gains/losses are adjusted to the cost of
such assets.

(iv) Forward Exchange Contracts not intended for trading or

speculation purposes

The premium or discount arising at the inception of forward

exchange contracts is amortized as expense or income over the life
of the contract. Exchange differences on such contracts are
recognized in the profit and loss in the year in which the exchange
rates change. Any profit or loss arising on cancellation or renewal
of forward exchange contract is recognized as income or as
expense for the year.

Representative offices

In translating the financial statements of representative offices for

incorporation in financial statements, the monetary assets and
liabilities are translated at the closing rate; non monetary assets and
liabilities are translated at exchange rates prevailing at the dates of
the transactions and income and expense items are converted at the
respective monthly average rate.

[m] Retirement benefits

Contributions in respect of provided fund, superannuation and

gratuity are made to Trust set up by the Company for the purpose
and charged to profit and loss account.
Provisions for liabilities in respect of gratuity pension and leave
encashment benefits are made based on actuarial valuation made
by an independent actuary as at the balance sheet date.

[n] Income taxes

Tax expenses comprise both current and deferred taxes.

The provision for current income tax is the aggregate of the

balance provision for tax for three months ended March 31, 2004
and the estimated provision based on the taxable profit of
remaining nine months up to December 31, 2004, the actual tax
liability, for which, will be determined on the basis of the results
for the period April 1, 2004 to March 31, 2005.

Deferred income taxes reflects the impact of current year timing

differences between taxable income and accounting income for the
year and reversal of timing differences of earlier years. Deferred
tax is measured based on the tax rates and the tax laws enacted or
substantively enacted at the balance sheet date. Deferred tax assets
are recognized only to the extent that there is reasonable certainty
that sufficient future taxable income will be available against
which such deferred tax assets can be realized.

[o] Export benefits/incentives

Export entitlements under the Duty Entitlement Pass Book

("DEPB") Scheme are recognized in the profit and loss account
when the right to receive credit as per the terms of the scheme is
established in respect of the exports made.

Obligation/entitlements on account of Advance License Scheme

for import of raw materials are accounted for on purchase of raw
materials and/or export sales.

[p] Contingent liabilities

Depending on facts of each case and after due evaluation of
relevant legal aspects, claims against the Company not
acknowledged as debts are disclosed as contingent liabilities. In
respect of statutory matters, contingent liabilities are disclosed
only for those demand(s) that are contested by the Company.

[q] Use of estimates

In preparing Company's financial statements in conformity with

accounting principles generally accepted in India, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period;
actual results could differ from those estimates.

[r] Earnings per share

Basic earnings per share are calculated by dividing the net profit or
loss for the period attributable to equity shareholders by the
weighted average number of equity shares outstanding during the
period. The weighted average numbers of equity shares
outstanding during the period are adjusted for events of bonus
issue.

For the purpose of calculating diluted earnings per share, the net
profit or loss for the period attributable to equity shareholders and
the weighted average number of shares outstanding during the
period are adjusted for the effects of all dilutive potential equity
shares.
 HR POLICY

“In my book, we have no greater asset than the quality of our

intellectual capital, and no greater priority than the growth and
retention of our vast pool of talent” – Anil Dhirubhai Ambani

At Reliance - Anil Dhirubhai Amabani Group, we recognise the

critical role that our people play in the success and growth of each
of our businesses. It is the skill and initiative of our workforce that
sets us apart from our peers in today’s knowledge-driven economy.
It is their commitment and dedication that lends us the competitive
edge, and helps us stay ahead of the curve.

Our strong team of professionals is among the youngest in the

country, and consists of some of the most dynamic, motivated and
qualified individuals to be found anywhere in the world. First-rate
management graduates, highly trained engineers, top-notch
financial analysts and razor sharp accountants—we have on our
rolls some of the brightest minds in the business.

Mission

Our transparent HR policies and robust processes are driven by a

single overarching objective: To attract, nurture, grow and retain
the best leadership talent in every sector and industry is which we
operate.

Our aim is to create a team of world beaters that is:

• Committed to excellence in quality,

• Focused on creation and enhancement of stakeholder value
• Responsive to evolving business needs and challenges
• Dedicated to uphold the core values of the Group
Promise

In order to achieve our objective, we offer our people...

• Growth opportunities to expand leadership capabilities

• True meritocracy and freedom to choose career paths
• Opportunities to develop and hone leadership and functional
capabilities
• An entrepreneurial environment where people can pursue
their dreams
• Competitive compensation

In addition, we follow a well-defined Rewards & Recognitions

programme that periodically identifies exceptional individual and
team achievers among the various business functions and verticals
in the Group.

Expectations

At Reliance - Anil Dhirubhai Ambani Group, we encourage our

colleagues to take leadership, at all levels of the organisation, and
participate in accelerating growth of our businesses to build a
formidable enterprise.

Leaders in Reliance - Anil Dhirubhai Ambani Group are expected

to…

• Always keep the customers’ needs in mind and constantly

innovate
• Execute flawlessly and with speed
• Sustain and strengthen the group’s spirit of entrepreneurship
—taking ownership and accountability for their actions
• Leverage synergies to learn and build on the diverse
experiences and skill sets of our various businesses and teams
• Create a true meritocracy with a pervasive commitment to
transparent systems and processes
• Do all this with unquestionable Integrity to ensure total
compliance with the laws of the land
 Introduction To Capital Market

 Primary Market

 Secondary Market

 Functions Of Secondary Market

 Role Of Secondary Market

 Relationship Between The Primary And Secondary

Market
  Functions Of Stock Exchange

CAPITAL MARKET

Introduction

The market for long-term securities like bonds, equity stocks and
preferred stocks is divided into primary market and secondary
market. The primary market deals with the new issues of securities.
Outstanding securities are traded in the secondary market, which is
commonly known as stock market or stock exchange. In the
secondary market, the investors can sell and buy securities. Stock
markets predominantly deal in the equity shares. Debt instruments
like bonds and debentures are also traded in the stock market.
Well-regulated and active stock market promotes capital
formation. Growth of the primary market depends on the
secondary market. The health of the economy is reflected by the
growth of the stock market.
Companies raise funds to finance their projects through various
methods. The promoters can bring their own money or borrow
from the financial institutions or mobilize capital by issuing
securities. The funds may be raised through issue of fresh shares at
par or premium, preference shares, debentures or global depository
receipts. The main objectives of a capital issue are given below:
 To promote a new company
  To expand an existing company
 To diversify the production
 To meet the regular working capital requirements
 To capitalize the reverses

Securities markets provide a channel for allocation of savings to

those who have a productive need for them. As a result, the savers
and investors are not constrained by their individual abilities, but
by the economy’s abilities to invest and save respectively, which
inevitably enhances savings and investment in the economy.

Market Segments

The securities market has two interdependent and inseparable

segments: the primary and the secondary market. The primary
market provides the channel for creation of new securities through
issuance of financial instruments by public companies as well as
Governments and Government agencies and bodies whereas the
secondary market helps the holders of these financial instruments
to sale for exiting from the investment. The price signals, which
subsume all information about the issuer and his business
including associated risk, generated in the secondary market, help
the primary market in allocation of funds. The primary market
issuance is done either through public issues or private placement.
A public issue does not limit any entity in investing while in
private placement, the issuance is done to select people. In terms of
the Companies Act, 1956, an issue becomes public if it results in
allotment to more than 50 persons. This means an issue resulting in
allotment to less than 50 persons is private placement.

There are two major types of issuers who issue securities. The
corporate entities issue mainly debt and equity instruments (shares,
debentures, etc.), while the governments (central and state
governments) issue debt securities (dated securities, treasury
bills). The secondary market enables participants who hold
securities to adjust their holdings in response to changes in their
assessment of risk and return. They also sell securities for cash to
meet their liquidity needs. The exchanges do not provide facility
for spot trades in a strict sense. Closest to spot market is the cash
market in exchanges where settlement takes place after some time.
Trades taking place over a trading cycle (one day under rolling
settlement) are settled together after a certain time. All the 23 stock
exchanges in the country provide facilities for trading of corporate
securities. Trades executed on NSE only are cleared and settled by
a clearing corporation which provides notation and settlement
guarantee. Nearly 100% of the trades in capital market segment are
settled through demat delivery. NSE also provides a formal trading
platform for trading of a wide range of debt securities including
government securities in both retail and wholesale mode. NSE also
provides trading in derivatives of equities, interest rate as well
indices.

In derivatives market (F&O market segment of NSE), standardized

contracts are traded for future settlement. These futures can be on a
basket of securities like an index or an individual security. In case
of options, securities are traded for conditional future delivery.
There are two types of options – a put option permits the owner to
sell a security to the writer of options at a predetermined price
while a call option permits the owner to purchase a security from
the writer of the option at a predetermined price. These options can
also be on individual stocks or basket of stocks like index. Two
exchanges, namely NSE and the Stock Exchange, Mumbai (BSE)
provide trading of derivatives of securities. Today the market
participants have the flexibility of choosing from a basket of
products like:

• Equities
• Bonds issued by both Government and Companies
• Futures on benchmark indices as well as stocks
• Options on benchmark indices as well as stocks
• Futures on interest rate products like Notional 91-day T-Bills, 10
year notional zero coupon bond and 6% notional 10 year bond.

The past decade in many ways has been remarkable for securities
market in Indian It has grown exponentially as measured in terms
of amount raised from the market,number of stock exchanges and
other intermediaries, the number of listed stocks,market
capitalisation, trading volumes and turnover on stock exchanges,
and investor population. Along with this growth, the profiles of the
investors, issuers and intermediaries have changed significantly.
The market has witnessed several institutional changes resulting in
drastic reduction in transaction costs and significant improvements
in efficiency, transparency, liquidity and safety. In a short span of
time, Indian derivatives market has got a place in list of top global
exchanges. In single stock futures category, the Futures Industry
Association (FIA) placed NSE in second position in the year 2000.

Reforms in the securities market, particularly the establishment

and empowerment of SEBI, market determined allocation of
resources, screen based nation-wide trading, dematerialization and
electronic transfer of securities, rolling settlement and ban on
deferral products, sophisticated risk management and derivatives
trading, have greatly improved the regulatory framework and
efficiency of trading and settlement. Indian market is now
comparable to many developed markets in terms of a number of
qualitative parameters.
Products and Participants

Financial markets facilitate the reallocation of savings from savers

to entrepreneurs. Savings are linked to investments by a variety of
intermediaries through a range of complex financial products
called “securities” which is defined in the Securities Contracts
(Regulation) Act, 1956 to include shares, bonds, scraps, stocks or
other marketable securities of like nature in or of any incorporate
company or body corporate, government securities, derivatives of
securities, units of collective investment scheme, interest and rights
in securities, security receipt or any other instruments so declared
by the central government.

Market Participants in Securities Market

Particulars Number of
participants
Securities Appellate Tribunal
1
Regulator 4
Depositories 2
Stock Exchanges with equity trading 23
Listed Securities 9,413
Brokers 9,519
Sub-brokers 13,291
 FIIs 502
Portfolio Managers 54
Custodians 11
Share Transfer Agents 143
Merchant Bankers 124
Bankers to an Issue 67
Debenture Trustees 35
Underwriters 43
Venture Capital Funds 43
Mutual Funds 38
Collective Investment Schemes 0

*Data collected from DCA, DEA, RBI & SEBI

It is not that the users and suppliers of funds meet each other and
exchange funds for securities. It is difficult to accomplish such
double coincidence of wants. The amount of funds supplied by the
supplier may not be the amount needed by the user. Similarly, the
risk, liquidity and maturity characteristics of the securities issued
by the issuer may not match preference of the supplier. In such
cases, they incur substantial search costs to find each other. Search
costs are minimised by the intermediaries who match and bring the
suppliers and users of funds together. These intermediaries may act
as agents to match the needs of users and suppliers of funds for a
commission, help suppliers and users in creation and sale of
securities for a fee or buy the securities issued by users and in turn,
sell their own securities to suppliers to book profit. It is, thus, a
misnomer that securities market disintermdiates by establishing a
direct relationship between the savers and the users of funds. The
market does not work in a vacuum; it requires services of a large
variety of intermediaries. The disintermediation in the securities
market is in fact an intermediation with a difference, it is a risk-
less intermediation, where the ultimate risks are borne by the
savers and not the intermediaries. A large variety and number of
intermediaries provide intermediation services in the Indian
securities market. The securities market has essentially three
categories of participants, namely the issuers of securities,
investors in securities and the intermediaries and products include
equities, bonds and derivatives. The issuers and investors are the
consumers of services rendered by the intermediaries while the
investors are consumers (they subscribe for and trade in securities)
of securities issued by issuers.

In pursuit of providing a product to meet the needs of each investor

and issuer, the intermediaries churn out more and more
complicated products. They educate and guide them in their
dealings and bring them together. Those who receive funds in
exchange for securities and those who receive securities in
exchange for funds often need the reassurance that it is safe to do
so. This reassurance is provided by the law and by custom, often
enforced by the regulator. The regulator develops fair market
practices and regulates the conduct of issuers of securities and the
intermediaries so as to protect the interests of suppliers of funds.
The regulator ensures a high standard of service from
intermediaries and supply of quality securities and non-
manipulated demand for them in the market.

The past decade in many ways has been remarkable for securities
market in India. It has grown exponentially as measured in terms
of amount raised from the market, number of stock exchanges and
other intermediaries, the number of listed stocks, market
capitalisation, trading volumes and turnover on stock exchanges,
and investor population. Along with this growth, the profiles of the
investors, issuers and intermediaries have changed significantly.
The market has witnessed fundamental institutional changes
resulting in drastic reduction in transaction costs and significant
improvements in efficiency, transparency and safety.
 DEPENDENCE ON SECURITIES MARKET

Three main sets of entities depend on securities market. While the

corporates and governments raise resources from the securities
market to meet their obligations, the households invest their
savings in the securities.

Corporate Sector

The 1990s witnessed emergence of the securities market as a

major source of finance for trade and industry. A growing number
of companies are accessing the securities market rather than
depending on loans from FIs/banks. The corporate sector is
increasingly depending on external sources for meeting its funding
requirements. There appears to be growing preference for direct
financing (equity and debt) to indirect financing (bank loan) within
the external sources. According to CMIE data, the share of capital
market based instruments in resources raised externally increased
to 53% in 1993-94, but declined thereafter to 33% by 1999-00 and
further to 21% in 2001-02. In the sector-wise shareholding pattern
of companies listed on NSE, it is observed that on an average the
promoters hold more than 55% of total shares. Though the non-
promoter holding is about 44%, Indian public held only 17% and
the public float (holding by FIIs, MFs, Indian public) is at best
25%. There is not much difference in the shareholding pattern of
companies in different sectors. Strangely, 63% of shares in
companies in media and entertainment sector are held by private
corporate bodies though the requirement of public offer was
relaxed to 10% for them. The promoter holding is not strikingly
high in respect of companies in the IT and telecom sectors where
similar relaxation was granted.

Governments
Along with increase in fiscal deficits of the governments, the
dependence on market borrowings to finance fiscal deficits has
increased over the years. During the year 1990-91, the state
governments and the central government financed nearly 14% and
18% respectively of their fiscal deficit by market borrowing. In
percentage terms, dependence of the state governments on market
borrowing did not increase much during the decade 1991-2001. In
case of central government, it increased to 77.6% by 2002-03.

Households

According to RBI data, household sector accounted for 82.4% of

gross domestic savings during 2001-02. They invested 38% of
financial savings in deposits, 33% in insurance/provident funds,
11% on small savings, and 8% in securities, including government
securities and units of mutual funds during 2001- 02. Thus the
fixed income bearing instruments are the most preferred assets of
the household sector. Their share in total financial savings of the
household sector witnessed an increasing trend in the recent past
and is estimated at 82.4% in 2001- 02. In contrast, the share of
financial savings of the household sector in securities (shares,
debentures, public sector bonds and units of UTI and other mutual
funds and government securities) is estimated to have gone down
from 22.9% in 1991-92 to 4.3% in 2000-01, which increased to 8%
in 2001-02. Though there was a major shift in the saving pattern of
the household sector from physical assets to financial assets and
within financial assets, from bank deposits to securities, the trend
got reversed in the recent past due to high real interest rates,
prolonged subdued conditions in the secondary market, lack of
confidence by the issuers in the success of issue process as well as
of investors in the credibility of the issuers and the systems and
poor performance of mutual funds. The portfolio of household
sector remains heavily weighted in favour of physical assets and
fixed income bearing instruments.

Investor Population
The Society for Capital Market Research and Development carries
out periodical surveys of household investors to estimate the
number of investors. Their first survey carried out in 1990 placed
the total number of share owners at 90-100 lakh. Their second
survey estimated the number of share owners at around 140-150
lakh as of mid-1993. Their latest survey estimates the number of
shareowners at around 2 crore at 1997 end, after which it remained
stagnant up to the end of 1990s. The bulk of increase in number of
investors took place during 1991-94 and tapered off thereafter.
49% of the share owners at the end of 2000 had, for the first time,
entered the market before the end of 1990, 44% entered during
1991-94, 6.3% during 1995-96 and 0.8% since 1997. The survey
attributes such tapering off to persistent depression in the share
market and investors’ bad experience with many unscrupulous
company promoters and managements.

Distribution of Investors
The Society for Capital Market Research & Development
estimates that 15% of urban households and only 0.5-1.0% of
semi-urban and rural households own shares. It is estimated that
4% of all households own shares.
 Distribution of Beneficial Accounts with NSDL
S. No. States/Union Beneficial Accounts
Territories Number % to total
1 Andhra Pradesh194,405 6.08
2 Bihar 27,340 0.85
3 Chandigarh 7,891 0.25
4 Delhi 323,693 10.12
5 Goa 11,374 0.36
6 Gujarat 536,720 16.78
7 Himachal Pradesh3,706 0.12
8 Jammu & Kashmir7,320 0.23
9 Karnataka 195,159 6.10
10 Kerala 76,793 2.40
11 Madhya Pradesh 71,158 2.23
12 Maharashtra 911,997 28.52
13 Orissa 14,701 0.46
14 Pondicherry 2,481 0.08
15 Punjab 52,434 1.64
16 Rajasthan 72,316 2.26
17 Tamil Nadu 230,407 7.20
18 Uttar Pradesh 188,835 5.90
19 West Bengal 214,432 6.71
20 Others 54,802 1.71
Total 3,197,964 100.00
An indirect, but very authentic source of information about
distribution of investors is the data base of beneficial accounts with
the depositories. By February 2003, there were 3 million beneficial
accounts with the National Securities Depository Limited (NSDL).
The state-wise distribution of beneficial accounts with NSDL
expected Maharashtra and Gujarat account for nearly 45% of total
beneficial accounts.
PRIMARY MARKET
Stocks available for the first time are offered through new issue
market. The issuer may be a new company. These issues may be of
new type or the security used in the past. In the new issue market
the issuer can be considered as a manufacturer. The issuing houses,
investment bankers and brokers act as the channel of distribution
for the new issues. They take the responsibility of selling the
stocks to the public.
A total of Rs. 2,520,179 million were raised by the government
and corporate sector during 2002-03 as against Rs. 2,269,110
million during the preceding year. Government raised about two
third of the total resources, with central government alone raising
nearly Rs. 1,511,260 million.
Corporate Securities

Average annual capital mobilisation from the primary market,

which used to be about Rs.70 crore in the 1960s and about Rs.90
crore in the 1970s, increased manifold during the 1980s, with the
amount raised in 1990-91 being Rs. 4,312 crore. It received a
further boost during the 1990s with the capital raised by
nongovernment public companies rising sharply to Rs. 26,417
crore in 1994-95. The capital raised which used to be less than 1%
of gross domestic saving (GDS) in the 1970s increased to about
13% in 1992-93. In real terms, the capital raised increased 4 times
between 1990-91 and 1994-95. During 1994-95, the amount raised
through new issues of securities from the securities market
accounted for about four-fifth of the disbursements by FIs. Issuers
have shifted focus to other avenues for raising resources like
private placement.

There is a preference for raising resources in the primary market

through private placement of debt instruments. Private placements
accounted for about 93% of total resources mobilised through
domestic issues by the corporate sector during 2002-03. Rapid
dismantling of shackles on institutional investments and
deregulation of the economy are driving growth of this segment.
There are several inherent advantages of relying on private
placement route for raising resources. While it is cost and time
effective method of raising funds and can be structured to meet the
needs of the entrepreneurs, it does not require detailed compliance
with formalities as required in public or rights issues. It is believed
in some circles that private placement has crowded out public
issues. However, to prevent public issues from being passed on as
private placement, the Companies (Amendment) Act, 2001
considers offer of securities to more than 50 persons as made to
public.

Indian market is getting integrated with the global market though

in a limited way through euro issues. Since 1992, when they were
permitted access, Indian companies have raised about Rs. 34,264
million through ADRs/GDRs. By the end of March 2003, 502 FIIs
were registered with SEBI. They had net cumulative investments
over of US $ 15.8 billion by the end of March 2003. Their
operations influence the market as they do delivery-based business
and their knowledge of market is considered superior. The market
is getting institutionalised as people prefer mutual funds as their
investment vehicle, thanks to evolution of a regulatory framework
for mutual funds, tax concessions offered by government and
preference of investors for passive investing. The net collections
by MFs picked up during this decade and increased to Rs. 199,530
million during 1999-00. This declined to Rs. 111,350 million
during 2000-01 which may be attributed to increase in rate of tax
on income distributed by debt oriented mutual funds and lacklustre
secondary market.
The total collection of mutual funds for 2002-03 has been Rs.
105,378 million. Starting with an asset base of Rs. 250 million in
1964, the total assets under management at the end of March 2003
was Rs. 794,640 million. The number of households owning units
of MFs exceeds the number of households owning equity and
debentures. At the end of financial year March 2003, according to
a SEBI press release 23 million unit holders had invested in units
of MFs, while 16 million individual investors invested in equity
and or debentures.

Government Securities
The primary issues of the Central Government have increased
many-fold during the decade of 1990s from Rs. 89,890 million in
1990-91 to Rs. 1,511,260 million in 2002-03. The issues by state
governments increased by about twelve times from Rs. 25,690
million to Rs. 308,530 million during the same period. The Central
Government mobilised Rs. 1,250,000 million through issue of
dated securities and Rs. 261,260 million through issue of T-bills.
After meeting repayment liabilities of Rs. 274,200 million for
dated securities, and redemption of T-bills of Rs. 195,880 million,
net market borrowing of Central Government amounted to Rs.
1,041,180 million for the year 2002-03. The state governments
collectively raised Rs. 305,830 million during 2002-03 as against
Rs. 187,070 million in the preceding year. The net borrowings of
State Governments in 2002-03 amounted to Rs. 290,640 million.
Along with growth of the market, the investor base has become
very wide. In addition to banks and insurance companies,
corporates and individual investors are investing in government
securities. With dismantling of control regime, and gradual
lowering of the SLR and CRR, Government is borrowing at near–
market rates. The coupons across maturities went down recently
signifying lower interest rates. The weighted average cost of its
borrowing at one stage increased to 13.75% in 1995- 96, which
declined to 7.34% in 2002-03. The maturity structure of
government debt is also changing. In view of bunching of
redemption liabilities in the medium term, securities with higher
maturities were issued during 2002-03. About 64% of primary
issues were raised through securities with maturities above 5 years
and up to 10 years. As a result the weighted average maturity of
dated securities increased to 13.83 years from 6.6 years in 1997-
98.
Relationship between the Primary and Secondary Market
1. The new issues market cannot function without the
secondary market. The secondary market or the stock
market provides liquidity for the issued securities. The
issued securities are traded in the secondary market
offering liquidity to the stocks at a fair price.
2. The stock exchanges through their listing requirements,
exercise control over the primary market. The company
seeking for listing on the respective stock exchange has to
comply with all the rules and regulations given by the
stock exchange.
3. The primary market provides a direct link between the
prospective investors and the company. By providing
liquidity and safety, the stock markets encourage the
public to subscribe to the new issues. The marketability
and the capital appreciation provided in the stock market
are the major factors that attract the investing public
towards the stock market. Thus, it provides an indirect link
between the savers and the company.
4. Even though they are complementary to each other, their
functions and the organizational set up are different from
 each other. The health of the primary market depends on
the secondary market and vice versa.
Functions of Primary Market
The main service functions of the primary market are organization,
underwriting and distribution. Origination deals with the origin of
the new issue. The proposal is analyzed in terms of the nature of
the security, the size of the issue, and timing of the issue and
floatation method of the issue. Underwriting contract makes the
share predictable and removes the element of uncertainty in the
subscription. Distribution refers to the lead managers and brokers
to the issue.
In the new issue market stocks are offered for the first time. The
functions and the organization of the new issue market are
different from the secondary market. In the new issue the lead
mangers manage the issue, the underwriters assure to take up the
unsubscribed portion according to his commitment for a
commission and the bankers take up the responsibility of the
collecting the application form and the money. Advertising
agencies promote the new issue through advertising. Financial
institutions and underwriter lend term loans to the company.
Government agencies regulate the issue. The new issues are
offered through prospectus. The prospectus is drafted according to
SEBI guidelines disclosing the needed information to the investing
public. In the bought out deal banks or a company buys the
promoters shares and they offer them to the public at a later date.
This reduces the cost of raising the fund. Private placement means
placing of the issue with financial institutions. They sell shares to
the investors at a suitable price. Right issue means the allotment of
shares to the previous shareholders at a pro-ratio basis. Book
building involves firm allotment of the instrument to a syndicate
created by the lead managers. The book runner manages the issue.
Norms are given by the SEBI to price the issue. Proportionate
allotment method is adopted in the allocation of shares. Project
appraisal, disclosure in the prospectus and clearance of the
prospectus by the stock exchanges protect the investors in the
primary market along with the active role played by the SEBI
SECONDARY MARKET
The market for long-term securities like bonds, equity stocks and
preferred stocks is divided into primary market and secondary
market. The primary market deals with the new issues of securities.
Outstanding securities are traded in the secondary market, which is
commonly known as stock market or stock exchange. In the
secondary market, the investors can sell and buy securities. Stock
markets predominantly deal in the equity shares. Debt instruments
like bonds and debentures are also traded in the stock market.
Well-regulated and active stock market promotes capital
formation. Growth of the primary market depends on the
secondary market. The health of the economy is reflected by the
growth of the stock market.

Corporate Securities
The number of stock exchanges increased from 11 in 1990 to 23
now. All the exchanges are fully computerised and offer 100% on-
line trading. 9,413 companies were available for trading on stock
exchanges at the end of March 2003. The trading platform of the
stock exchanges was accessible to 9,519 members from over 358
cities on the same date.
The market capitalisation grew ten fold between 1990-91 and
1999-00. It increased by 221% during 1991-92 and by 107%
during 1999-00. All India market capitalisation is estimated at Rs.
6,319,212 million at the end of March 2003. The market
capitalisation ratio, which indicates the size of the market,
increased sharply to 57.4% in 1991-92 following spurt in share
prices. The ratio further increased to 85% by March 2000. It,
however, declined to 55% at the end of March 2001 and to 29% by
end March 2003.

The trading volumes on exchanges have been witnessing

phenomenal growth during the 1990s. The average daily turnover
grew from about Rs.1500 million in 1990 to Rs. 120,000 million in
2000, peaking at over Rs. 200,000 million. One-sided turnover on
all stock exchanges exceeded Rs. 10,000,000 million during 1998-
99, Rs. 20,000,000 million during 1999-00 and approached Rs.
30,000,000 million during 2000-01. However, the trading volume
substantially depleted to Rs.9,689,541 million in 2002-03. The
turnover ratio, which reflects the volume of trading in relation to
the size of the market, has been increasing by leaps and bounds
after the advent of screen based trading system by the NSE. The
turnover ratio for the year 2002-03 increased to 375 but fell
substantially due to bad market conditions to 119 during 2001-02
regaining its position accounted 153.3% in 2002-03.
The relative importance of various stock exchanges in the market
has undergone dramatic change during this decade. The increase in
turnover took place mostly at the large big exchanges and it was
partly at the cost of small exchanges that failed to keep pace with
the changes. NSE is the market leader with more 85% of total
turnover (volumes on all segments) in 2002-03. Top 5 stock
exchanges accounted for 99.88% of turnover, while the rest 18
exchange for less than 0.12% during 2002-03. About ten
exchanges reported nil turnover during the year.
Role of the Secondary Market
When company management has different objectives than its
outside investors, "agency” and "information" problems may
result. For example, management may exert less than optimal
effort, may pursue goals that simply enhance its own power and
control, or may squander or divert company resources. In addition,
to the extent that management is better informed than outside
investors about the company's financial situation, this creates an
informational asymmetry. This, in turn, may result in management
being unable to convince its outside investors of the true value of
the company as well as of management's intentions. As a
consequence, management also may find that it is not able to raise
as much capital as it wants or needs to finance new projects, or that
management may have to surrender too much of the value of the
firm to raise the capital it wants or needs. "Governance" refers to
the various mechanisms that exist to mitigate these agency and
information problems. These mechanisms are numerous, some
involving capital markets (e.g., facilitation of corporate control via
takeover) while others do not, at least not directly (e.g., the role of
the board of directors as a monitoring device). These major
mechanisms will be discussed. We use the term "market-based
governance" to refer to the role of capital markets in alleviating the
agency and information problems, by functioning as an effective
conduit for monitoring and controlling management's sub optimal
behavior. Market-based governance may take different forms.
However, generally speaking, such governance takes the form of
facilitating the monitoring of management by outsiders, and
aggregating information—in the form of equilibrium prices (or
price discovery)—to help guide management decisions within the
firm.
A. Monitoring and Control.
As noted, secondary equity markets serve as a conduit for
monitoring and controlling management by outsiders. First,
markets generate information that helps outside investors
Evaluate the quality of past management decisions. Second, the
threat of a takeover may mitigate management inefficiencies.
Third, information on stock-market prices provides for effective
incentives for management. And fourth, the rich menu of contracts
provided in the market allows private workouts of financial
distress, easing the transfer of control.

For purposes of our analysis below, we have divided monitoring

into two categories
 Market-based monitoring
 Non market-based monitoring
I. Market-Based Monitoring
I. 1 Active Shareholders:
The secondary equity market can facilitate effective monitoring by
providing the ability to build positions so as to influence
management decisions in situations where a change in corporate
policies could increase a firm's value.
I. 2 the Market for Corporate Control:
The threat of a corporate takeover by outside investors could serve
as a deterrent to mismanagement. Secondary equity markets
provide the means for launching a credible takeover threat, which
could influence actions by management.
I. 3 Facilitation of Incentive-Based Compensation:
Management could be aligned with its outside shareholders
through a proper structuring of incentive-based compensation.
Management's equity ownership and stock options provide
management with additional incentives to act in the interest of
outside shareholders.
I. 4 Certification by Investment Banks:
When issuing securities to the public, the underwriting investment
bankers monitor management. When certifying a firm that hires
them to sell its securities, these investment bankers place their own
reputations and capital at stake.
II. Non Market-Based Monitoring
II. 1 Board of Directors:
A board of directors is the primary method of non market-based
monitoring. Management reports directly to the board, and the
board has a fiduciary obligation to stay informed of management's
major activities. The board has the power to terminate management
that does not act in the best interests of the company's
shareholders. The key to a board's being an effective monitoring
mechanism is its independence. In this regard, the composition of
the board, especially the presence of outside board members, is
critical to its effectiveness as a monitor.
II. 2 Financial intermediaries as delegated monitors:
Banks closely monitor their business borrowers, and collect
information and scrutinize major investment and financing
decisions. In doing so, they can threaten to withhold financing
should management act in a manner contrary to the banks'
interests. Monitoring via business groups. In some countries, such
as Japan and Korea, corporate actions are coordinated within a
family of interrelated firms, with a main bank at the center. Firms
in the group are interconnected through intricate vertical and
horizontal business relationships and cross-ownership. Members of
the business group, with the lead participation of the main bank,
closely monitor the actions of a member firm's management.
The Legal System:
The four main legislations governing the securities market are: (a)
the SEBI Act, 1992 which establishes SEBI to protect investors
and develop and regulate securities market; (b) the Companies Act,
1956, which sets out the code of conduct for the corporate sector in
relation to issue, allotment and transfer of securities, and
disclosures to be made in public issues; (c) the Securities Contracts
(Regulation) Act, 1956, which provides for regulation of
transactions in securities through control over stock exchanges;
and (d) the Depositories Act, 1996 which provides for electronic
maintenance and transfer of ownership of demat securities.
Government has framed rules under the SCRA, SEBI Act and the
Depositories Act. SEBI has framed regulations under the SEBI Act
and the Depositories Act for registration and regulation of all
market intermediaries, and for prevention of unfair trade practices,
insider trading, etc. Under these Acts, Government and SEBI issue
notifications, guidelines, and circulars which need to be complied
with by market participants. The SROs like stock exchanges have
also laid down their rules of
game.
The responsibility for regulating the securities market is shared by
Department of Economic Affairs (DEA), Department of Company
Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The
activities of these agencies are co-ordinated by the High Level
Committee on Capital Markets. Most of the powers under the
SCRA are exercisable by DEA while a few others by SEBI. The
powers of the DEA under the SCRA are also con-currently
exercised by SEBI. The powers in respect of the contracts for sale
and purchase of securities, gold related securities, money market
securities and securities derived from these securities and ready
forward contracts in debt securities are exercised concurrently by
RBI. The SEBI Act and the Depositories Act are mostly
administered by SEBI. The rules and regulations under the
securities laws are administered by SEBI. The powers under the
Companies Act relating to issue and transfer of securities and non-
payment of dividend are administered by SEBI in case of listed
public companies and public companies proposing to get their
securities listed. The SROs ensure compliance with their own
rules as well as with the rules.

The legal system governs both the rights of management and the
rights of investors. The legal system also specifies the recourse
available to investors. Recent research indicates that countries vary
in the level of protection afforded to minority shareholders
(LaPorta et al, 1996). Generally, countries with common-law
traditions afford the highest protection, while civil-law countries,
particularly the French civil-law systems, provide the least amount
of protection.
For purposes of this paper, the main focus and emphasis are on
market-based governance services.
B. Information Production.
Markets serve to aggregate the diverse opinions held by investors
regarding the financial prospects of a company, thereby providing
management with an important guide when it
comes to its investment decisions. This price discovery role of
secondary equity markets is well recognized. Prices aggregate the
diverse opinions and convey that collective wisdom to
management. This flow of information from the market to the firm
might be especially relevant in today's economy, since consensus
on the optimal management actions is so difficult to achieve due to
rapid technological change and constantly changing market
conditions.
Functions of Stock Exchange
 Maintains active trading: shares are traded on the stock
exchanges, enabling the investors to buy and sell securities.
The prices may vary from transactions to transaction. A
 continuous trading increases the liquidity or marketability of
the shares traded on the stock exchanges.
 Fixation of prices: Price is determined by the transactions that
flow from investors’ demand and suppliers’ preferences.
Usually the traded prices are made known to the public. This
helps the investors to make better decisions.
 Ensures safe and fair dealing: The rules, regulations and by-
laws of the stock exchanges’ provide a measure of safety to
the investors. Transactions are conducted under competitive
conditions enabling the investors to get a fair deal.
 Aids in financing the industry: A continuous market for shares
provides a favourable climate for raising capital. The
negotiability and transferability of the securities helps the
companies to raise long-term funds. When it is easy to trade
the securities, investors are willing to subscribe to the initial
public offerings. This stimulates the capital formation.
 Dissemination of information: Stock exchanges provide
information through their various publications. They publish
the share prices traded on daily basis along with the volume
traded. Directory of Corporate Information is useful for the
investors’ assessment regarding the corporate. Handouts,
handbooks and pamphlets provide information regarding the
functioning of the stock exchanges.
 Performance inducer: The prices of stocks reflect the
performance of the traded companies. This makes the
corporate more concerned with its public image and tries to
maintain good performance.
 Self-regulating organization: The stock exchanges monitor the
integrity of the members, brokers, listed companies and
clients. Continuous internal audit safeguards the investors
against unfair trade practices. It settles the dispute between
member brokers, investors and brokers.

Research in Securities Market

In order to deepen the understanding and knowledge about Indian

capital market, and to assist in policy-making, SEBI has been
promoting high quality research in capital market. It has set up an
in-house research department, which brings out working papers on
a regular basis. In collaboration with NCAER, SEBI brought out a
‘Survey of Indian Investors’, which estimates investor population
in India and their investment preferences. SEBI has also tied up
with reputed national and international academic and research
institutions for conducting research studies/projects on various
issues related to the capital market. In order to improve market
efficiency further and to set international benchmarks in the
securities industry, NSE administers a scheme called the NSE
Research Initiative with a view to develop an information base and
a better insight into the working of securities market in India. The
objective of this initiative is to foster research, which can support
and facilitate (a) stock exchanges to better design market micro-
structure, (b) participants to frame their strategies in the market
place, (c) regulators to frame regulations, (d) policy makers to
formulate policies, and (e) expand the horizon of knowledge. The
Initiative has received tremendous response.

Testing and Certification

The intermediaries, of all shapes and sizes, who package and sell
securities, compete with one another for the chance to handle
investors/issuers’ money. The quality of their services determines
the shape and health of the securities market. In developed markets
and in some of the developing markets, this is ensured through a
system of testing and certification of persons joining market
intermediaries in the securities market. A testing and certification
mechanism that has become extremely popular and is sought after
by the candidates as well as employers is a unique on-line testing
and certification programme called National Stock Exchange’s
Certification in Financial Markets (NCFM). It is an on-line fully
automated nation-wide testing and certification system where the
entire process from generation of question paper, invigilation,
testing, assessing, scores reporting and certifying is fully
automated - there is absolutely no scope for human intervention. It
allows tremendous flexibility in terms of testing centres, dates and
timing and provides easy accessibility and convenience to
candidates as he can be tested at any time and from any location. It
tests practical knowledge and skills, that are required to operate in
financial markets, in a very secure and unbiased manner, and
certifies personnel who have a proper understanding of the market
and business and skills to service different constituents of the
market. It offers 9 financial market related modules.
 Market Design
Primary Market

1. Corporate Securities: The Disclosure and Investor Protection

(DIP) guidelines prescribe a substantial body of requirements for
issuers/intermediaries, the broad intention being to ensure that all
concerned observe high standards of integrity and fair dealing,
comply with all the requirements with due skill, diligence and care,
and disclose the truth, whole truth and nothing but truth. The
guidelines aim to secure fuller disclosure of relevant information
about the issuer and the nature of the securities to be issued so that
investors can take informed decisions. For example, issuers are
required to disclose any material ‘risk factors’ and give
justification for pricing in their prospectus. An unlisted company
can access the market up to 5 times its pre-issue net worth only if it
has track record of distributable profits and net worth of Rs. 1
crore in 3 out of last five years. A listed company can access up to
5 times of its pre-issue net worth. In case a company does not have
track record or wishes to raise beyond 5 times of its pre-issue net
worth, it can access the market only through book building with
minimum offer of 60% to qualified institutional buyers.
Infrastructure companies are exempt from the requirement of
eligibility norms if their project has been appraised by a public
financial institution and not less than 5% of the project cost is
financed by any of the institutions, jointly or severally, by way of
loan and/or subscription to equity. The debt instruments of
maturities more than 18 months require credit rating. If the issue
size exceeds Rs. 100 crore, two ratings from different agencies are
required. Thus the quality of the issue is demonstrated by track
record/appraisal by approved financial institutions/credit
rating/subscription by Sibs. The lead merchant banker discharges
most of the pre-issue and post-issue obligations. He satisfies
himself about all aspects of offering and adequacy of disclosures in
the offer document. He issues a due diligence certificate stating
that he has examined the prospectus, he finds it in order and that it
brings out all the facts and does not contain anything wrong or
misleading. He also takes care of allotment, refund
and dispatch of certificates. The admission to a depository for
dematerialisation of securities is a prerequisite for making a public
or rights issue or an offer for sale. The investors, however, have
the option of subscribing to securities in either physical form or
dematerialised form. All new IPOs are compulsorily traded in
dematerialised form. Every public listed company making IPO of
any security for Rs. 10 crore or more is required to do so only in
dematerialised form.

2. Government Securities: The government securities market has

witnessed significant transformation in the 1990s. With giving up
of the responsibility of allocating resources from securities market,
government stopped expropriating seigniorage and started
borrowing at near - market rates. Government securities are now
sold at market related coupon rates through a system of auctions
instead of earlier practice of issue of securities at very low rates
just to reduce the cost of borrowing of the government. Major
reforms initiated in the primary market for government securities
include auction system (uniform
price and multiple price method) for primary issuance of T-bills
and central government dated securities, a system of primary
dealers and non-competitive bids to widen investor base and
promote retail participation, issuance of securities across maturities
to develop a yield curve from short to long end and provide
benchmarks for rest of the debt market, innovative instruments
like, zero coupon bonds, floating rate bonds, bonds with embedded
derivatives, availability of full range ( 91-day and 382-day) of T-
bills, etc.
Secondary Market
(a) Corporate Securities: The stock exchanges are the exclusive
centres for trading of securities. Though the area of
operation/jurisdiction of an exchange is specified at the time of its
recognition, they have been allowed recently to set up trading
terminals anywhere in the country. The three newly set up
exchanges (OTCEI, NSE and ICSE) were permitted since their
inception to have nation wide trading. The trading platforms of a
few exchanges are now accessible from many locations. Further,
with extensive use of information technology, the trading
platforms of a few exchanges are also accessible from anywhere
through the Internet and mobile devices. This made a huge
difference in a
geographically vast country like India.
(b) Exchange Management: Most of the stock exchanges in the
country are organized as “mutual” which was considered beneficial
in terms of tax benefits and matters of compliance. The trading
members, who provide brokering services, also own, control and
manage the exchanges. This is not an effective model for self-
regulatory organisations as the regulatory and public interest of the
exchange conflicts with private interests. Efforts are on to
demutualise the exchanges whereby ownership, management and
trading membership would be segregated from one another. Two
exchanges viz. OTCEI and NSE are demutualised from inception,
where ownership, management and trading are in the hands of
three different sets of people. This model eliminates conflict of
interest and helps the exchange to pursue market efficiency and
investor interest aggressively.

(c) Membership: The trading platform of an exchange is

accessible only to brokers. The broker enters into trades in
exchanges either on his own account or on behalf of clients. No
stock broker or sub-broker is allowed to buy, sell or deal in
securities, unless he or she holds a certificate of registration
granted by SEBI. A broker/sub-broker complies with the code of
conduct prescribed by SEBI. Over time, a number of brokers -
proprietor firms and partnership firms – have converted themselves
into corporates. The standards for admission of members stress on
factors, such as corporate structure, capital adequacy, track record,
education, experience, etc. and reflect a conscious endeavor to
ensure quality broking services.

(d) Listing: A company seeking listing satisfies the exchange that

at least 10% of the securities, subject to a minimum of 20 lakh
securities, were offered to public for subscription, and the size of
the net offer to the public (i.e. the offer price multiplied by the
number of securities offered to the public, excluding reservations,
firm allotment and promoters’ contribution) was not less than
Rs.100 crore, and the issue is made only through book building
method with allocation of 60% of the issue size to the qualified
institutional buyers. In the alternative, it is required to offer at least
25% of the securities to public. The company is also required to
maintain the minimum level of non-promoter
holding on a continuous basis. In order to provide an opportunity
to investors to invest/trade in the securities of local companies, it is
mandatory for the companies, wishing to list their securities, to list
on the regional stock exchange nearest to their registered office. If
they so wish, they can seek listing on other exchanges as well.
Monopoly of the exchanges within their allocated area, regional
aspirations of the people and mandatory listing on the regional
stock exchange resulted in multiplicity of exchanges. The basic
norms for listing of securities on the stock exchanges are uniform
for all the exchanges. These norms are specified in the listing
agreement entered into between the company and the concerned
exchange. The listing agreement prescribes a number of
requirements to be continuously complied with by the issuers for
continued listing and such compliance is monitored by the
exchanges. It also stipulates the disclosures to be made by the
companies and the corporate governance practices to be followed
by them. SEBI has been issuing guidelines/circulars prescribing
certain norms to be included in the listing agreement and to be
complied with by the companies. A listed security is available for
trading on the exchange. The stock exchanges levy listing fees -
initial fees and annual fees - from the listed companies. It is a
major source of income for many exchanges. A security listed on
other exchanges is also permitted for trading. A listed company
can voluntary delist its securities from non-regional stock
exchanges after providing an exit opportunity to holders of
securities in the region where the concerned exchange is located.
An exchange can, however, delist the securities compulsorily
following a very stringent procedure.

(e) Trading Mechanism: The exchanges provide an on-line fully-

automated screen based trading system (SBTS) where a member
can punch into the computer quantities of securities and the prices
at which he likes to transact and the transaction is executed as soon
as it finds a matching order from a counter party. SBTS
electronically matches orders on a strict price/time priority and
hence cuts down on time, cost and risk of error, as well as on fraud
resulting in improved operational efficiency. It allows faster
incorporation of price sensitive information into prevailing prices,
thus increasing the informational efficiency of markets. It enables
market participants to see the full market on real-time, making the
market transparent. It allows a large number of participants,
irrespective of their geographical locations, to trade with one
another simultaneously, improving the depth and liquidity of the
market. It provides full anonymity by accepting orders, big or
small, from members without revealing their identity, thus
providing equal access to everybody. It also provides a perfect
audit trail, which helps to resolve disputes by logging in the trade
execution process in entirety.

(f) Trading Rules: Regulations have been framed to prevent

insider trading as well as unfair trade practices. The acquisitions
and takeovers are permitted in a well defined and orderly manner.
The companies are permitted to buy back their securities to
improve liquidity and enhance the shareholders’ wealth.

(g) Price Bands: Stock market volatility is generally a cause of

concern for both policy makers as well as investors. To curb
excessive volatility, SEBI has prescribed a system of price bands.
The price bands or circuit breakers bring about a coordinated
trading halt in all equity and equity derivatives markets nation-
wide. An index-based market-wide circuit breaker system at three
stages of the index movement either way at 10%, 15% and 20%
has been prescribed. The movement of either S&P CNX Nifty or
Sensex, whichever is breached earlier, triggers the breakers. As an
additional measure of safety, individual scrip-wise price bands of
20% either way have been imposed for all securities except those
available for stock options.

(h) Demat Trading: The Depositories Act, 1996 was passed to

proved for the establishment of depositories in securities with the
objective of ensuring free transferability of securities with speed,
accuracy and security by (a) making securities of public limited
companies freely transferable subject to certain exceptions; (b)
dematerialising the securities in the depository mode; and (c)
providing for maintenance of ownership records in a book entry
form. In order to streamline both the stages of settlement process,
the Act envisages transfer of ownership of securities electronically
by book entry without making the securities move from person to
person. Two depositories, viz. NSDL and CDSL, have come up to
provide instantaneous electronic transfer of securities. At the end
of March 2002, 4,172 and 4,284 companies were connected to
NSDL and CDSL respectively. The number of dematerialised
securities increased to 56.5 billion at the end of March 2002. As on
the same date, the value of dematerialsied securities was Rs. 4,669
billion and the number of investor accounts was 4,605,588. All
actively traded scrips are held, traded and settled in demat form.
Demat settlement accounts for over 99% of turnover settled by
delivery. This has almost eliminated the bad deliveries and
associated problems. To prevent physical certificates from
sneaking into circulation, it has been mandatory for all new IPOs
to be compulsorily traded in dematerialized form. The admission to
a depository for dematerialisation of securities has been made a
prerequisite for making a public or rights issue or an offer for sale.
It has also been made compulsory for public listed companies
making IPO of any security for Rs. 10 crore or more to do the
same only in dematerialised form.

(i) Charges: A stock broker is required to pay a registration fee of

Rs.5,000 every financial year, if his annual turnover does not
exceed Rs. 1 crore. If the turnover exceeds Rs. 1 crore during any
financial year, he has to pay Rs. 5,000 plus one-hundredth of 1%
of the turnover in excess of Rs.1 crore. After the expiry of five
years from the date of initial registration as a broker, he has to pay
Rs. 5,000 for a block of five financial years. Besides, the
exchanges collect transaction charges from its trading members.
NSE levies Rs. 4 per lakh of turnover. The maximum brokerage a
trading member can levy in respect of securities transactions is
2.5% of the contract price, exclusive of statutory levies like SEBI
turnover fee, service tax and stamp duty. However, brokerage
charges as low as
0.15% is also observed in the market.

(j) Trading Cycle: Rolling settlement on T+3 basis gave way to

T+2 from April 2003. The market has moved close to spot/cash
market.

(k) Risk Management: To pre-empt market failures and protect

investors, the regulator/exchanges have developed a
comprehensive risk management system, which is constantly
monitored and upgraded. It encompasses capital adequacy of
members, adequate margin requirements, limits on exposure and
turnover, indemnity insurance, on-line position monitoring and
automatic disablement, etc. They also administer an efficient
market surveillance system to curb excessive volatility, detect and
prevent price manipulations. Exchanges have set up
trade/settlement guarantee funds for meeting shortages arising out
of non fulfillment/partial fulfillment of funds obligations by the
members in a settlement. A clearing corporation assures the
counterparty risk of each member and guarantees financial
settlement in respect of trades executed on NSE.
(l) Government Securities: The reforms in the secondary market
include Delivery versus Payment system for settling scripless SGL
transactions to reduce settlement risks, SGL Account II with RBI
to enable financial intermediaries to open custody (Constituent
SGL) accounts and facilitate retail transactions in scripless mode,
enforcement of a trade-for-trade regime, settlement period of T+0
or T+1 for all transactions undertaken directly between SGL
participants and up to T+5 days for transactions routed through
NSE brokers, routing transactions through brokers of NSE, OTCEI
and BSE, repose in all government securities with settlement
through SGL, liquidity support to PDs to enable them to support
primary market and undertake market making, special fund facility
for security settlement, etc. As part of the ongoing efforts to build
debt market infrastructure, two new systems, the Negotiated
Dealing System (NDS) and the Clearing Corporation of India
Limited (CCIL) commenced operations on February 15, 2002.
NDS, interlaid, facilitates screen based negotiated dealing for
secondary market transactions in government securities and money
market instruments, online reporting of transactions in
the instruments available on the NDS and dissemination of trade
information to the market. Government Securities (including T-
bills), call money, notice/term money, repose in eligible securities,
Commercial Papers and Certificate of Deposits are available for
negotiated dealing through NDS among the members. The CCIL
facilitates settlement of transactions in government securities (both
outright and repot) on Delivery versus Payment (DvP-II) basis
which provides for settlement of securities on gross basis and
settlement of funds on net basis simultaneously. It acts as a central
counterparty for clearing and settlement of government securities
transactions done on NDS.

The relative importance of various stock exchanges in the market

has undergone dramatic change during this decade. The increase in
turnover took place mostly at the large big exchanges and it was
partly at the cost of small exchanges that failed to keep pace with
the changes. NSE is the market leader with over 80% of total
turnover (volumes on all segments) in 2001-02. Top 6 stock
exchanges accounted for 99.88% of turnover, while the rest 17
exchange for less than 0.12% during 2002-03 (Table 5.4). About a
dozen exchanges reported nil turnover during the year.

The movement of the S&P CNX NIFTY, the most widely used
indicator of the market, is presented in Chart 5.1. In the very first
year of liberalization, i.e. 1991-92, it recorded a growth of 267%,
followed by sharp decline of 47% in the next year as certain
irregularities in securities transactions were noticed. The market
picked up next year thanks to increased inflow of foreign funds,
and increased investor interest. Thereafter the market remained
subdued. The index recorded a decline of 3.47% during 1998-99
under the pressure of economic sanctions following detonation of
nuclear device, continuing woes of East Asian financial markets,
volatility of Indian currency and worries about financial health of
UTI’s US-64 scheme. The Union Budget of 1999 brought cheers to
the market. The market moved on a roller coaster ride, but a
distinct rising trend emerged due to all-round positive perception
about strength of the Government and also its commitment towards
second generation reforms, improved macro-economic parameters
and better corporate results. The S&P CNX Nifty firmed up during
1999-2000 by 42% which was nearly four times the average return
offered on bank deposits. The trend got reversed during 2000-01,
which witnessed large sell-offs in new economy stocks in global
markets and deceleration in the growth of the domestic economy.
This brought down Nifty from a high of 1636.95 in April 2000 to a
low of 1108.20 in October 2000. The market looked up in
November-January in anticipation of a good budget. However it
did not last long as the market received shocking news about
imminent payment crisis on certain exchanges, large scale
manipulations in stock prices and revelation of large scale
corruption in the procurement of defense equipments. The Nifty
closed at 1148.20 at the end of March 2001 recording a fall of
about 25% during 2000-01. The trend precipitated further with
introduction of rolling settlement and withdrawal of deferral
products in July 2002, suspension of repurchase facility under
UTI’s US-64 scheme, terrorist attack on world Trade Centre in
September 2002, etc. which caused a further decline in S&P CNX
Nifty by 1.6% during 2001-02. The Nifty closed at 978.2 at the
end of March 2003.
Government Securities
The trading volumes in government securities exceeded the
combined trading volumes in equity segments of all the exchanges
in the country during 2002-03. The aggregate turnover in central
and state government dated securities, including treasury bills,
through SGL transactions increased by manifold between 1994-95
and 2002-03. During 2002-03 it reached a level of Rs. 19,557,313
million, recording about 24.3% growth over Rs.15,738,930 million
in the previous year. Such growing turnover reflects further
deepening of the market. The bulk of transactions during 2000-02
were on outright basis. The share of outright transactions in
government securities increased from 23.2% in 1995-96 to 71.2%
in 2002-03. The share of repot transactions declined
correspondingly from 76.8% in 1995-96 to 29% in 2002-03. The
share of WDM segment of NSE in total turnover for government
securities decreased marginally from 58.9% in 2000-01 to 52% in
2002-03. As compared to the increase in overall turnover of
government securities by 24%, the same on WDM grew by 11%
during 2002-03. Share of WDM in transactions of dated securities
decreased from 61.1% in 2001-02 to 55.6% in 2002-03. Its share in
transactions of T-bills decreased from 27.4% in 2001-02 to 21.5%
in 2002-03. Government debt, which constitutes about three-fourth
of the total outstanding debt, has the highest level of liquidity
amongst the fixed income instruments in the secondary market.
The share of dated securities in total turnover of government
securities has been increasing over the years. Two-way quotes are
available for the active gilt securities from the primary dealers.
Though many trades in the gilts take place through telephone, a
larger chunk of trades get routed through NSE brokers.

Derivatives Market
Trading in derivatives of securities commenced in June 2000 with
the enactment of enabling legislation in early 2000. Derivatives are
formally defined to include: (a) a security derived from a debt
instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security,
and (b) a contract which derives its value from the prices, or index
of prices, or underlying securities. Derivatives are legal and valid
only if such contracts are traded on a recognized stock exchange,
thus precluding OTC derivatives. Derivatives trading commenced
in India in June 2000 after SEBI granted the approval to this effect
in May 2000. SEBI permitted the derivative segment of two stock
exchanges, i.e. NSE and BSE, and their clearing house/corporation
to commence trading and settlement in approved derivative
contracts. To begin with, SEBI approved trading in index futures
contracts based on S&P CNX Nifty Index and BSE-30 (Sensex)
Index. This was followed by approval for trading in options based
on these two indices and options on individual securities. The
trading in index options commenced in June 2001 and trading in
options on individual securities would commence in July 2001
while trading in futures of individual stocks started from
November 2001. In June 2003, SEBI/RBI approved the trading on
interest rate derivative instruments.
The total exchange traded derivatives witnessed a volume of
Rs.4,423,333 million during 2002-03 as against Rs. 1,038,480
million during the preceding year. While NSE accounted for about
99.5% of total turnover, BSE accounted for less than 1% in 2002-
03. The market witnessed higher volumes from June 2001 with
introduction of index options, and still higher volumes with the
introduction of stock options in July 2001. There was a spurt in
volumes in November 2001 when stock futures were introduced. It
is believed that India is the largest market in the world for stock
futures.
The foreign exchange (currency or forex or FX) market exists wherever one
currency is traded for another. It is by far the largest financial market in the world, and
includes trading between large banks, central
banks, currency speculators,
multinational corporations, governments, and other financial markets
and institutions. The average daily trade in the global forex markets currently exceeds
US$1.9 trillion. Retail traders (individuals) are a small fraction of this market and may
only participate indirectly through brokers or banks.

Market size and liquidity

The foreign exchange market is unique because of:

• its trading volume,

• the extreme liquidity of the market,
• the large number of, and variety of, traders in the
market,
• its geographical dispersion,
• its long trading hours - 24 hours a day (except on
weekends).
• the variety of factors that affect exchange rates,

According to the BIS [1], average daily turnover in traditional

foreign exchange markets was estimated at $1,880 billion. Daily
averages in April for different years, in billions of US dollars, are
presented on the chart below

Global foreign exchange market turnover:

• $621 billion spot

• $1.26 trillion in derivatives, ie
• $208 billion in outright forwards
• $944 billion in forex swaps
• $107 billion in FX options.

Exchange-traded forex futures contracts were introduced in 1972 at

the Chicago Mercantile Exchange and are actively traded relative
to most other futures contracts. Forex futures volume has grown
rapidly in recent years, but only accounts for about 7% of the total
foreign exchange market volume, according to The Wall Street
Journal Europe (5/5/06, p. 20).

Average daily global turnover in traditional foreign exchange

market transactions totaled $2.7 trillion in April 2006 according to
IFSL estimates based on semi-annual London, New York, Tokyo
and Singapore Foreign Exchange Committee data. Overall
turnover, including non-traditional foreign exchange derivatives
and products traded on exchanges, averaged around $2.9 trillion a
day. This was more than ten times the size of the combined daily
turnover on all the world’s equity markets. Foreign exchange
trading increased by 38% between April 2005 and April 2006 and
has more than doubled since 2001. This is largely due to the
growing importance of foreign exchange as an asset class and an
increase in fund management assets, particularly of hedge funds
and pension funds. The diverse selection of execution venues such
as internet trading platforms has also made it easier for retail
traders to trade in the foreign exchange market.

Because foreign exchange is an OTC market where brokers/dealers

negotiate directly with one another, there is no central exchange or
clearing house. The biggest geographic trading centre is the UK,
primarily London, which according to IFSL estimates has
increased its share of global turnover in traditional transactions
from 31.3% in April 2004 to 32.4% in April 2006. Other large
centres include the US (with a 18.2% global share), Japan (7.6%)
and Singapore (5.7%) (Chart 2). Most of the remainder was
accounted for by trading in Germany, Switzerland, Australia,
Canada, France and Hong Kong.

The ten most active traders account for almost 73% of trading
volume, according to The Wall Street Journal Europe, (2/9/06 p.
20). These large international banks continually provide the market
with both bid (buy) and ask (sell) prices. The bid/ask spread is the
difference between the price at which a bank or market maker will
sell ("ask", or "offer") and the price at which a market-maker will
buy ("bid") from a wholesale customer. This spread is minimal for
actively traded pairs of currencies, usually only 0-3 pips. For
example, the bid/ask quote of EUR/USD might be 1.2200/1.2203.
Minimum trading size for most deals is usually $100,000.

These spreads might not apply to retail customers at banks, which

will routinely mark up the difference to say 1.2100 / 1.2300 for
transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks.
Spot prices at market makers vary, but on EUR/USD are usually
no more than 3 pips wide (i.e. 0.0003). Competition has greatly
increased with pip spreads shrinking on the major pairs to as little
as 1 to 2 pips.
Market participants

Unlike a stock market, where all participants have access to the

same prices, the forex market is divided into levels of access. At
the top is the inter-bank market, which is made up of the largest
investment banking firms. Within the inter-bank market, spreads,
which are the difference between the bid and ask prices, are razor
sharp and usually unavailable, and not known to players outside
the inner circle. As you descend the levels of access, the difference
between the bid and ask prices widens. This is due to volume. If a
trader can guarantee large numbers of transactions for large
amounts, they can demand a smaller difference between the bid
and ask price, which is referred to as a better spread. The levels of
access that Source: Euromoney FX survey[3]
make up the Top 10 Currency Traders
forex market % of overall volume, May % of
are Name
2006 volume
determined Rank
by the size 1 Deutsche Bank 19.26
of the “line”
2 UBS AG 11.86
(the amount
of money 3 Citigroup 10.39
with which 4 Barclays Capital 6.61
they are Royal Bank of
5 6.43
trading). Scotland
The top-tier 6 Goldman Sachs 5.25
inter-bank 7 HSBC 5.04
market 8 Bank of America 3.97
9 JPMorgan Chase 3.89
10 Merrill Lynch 3.68
accounts for 53% of all transactions. After that there are usually
smaller investment banks, followed by large multi-national
corporations (which need to hedge risk and pay employees in
different countries), large hedge funds, and even some of the retail
forex market makers. According to Galati and Melvin, “Pension
funds, insurance companies, mutual funds, and other institutional
investors have played an increasingly important role in financial
markets in general, and in FX markets in particular, since the early
2000s.” (2004) In addition, he notes, “Hedge funds have grown
markedly over the 2001-2004 period in terms of both number and
overall size” Central banks also participate in the forex market to
align currencies to their economic needs.

Trading characteristics

There is no single unified foreign exchange market. Due to the

over-the-counter (OTC) nature of currency markets, there are
rather a number of interconnected marketplaces, where different
currency instruments are traded. This implies that there is no such
thing as a single dollar rate - but rather a number of different rates
(prices), depending on what bank or market maker is trading. In
practice the
Top 6 Most Traded Currencies
rates are
ISO 4217 Symb
often very Rank Currency
Code ol
close,
otherwise 1 United States dollar USD $
they could 2 Eurozone euro EUR €
be exploited 3 Japanese yen JPY ¥
by British pound
4 GBP £
arbitrageurs. sterling
5-6 Swiss franc CHF -
The main 5-6 Australian dollar AUD $
trading
centers are in London, New York, Tokyo, and Singapore, but
banks throughout the world participate. As the Asian trading
session ends, the European session begins, then the US session,
and then the Asian begin in their turns. Traders can react to news
when it breaks, rather than waiting for the market to open.

There is little or no 'inside information' in the foreign exchange

markets. Exchange rate fluctuations are usually caused by actual
monetary flows as well as by expectations of changes in monetary
flows caused by changes in GDP growth, inflation, interest rates,
budget and trade deficits or surpluses, large cross-border M&A
deals and other macroeconomic conditions. Major news is released
publicly, often on scheduled dates, so many people have access to
the same news at the same time. However, the large banks have an
important advantage; they can see their customers' order flow.

Currencies are traded against one another. Each pair of currencies

thus constitutes an individual product and is traditionally noted
XXX/YYY, where YYY is the ISO 4217 international three-letter
code of the currency into which the price of one unit of XXX is
expressed. For instance, EUR/USD is the price of the euro
expressed in US dollars, as in 1 euro = 1.3045 dollar. Out of
convention, the first currency in the pair, the base currency, was
the stronger currency at the creation of the pair. The second
currency, counter currency, was the weaker currency at the
creation of the pair.

The factors affecting XXX will affect both XXX/YYY and

XXX/ZZZ. This causes positive currency correlation between
XXX/YYY and XXX/ZZZ.

On the spot market, according to the BIS study, the most heavily
traded products were:

• EUR/USD - 28 %
• USD/JPY - 18 %
 • GBP/USD (also called sterling or cable) - 14 %

and the US currency was involved in 89% of transactions,

followed by the euro (37%), the yen (20%) and sterling (17%).
(Note that volume percentages should add up to 200% - 100% for
all the sellers, and 100% for all the buyers).

Although trading in the euro has grown considerably since the

currency's creation in January 1999, the foreign exchange market is
thus far still largely dollar-centered. For instance, trading the euro
versus a non-European currency ZZZ will usually involve two
trades: EUR/USD and USD/ZZZ. The only exception to this is
EUR/JPY, which is an established traded currency pair in the inter
bank spot market.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end,

currency prices are a result of supply and demand forces. The
world's currency markets can be viewed as a huge melting pot: in a
large and ever-changing mix of current events, supply and demand
factors are constantly shifting, and the price of one currency in
relation to another shifts accordingly. No other market
encompasses (and distills) as much of what is going on in the
world at any given time as foreign exchange.

Supply and demand for any given currency, and thus its value, are
not influenced by any single element, but rather by several. These
elements generally fall into three categories: economic factors,
political conditions and market psychology.
 INTRODUCTION TO MUTUAL FUND

 MUTUAL FUND OPERATION FLOW CHART

 IMPORTANT CHARACTERISTICS OF MUTUAL FUND

 EVOLUTION OF THE MUTUAL FUND

 HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

 FIRST PHASE 1964-1987

 SECOND PHASE 1987-1993

 THIRD PHASE 1993-2003

 FOURTH PHASE since February 2003

 GROWTH ASSETS UNDER MANAGEMENT

 MUTUAL FUND

Introduction

A mutual fund is a pool of money, collected from investor and is

invested according to certain investment objectives.

A mutual fund is created when investors put their money together.

It is therefore a pool of the investors’ funds. The most important
characteristic of a mutual fund is that contributors and the
beneficiaries of the fund are the same class of people, namely the
investors. The term mutual means that investors contribute to the
pool, and also benefit from the pool. There are no other claimants
to the funds. The pool of funds held mutually by investors is the
mutual fund.

A mutual fund’s business is to invest the funds thus collected,

according to the wishes of the investors who created the pool. In
many markets these wishes are articulated as “investment
mandates.” Usually, the investors appoint professional investment
managers, to manage their funds. The same objective is achieved
when professional investment managers create a “product,” and
offer it for investment to the investor. This product represents a
share in the pool, and pre-states investment objectives. For
example, a mutual fund, which sells a “money market mutual
fund,” is actually seeking investors willing to invest in a pool that
would invest predominantly in money market instruments.

The money accumulated in a mutual fund is managed by

professionals who decide on behalf of shareholders on investment
strategy. These professionals choose investments that best match
the fund’s objectives as described in the prospectus. Their
investment decisions are based on extensive knowledge and
research of market conditions and the financial performance of
individual companies and specific securities. As economic
conditions change, the fund may adjust the mix of its investments
to adopt a more aggressive or a more defensive posture to meet its
investment objective.
A mutual fund is an investment company that pools money from
shareholders and invests in a diversified portfolio of securities. An
estimated 91.2 million individual Americans in 53.3 million U.S.
households own mutual fund shares. In India, investors in the
mutual fund industry today have a choice of around 40 mutual
funds offering more than 500 products. Though the categories of
products offered could be classified under about a dozen generic
heads, competition in the industry has lead to innovative alterations
to standard products. It is also possible for investors to decide the
manner in which their returns would be distributed, and choose
from daily, monthly, quarterly or annual payout; or re-investment
of dividends into the mutual fund product itself; or a growth option
that would seek growth in investment over distribution of income.
The most important benefit of product choice is that it enables
investors to choose an option that suits their return requirements
and risk appetite. Investors can combine the options to arrive at
their own mutual fund portfolio that fit with the financial planning
objectives.

A Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. The money thus
collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through
these investments and the capital appreciations realized are shared
by its unit holders in proportion to the number of units owned by
them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a mutual
fund:
Mutual Fund Operation Flow Chart

Important Characteristics of a Mutual Fund

 A mutual fund belongs to the investors who have pooled their

funds. The ownership of mutual fund is the hands of the
investors.
 Investment professionals and other service providers, who
earn a fee for their services, from the fund, manage the mutual
fund.
 The pool of funds is invested in a portfolio of marketable
investments. The value of the portfolio is updated every day.
 The investor’s share in the fund is denominated by “units.”
The value of the units changes with change in the portfolio’s
value, every day. The value of one unit of investment is called
as the Net Asset Value or NAV.
 The investment portfolio of the mutual fund is created
according to the stated investment of the fund.

EVOLUTION OF MUTUAL FUND

Mutual funds have been around for a long time, dating back to the
early 19th century. The first modern American mutual fund opened
in 1924, yet it was only in the 1990's that mutual funds became
mainstream investments, as the number of households owning
them nearly tripled during that decade. With recent surveys
showing that over 88% of all investors participate in mutual funds,
you're probably already familiar with these investments, or perhaps
even own some. In any case, it's important that you know exactly
how these investments work and how you can use them to your
advantage.

History of the Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the
formation of Unit Trust of India, at the initiative of the
Government of India and Reserve Bank the. The history of mutual
funds in India can be broadly divided into four distinct phases.
First Phase – 1964-87
Second Phase-1987-93
Third Phase-1993-2003
Fourth Phase-Since Feb 2003

I. First Phase – 1964-87

Unit Trust of India (UTI) was established in 1963 by an Act of

Parliament. It was set up by the Reserve Bank of India and
functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI
and the Industrial Development Bank of India (IDBI) took 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.6, 700 cores of assets under management.

II. 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 Canarabank 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.

III. 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.
IV. 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 September 2004, there
were 29 funds, which manage assets of Rs.153108 crores under
421 schemes.
The graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER

MANAGEMENT
Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the
Specified Undertaking of the Unit Trust of India effective from
February 2003. The Assets under management of the Specified
Undertaking of the Unit Trust of India has therefore been excluded
from the total assets of the industry as a whole from February 2003
onwards.
  ORGANISATION OF A MUTUAL FUND
 TRUSTEES
 SPONSORS
 CUSTODIANS
 REGISTRAR AND TRANSFER AGENTS
 SELLING AND DISTRIBUTION AGENTS
 LEGAL ADVISORS AND AUDITORS
 BROKERS
 DEPOSITORY PARTICIPANTS

FUND STRUCTURE AND CONSTITUENTS

Organization of a Mutual Fund

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

Organization of a Mutual Fund

Trustees

A trust is a notional entity that cannot contract in its own name so

the trust enters into contracts in the name of the trustees. Trustees
can either be individual or corporate body. Trustees appoint the
asset management company secure necessary approvals,
periodically monitor how the AMC functions, and hold the
properties of the various schemes in the trust for the benefit of the
investors. Trustees can be held accountable for the financial
irregularities of the mutual fund.

Rights of the Trustees

 Trustees appoint the AMC, in consultation with the sponsor and
according to SEBI regulations.
 All mutual fund scheme floated by the AMC have to be
approved by the trustees.
 Trustees can seek information from the AMC on the operation
and compliance of the mutual fund, with provision of trust deed,
investment agreement and SEBI regulations. These mandatory
reviews and monitoring are to be made on quarterly basis.
 Trustees can seek remedial action from AMC, and in the
extreme situation of dissatisfaction with the performance,
dismiss the AMC.

Obligations of the Trustees

General Due Diligence

 Appointment of AMC and its directors
 Observance of AMC functioning and desirability of its
continuance
 Protection of trust property
 Ensuring that all constituents and associates are registered
entities
 Review of service contracts and terms
 Reporting to SEBI any special developments in the mutual
funds.

Special Due Diligence

Appointment of independent auditors and review of periodic audit
reports
Periodic compliance report from the AMC
Communicate deficiency and recommendations in writing to the
AMC
Prescribe a code of ethics for the trustees and the personnel of the
AMC

Other Obligations
 Trustees must ensure that the transaction of the mutual fund are
in accordance with the trust deed
 Trustees must ensure that AMC has systems and procedures in
place, and that all the fund constituents are appointed
 Trustees must ensure due diligence in the part of the AMC in
the appointment of the constituents and business associates
 Trustees must furnish to SEBI, on half yearly basis a report on
the activities of the AMC.
 Trustees must ensure that net worth of the AMC is according to
the stipulated norms, every quarter.
 Trustees must ensure that the activities of the mutual fund are
in compliance with the SEBI regulations.

Sponsors
The sponsor of mutual fund is like the promoter of a company. The
sponsor may be bank, a financial institution, or financial service
company. It may be Indian or foreign. Sponsor appoints the
trustees, custodians and the AMC with the prior approval of the
SEBI and in accordance with SEBI regulations. Sponsor must be
carrying on business in financial services for a minimum period of
5years.
 Net worth of sponsor is positive in all preceding 5 years
 Net worth in immediately proceeding year is more than capital
contribution to AMC.
 Sponsor must have been profit making in at least 3 of the
immediately preceding 5 years including the 5th year.
 Sponsor must contribute 40% of the net worth of the AMC.
Custodian
The custodian handles the investment back office operations of a
mutual fund. Inter alias, it looks after the receipt and delivery of
securities, collection of income, distribution of dividends, and
segregation of assets between schemes. The sponsor of mutual
fund cannot act as its custodian. This condition is meant to ensure
that the asset of mutual fund is not in the hand of the sponsor. They
keep the investment account of the mutual fund, and also collect
the dividend and interest payment due on mutual fund investments.
On the advice of the fund managers they act on the corporate
actions.

Function of Custodian
Custodians are responsible for the securities held in the mutual
fund’s portfolio. They discharge an important back office function,
by ensuring that securities that are bought are delivered and
transferred to the books of the mutual funds, and that funds are
paid out when a mutual fund buys securities. They keep the
investment account of the mutual fund, and also collect the
dividends and interest payment due on mutual fund investments.
On the advice of the fund managers they act on the corporate
actions.

Registrar and Transfer Agents

The registrar and transfer agents are responsible for investor
servicing functions as they maintain the records of investors on
mutual funds. They process investor application; record details
provided by the investors on the application form; send out the
investors details regarding their investment in the mutual fund;
send out periodical information on the performance of the mutual
fund; process dividend payout to the investors; in corporate
changes in information as communicated by investors; and keep
the investor record up to date, by recording new investors and
removing investors who have withdrawn their funds. In many
cases they also provide additional services by tracking investor
behavior for mutual funds, tracking the performance of selling and
distributing agents; and creating database for use in marketing of
mutual fund products.

Selling and Distributing Agents

Mutual fund products are reached to investors across the country
through selling agents and distributors. Selling agents are usually
individuals who bring in investors fund for a commission.
Distributors are institutions that appoint agents and other
mechanism to mobilize funds from investors. Bank that function as
distributors; for example, tend to offer mutual fund products to
their chosen customers. Some agencies use direct marketing agents
to sell mutual fund products. Some agencies cross sell mutual fund
products to clients, to whom they are already offering other
financial products.

Most agents and distributors are paid commissions on the fund

they mobilize from investors. These commissions are split into a
initial commission, which is paid on mobilization of funds; and
trail commission, which is paid depending on the length of stay of
the investor in the mutual fund. Some agents also pass on the
commission they receive, to the investor as an incentive.

Legal Advisors and Auditors

Legal advisors advice mutual funds on regulatory and taxation

issues. Every mutual fund has an employee designated as
compliance officer, who work under the advice of the legal
advisors. The accounts of the mutual funds are actually the
accounts of the pool in which the investors have invested.
Therefore each mutual fund scheme created by an AMC has to
maintain a separate book of account and draw up its annual report.
The AMC also has its accounts and annual report. These two sets
of accounts are required to be statutorily audited. SEBI regulation
stipulated that auditors of the mutual fund couldn’t also be the
auditors of the AMC. The two sets of the accounts have to be
audited by two separate auditing firms. Auditors charge a fee from
the mutual fund for these services.

Brokers
Brokers support the investment management function of the
mutual fund, by enabling the investment managers to buy and sell
securities. Brokers are registered members of stock exchanges.
They charge a commission for their services. In many cases,
brokers also provide investment managers with research report on
the performances of various companies and industrial sectors, and
investment recommendations. Brokers also are an important source
of market information to fund managers.
If the broker is associated with the sponsor or its associates then
the AMC shall not purchase or sell securities through that broker in
excess of 5% of the aggregate of purchase and sale of securities
made by the mutual fund in its entire scheme.

For transactions through any other broker the AMC can exceed the
limit of 5% provided it has recorded justification in writing and
report of such exceeding has been sent to trustee on a quarterly
basis.

Depository Participant
Depository participants hold the securities of mutual funds in
dematerialized form. They work with the custodian and handle the
operational aspects of actually making/receiving delivery of
securities into the account of the mutual funds. On instructions
from the custodian, they deliver/receive securities from the
company/stock exchange, in dematerialized form. They also
communicate the custodian’s instructions on corporate actions to
the company.
 REGULATORY ASPECTS OF MUTUAL FUND

Schemes of Mutual Fund:

• 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.

• No one shall issue any form of application for units of a

mutual fund unless the form is accompanied by the
 memorandum containing such information as may be
specified by the Board.
• Every close ended scheme shall be listed in a recognized
stock exchange within six months from the closure of the
subscription
• The asset management company may at its option repurchase
or reissue the repurchased units of a close-ended scheme.
• 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);

(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).

• 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.

Rules Regarding Advertisement:

• The advertisement for each scheme shall disclose investment

objective for each scheme.
• An advertisement shall be truthful, fair and clear and shall
not contain a statement, promise or forecast which is untrue
or misleading.
• Advertisements shall not be so framed as to exploit the lack
of experience or knowledge of the investors.
• All advertisements issued by a mutual fund or its sponsor or
Asset Management Company, shall state "all investments in
mutual funds and securities are subject to market risks and
the NAV of the schemes may go up or down depending upon
the factors and forces affecting the securities market".
• The advertisement shall not compare one fund with another,
implicitly or explicitly, unless the comparison is fair and all
information relevant to the comparison is included in the
advertisement.
• The offer document and advertisement materials shall not be
misleading or contain any statement or opinion, which are
incorrect or false.
Investment Objectives and Valuation Policies:

• The moneys collected under any scheme of a mutual fund

shall be invested only in transferable securities in the money
market or in the capital market or in privately placed
debentures or securitized debts.
• Provided that moneys collected under any money market
scheme of a mutual fund shall be invested only in money
market instruments in accordance with directions issued by
the Reserve Bank of India;
• The mutual fund shall not borrow except to meet temporary
liquidity needs of the mutual funds for the purpose of
repurchase, redemption of units or payment of interest or
dividend to the unit holders.
• The mutual fund shall not advance any loans for any purpose.
• Every mutual fund shall compute and carry out valuation of
its investments in its portfolio and publish the same in
accordance with the valuation norms specified in Eighth
Schedule
• Every mutual fund shall compute the Net Asset Value of
each scheme by dividing the net assets of the scheme by the
number of units outstanding on the valuation date.
 • The Net Asset Value of the scheme shall be calculated and
published at least in two daily newspapers at intervals of not
exceeding one week:
• 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.
 • 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.

Procedure for Action In Case Of Default:

• 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.
• Transfers of investments from one scheme to another scheme
in the same mutual fund shall be allowed only if, -
1. Such transfers are done at the prevailing market price for
quoted instruments on spot basis.
2. 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 inter
scheme 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 badly 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.
 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;

Any unlisted security of an associate or group company of

the sponsor; or
 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 that 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.

Self-Regulatory Organizations

Self-regulatory organizations are the second –tier regulatory

mechanism created by market participants, to regulate the working
of a group of persons/organizations. If the self-regulatory
organization is registered with the regulatory authority, they have
the powers to enforce rules, seek information, conduct inspections,
and award penalties. A registered self-regulatory organization
obtains these powers from the regulatory authority, which has
delegated these to them. For example, though the stock exchanges
are regulated by SEBI, they are also registered self-regulatory
organizations. They can form rules and code of conduct for their
members, and enforce them. In this sense they are the second tiers
of regulation.
There are a number of industry bodies like the fixed income money
market and derivative associations (FIMMDA), Primary Dealers
Association of India (PDAI) and the Association of Mutual Funds
in India (AMFI), which are industry associations. These are not
registered self-regulatory organization, and therefore can only
issue guidelines to members. They cannot enforce regulation.
However, in order to enable orderly growth of the industry, and
bring about uniformity and standards in practice, most members
tend to abide by the guidelines of these industry associations.
Regulators also find it convenient to discuss regulatory issues with
these associations, rather than deal with each regulated entity in
isolation. A number of significant changes that have raised the
level of disclosure and standards for the mutual fund industry have
been enabled by the AMFI, despite it not being a self-regulatory
organization yet.

Regulation of Mutual Fund through companies act

The AMC and the trustee company may be structure as limited
companies, which come under the regulatory purview of the
company law board. The provisions of the companies Act, 1956,
are applicable to these company forms of organizations. The CLB
is the apex regulatory authority for companies. CLB is also the
appellate authority for all the issues relating to the companies Act.
Any grievance against the
AMC or the Trustee Company can be addressed to the CLB for
redressal.
The Registrar of Companies (ROC) oversees the compliance by
the AMC and trustee company, with the provisions of the
Companies Act. Periodic reports and annual accounts have to be
filed by the companies with the ROC.
The Department of Company Affairs (DCA) is responsible for the
formulation and modification of the laws relating to the companies
including the Indian Companies Act. The DCA also has the powers
to prosecute directors for non-compliance provision of this act.

SEBI’s Regulation of Mutual Funds

For smooth conduct and regulation of the mutual fund several
guidelines have been issued by the SEBI regarding the investment,
disclosure, accountability distribution of its profits to its members
and asset management companies. SEBI has issued regulation and
code of conduct in 1993 that provided a basic legal framework for
the functioning of the mutual fund. The Mutual Fund Regulation
Act 1996 has provided a sound footing and considerable leeway to
fund management. The new elements incorporated in the year
1998, have placed the investors in a better position with regard to
proper asset management and disclosure.
Disclosure norms:
With the number of mutual fund schemes ever on the increase the
investors should be kept well informed about the nature and
functioning of the mutual funds. It should start right from the offer
document. The offer document should essential information to
assist the investors to take informed and correct decision.
According to the SEBI regulations, the standard offer document
should give the following details:
1. Standard and scheme specific risk factors. The later may be
related to investment objective, investment strategy, asset
allocation, and risks from non-diversification if any, and from
investing in close ended schemes.
2. Due diligence by the Asset Management Company (AMC)
3. Fundamental attributes such as type of scheme, investment
objective and terms of issue. Details of offer such as sale,
 purchase, minimum corpus and pricing of units in relation to
NAV.
4. Likely initial issue expenses, actual issue expenses for schemes
launched during the last year, expenses borne by AMC and
annual recurring expenses.
5. Identification of AMC and background of fund managers.
6. Asset allocation pattern with indicative range of investments or
the maximum investment in a certain asset class.
7. The policy of diversification or concentration to be pursued.
8. The policy turnover policy and the effects of investment
techniques on total portfolio turnover.
9. The policy with respect to dividends and distributions,
including any options for unit holders.
10. The policy of the fund regarding inter scheme transfers.
11. Associate transactions
12. The borrowing policy, including the intent and purpose of
borrowing and any stock lending by the fund.
13. Valuation of assets, accounting policies and NAV.
14. The manner of determination of redemption and repurchase
price of the units.
15. Tax treatment of investments in mutual funds, investor rights
and services and redressal of investor grievances.
The amendments in 1998 made a significant change in information
disclosure pertaining to litigation/penalties. SEBI has now
mandated the disclosure of information contained in reports of
investigation and inspection conducted by it. So far, such
information was neither disclosed in the offer document nor in the
annual reports. Now, all mutual funds have to disclose in their
offer documents the information pertaining to the following areas.
1. All cases of penalties awarded by SEBI or any other regulatory
body against the sponsor of the mutual fund, the trustee
company/board of trustees, or any of the directors or key
personnel of the AMC and Trustee Company. The nature of the
penalty must be disclosed.
2. Pending material litigation proceedings including pending
criminal and economic cases against any of the afore
mentioned parties. The name of the court or agencies in which
the proceedings are pending, the date instituted, the principal
parties thereto, a brief description of the factual basis alleged to
underline the proceedings and relief sought, if any, shall be
indicated.
3. Any deficiency in the systems and operations of the sponsors
of the mutual fund or any company associated with the sponsor
in any capacity such as the AMC or the trustee company. This
must pertain to matters that SEBI has specifically directed
 disclosures. The full portfolio disclosure in the annual reports
is mandatory.

SEBI has enacted the SEBI (mutual funds) regulations, 1996,

which provides the scope of regulations of mutual funds in India.
All mutual funds are required to be mandatory registered with
SEBI. The structure and formation of mutual funds, appointment
of key functionaries, operations of the mutual funds, accounting
and disclosure norms, rights and obligations of functionaries and
investors, investment restriction, compliance and penalties all are
defined under the SEBI regulation. Mutual funds have to send half
yearly compliance report to SEBI, and also provide all other
information about their operations as SEBI may require. SEBI is
also empowered to periodically inspect mutual fund organization
to ensure compliance with SEBI regulations. SEBI also regulates
other fund constituents such as AMCs, trustees, custodians, R&T
agents and brokers.

Regulatory Jurisdiction RBI Over Mutual Funds

RBI is the monetary authority of the company and is also the
regulator of the banking system. Earlier bank sponsored mutual
fund were under the dual regulatory control of RBI and SEBI.
Money market funds, which invested in short term instruments,
were also regulated by RBI. These provisions are no longer vogue.
SEBI is the regulator of all mutual funds. The present position is
that RBI is involved with the mutual fund industry, only to a
limited extent of being the regulator of the sponsors of the bank-
sponsored mutual funds. Specifically, if the sponsor has made any
financial commitment to the investors of mutual funds in the form
of guaranteeing assured returns such as guarantees can no longer
be made without the prior approval of the RBI. RBI will review the
financial condition and capital adequacy of the sponsoring bank,
before permitting it to make such guarantees. RBI is the issuer of
the government securities and also the regulator of money market.
Mutual funds invest in these securities, and are affected by the RBI
stipulations on the structure, issuance, pricing and trading of these
instruments.
 Characteristic Features Of Mutual Fund Accounts
 Standard Accounting Policy For Mutual Fund
 Net Assets Of Mutual Funds
 NAV And Pricing
 Load
 Sources Of Income For Mutual Fund
 Initial Issue Expenses
 Income Equalization Account
 Disclosure Norms Of Mutual Funds
 Valuation Of Securities
 Thinly Traded Securities
 Non Traded Securities
 Regulatory Norms For Illiquid Securities
 ACCOUNTING AND VALUATION
Introduction
The ninth schedule of the SEBI (Mutual Funds) Regulations, 1996
lays down the framework of accounting and disclosure norms for
mutual funds, and mutual funds have to mandatory abide by these
stipulations.

Characteristics Features of mutual fund accounts

 Mutual funds are pools of investments held by
investors with common investment objective.
Therefore there is a separate account for every mutual
fund scheme. Each scheme has a distinctive balance
sheet and profit and loss account.
 Mutual fund investments are marked to market and
carried in the accounts at market value, and not at
cost.
 Since the value of units is based on the NAV,
unrealized profits are also shown in the income
statements of mutual funds. Dividends however, are
not distributed out of such unrealized profit.
Standard Accounting Policy for Mutual Funds
 All investments have to be marked to market or
valued using fair valuation methods as approved by
the boards of trustees and SEBI.
 Unrealized appreciation cannot be distributed.
 Dividend should be accrued on the ex dividend date.
 Investments have to be valued on average cost basis
for determining profit or loss on sale.
 Purchase and sale of securities should be recognized
on trade.
 Sale and repurchase prices, which include realized/
unrealized appreciation/ depreciation, have to be
adjusted in accounts using the income equalization
account.
 Provisions for NPAs have to be done according to
SEBI guidelines for the same.
Net Assets of Mutual Funds
The investor’s funds are deployed in a portfolio of securities by the
fund manager. The value of these investments keeps changing as
the market price of the securities change. Since investors are free
to enter and exit the fund at any time, it is essential that the market
value of their investments is used to determine the price at which
such entry and exit will take place. The net assets represent the
 market value of assets, which belong to the investors, on a given
date.
Net assets are calculated as
 Market value of investment
 Plus current assets and other assets
 Plus accrued income
 Less current liabilities and other liabilities
 Less accrued expenses

Net Asset Value

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.
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.
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.

Calculation of NAV
NAV of a mutual fund is the value of one unit of investment in the
fund, in net assets terms. It is computed by dividing the net assets
of a fund by the number of units that are outstanding in the books
of the fund.

Market value of the fund’s investments +

Receivables
+ Accrued income – Liabilities – Accrued
expenses
NAV=
Number of shares or units
outstanding

Example
Considered a mutual fund that collects Rs.10cr by issuing units of
Rs.10 each. Therefore when the mutual fund begins operations, it
would have 100, 00,000 units of Rs.10 each.
Assets mix of the fund
● Equity shares Rs.4, 50, 00,000
● Government bonds Rs.3, 00, 00,000
● Money market instruments Rs.1, 00, 00,000
● Corporate bonds Rs.1, 50, 00,000
Total Assets Rs.10, 00, 00,000
After 30 days, the fund is scheduled to open for fresh sales as well
as repurchases. For this the investment portfolio will have to be
valued again, to ascertain what its current value is? In the interim
the mutual fund would have incurred expenses, earned income,
which has to be reflected in the price per unit. We call these
charges as accrued income and accrued expenses. Mutual funds
have internal accounting policies, which enables the computation
of these accruals. Let us assume the status of the investment at the
end of 30 days is as follows:
● Equity shares Rs.6, 50, 00,000
● Government bonds Rs.4, 00, 00,000
● Money market instruments Rs.1, 00, 00,000
● Corporate bonds Rs.1, 20, 00,000
Total Assets Rs.11, 50, 00,000
The value of the investment has changed with the changes in the
market prices. The process of valuing assets by using market
prices, as “marking to market.” Let us assume the accrued income
and expenses are Rs 1, 00,000 and Rs. 1, 35,000 respectively. The
level of current assets and liabilities are Rs 4, 00,000 and Rs. 3,
00,000 respectively (assumed).

The net asset of fund at the end of the 30 days

Market to market value of investments: Rs.
11,50,00,000
Plus current assets Rs. 4,00,000
Plus accrued income Rs. 1,00,000
Rs. 11,55,00,000

Less current liabilities Rs. 3,00,000

Less accrued expenses Rs. 1,35,000

Net Assets of the Fund Rs. 11,50,65,000

Since the number of units are 1,00,00,000. The NAV on this date
will be 11.5065. Price at which new investors can buy the units, an
existing investor can redeem their units will be based on this price
 Expenses usually incurred by mutual fund
Investment management fees to the AMC
Custodians fees
Trustees fees
Registrar and transfer agent fees
Recurring expenses including
 Marketing and selling expense
 Brokerage and transaction cost
 Audit fees
 Costs of fund transfer
 Cost related to investor communication
 Cost of providing account statements
 Cost of redemption cheques and warrants
 Legal expenses
 Cost of advertising
All these expenses are charged against the income earned by the
fund.
Expenses that cannot be charged that cannot be charged against the
income earned by the fund
Penalties and fine for infraction of laws
Interest on delayed payments to unit holders
Legal marketing and publication expenses not attributable to any
scheme
Expenses on investment and general management
Expenses on general administration, corporate advertising
Infrastructure cost
Expenses on fixed assets and software development
Cost as may be prohibited by SEBI
All these expenses are borne by either by the sponsor or AMC

Instructions Regarding Charging of Expenses That It Incurs,

To the Income of the Fund.
There are two levels of restrictions on the expenses that can be
charged to the income of a mutual fund
Level 1: only certain kinds of expenses that are identified as
having being incurred for the conduct of the business of the fund,
can be charged with the fund. For example, the AMC decides to
have an investor education drive across the country such expenses
cannot be charged to the fund. Regulations stipulate the kind of
expenses that the mutual fund will be bear. All other types of
expenses thus not stipulated have to be borne by the AMC or the
sponsor.
Level 2: Regulation refers to the limit on total expenses that can be
charged to the fund. The maximum limit on expenses including
issue or redemption expenses that can be charged to equity
scheme.
● For net asset unto Rs. 100cr 2.5%
● For net asset upto Rs. 300cr 2.25%
● For net asset upto Rs. 300cr 2%
● For remaining net assets 1.75%
The AMC receives an investment management fee for managing
the assets of the mutual funds. The fees are regulated by SEBI as
follows
● For the first Rs. 100 cr of average net
assets 1. 25%
● For net assets exceeding Rs. 100 cr
1.00%
If the AMC does not charge any of the initial issue expenses to the
fund, it can charge the scheme a management fee that is 1% higher
than above rates. These rates are applied to the weekly average net
assets of the mutual fund scheme, to determine AMCs fees.

NAV and Pricing

Application of NAV on sale and the repurchase of the unit.
There are two ways in which units are priced by mutual funds
namely historical pricing and prospective pricing. If the investor
receives a NAV based on market prices and valuation in the past, it
is called historical pricing.

For example, if a fund’s NAV on 6th March 2002 was Rs. 25.56,
and an investor buying units on 7th March 2002 were to be offered
unit at this value, we call it as historical pricing. In case of many
liquid funds, a cut off time is indicated, say 10 a.m. and application
received before this time get the historical pricing.
If the sale on 7th March 2002 depends on the NAV computed at the
end of the business day of 7th March2002, which is unknown at the
time of the transaction, we call such pricing as prospective pricing.
Mutual funds usually announces a cut off time before which
applications have to be handed into be eligible for the end of the
day NAV.
Every offered document defines both “applicable NAV” and
“business day” depending on which the NAV applicable to the
investor for each of the schemes is decided.

Sale and repurchase prices

The sale price is the price at which a mutual fund is willing to sell
the units to investors. An investor, who buys or invests in the
mutual fund, pays the same price. The repurchase price represents
the price at which the mutual fund is willing to buy the unit back
from the investor. The mutual fund decides the sale and
repurchases price, based on the NAV of the scheme

Load
Load is the factor that is applied to the NAV of the scheme to
arrive at the price. If a commission is paid to agents to bring in
new business, this represents a cost incurred by the mutual fund,
for the additional sales. Therefore it may decide to impose this cost
on the investors by increasing the price at which they can buy the
units. This is called the entry load.
Similarly, if an investor stays in a fund for a short while, and
decides to repurchase his units, the fund may incur some costs in
liquidating the portfolio and paying off these investors. The fund
imposes the cost of this operation on the exiting investor, in form
of load. This is called exit load.
Mutual funds have a choice. Mutual funds may decide to impose
no load, or only the sales load, or the exit load. If there are no
loads, then the cost associated with sales and repurchases are being
borne by the AMC not by the mutual fund’s scheme. Load may not
always be constant. It may depend on the period of stay of the
investor in the schemes, are called contingent deferred sales
charge.
 SEBI regulates the load that a mutual fund can charge. There are
two regulatory requirements.
1. The sale price cannot be more than 7% of the NAV and the
repurchases price cannot be less than 7% of the NAV.
2. The repurchase price cannot be less than 7% of the sale price.
Read together, this means that the 7% limit applies to the sale and
repurchases price, though the fund is free to impose the load on
either of them or both. For example, if the NAV is Rs.10 the
mutual fund can charge a sale price not higher than Rs. 10.7, or a
repurchase price that is not lower than Rs 9.3. However, the mutual
fund cannot charge both these prices. If the sale price is Rs.10.7,
the repurchase price cannot be lower than Rs. 9.95(10.7*0.93). If
repurchase price is Rs. 9.3, the sale price cannot be higher than Rs.
10(9.3/1.07).
In case of close-ended schemes the repurchase price of the units
should not be more than 95% of the NAV.

Factors that affect the NAV of a fund

 Sale and purchase of securities
 Sale and repurchase of units
 Valuation of assets
 Accrual of income and expenses
Sources of Income for Mutual Fund
  Dividend from equity investment
 Interest from debt instruments
 Profit from sale of securities
 Other income (commitment charges, underwriting
commission)

Initial Issue Expenses

Expenses that are incurred in the launch of the fund are called
initial issue expenses. The cost of registration and fund formation,
legal and advisory expenses, cost of launching the scheme,
advertising and promotion expenses, distribution costs,
commission to selling agents are some of the initial issue expenses
incurred by fund. SEBI regulations impose a ceiling of 6% of fund
mobilized on the expenses. If the expenses incurred exceed these
limits the expenses over and above the statutory limits, have to be
borne by AMC or sponsors and cannot be charged by the fund.

The AMC may decide that it would not charge the fund with any
of the initial issue expenses. Such schemes are called no load
schemes. In this case AMC can charge an investment management
fees higher than the statutory limit.
Treatment of initial issue expenses in accounts of mutual fund
Since the initial issue expenses is a large amount it is usually
amortized, or spread over a period of time, and charged in
installments to the income of the fund.
For a close-ended scheme floated on a load basis, initial issue
expenses are charged over the life of the scheme, on weekly basis.
For a open ended scheme the initial issue expenses written off over
a period not exceeding 5 years initial issue expenses are charged in
installments to the income of the fund not exceeding 5 years.
The unamortized portion of the initial issue expenses is shown on
the assets side of the balance sheet as deferred revenue expenditure
and included in the net asset calculation as other assets. However
for the purpose of computing the investment manager’s fees and
limits on expenses both of which are based on average net asset,
the deferred revenue expenditure is not included as it is not an
income-earning asset.

Income Equalization Account

The income equalization account is used to compute an account for
realized gains and unrealized loses, to ensure that in the sale and
repurchase of units on NAV based prices, unrealized profits are not
distributed to unit holders.
The NAV based prices have 3 components.
Face value of the unit, which has to be accounted in the unit capital
account
Premium/discount on face value, which represents the unrealized
gains/loses and therefore accounted in the premium reserve
account.
Realized gain/loses, which is to be accounted for in the income
equalization account.

The income equalization account operated as follow

The distributable surplus is computed as the realized
income
Plus realized gain on sale of investment.
Less expense
Accounting policy demands that unrealized loss should be reduced
from this figure. But funds usually account for loses before
dividend distribution to avoid large variation in the income
equalization account.

The per unit distributable surplus is computed as

Distributable surplus
Number of units outstanding.
When a unit is repurchased at a price above the par value, the
distributable surplus is actually paid put to the investor. The
income equalization account is debited by the amount of the
distributable surplus per unit. If a unit is repurchased below par,
the investor is paid an amount lower than the unit capital
contributed by him, thus foregoing the distributable surplus. The
income equalization amount is debited. Thus, for every sale and
repurchase, a part of the consideration attributable to distributable
surplus of the fund, is charged to the income equalization account.
The balance in the account is transferred to the P&L account at the
end of the year.

Disclosure Norms of Mutual Funds

Every mutual fund is required to disclose information on the

balance sheet and the annual report dually audited, in the annual
report. The format and contents of the annual report is regulated by
SEBI. The annual report contains information about assets,
liabilities, expenses, income, accounting policies and a substantial
amount of information on the performance of the fund.
Within 30 days of the close of each half-year (31st March and 30th
September), the fund has to publish its unaudited financial result in
one national daily newspaper and on published in language of the
region where the head office is situated. Also, it has to publish its
annual report in similar manner and mail a summary to all unit
holders.
Mutual funds are required to disclose the complete details of the
investment portfolio to the investor. The disclosure has to be made
on six monthly basis, within a month of the six monthly accounts
closing date. Mutual funds usually print periodic statement which
are sent to the investors and also available on the website. These
statements usually contain the fund manager commentaries on the
market; NAV of the fund over time, and the complete portfolio of
fund, providing the list of investment with the name of the
companies and the amount have been invested. There is also
additional information on the credit quality of the portfolio, and the
average tenure of the holdings, in case of debt funds.
Mutual funds have to prepare their accounts and publish them in
format prescribed by SEBI. Following are the disclosures to be
made by the fund:
 Any item of expenditure accounting for more
than 10% of the total expenditure should be disclosed in the
accounts separately.
 Script wise disclosure of non-performing
assets should be made in the accounts and the half yearly
portfolio disclosure to the investors. The total provisioning
for NPAs and the proportion of the NPA to total net assets
should also be disclosed.
 Details of large holding by unit holders have
to be disclosed in annual and half yearly
reports. The number of unit holders holding
more than 25% of the net asset of the fund,
and their total holdings in percentage terms
should be disclosed.

Valuation of Securities
Norms for valuing traded securities in a mutual fund.
If the securities held by the mutual fund are traded on stock
exchange regularly, the process of marking to market is simple.
The market price of the security is used to value the security. The
following are the regulations for valuing such traded securities:
 The last quoted closing price on the stock exchange where the
securities is principally traded is used for valuation. It would be
left to the AMC to select the appropriate stock exchange but
the reasons for selection should be recorded in writing.
 If a security is not traded on the particular day, its traded price
on the earliest previous trading day can be used. Such a date
should not be more than 30 days prior to the valuation date.

Thinly Traded Securities

An equity share is considered thinly traded:
1. If the traded value in a month is less than Rs.5 lakh, and total
volume of shares traded is less than 50,000 shares a month.
2. If a debt security has a traded value of less than Rs. 15 crores
in the 30 days prior to the valuation date, it is to be classified
as thinly traded.
A thinly traded security’s market price may not be representative
of its underlying value, as it is not valued frequently in the market.
Mutual funds have to use a fair valuation methodology for such
securities.
Non-Traded Securities
If a security, equity or debt is not traded in any recognized stock
exchange, for a period of 30 days prior to the valuation date, such
securities have to be classified as non-traded securities for the
purpose of valuation.
Guidelines for valuation of thinly traded and non-traded securities
The methodology recommended by SEBI is as follows
 1. On the basis of the latest available balance sheet, find out the
net worth per share. Net worth per share is defined as share
capital plus reserves minus loses divided by the number of
shares. This is the book value per share.
2. The value per share is calculated using the earning
capitalization method. This involves
a. Compute the earnings per share from the latest balance
sheet.
b. Find out the average price earnings multiple for the
industry to which the share being valued can be
classified.
c. The industry P/E ratio is to be discounted by 75%.
Thus the value calculated is called capitalized earning value.
2. The values obtained by above two methods have to be
averaged. This number is further accounted by 10% because
the share being valued in illiquid. The value thus obtained is
the fair value on which an illiquid share is valued by mutual
fund.
3. If the EPS is negative, the earning capitalization value is
taken as zero. If the balance sheet of the company is not
available even 9 months after the accounting year-end, the
company is valued at zero.
 4. If an illiquid security accounts for more than 5% of the net
assets of scheme, after using the above methodology for
valuation, such a security should be valued again by an
independent value.

Regulatory Norms for Illiquid Securities

 Illiquid securities are defined as non-traded,
thinly traded and unlisted equity shares.
 Illiquid securities should not exceed 15% of
the net assets of the scheme. Holdings above this limited are
to be valued at zero.
 Schemes having illiquid securities of over
15% of the net assets, as on September 2000, should bring
them down to 15% over a period of 2 years.
 In the half yearly portfolio disclosure to
investors, illiquid securities should be disclosed with an
asteroid mark, in the list of investments.
 Illiquid securities cannot be transferred
between schemes.
 Tax Benefits Available To Mutual funds
 Taxation Of Shares And Mutual Funds
 Capital Gain Tax Structure
 Dividend Stripping
 TAX ASPECTS

The tax benefits for investing in mutual funds are as follows:

A mutual fund which is registered under the SEBI (mutual fund)

regulation1996 is fully exempt from paying tax on its income,
under section 10(23D) of the IT act. Since it is only a pass through
entity, income is not taxed in the hands of the mutual fund.

Investments in units are not considered as wealth under the wealth

tax act and therefore shall not be chargeable to wealth tax.

Twenty percent of the amount invested in specified mutual funds

(called equity linked savings schemes or ELSS and loosely
referred to as "tax savings schemes") is deductible from the tax
payable by the investor in a particular year subject to a maximum
of Rs.2000 per investor. This benefit is available under section 88
of the I.T. Act.

Investment of the entire proceeds obtained from the sale of capital

assets for a period of three years or investment of only the profits
for a period of 7 years, exempts the asset holder from paying
capital gains tax. This benefit is available under section 54EA and
54EB of the I.T. Act.

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. This
benefit is available to the mutual fund under section 10 (23D) of
the I.T. Act.

A mutual fund has to pay a withholding tax of 10% on the

dividends distributed by it under the revised provisions of the 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, by an overriding provision. This benefit is
available under section 115R of the I.T. Act.

The investor in a mutual fund is exempt from paying any tax on

the dividend received by him from the mutual fund, irrespective of
the type of the mutual fund. This benefit is available under section
10(33) of the I.T. Act.

The units of mutual funds are treated as capital assets and the
investor has to pay capital gains tax on the sale proceeds of mutual
fund units sold by him. For investments held for less than one year
the tax is equal to 30% of the capital gain. For investments held for
more than one year, the tax is equal to 10% of the capital gains.
The investor is entitled to indexation benefit while computing
capital gains tax. Thus if a typical growth scheme of an income
fund shows a rise of 12% in the NAV after one year and the
investor sells it, he will pay a 10% tax on the selling price less cost
price and indexation component. This reduces the incidence of tax
considerably. This concession is available under section 48 of the
I.T. Act. The following calculations show this in more detail:

Purchase NAV = Rs.10

Sale NAV = Rs.11.2

Indexation component = 8%

Capital gains = 11.2 – 10(1.08)

= 11.2 – 10.8

= 0.4

Capital gains tax = 0.4*0.1 = 0.04.

If an investor buys a fresh unit in the closing days of March and

sells it in the first week of April of the following year, he is
entitled to indexation benefit for two financial years, which close
in the two March ending periods. This is termed as double
indexation and lowers the tax even further especially for income
funds. In the above example, the calculation would be as follows:

Capital gains = 11.2 – 10(1.08) (1.08)

= 11.2 – 11.7

= -0.5

Thus there would be no capital gains tax.

Taxation of Shares and Mutual Funds

There are three main points in regard to this year's Budget. The
first point is in regard to the new share transaction tax (STT).
Originally, it was proposed to be levied at 0.15 per cent on all
transactions of purchases of securities on stock exchanges. But it
was reduced on persistent demand from the share broker and
investors. This new tax will increase the cost of purchase every
time you buy and sell listed securities and mutual fund units.

After you have purchased share or units, there can be two types of
incomes -- dividend income (regular income during the period of
holding your investment) and capital gain (profit on sale of your
investment). When you receive any dividend, the same can be
included in your income, and you have to pay taxes on that
income. But instead of payment of taxes by the investor, the onus
has, in the recent past, shifted to the company to pay tax when it
pays dividend. This tax is called Dividend Distribution Tax (DTT).
Third is tax on capital gain when the shares or units are sold. Even
in this respect, major changes have been made in this Budget.

Here is a bird's eye-view of the net result of changes in regard to

these three points:
 Long Short
Securities Dividend Term Term
Transactions Distribution Capital Capital
Tax (STT) Tax (DTT) Gains Gains
(LTCG) (STCG)
No LTCG
tax is STCG is
STT is
payable. In taxable
payable by
The unit previous at10 per
MF and not
holders will year, such cent.
by investor.
In case of have to pay profit was Previously,
MF has once
equity- STT at the taxed10 they are
again been
oriented rate of 0.075 per cent taxable as
exempted
mutual per cent at without per normal
from DTT.
funds the time of indexation tax rate i.e.
Even in the
purchase and or 20 per 10 to 35
previous
sale of units cent with per cent as
year, they
indexation, the case
were exempt
whichever may be
is less
DTT is 12.5
per cent in
The LTCG
case payee is
tax rate is
individual or STCG is
20 per cent
HUF, and 20 taxable as
In case of with
The unit per cent if per normal
debt indexation,
holders will the payee is tax rate i.e.
oriented and 10 per
not have to corporate or 10 to 35
mutual cent
pay STT other person per cent as
funds without
as firm etc. the case
indexation,
Previously, may be
whichever
both are
is less
same at12.5
per cent.
STT is 0.015
per cent in Not Not
case of day applicable applicable
Non delivery
traders etc. as the as the
 and 0.01 per DDT is not profit is profit is
transactions;
cent in case applicable as taxable as taxable as
as day
of these traders business business
trader,
derivatives. do not take profits, so profits, so
arbitrageur
But credit for delivery tax rates tax rates
or future &
the same can are normal are normal
options
be taken from rate of rate of
normal taxation taxation
income tax
The tax rate Companies
• Cess and surcharge have to be added where applicable.
is now have to pay
Delivery proposed at DDT at12.5
•
basedThe STT is tax levied
0.075 per peroncent
purchase
and and saleTax of certainis
No tax
transactions
securitiescent,
on anypayable dividend
recognized stockisexchange. Thepayable @
STT will
payable on
(in case of by both the exempted in 10 per cent
be payable from the date on which LTCG
Chapter VIISTCG
of the
investor in buyer and the the hand of on
securities) seller2) Bill
Finance (No. upon payee
2004 as per
(which deals with this tax) comes
delivery of Section
into forcethebysecurities
way of notification
10(34) in the official gazette by the
The STT isFurther the new rate of capital gain tax
Central Government.
now
will also be applicable from that date; until then, the previous
proposed at
Not Not
0.075
rate will be applicable. Companies
applicable applicable
percent, have to pay
as the as the
Delivery payable
• The benefits of newbytransaction
DDT at12.5 tax profit
in case ofis investor
profit can is
based both the per cent and
happen when taxableareas taxable as
transactions buyertheandprofits on the transaction
the dividend is more than 1.5
business business
(in case
per centof of
seller upon exempted
the purchase price of thein securities. The more the
profits, so profits, so
dealer in delivery of the hand of
profits, the taxof loss,
ratesthe
tax lossrates
securities) themore they benefit.
securities. payee asInpercase will
are normal are normal
But credit for Section
also be more. rates of rates of
the same can 10(34).
taxation taxation
be taken from
• Securities transaction tax is levied on the buyer and seller on
normal
stock exchange.
income Buttax the question is whether it is capital gain
on presumptive basis. Or Companies
is it simply tax under entry no. 90
have to pay STCG is
of the Union list of the seventh schedule and not concerned in
STT is not DDT @ 12.5 taxable as
payable as per cent and per normal
In case of LTCG is
they are not dividend is tax rate,
non- listed payable at
traded on exempted in i.e. 10 to
shares, etc. 20 per cent
stock the hand of 35 per cent
exchange payee as per as the case
 Section may be
10(34)

any way to the Income Tax Act? The nature of this tax has to
be clarified.

• If the profit on sale of securities is taxable under the head,

'Business and Profession', then at the time of payment of final
income tax the credit of STT can be availed of from the
normal tax. If the profit on sale of securities is taxable as
capital gain, then no credit is allowable as capital gains are
now taxable on a concession basis

• New DDT rates are effective from 9 July 2004.

• In some of the cases the companies/mutual funds have to pay

distribution tax instead of the payee having to do the same.
This is beneficial for assesses in the upper income bracket or
chargeable at a higher rate. It is adverse in case of those
assesses who don't have any chargeable income.

• A capital gain on securities arises when the securities are

held for investment and not for the purpose of trading. In
case of trading of securities (dealers, etc.), the profits are
taxable as normal business profits. 'Short-term capital gains'
means gains on securities, which are kept for less than a year
from the date of purchase. 'Long-term capital gains' means
gains on securities, which are kept for one year or more from
the date of purchase.
• Dealer in securities means the people who do trading in
securities instead of investment. The difference between the
trading and investment is one of the motives and very thin. In
case of investment, the securities are held for regular return
(dividend) instead of gain from sale of securities. On the
other hand, the dealers are interested in profit from the sale of
securities in the ordinary course of business. Generally it also
leads to disputes on what are trading activities and what are
investment activities. Because only capital gain will be taxed
as per a new concession rate it may create controversy
whether the transactions are investment or business
transactions. So when there are many transactions of
purchase and sale, then the department may say that the
assessed is doing business. This is why the same should be
taxable at the normal rate. Sometimes even the single
transaction is deemed as business. The concept of long-term
capital gain or short-term capital gain is also not applicable in
the case of dealer.

• In case of Foreign Institutional Investors, the STCG --

referred to in Section 111A -- shall be calculated at the rate
of 10 per cent. Previously, it was taxable at 30 per cent.
 • When the income is not taxable, then the loss on sale or other
expenditure will also not be allowable. When the long-term
capital gain is not taxable, then the loss on the same will also
not be allowable. Similarly when the dividend is tax free,
then any expenditure (even interest) in that regard will not be
allowable against that dividend as per Section 14A and
Section 57(i)

• Exchange Traded Funds (ETFs) enjoy the same tax treatment

as listed securities

Investors receive two types of income from investment in mutual

fund, namely dividends declared from time to time by the mutual
fund and capital gains arising out redemption of the mutual fund
units. Both these incomes are subject to provisions of income tax
act 1961.

Tax provisions applicable after the finance act 2003-04

Dividends:

 Dividends from mutual funds for the year

2003-04 are tax free in the hands of the investors.
  In the case of mutual fund scheme with more
than 50% in debt, a dividend distribution tax of 10% plus
surcharge has to be paid by the mutual funds.
 In case of mutual fund schemes with more
than 50% in equity, the dividend distribution tax is not to be
paid.

Investment in specific equity linked saving schemes, as notified by

the government of India, are eligible for tax rebate under section
88-upto maximum limit of Rs. 10,000 on the investment. The
rebate is available according to the taxable income of the investor.
Investors whose taxable income exceeds Rs 5lakh are not eligible
for any tax rebate under section 88.

Taxable income Available IT rebate Maximum amount of

rebate
Upto Rs 1,00,000 30% of the Rs3000
investment made
>Rs1 lakh <1.5 20% of the Rs2000
lakhs investment made
>Rs 1.5 lakhs 15% of the Rs1500
investment made
Capital Gain Tax Structure

Mutual funds are securities under the securities contract regulation

act. Therefore, any holding that is for a period of less than 12
months is considered short term; holding beyond 12 months is
considered long term. If units are redeemed by an investor, at a
price that is higher than its acquisition price, the investor earns a
capital gain if the holding period of the investor is less than 12
months, such gains are short term capital gains, and are subject to
tax at the same marginal rate of taxation the investor is subject to.
In the following way the capital gain is taxable.

In case of individual and corporate

Equity Debt

Long-term capital gain-Nil LTCG (individual)-

11.22%

(10%+10%
surcharge +2% cess)

LTCG
(corporate)-22.44%
(20%+10% surcharge +2% cess)
Short-term capital gain-10% STCG
(individual)-33.66%

(30%+10% surcharge +2%

cess)

STCG (corporate)-39.13%

(35%+10% surcharge
+2% cess)

In case of NRI

Equity Debt

Long-term capital gain-Nil Long-term capital

gain-22.44%

(20%+10% surcharge +2%

cess)

Short-term capital gain-11.22% STCG (individual)-

33.66%
(10%+10% surcharge +2% cess) (30%+10% surcharge
+2% cess)

Dividend Distribution Tax:

INDIVIDUAL: 14.02% CORPORATE: 22.44%

(12.5%+10% surcharge +2% cess) (20%+10%

surcharge +2% cess)

Practice of dividend stripping

Under income tax Act 1961, when dividends are distributed by a

scheme the NAV of a scheme falls down to that extent. A number
of investors used this to their advantage by buying units just before
the dividend record date and selling them immediately after the
record date at lower NAV. This could result in short term capital
loss, which the investor could offset against short-term gain.
Further dividends being tax free he would save tax overall. This
phenomenon is known as dividend stripping.

Section 94(7) of income tax act, 1961 has prohibited dividend

stripping. It provided that if a person buys units within a period of
3 months before recorded and sells the same within a period of 3
months after such record date, then any loss arising from such
buying and selling shall be ignored in the computation of taxable
income of that person.
 The Treynor Measure
 The Sharpe Measure
 Jenson Model
 Fame Model
 Measuring Returns
 Measuring Risk
 Risk Management and Mutual Fund
 Benchmarks
 Mutual Fund Ranking and Group Comparison

Performance Measures of Mutual Funds

Mutual Fund industry today, with about 34 players and more than
five hundred schemes, is one of the most preferred investment
avenues in India. However, with a plethora of schemes to choose
from, the retail investor faces problems in selecting funds. Factors
such as investment strategy and management style are qualitative,
but the funds record is an important indicator too. Though past
performance alone cannot be indicative of future performance, it
is, frankly, the only quantitative way to judge how good a fund is
at present. Therefore, there is a need to correctly assess the past
performance of different mutual funds.

Worldwide, good mutual fund companies over are known by their

AMCs and this fame is directly linked to their superior stock
selection skills. For mutual funds to grow, AMCs must be held
accountable for their selection of stocks. In other words, there must
be some performance indicator that will reveal the quality of stock
selection of various AMCs.

Return alone should not be considered as the basis of measurement

of the performance of a mutual fund scheme, it should also include
the risk taken by the fund manager because different funds will
have different levels of risk attached to them. Risk associated with
a fund, in a general, can be defined as variability or fluctuations in
the returns generated by it. The higher the fluctuations in the
returns of a fund during a given period, higher will be the risk
associated with it. These fluctuations in the returns generated by a
fund are resultant of two guiding forces. First, general market
fluctuations, which affect all the securities, present in the market,
called market risk or systematic risk and second, fluctuations due
to specific securities present in the portfolio of the fund, called
unsystematic risk. The Total Risk of a given fund is sum of these
two and is measured in terms of standard deviation of returns of
the fund. Systematic risk, on the other hand, is measured in terms
of Beta, which represents fluctuations in the NAV of the fund vis-
à-vis market. The more responsive the NAV of a mutual fund is to
the changes in the market; higher will be its beta. Beta is calculated
by relating the returns on a mutual fund with the returns in the
market. While unsystematic risk can be diversified through
investments in a number of instruments, systematic risk cannot. By
using the risk return relationship, we try to assess the competitive
strength of the mutual funds vis-à-vis one another in a better way.

In order to determine the risk-adjusted returns of investment

portfolios, several eminent authors have worked since 1960s to
develop composite performance indices to evaluate a portfolio by
comparing alternative portfolios within a particular risk class. The
most important and widely used measures of performance are:

Ø The Treynor Measure

Ø The Sharpe Measure

Ø Jenson Model

Ø Fame Model

The Treynor Measure

To understand the Treynor index, an investor should know the
concept of characteristic line. The relationship between a given
market return and the fund’s return is given by the characteristic
line. The fund’s performance is measured in relation to the market
performance. The ideal fund’s return rises at a faster rate than the
general market performance when the market is moving upwards
and its rate of return declines slowly than the market return, in the
decline. The ideal fund may place its fund in the treasury bills or
short sell the stock during the decline and earn positive return. The
market return is given on the horizontal axis and the fund’s rate of
return on the vertical axis. When the market rate of return
increases, the fund’s rate of return increases more than
proportional and vice versa.
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. Sharpe’s performance index gives a
single value to be used for the performance ranking of various
funds or portfolios. Sharpe index measures the risk premium of the
portfolio relative to the total amount of risk in the portfolio. This
risk premium is the difference between the portfolio’s average rate
of return and the risk less rate of return. The standard deviation of
the portfolio indicates the risk. The index assigns the highest
values to assets that have best risk-adjusted average rate of return.
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. The reason is that the
fund manager takes a great risk to earn higher returns and its risk
adjusted return was not the most desirable. Sharpe index can be
used to rank the desirability of funds or portfolios, but not the
individual assets. The individual asset contains its diversification
risk.

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. It is
mentioned as a measure of the absolute performance because a
definite standard is set and against that the performance is
measured. The standard is based on the manager’s predictive
ability. 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 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.
Successful prediction of security price would enable the manager
to earn higher returns than the ordinary investor expects to earn in
a given level of risk. The return of the portfolio varies in the same
proportion of B to the difference between the market return and
risk less rate of interest. Beta is assumed to reflect the systematic
risk. The fund’s portfolio beta would be equal to one if it takes a
portfolio of all market securities. The B would be greater than one
if the fund’s portfolio consists of securities that are riskier than a
portfolio of all market securities.
Any professional manager would expect to earn average portfolio
return. If his predictive ability is superior, he should earn more
than other funds at each level of risk. If the fund manager has
consistently performed better than average Ri, there would be
some constant factor that would make the actual return higher than
average Ri. The constant may be Rf that represents the forecasting
ability of the manager.

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 return over and above the return
required to compensate for the total risk taken by the fund
manager. Higher value of which indicates that fund manager has
earned returns well above the return commensurate with the level
of risk taken by him.
Required return can be calculated as:

Ri = Rf + Si/Sm*(Rm - Rf)
Where, Sm is standard deviation of market returns. The net
selectivity is then calculated by subtracting this required return
from the actual return of the fund.

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.

Risk management and the mutual funds

The basic objective of a mutual fund is to provide a diversified

portfolio so as to reduce the risk in investments at a lower cost.
The mutual fund industry worldwide is based on this premise.
Investors who take up mutual fund route for investments believe
that their risk is minimized at lower costs, and they get an optimum
portfolio of securities that match their risk appetite. They are
ignorant about the diverse techniques and hedging products that
can be used for minimizing the market volatility and hence take the
help of the fund managers. It is very daunting to note that the drop
in the NAV of some of the schemes is higher than the erosion of
value in some of the ICE stocks. The recent survey conducted by
PricewaterhouseCoopers (PWC) on risk management by mutual
funds has posted interesting as well as worrying results. According
to the survey, as many as 50 percent of the respondent mutual
funds are not managing risk properly. If this is not all, 50 percent
of the respondents did not even have documented risk procedures
or dedicated risk managers. The respondents included among
others, some of the heavyweights of the Indian MF industry viz.
Templeton, Alliance, Prudential and IDBI Principal MF.

Worrisome news it is, for the investor who still believes MFs are a
route to manage one’s money in a better and safe manner. The
recent wild movements in the NAVs of several equity funds have
belied all expectation of a diversified portfolio from the fund
managers when the basic tenet behind portfolio management is risk
management. Mr. Shyam Bhatt, Fund Manager-Tata asset
Management Ltd. said ‘Indian Mutual fund industry is not using
statistical techniques of risk management but is using
diversification effectively within the market limitations. As far as
use of derivatives is concerned, they are not presently used because
of the low volumes, low liquidity and absence of sufficient
hedging products in the market ’.

Aggression has been the key word followed by the AMCs when it
comes to taking positions in stocks. With investment in volatile
ICE sectors being the driver of growth last season, almost
everybody had taken big exposures to them. Birla MF maintained
its exposures in Infosys to almost 25 percent in all of its equity
schemes throughout last year. The same is true of ING Savings
Trust that has Rs. 60 crores invested in Wipro and Infosys out of
the total fund size of 135 crores in its growth fund. The result of
these exposures is that the fund witnessed a movement of almost 9
percent in a single day on budget when the market saw an
appreciation of around 4.36 percent. In their quest for growth,
many funds have seen very volatile movements in NAVs. The
investor confidence may not be lost but such volatility sure dents
it. The point is not whether AMCs should be chastised or not but
just to question the practices as the fate of many investors is linked
to it. An ordinary investor considers mutual funds as the experts in
investment decisions and so naturally expects the decision of
investing in mutual funds to bear fruit. However, AMCs often
leave a lot to be desired as they falter on important fronts like
NAV and portfolio disclosure besides posting high fluctuations and
poor returns.

The Beta of some of the favorite stocks is shown below. The Table
contains the Beta of some of the ICE scrips that constitute the top
10 holdings across various equity funds.

DSQ Software Ltd. 2.09 Taurus Libra Leap

(5.68%), DSP ML
Tech. (6.06%)
Satyam Computer 2.00 ING Growth Port
Services Ltd. (11.2%), Alliance
Equity Fund (9.7%),
Chola freedom Tech
(11.51%)
SSI Ltd. 1.98 IL&FS eCom
(9.63%), LIC
Dhansamridhi
(9.18%)
Wipro Ltd. 1.87 ING Growth (23.8%),
Magnum Sector Fund
-InfoTech (15%),
Alliance Alliance New
Millennium (10%)
Himachal Futuristic 1.82 UTI Sector- Services
 Communications (9.48%), Taurus
Ltd. Discovery Stock
(10.45%)
Global Tele-Systems 1.81 UTI US 92 (7.02%),
Ltd. ING Growth Portfolio
(3.8%)
Zee Telefilms Ltd. 1.70 UTI Sector- Services
(7.21%), ING Growth
Portfolio (10.06%),
Infosys 1.54 ING Growth Portfolio
Technologies Ltd. (20.5%), Alliance
New Millennium
(11.5%)

As can be seen, some of the stocks are too volatile and can cause
wild movements in the NAVs of funds that have taken exposures
in them. The standard deviation of the returns 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 scrips. 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.

MEASURING RETURNS

An investor in mutual fund earns returns from two sources:

 Income from dividend paid by the mutual fund.

 Capital gains arising out of selling the units at a price

higher than the acquisition price.

Since the mutual fund does not commit any specific rate at which
dividends will be paid, the rate of return is known in advance. The
mutual fund also does not specify any particular tenor for its return
is known in advance. The mutual fund also does not specify any
particular tenor for its products. The investor is free to enter and
exit the fund at any time. However, he would do so at a price
depends on the NAV at the time of entry and exit. Since the NAV
itself changes continuously, the investor would no know in
advance whether there would be a capital gain or a loss from
investment. Therefore there is nothing like pre-specified rate of
return on investment in mutual fund.

The mutual fund invests the fund mobilized from the investor, in a
portfolio of marketable securities. Since the value of these
securities can change over time, the mutual fund cannot assure a
rate of return. There is no technique by which the fund manager
can accurately predict how the market prices will behave in the
future. Therefore the mutual fund cannot provide assured returns to
the investor. In case the market value of the securities falls, if
assured returns have to be provided, the short fall has to be made
good by another entity. SEBI regulations do not permit the sale of
assured return products by mutual funds, unless the sponsor or the
AMC provide an explicit guarantee that they would make good the
shortfall, if the value of the portfolio falls below that of guarantee
that they would make good the shortfall, if the value of the
portfolio falls below that of the assure levels.
Methods for computing returns on investment in mutual fund.

The various methods for measuring mutual fund returns are as

follows:

1. Percentage change in NAV

2. Simple total return

3. ROI or Total return with dividend re-investment

Percentage change in NAV.

Percentage change in NAV is an absolute measure of return, which

finds the NAV appreciation between two points of time, as a
percentage.

For a period equal to one year

Formula

Absolute change in NAV

NAV in the beginning

For a period not equal to one year

Formula

Difference in NAV

Beginning NAV

n being the number of months between the beginning and

end NAV.

This method is simple and very easy to calculate and understand.

However, examining return over a single period may not provide
an indication pf long term returns. An important limitation also is
that this method does not take into account the dividends
distributed by the fund. Therefore this method is more useful for
computing returns on growth options of mutual fund schemes. It
may not be suitable for computing returns on schemes with
dividend distribution or withdrawal plans.

Total return method

The total return method takes into account the dividend distributed
by the mutual fund, and adds it to the NAV appreciation, to arrive
at return.
Example an investor bought units of mutual fund scheme at a price
of Rs.12.45 per unit. He redeems the investment a year latter, at
Rs.15.475 per unit. During the year, he also receives dividend at
7%. The rate of return on his investment can be compute as

{[(15.475-12.45)+0.70]/12.45}*100
= (3.725/12.45)/100
= 29.92%
The amount (15.475-12.45) represents the capital gain earned by
the investor. 0.70 is the dividend amount received which is 7% of
Rs.10, the face value of the unit. The rate of return in the
percentage return the investor makes, on his investment Rs.12.45,
from these two sources.

Simple annualized total return

It is customary to represent return as % per annum. The market it

easier to compare the return from various investment option, for a
standard holding period. The investor in a mutual fund can choose
to keep his investment for any period of time, not necessarily in
1year. Therefore, if the holding period is different from 1 year, we
have to normalize the computation show above, as % p.a. let us
assume that the capital gain and dividend in the above e.g. were
earned for a holding period of 250 days, and not 1 year. We can
then normalize the rate of as follows:
(3.725/12.45)*365/250*100
= 43.68%
The return is called the simple annualized return from investing in
mutual fund.
The total return method takes into account the dividend
distribution and is therefore comparable across various kinds of
fund and fund classes. The most important limitation of this
method is that it does not take into account the re-investment of
dividends received in the intervening period.

Total return with dividend re-investment

This method is also called the return on investment method. In this
method we assume that dividends are re-invested into the scheme
as soon as they are received at the then prevailing NAV (ex-
dividend NAV).

Total return with reinvestment is calculated as:

(Value of holding at the end of the period/value of holdings at the

beginning of the period)-1)*100
Value of holdings at the beginning of period=number of units at
the beginning*begin NAV.

Value of holdings end of the period= (number of units held at the

beginning + number of units re-invested)*end NAV.

Number of units re-invested=dividends/ex-dividend NAV.

RISK AND PERFORMANCE EVALUATION

Risk and its measurement

Risk arises out of the fact that returns do not remain constant or
unchanged. Every changed in return is a situation of risk for the
investor. The simplest way to measure risk, is to find out, over a
period of time, what is the average return from investing in a fund.
If the actual returns earned by the investor are close to the average,
such a fund is less risky. If the return varies by larger amounts,
around the average, the fund is more risky.
The distance between the average return and the dispersion of
actual returns around this average can be measured with the help of
a statistical measure called the standard deviation. The standard
deviation measures what is the average dispersion of return around
the average value, if the standard deviation is high, the risk
inherent in the return of the mutual fund are high.
Market risk refers to the extent of which fluctuations in the return
of a fund are caused by broad market factors. The changes in the
return performance of a fund may be attributed to a large extent to
changes in the market factors, rather than any factor specific to the
companies in the fund’s portfolio. There are two ways of
measuring market risk:

Bogle’s Ex-Marks or R- squared

This measure simple compares the returns from the fund and the
return from a market index, over the same period, and measures
the extent of sympathy in their movement. For example, an index
funds returns would be in complete sympathy with the movement
in the index that it seeks to track. The R-squared of this fund would
be 1, or the Ex-marks would be 100%. Lower ex-marks refer to
funds with lower levels of sympathy with market returns. A fund’s
risk can be gauged by its ex-marks in comparison with the market
index.

Beta coefficient
This is a popular measure of the extent to which the fund returns
are impacted by market factors. Returns of the fund are assumed to
be linearly related to the returns from the underlying market. The
extent to which fund returns are impacted by the market returns is
measured by the market returns is measured by the beta co-
efficient (the value of “b” in the equation y=a+bx, where x is the
market return and y is the return on the fund, for the same period).
A fund with higher beta is more risky than one with a lower beta.

Mutual funds cannot be expected to deliver a pre-specified rate of

return; the measures of risk and return make little sense, unless we
are able to define what we can expect from the fund, in terms of
risk and return. Since this cannot be done in absolute terms, given
that the portfolio varies along with the changes in the market prices
of securities, we have to set relative standards of performance. We
do this, using benchmarks.

BENCHMARKS
Benchmarks are independent portfolios that are not managed by
any fund manager, but are representative of the behavior of returns
from the markets. For example, the S&P CNX Nifty is a portfolio
of 50 securities traded on the National Stock Exchange. The BSE
Sensitive Index is a portfolio of thirty securities traded on the BSE.
The movement of these indices represents the movement in prices,
and therefore returns, of large, actively traded stocks in the equity
markets. If an investor has invested in an index fund, the return
from the index fund will have to compare with the risk and return
of the equity index, which the fund manager is replicated. If the
fund manager is managing an equity portfolio, that invests only in
equity, but is not an index fund, investors may want to know how
his performance compares with an independent portfolio like the
Nifty or the Sensex. These independent portfolios, used to
understand fund manager performance, are called benchmarks.

SEBI guidelines on benchmarks to be used by mutual funds

 Mutual funds should use benchmarks that reflect the asset
allocation of the fund, and the period of returns being
compared should be identical for the fund and the
benchmarks.
 If the scheme’s offer document indicates a benchmark for
return comparisons, the same should be used by the scheme.
 Growth funds with more than 60% in equity should always
use any of the standard equity market indices like Sensex;
NSE fifty, BSE 100 or Crisil 500.These indices should be
used consistently. Changes in benchmark can happen only if
asset allocation has changed significantly, and trustees
approve the change.
 Income funds with more than 60% in debt should use a bond
market index as benchmark.
 Balanced funds should be compared with the tailored
benchmark that combines equity and bond index returns in the
same proportion as in the asset allocation of the fund.
 Money market funds can use a money market instrument or a
combination of them, as benchmarks.

Mutual Fund Ranking and Group Comparison

By computing the Sharpe ratio for funds in the same group, say
equity funds, comparing them with the S&P CNX 500 index, the
Sharpe ratios that we get can be used to rank the funds. The fund
with the highest Sharpe ratio will be the top performer, since it has
delivered the highest return for unit of risk. Mutual und ranking
involves the comparison of mutual fund performance over a period
of time, using several criteria to judge for consistency in
performance.

Mutual fund ranking services usually do peer comparisons and

provide performance ranking of funds. In many cases, the criteria
for ranking extend beyond risk and return. In order to meaningfully
compare some level of similarity the following factors have to be
ensured:
1. Size of the funds
2. Investment objective
3. Risk profile
4. Portfolio composition
5. Credit profile and average maturity
6. Expense ratios

Fund performance may be vastly different owing to one or many of

the above factors.
 On Basis of Structure
 On Basis of Investment
 On Basis of Specialization
 Interval Fund
 Options Available
 Composition Of The Industry Between Open And Close
End Fund
 TYPES OF MUTUAL FUND SCHEMES

Wide varieties of Mutual Fund Schemes exist to cater to the needs

such as financial position, risk tolerance and return expectations
etc. The table below gives an overview into the existing types of
schemes in the Industry.
Mutual Fund can be classified on the following basis
I. On The Basis Of Structure
 Open ended
 Close ended
 Interval schemes

II. On The Basis Of Objective Of Investment

 Equity
 Simple equity
 Primary market
 Debt
 Balanced

III. On The Basis Of Specialization

 Tax saving
 Index
 Sectoral fund
 Money market fund

ON THE BASIS OF 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.
There are two ways in which investor participation in a mutual
fund can be structured. In an open- ended fund, the investors can
buy and sell units of the fund, at NAV related prices, at any time,
directly from the fund. This is called an open-ended fund because;
the pool of funds is open for additional sales and repurchases.
Therefore both the amount of funds that the mutual fund manages
and the number of units, vary everyday. The price at which an
investor buys or sells units is linked to the NAV. Open-ended
funds have to balance the interests of investors who come in,
investors who go out and investors who stay invested. Open-ended
funds offered for sale at pre-specified price, say Rs.10 in the initial
offer period, say 30 days, a fund is declared open for further sale
and repurchases. These transactions happen at the computed
related price. An investor in an open fund can liquidate his
investments by repurchasing the units from the funds. Investors in
an open fund receive an account statement of their holdings.

Reliance money provides following types of open ended mutual

funds.

 Reliance Income Fund

 Reliance Liquid Fund
 Reliance Floating Rate Fund
 Reliance Liquidity Fund
  Reliance Monthly Income Plan
 Reliance Short Term Fund
 Reliance NRI Income Fund
 Reliance Medium Term Fund
 Reliance Gilt Securities Fund
 Reliance Regular Savings Funds

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.

A close-ended fund is open for sale to investors for a specific

period, after which further sales are closed. Any further
transactions for buying the units or repurchasing them happen in
secondary market, where close-ended funds are listed. Therefore
new investor buys from the existing investors, and existing
investors can liquidate their units by selling them to other willing
buyers. In close end fund, thus, the pool of fund can be kept
constant. The AMC however, can buy out the units from investors,
in the secondary markets, thus reducing the amount of funds held
by outside investors. The price at which unit can be sold or
redeemed depends on the market prices, which are fundamentally
linked to the NAV. Investors in close end funds receive either
certificates or depository receipts, for their holding in close end
mutual funds.

Reliance Money provides following Various Types of closed-

ended income scheme.

 Reliance Fixed Tenor Fund

 Reliance Fixed Maturity Fund Series I
 Reliance Fixed Maturity Fund Series II
Composition of the Industry between Open and Close End
Fund

In the earlier days of mutual fund industry, most mutual funds

were close ended, and were listed in the stock exchange. One of
the reasons fund managers choose to have close end funds was
apprehension that an underlying markets may not be liquid enough
to support frequent changes in the size of the investment portfolio.
However, close end funds presented a set of other problems.
Investor perceived mutual fund to be akin to equity shares, because
this issue process was similar to that of equity shares, a limited
initial offer period and subsequent listing on stock exchanges. This
perception created unrealistic return expectations from mutual
funds. The next problem was that discount at which mutual fund
were priced, to the NAV, in the secondary market. Most mutual
funds units were priced at steep discounts, ranging from 15% to
45%. Since the mid 90s, mutual fund have opening repurchase
windows, at NAV linked price for the close end funds, many close
end funds have also being converted into open-ended funds. At the
end of March 2001, 74% of the assets managed by the Indian
mutual fund industry are in open ended fund.

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:

Equity or 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.

Types of equity fund

Simple Equity Fund

Simple equity funds invest a pre-dominant portion of funds

mobilized in equity and equity related products. In most case about
80%-90% of investments are in equity shares. These funds have
the freedom to invest both in primary and secondary market for
equity. One variation of simple equity fund is the equity linked
saving schemes. These funds are equity funds formed under a
special scheme notified by the government of India in 1990.
According to the provisions of this notification, investment in
specially formed mutual fund product that invests at least 90% of
its fund in equity and equity linked investment is eligible for a tax
rebate, upto maximum investment of 10,000 under section 88 of
the income tax act. Investors have to hold their units for minimum
lock in period of 3 years in order to avail the tax rebate.

Primary Market Fund

The primary market share invests in equity shares, but do so only

when a primary market offering is available. The focus is on
capturing the opportunity to buy those companies, which issue
their equity in primary markets, either through a public or through
a private placement.
Debt or 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. These funds are those that predominantly invest in debt
security pay periodic interest to investors, these funds also known
as income funds. However it must be remembered that funds
investing in debts products can also offer a growth option to their
investors.

The universe of debt comprises of long-term instruments such as

bond issued by central and state governments, public sector
organization, public financial institutions and private sector
companies, and short-term instruments such as call money lending,
commercial papers, certificates of deposits and treasury bills. Debt
funds tend to create a variety of options for investor by choosing
one or more of these segments of the debt market in their
investment portfolio.

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.

These funds invest both in debt and equity market, a typical

balance fund would be almost equally invested in both the markets.
The variation of funds that invest predominantly in equity
about70% and keep a small part of their portfolio in debt. This
fund seeks to enhance the income potential of their equity
component, buy bringing in debt. Similarly there are
predominantly debt funds over 70% in debts to provide same
growth potential to their fund. The benefit of diversification gets
further enhanced, as equity and debt markets have different risk
and return profiles.

BY SPECIALIZATION

Money Market and liquid 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.

These debt funds invest only in instruments with maturities less

than a year. The investment portfolio is very liquid, and enables
investors to hold their investments for very short horizons of a day
or more. The fund predominantly invests in money market
instruments and provides investors the returns that are available on
these instruments. The funds also provide investors with check
writing facilities (only self cheques), as an additional facility for
liquidity.

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 and 54EB by investing in Mutual
Funds.

Index Schemes
 Index Funds attempt to replicate the performance of a particular
index such as the BSE Sensex or the NSE 50. in order to track the
return performance of markets, market indices of a subset of
trading stocks is created. An index provides an ideal exposure to
equity markets without the investor having to bear the risk and cost
arising from the market views that a fund manager may take. The
CNX Nifty in one of such index of 50 large and liquid stocks. If a
fund manager creates an equity fund, which will invest in the Nifty
stocks, in the same proportion as in the index, he is creating an
index fund.

Industry Specific and 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.

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.

Options available to investors for structuring returns in

mutual fund.

 Dividend option
 Growth option
 Re- investment option

Dividend Option

Investors, who choose a dividend option on their investments, will

increase dividend from mutual funds, as and when such dividends
are declared. Dividends are paid in the form of warrants, or are
directly credited to the investors’ bank accounts.

There are further choices in the distribution of dividend. In a

normal dividend plan periodicity of dividends is left to the fund
managers, who may pay annual and/or an interim dividend.
Though investors know that they would earn a dividend income
from their investment, the timing of the pay out is decided by fund
managers. The variants to the normal dividend plan are pre-
specified distribution schedules. Mutual funds provide investor the
options of receiving the dividends at pre-determined frequencies,
which can vary from daily, weekly, monthly, quarterly, half-yearly
and annual. Investors can choose the frequency of dividend
distribution that suits their requirements. Not all mutual funds
provide all of these frequencies as choices, though. Investors can
chose an income distribution frequency from the choices available
in a particular mutual fund product. Investors choosing this option,
have a fixed no of units invested in the fund, and earn incomes on
this investment. The name of these investors’ holdings will vary
with changes in the value of the portfolio, and the impact of the
proportion of income earned by the fund, to what is actually
distributed as dividend.

Growth option

Investors who do not required periodic income distribution can

choose the growth option, where the incomes earned are retained
in the investment portfolio, and allow growing, rather than being
distributed to the investors. Investors with longer-term investment
horizons, and limited requirements for income, choose this option.
The return to the investor who chooses a growth option is the rate
at which his initial investment has grown over the period for which
he was invested in the fund. The NAV of the investor choosing this
option will vary with the value of the investment portfolio, while
the number of units held will remain constant.

Re-Investment Option

Mutual funds also provide another option to investors in the form

of re- investment. Investors re-invest the dividends that are
declared by the mutual fund, back into the fund itself, at NAV that
is prevailing at the time of re-investment. The value of the units
will be similar to that under the dividend option.
The choice of income option depends not only on the investor’s
requirements for income and growth, but also on his tax status. The
differential tax treatment of dividends and capital gains will also
impact the choice made by the investor.
 Distribution Channels through Which Mutual Fund
Products Are Distributed
 Categories of Investors Eligible to Invest In Mutual Fund
 Proof of Purchase of Units
 Offer Document
 Key Information Memorandum
 Precautions Investing In Mutual Fund
 Steps to Investing In Mutual Funds
 Choosing Best Mutual Fund
 PROCESS OF INVESTING
Process of investing in mutual funds
Here we are talking about the mechanics of what an investor
generally does when buying or selling shares in a mutual fund. In
the case of a load fund, the broker usually takes care of the details
for you. In the case of a no-load fund, investors usually deal
directly with the fund in question. It is really a very simple process,
and fund representatives are almost always available, through a
toll-free telephone number, to help.

Since investors in load funds (presumably) have the assistance of

their brokers, we will discuss the process of buying and selling no-
load funds. Many investors are a bit daunted by this process, which
is unfamiliar to them. If they knew how easy it is, they wouldn't
hesitate to "do it themselves"!

Once an investor knows the name of a fund that he or she has an

interest in, the first task is to find the toll-free telephone number. A
simple call to the fund, requesting a prospectus (a booklet that
describes the investment--more below) and application, sets the
process in motion. In a few days, these documents arrive in the
mail. After reviewing the prospectus, the investor fills out the
application, writes a check to the fund, and mails the application
and check back to the fund in the enclosed envelope. That's all
there is to it! Upon receipt, the fund will then open an account for
the investor, purchasing as many shares as the investment money
amount allows (fractional shares are common). Then, the fund
issues periodic statements to the investor, detailing all transactions,
including purchases, sales and dividends.

Selling shares is even easier than purchasing them. A simple phone

call will initiate the process of the sale of shares, as directed, and
money can be sent to the investor by check or wire, depending on
how the account was set up. (Helpful tip: Unless you might be
tempted to spend money that is too easily available, always sign up
for all of the selling options available -- that way, you can get your
money more quickly, should you require it, or should you find that
one or more options are unavailable when the time to sell comes.)
By the way, you can almost always add to your account, or take
partial proceeds out. Most funds have a minimum beginning
amount, but after that, almost anything goes in terms of additions
and withdrawals (be sure to check the prospectus for details on
individual fund operations procedures in this regard). One last
point, Mutual funds are heavily regulated and have proven to be
trustworthy over time. You need not have trepidations about
dealing through the mail with mutual funds.

Investors buy the units of mutual fund. The number of units bought
by an investor represents his holdings in a mutual fund. The price
at which each unit is being sold is announced by the mutual fund.
This is usually called the sales price. In an existing mutual fund
scheme, the price is announced by the mutual fund everyday based
on the NAV of the fund. The investor can either but a fixed
number of units, or can invest fixed sum of money. All mutual
fund schemes specify the minimum amount that has to be invested
and the multiple thereof. These restrictions are not usually
applicable to inter-scheme and inter-options switches and
reinvestments.
If a scheme is open ended, the investor can invest on any given
day, at the price quoted by the mutual fund. Usually mutual funds
have a distribution network, made up of distributing agents,
investor service centers and branch networks. Investor can buy
units of the fund from any of these agencies. If the fund is close
end, the mutual fund has initial offer period. During this period,
 investors can buy units at a price that is fixed, for the whole period.
After the closure of this initial offer, the mutual fund closes further
direct sales to the investors. Investor who wants to invest in close
end fund, after the initial offer period, has to buy units from stock
markets. Close end funds have to list their units on a stock
exchange to enable this.
Distribution Channels through which Mutual Fund Products are
distributed
 Individual agents
 Distribution companies
 Bank and NBFCs
 Direct marketing channels
Categories of Investors Eligible to Invest in Mutual Fund
 Resident individuals
 Indian companies
 Indian trust and charitable institutions
 Banks
 Non banking finance companies
 Insurance companies
 Provident funds
 NRIs
 Overseas corporate bodies
  SEBI registered FIIs

Proof of purchase of units

In the Indian mutual fund industry, mutual funds have stopped
issuing certificates to investors, in their open-ended schemes.
Investors instead get an account statement, which shows their
holdings and the price at which they were bought. Mutual funds
holdings of an investor are identified by the account number or a
folio number. Investor can if they wish, consolidate their mutual
fund holdings, across various schemes, and receive their
consolidate account statement. The account statement is computer
generated and has no signature. It is also not an instrument that can
be traded or transferred.
The account statement shows the holding details, the number of
units outstanding and the value of the holdings. All transactions
relating to purchase to units, redemption of units, dividends,
reinvestment, etc are shown in the account statement. The
investors holding in mutual fund scheme on a particular date is
called outstanding holding. Along with the account statements, the
mutual funds also provide transaction slips, which enables investor
to buy more units, or sell whole or part of their holdings. An
investor can however demand a certificate, by writing to the
registrar.
In a close end fund investor usually receives certificates as proof of
purchase. These certificates are negotiable and can be transferred
from one person to another. Certificate usually has a folio number,
a distinctive number and the certificate number for the units
actually held. The details of holdings are printed on the certificate.
Certificates can be issued in market lots of 50 units each, or as
consolidate jumbo certificate.
The frequency of account statement is stated in the offered
document. An investor receives an annual statement if there are no
transactions in a year. For every transaction during the year,
namely, sale or purchase of units, repurchase of units, reinvestment
of dividends etc, and the updated account statement is sent to the
investor. Investor can check the balance in their account, and effect
transactions through phone and internet.
Every holding in a mutual fund can have upto three joint holders.
The first holder is entitled to receive all information and
notification as also the dividend payments and the redemption
proceeds. An investor can specify the nature of joint ownership,
which can be on joint basis or on either or survivor basis. If
ownership is on joint basis redemption requisition has to sign by
holders. In the case of either or survivors’ basis it is sufficient if
one of the holders sign the redemption request. The redemption
proceeds however, are payable only to the first holder, both cases.
Offer Document
The offered document is very detailed and can run into 100 pages
or more. It usually contains information about the scheme that is
being sold, namely, the objective scheme, the asset allocation, and
the sale and repurchases procedure, the load and expense structure,
and the accounting and valuation policies. Apart from these core
information the offered document also contains detail regarding the
structure of the mutual fund, it constituents, and the performance
of the existing schemes of mutual fund. It also contains operational
details about how to apply what the investor’s rights and
obligations are.

Broad contents of the offer document

(A) Preliminary information
 Summary information about the mutual fund, the
scheme and term of offer.
 Mandatory disclaimer clauses as required by SEBI.
 Glossary of terms in the offered document, which
defines the terms, used.
 Standard and scheme specific risk factors pertaining to
the scheme being offered
(B) Fund specific information
  Constitution of fund, detail of sponsor, trustee and
AMC
 Financial history of sponsors for 3 years, in summary
form
 Directors of boards of trustee and AMC
 Detail of key personnel of the AMC
 Details of the fund in the constituents
(C) Scheme attributes
Fundamental attributes of the scheme. This includes types,
investment objective, investment pattern, and terms of the scheme
with regard to liquidity, fees and expenses, valuation norms and
accounting policies and investment restriction.
(D) Details of scheme being offered
 Dates of IPO and details regarding sale and repurchase
 Minimum subscription and face value
 Initial issue expenses, for both current scheme and the past
schemes.
 Special facilities to investors and plans being offered.
 Eligibility for investing and documentation required.
 Procedure for applying, and subsequent operations
relating to transfer, redemption, nomination, pledge
and mode of holding of units.
(E) Loads, fee structure and expenses
  Loads and the annual recurring expenses proposed for
the scheme being offered, and for the other schemes
being managed by the AMC, with the comparisons of
the actual with terms in the original offer document.
 Scheme expenses under various heads over the past 3
years
 Condensed financial information of the past schemes
for the past 3 years.

(F) Unit holder rights

 Rights of unit holders with regard to services,
information, and protection of rights and problem
resolution.
 Detail of information disclosure and their periodicity.
 Documents available for inspection
 Details of pending litigation and penalties.
(G) Associate transactions
 Summary information on associate companies being
used as constituents and service providers, with
details of fees paid.
 Summary information of associates investing in
schemes of the mutual fund.
  Summary information on investment made by mutual
fund schemes in associate company securities.

Mandatory summary disclosures to be made on the cover page

of the offer document
Name of the mutual fund
Name of the scheme
Type of the scheme
Name of the AMC
Classes of units offered for sale
Price of units
Name of the guarantor in case of assured return schemes
The opening, closing and earliest closing date of the offer
Mandatory statements

Mandatory statements on the cover page of the Offer

Document
 A statement to the effect that the offer document sets forth
concisely, the information about the scheme that a prospective
investor ought to know before investing, and that the offer
document should be retained for future reference.
 A statement to the effect that the scheme particulars have been
prepared in accordance with the SEBI regulations, as amended
 till date and filed with SEBI, and the units being offered for
public subscription have not been approved or disapproved by
SEBI nor has the SEBI certified the accuracy or adequacy of
the offer document.

Importance of Offer Document

 Information about the scheme, and its fundamental attributes,
are specified in the offer document. Therefore it forms the
basis for the investor’s decisions.
 Offer document is the legal document that specifies the details
of the offer made by the mutual fund, and before buying the
mutual fund product; an investor must read and understand the
terms of the offer.

Key Information Memorandum

Since the offer document is very detailed, it is not feasible for
mutual fund to provide them to all prospective investors. SEBI
regulation allows mutual funds to summaries the key points in the
summary document called as the key information memorandum. It
is mandatory that the key information memorandum is made
available to all investors, along with the application forms.

Standard Risk Factors

Standard risk factors are SEBI stipulated factors that apply for the
mutual fund products as a category. These have to be stated in first
section of the offer document. The Standard risk factors are:
 Mutual fund and securities investments are subjected to market
risks and there is no assurance or guarantee that the objectives
of the mutual fund will be achieved.
 As with any investment in securities, the name of units issued
under the scheme

Scheme specific risk factors

Scheme specific risk factors pertain to the scheme being offered
and include the following:
 Risk arising from investment objective, investment strategy
and asset allocation of a scheme. As for example, a scheme
may decide to invest in small liquid shares, as a strategy to
earn higher returns. This strategy however has the risk that the
scheme’s liquidity and return volatility are impacted by the
presence of liquid shares in the portfolio. The offer document
has to state the specific risk that investors have to bear while
investing in such a scheme.
 Risk arising from non-diversification, for example a scheme
may focus on particular sector, such as information
technology, due to which the extent of diversification can be
limited.
 If a scheme offers assured returns, the scheme must state that
the assurance is on the basis of guarantee provided by the
sponsors/AMC.
 If the AMC has no previous experience in managing the
mutual fund, a disclosure to the effect that this is the first
being launched under its management should be made.

Precautions Should an Investor Take While Investing In

Mutual Fund
 Always keep as photocopy of the application form. This can be
filed to know the manner in which application was made.
Investor will also be able to see how they have signed the form.
Investor will also know the choice they have exercised.
 Preserve the counterfoil/acknowledgement issued by the
collecting agency. This acknowledgement usually also has the
application number. If the account statement or certificate is
not received, the acknowledgement is the proof of purchase,
with which investors can approach the register and transfer
agent.
 It is preferable to have joint ownership, so that investments will
pass on to the joint owner in the event of death of the first
holder.
 It is important to fill up nomination details in the application.
This will enable legal heirs to claim the holdings without
procedural delays. Nominations that do not indicate the
guardian of a minor are not valid. Guardian indicated will have
to be a person other than the holders of the investment.
 Cheques should be crossed and application number and name
should be written on the back of the cheque. Most mutual funds
do not accept outstation cheques, post dated cheques or postal
orders.
 Existing investors can quote their unique account or folio
numbers so that their holdings will be consolidated. This is
helpful in tax matters and in keeping investment information in
a consolidated manner.

Easy Steps to Investing In Mutual Funds

A fund sponsor with integrity

An investor must check the sponsor's (promoter) record in the

financial services arena. Apart from a consistent and clean record
in financial services, sponsor(s) should have requisite experience
and background in managing mutual funds in India or overseas.
An experienced fund manager

The fund manager must be experienced, which is best reflected in

the returns he has generated on funds previously/currently
managed by him.

A suitable investment philosophy

Every fund manager has his own individual style and investment
philosophy. While some managers are aggressive, others are
passive. The investor must choose the fund that best reflects and
matches his own investment philosophy.

The correct fund by nature

Funds are either open-ended or close-ended.

Open-ended funds:
An open-end fund is available for subscription throughout the year.
Investors have the flexibility to buy or sell any part of their
investment at any time at a price linked to the funds -- Net Asset
Value (NAV).

Close-ended funds:
A close-end fund begins with a fixed corpus and operates for a
fixed duration. The fund is open for subscription only during a
specified period. When the period terminates, investors can redeem
their units. Close-ended funds may be listed on the stock
exchanges to impart liquidity to the investment.

The correct fund category

Mutual funds offer different categories. These can be classified as:

Debt funds

They seek to provide a regular source of income by investing in

fixed income securities like debentures and bonds.

Equity Funds

They aim to grow money over time (i.e. capital appreciation). Here
the investment focus is mainly on stocks/shares. Historically,
stocks have outperformed other asset classes like bonds, fixed
deposits, gold, and real estate over the long term -- 10 years.

Balanced funds

The fund attempts to maintain a balance between fixed income

securities and equities in a pre-determined ratio like 60:40 equity --
debt for instance.

The investor must invest in mutual fund categories, which meet his
criteria in terms of need for regular income, capital appreciation,
and safety of principal.
Fees and charges

Asset management companies (AMC) charge a fee for managing

investor monies. In other words, your mutual fund deducts charges
and fees from the net asset value (NAV) of the fund. As an
investor you must be aware of the fees and charges of the AMC.
Two schemes with more or less similar performances would
generate different returns if one of the two schemes charges higher
fees.

The load

An investor may be required to pay a load either at the time of

buying the units or at the time of selling the units. Again, the
returns of two similar performing schemes may vary depending on
the load charged by the scheme to the investor.

The tax implications

The investor needs to understand the tax implications before

investing in mutual fund schemes. Investments in mutual funds
have varying tax implications depending on whether you exit from
the fund before or after 12 months from the investment date. Tax-
saving funds in particular make attractive investments from a tax
perspective as they offer tax relief under Section 88.
Investor service and transparency

Services offered by mutual funds vary across funds. Some mutual

funds are more investor friendly than others, and offer information
at regular intervals. For instance, some funds disclose the expense
ratios, an important criterion for fund selection, once a year, some
disclose it once every 3 months, while a few disclose it every
month.

Fund performance

Every fund is benchmarked against an index like the BSE Sensex,

Nifty, BSE 200, and CNX 500. The investor must track the fund's
performance against the benchmark index. He must also compare
its performance with other funds from the same category. He
should also see the fund's calendar year performances over the
years

How to choose the best mutual funds

There are no two opinions on the fact that mutual funds are
increasingly gaining widespread acceptability among masses.
Investors who have traditionally embraced fixed deposits, post-
office schemes and even stocks have bought the idea of investing
through a professional money manager.

Some bad news:

There are too many mutual funds in the country and investors
aren't able to decide which fund to own and which to abandon. A
steady stream of mutual fund initial public offering compounds the
issue even further.

We have tried to define an ideal mutual fund portfolio for the

investor with a moderate risk appetite and an investment time
frame of at least five years.

A large-cap diversified equity fun

One of the first funds that investors should probably consider

owning is a large-cap diversified equity fund with a steady track
record of at least five years. Large cap stocks would typically
include stocks from the BSE Sensex/S&P Nifty.

A well-diversified fund should have not more than 40% of assets

in the top 10 stocks (this is a global standard). A steady track
record should involve out performance vis-à-vis the benchmark
index and peers especially during a downturn in equity markets.
Admittedly, there are few funds that fit the bill, but the ones that
qualify are the ones worth owning.

A mid-cap diversified equity fund

Mid-cap funds (with the exception of Franklin Prima Fund) did not
exist until even 3 years ago. So it is a fairly nascent fund category.
You can give the 'steady 5-year track record' criterion a miss for
mid-cap funds.

However, you need to be careful of 'mid-cap funds' as right now its

'fashionable' to be invested in mid-cap stocks. There are a lot of
'opportunity' funds with equity portfolios that swing in line with
the market mood. So if the accent is on large cap stocks the
'opportunity' fund will be invested in large caps.

If the mood in the markets turns and mid-cap stocks are pitch
forked into the limelight, the fund's strategy will reflect the change
in the market mood.

Choose funds that define themselves as 'mid-cap' either by name or

by investment objective. Also look at the benchmark index; a fund
that benchmarks itself against the CNX 500 or BSE 500 can be
considered a mid-cap fund. However, a fund that tracks the Sensex
or Nifty may not necessarily be a mid-cap fund even if it has a lot
of mid-cap stocks in its current portfolio.
In other words, a fund's investment objective and investments
should both correspond to its benchmark index.

A balanced fund

Balanced funds work particularly well during a downturn in equity

markets, when the fund manager has a window to shift assets on to
the debt side. The flexibility helps the fund manager curtail losses
in a falling market.

While selecting a balanced fund, choose the conventional type -

60:40 (equity:debt) with a steady track record. Make sure the fund
manager sticks to the 60:40 mandate even during bullish times,
when most balanced fund managers succumb to the temptation of
over-allocation to equities for higher growth.

A monthly income plan

A monthly income plan (MIP) works on the same premise as a

balanced fund. The fund manager has the flexibility to invest a
portion of assets (between 5-25% of assets in most cases) in
equities.

An MIP works well when debt markets are witnessing a subdued

phase, like now for instance. When debt markets are in turmoil, the
fund manager has the flexibility to shift assets in equities (provided
equity markets are robust) to generate that extra growth. Again,
since monthly income plans are a relatively recent phenomenon,
investors can consider the short-term performance (at least 1-year)
before selecting a good MIP.

If you are looking for a regular income stream, choose the

quarterly option as opposed to a monthly option, to allow the fund
manager to declare a dividend in volatile equity markets.

A floating rate fund

Floating rate debt funds invest in floating rate paper. Floating rate
instruments have their coupon rates adjusted at periodical intervals,
which reduces price fluctuations arising out of interest rate
volatility.

Investors can park funds in a floating rate fund (short-term plan)

until more attractive investment opportunities emerge. Given the
scenario in debt markets at present, we believe its makes more
sense to own a floating rate fund for some time going forward,
rather than a regular long-term debt fund.

Floating rate funds have a relatively short history and investors can
look at the 1-year performance before selecting a floating rate
fund.
 Introduction
 Different Versions of Asset Allocation
 Allocation Models
 Allocation and Return
 Portfolio Asset Selection
 Return & Return Volatility
 Portfolio Risk Analysis
 Value at Risk
 Market Risk Exposure
ASSET ALLOCATION

INTRODUCTION

The process of dividing investments among different kinds of

assets, such as stocks, bonds, real estate and cash, to optimize the
risk/reward tradeoff based on an individual's or institution's
specific situation and goals. A key concept in financial planning
and money management. If you put your entire invest able funds
into Treasury bills you have made an asset allocation decision.
Asset allocation is how one decides to allocate assets among
various asset classes such as stocks, bonds, and cash.

Different versions of asset allocation

 Strategic asset allocation
 Tactical asset allocation
 Drifting asset allocation
 Balanced asset allocation
 Dynamic asset allocation

Strategic asset allocation is concern with establishing the long-term

asset mix of a portfolio; the other types of asset allocation refer to
what the portfolio manager does in response to evolving market
condition.

Strategic asset allocation

Strategic asset allocation refers to the long-term “normal” asset

mix sought by the investor (or portfolio manager to achieve an
ideal blend of risk and return. It may be establish with the help of
either and informal or formal approach.
 Informal approach

Essentially, it involves three broad steps.

 Subjectively assess the risk tolerance as “low”, “medium”, or
“high”.
 The investment horizon is defined as “short”, “intermediate”, or
“long”.
 The optimal strategic asset allocation is established
using some “rule of thumb”.

Formal approach

Essentially, it involves following steps

 Quantitative forecast is developed of expected returns,
standard deviation and correlations of the two asset categories,
namely stocks and bond.
 Efficient frontier is defined which contains all the efficient
portfolio options
 Specify the utility indifference curves reflecting the risk
disposition of the investor
 Choose the optimal asset allocation. The optimal asset
allocation is found at the point of the tangency between the
efficient frontier and a utility indifference curve. This point
represents the highest level of the utility the investor can real.

Exhibit – strategic asset allocation.

A: Quantitative Forecasts B: Efficient

Frontier
E(Rp)
Expected Standard
Return Deviation
Stocks 20.2% 18.0%
Bonds 13.0% 8.2%
Correlation +0.5

σ
p

C: Utility Indifference Curves D:

Optimal Frontier
E(Rp)
E(Rp)
 σp
σp

Tactical Asset Allocation

Tactical asset allocation involves a conscious departure from the

strategic or normal asset mix based on rigorous and objective
measurement of the value. The objective of tactical asset allocation
is to enhance the performance of the portfolio through an
opportunistic shift in the asset mix in response to the changing
pattern of rewards in the capital market. The distinctive features of
tactical asset allocation are as follows.
 It is guided by objective measures of prospective
values like earning yield and yield to maturity
 It is inherently contrarians in nature as it involves
buying after a market decline and selling after a market
rise.

Drifting
 The policy advocates that the initial portfolio be left undistributed.
It is essentially a buy and hold policy irrespective of what happens
to relative value, no rebalancing is done. . The distinctive features
of drifting asset allocation are as follows.
 The value of the portfolio is linearly related to the stock market.
 The portfolio value cannot fall below the value of the
initial investment in bonds, it upside potential is
unlimited.
 Stocks outperform bonds, the higher the initial
percentage in the stocks, the better the performance of
the “buy and hold” policy and vice versa.

Exhibit – Payoff Diagram For Buy and Hold Policy

BALANCE ASSET ALLOCATION

A balance asset allocation policy calls for a periodically
rebalancing of the portfolio to ensure that the stock bond is mix
inline with the long-term “normal” mix. Put differently, this policy
calls for maintain an exposure to stocks that is constraint
proportion of portfolio value. This policy calls for rebalancing the
portfolio when relative value of its components changes, so that
target proportions are maintained. Thus the policy is a do
something policy. As for example, constant mix policy.

Exhibit – Payoff Diagram For constant mix policy

DYNAMIC ASSET ALLOCATION

Dynamic asset allocation also known as insured asset allocation

involves shifting the asset mix mechanistically in response to
changing market conditions. As for example, constant proportion
portfolio insurance (CCPI) policy.
 Investment in stocks=m (Portfolio value-
Floor)

Where m is greater than 1.

Exhibit – Payoff Diagram for constant proportion portfolio

insurance policy

Asset allocation is a strategy for building and managing your

investment portfolio. You allocate your assets by deciding how
much of your principal to invest in different asset classes, or
investment categories. For example, you might invest some of your
money in stocks, some in bonds, and some in cash or cash
equivalents. The allocation you choose has a major impact on your
investment return, and on the level of risk you take as an investor.
Asset allocation determines the investment returns you achieve
because different asset classes — stocks, bonds, and cash
equivalents — typically react differently to changes in the financial
markets and to broader economic conditions. For example, a
market that produces strong stock returns may cause bond returns
to slump, and vice versa. But, if you spread your investments
across different asset classes, you may be able to limit, or offset,
potential losses in one asset class with stable values, or even gains,
in another.

Choosing the specific asset classes you’ll include in your portfolio

is the first step. Next, you have to consider what percentage of
your total portfolio you want to allocate to each of those classes.

Stocks for growth

Stocks, bonds, and cash equivalents are all considered asset classes
— as are real estate, collectibles, precious metals, futures and
options, and other alternative investments. Each asset class carries
different types and levels of risk and serves a different purpose in
your portfolio, such as providing capital preservation or potential
growth.

Stocks
If you want your investment portfolio to grow in value over time,
you’ll probably need to allocate at least some of your assets to
stocks. Most financial experts say that the younger you are, the
more you should stress stocks. That’s because historically, stocks
have turned in the strongest performance over the long term. And
if you begin investing early, you have time to ride out the
inevitable ups and downs in the stock market. Although your stock
investments can go up and down significantly in value over the
short term, the longer you stay in the stock market, the more likely
you are to come out ahead. In fact, over periods of 15 years or
more, stocks have always provided positive returns.

Bonds for income

Bonds are also known as fixed-income or income-producing

investments because when you buy a bond, you receive interest
payments on a regular schedule. And the bond issuer promises to
pay back your principal, or original investment, when the bond
matures.

Cautious investors, or investors approaching a major financial goal

such as retirement, may allocate more of their assets to bonds than
to stocks not only because bonds pay regular income, but because
their prices are usually less volatile than stocks.
But that doesn’t mean that bonds are invulnerable to market
changes, or are always risk-free investments. Bond prices change
in response to supply and demand that’s driven by changes in the
interest rates. The prices of some bonds, such as zero coupon
bonds, can be highly volatile in the secondary markets. And high-
yield bonds, sometimes called junk bonds, can be very high-risk
investments because of the danger that the bond issuer will default,
and fail to make its interest payments, or even fail to pay back your
principal.

But a portfolio heavily weighted in high-quality corporate bonds,

municipal bonds, and treasury will almost certainly fluctuate in
value less than a portfolio that is concentrated in stocks. The trade-
off is that high-quality bonds generally provide more modest rates
of return over the long term than stocks.

Capital preservation

Cash and cash equivalent investments, such as money market

funds, certificates of deposit, and Treasury bills, are low-risk
investments that pay interest. Their short terms and stable values
mean they generally provide smaller returns than the other major
asset classes. But they have one big advantage — they’re highly
liquid, which means you can turn them into cash at any time
without a major loss in value.
The rate of interest that cash investments pay is often not enough
to offset the effects of inflation, or the gradual erosion of the
buying power of your money. So if you’re seeking long-term
growth, you’ll want to limit the amount of money you allocate to
cash investments. Nonetheless, cash investments can play a role in
a well-balanced portfolio — to provide liquidity to meet shorter-
term goals, emergency expenses, and to make new investments
when the opportunity arises, or to provide a buffer against the
fluctuation in value of more volatile securities.

Allocation models

An asset allocation model is a formula for distributing your total

assets among different types of investments — primarily stock,
bonds, and cash, or the mutual funds that buy those investments.
One classic example calls for putting 60% of your portfolio in
stocks, 30% in bonds, and 10% in cash.

The key is to choose a model that has the highest likelihood of

helping you achieve your financial goals at a level of risk you’re
comfortable taking. Then, as your life situation and tolerance for
risk changes, or as you get closer to reaching a particular goal,
you’ll want to adjust your allocation.
For example, you might have as much as 90% of your portfolio in
stock early in your career, but over time, you might reduce the
amount of stock to 40% to lower the volatility of your portfolio as
you near retirement. Similarly, a major life change that affects your
financial situation, such as the arrival of children or responsibility
for the care of an elderly relative, may mean that you want to lower
the level of risk in your portfolio.

You can work with your financial adviser to determine an initial

allocation model and refine it as time goes by. You’ll find that
investment professionals regularly revise the allocations they’re
suggesting in response to shifts in the market or their expectations
for the future. But, in fact, the changes from month to month or
even year to year tend to be within a fairly narrow range.

Allocation and return

More than any other investment strategy, how you allocate your
portfolio can have a major impact on your investment return.

Asset allocation has a dramatic long-term impact, as you can see

by comparing the pretax value of three hypothetical $100,000
portfolios after 20 years. The first portfolio, emphasizing stocks,
outperformed the portfolios with larger percentages allocated to
corporate bonds and cash.

The account value assumes all earnings were reinvested, and are
figured using the average annual returns for each investment
category for 1926 through 2003: large-company stocks at 10.4%,
corporate bonds at 5.9%, and cash investments at 3.8%*.

Allocati Value Allocati Value Allocati Value

on on on
Stoc 60.0% $434,0 30.0% $217,0 10.0% $72,30
ks 00 00 0
Bond 30.0% $94,40 60.0% $188,8 30.0% $72,30
s 0 00 0
Cash 10.0% $21,10 10.0% $21,10 60.0% $126,5
0 0 00
Total 100% $549,5 100% $426,9 100% $293,2
00 00 15

Source: Ibbotson Associates, 2004.

Past performance is no guarantee of future results.

As you can see, the portfolio emphasizing stocks dramatically

outperforms the portfolios with larger percentages allocated to
bonds and cash. Most experts agree that to get the best long-term
returns, you’ll need to have substantial holdings in stocks and
stock mutual funds.
Allocating for retirement

If you have a variety of investment accounts — for instance a

401(k), an IRA, and a separate taxable account — you’ll want to
consider not only how to allocate the assets within each account,
but also how your different accounts can work together to help you
meet your financial goals.

For example, if your 401(k) and IRA are invested primarily in

stocks and stock mutual funds, you may want to seek balance by
allocating a larger percentage of your taxable account to tax-
exempt municipal bonds and treasury. Or if you’re buying growth
stocks for your taxable account, you might want to emphasize
equity income in your 401(k).

Guaranteed income

Another consideration is whether you’ll be eligible for a

guaranteed, fixed-income pension when you retire. If that’s the
case, you may be in a position to assume greater risk in your own
investment portfolios, with the goal of achieving higher returns.
That might mean weighting your asset allocation more heavily
toward stocks, as opposed to fixed-income securities. Your
financial adviser can help you assess the overall picture to find an
allocation that’s in line with your goals.
Tracking your investments

Understanding how asset allocation works is relatively easy

compared to actually sticking with a plan and keeping track of
your investments. Fortunately, you can get help.

Your financial adviser or broker

One way to keep track of your asset allocation is by using one

financial institution — a brokerage firm, mutual fund, or bank —
for all your investments except your employer-sponsored plan.
That way, you’ll get one consolidated statement each month that
shows all of your assets and the current value of your portfolio.

Your statement will also alert you to imbalances that may develop
in your asset allocation if one asset class turns in a much stronger
performance than the others. For example, if the return on bonds
outpaces the return on stocks, the bond portion of your portfolio
might turn out to be a larger percentage of the total account than
you had allocated. That might mean you’d want to increase the
percentage of money going into stocks to build up that class and
get back where you intended to be. This process is known as
reallocation.

Online resources
You can also track your investments online. There are a number of
computer programs that can help you organize, analyze, and keep
track of your asset allocation. Brokerage firms and mutual fund
companies offer many of these programs, as do independent Web-
based companies.

Portfolio Asset Selection

To use Portfolio Asset Selection most effectively, first be sure that

you know how to use the selection criteria - That means taking the
time to understand the concepts of Average Return, Return
Volatility, Risk-Adjusted Returns, and Asset Correlation, as well
as the differences between the various benchmark indices. Then
follow these four steps:

1. Identify your selection criteria, setting each against a

benchmark index or some value that you have chosen
yourself. Note: You can choose to select on a single criteria
or any combination of criteria.
2. Submit a query.
3. Review your query results - Since one of the main goals of
portfolio asset selection is to help you narrow down the list of
prospective portfolio assets, your query should produce a
fairly short list of assets. If your results include more than 20-
 25 assets, your criteria have likely been set to broadly. If your
query produces no results at all, you will be advised to
broaden your criteria and try again. Note: It may take several
tries to produce a useful set of results that is neither too long
nor too short.
4. Act on your query results - If you like an asset, you can add it
to an existing portfolio.

Return & Return Volatility

To explain the relationship between expected return and return

volatility, and to show why it is important to consider more than
just expected returns when selecting assets for inclusion in a
portfolio.

• Expected Return – The return expected on an investment

(an asset or a portfolio) based on a probability distribution,
taking into account all possible return scenarios.
• Return Volatility – Represents the variability or uncertainty
of an asset’s return; it is measured by a value called standard
deviation.

How it works
Essentially, return volatility (or standard deviation) tells us how
much an asset’s actual return is likely to deviate above or below its
expected return. Consider the graph above, where each segment
represents one standard deviation:

• "Red" Zone = The asset’s actual return has approximately

68% probability of falling within this zone (i.e. within 1
standard deviation of the asset’s expected return).
• "Red + Green" Zone = The asset’s actual return has
approximately 95% probability of falling within this zone
(i.e. within 2 standard deviations of the asset’s expected
return).
• "Red + Green + Blue" Zone = The asset’s actual return has
approximately 99% probability of falling within this zone
(i.e. within 3 standard deviations of the asset’s expected
return).
Example :
Asset A has an expected return of 22%, and a return volatility
(standard deviation) of 15%. With this information, we can infer
the following:

• Asset A has a 68% probability of achieving an actual return

between 7% and 37% (i.e. one standard deviation below and
above expected return – On the graph, this range is
represented the red area).
• Asset A has a 95% probability of achieving an actual return
between -8% and 52% (i.e. two standard deviations below
and above expected return – On the graph, this range is
represented the red + green area).
• Asset A has a 99% probability of achieving an actual return
between -23% and 67% (i.e. three standard deviations below
and above expected return – On the graph, this range is
represented the red + green + blue area).

The important point here is that return volatility (standard

deviation) can have a tremendous impact on actual return. The oft-
quoted cliché says, “High risk, high reward”, but that’s only half of
the story. With an understanding of return volatility, it's clear that
the cliché fails to mention that high risk also means the potential
for great loss.
Conclusion

When considering an asset for inclusion in a portfolio, it's natural

to look to the upside associated with expected return. However, we
also need to factor in return volatility and decide whether or not we
can live with the potential downside associated it represents.

Risk-adjusted Return

To illustrate the usefulness of knowing an investment's Risk-

Adjusted Return, which is commonly measured by the Sharpe
Ratio.

Definition

• Risk-Adjusted Return: The return on an asset or a portfolio

adjusted for volatility; commonly represented by the Sharpe
Ratio.
• Sharpe Ratio: A ratio of return to volatility; useful in
comparing assets or portfolios in terms of risk-adjusted
return.

How it works
The historical average return of an asset or portfolio can be
extremely misleading, and should not be considered alone when
selecting assets or comparing the performance of portfolios. The
Sharpe Ratio is such an important tool because it allows you to
factor in the potential impact of Return Volatility on Expected
Return, and to objectively compare assets or portfolios that may
vary widely in terms of returns.

Consider Assets A, B and C in the chart below:

Avg. AnnualReturn
Sharpe Ratio
Return Volatility
Asset A 54.52% 177.20% 0.279
Asset B 36.91% 68.20% 0.468
Asset C 25.64% 22.69% 0.910

If we compare these assets on average annual return alone, Asset

A appears to be the clearly superior investment, and even Asset B
appears to be a better bet than Asset C. However, if we factor in
return volatility, Asset C emerges as the superior investment in
terms of risk-adjusted returns.

Conclusion

When selecting assets for inclusion in a portfolio, or when

comparing the performance of two portfolios, it is important to
look beyond average historical return. Risk-adjusted return, as
measured by the Sharpe Ratio, provides a useful, reliable means of
factoring Return Volatility into your assessment

Portfolio Risk Analysis

Portfolio Risk Analysis is the process of measuring and assessing

your portfolio's exposure to market risk. Fin Portfolio offers you
three views on risk, allowing you to compare your portfolio to the
market portfolio (S&P 500) in terms of Risk-Adjusted Return,
Value-at-Risk (VaR), and Market Risk Exposure (Alpha, Beta and
R-squared).

You should analyze portfolio risk on a regular, periodic basis. How

often you analyze portfolio risk is up to you, but to keep abreast of
the impact of the market on portfolio risk, you might want to run
Portfolio Risk Analysis on a weekly or even daily basis.

Portfolio Risk Analysis is important because it gives you a

powerful tool for assessing your portfolio's risk, both relative to the
market and to the risk level you desire to maintain.

To use Portfolio Risk Analysis most effectively, there are really

only two recommended steps:
 1. Be sure that you understand the various measurements that
Fin Portfolio uses in its presentation of portfolio risk - That
means taking the time to familiarize yourself with the
concepts of Risk-Adjusted Return, Value at Risk (VaR), and
Market Risk Exposure. (See links below)
2. Use Fin Portfolio’s three risk measurements to compare your
portfolio's risk profile with that of the market portfolio (S&P
500), and to assess whether or not your portfolio has the risk
profile that you desire.

Value at Risk (VaR)

To explain the concept of Value at Risk (VaR), and illustrate how

it can be used to analyze the risk level of a portfolio.

Definition

A measurement of risk in terms of potential future financial loss on

your current investment portfolio; Represents the worst-case future
financial loss you can expect to incur on that portfolio within a
given timeframe (95% confidence level).

How it works

VaR is one of the most important risk measurements used by major

a financial institution that presents risk in terms of potential
financial loss on your portfolio. VaR draws on statistics to
translate portfolio volatility into an actual value, which represents
(with 95% confidence) the most money your portfolio is likely to
lose within a given timeframe in the future. As a tool, VaR is very
useful for comparing your portfolio with the market portfolio (S&P
500).

Of course, since VaR is presented "with 95% confidence", this

implies that you can pessimistically anticipate maximum future
losses exceeding a VaR amount 5% of the time within a given
timeframe.

Note: In general, a portfolio with low return volatility and

low correlation between individual assets will have a low
VaR.

A Practical Example

In the chart below, we have a user portfolio and the S&P 500
portfolio. While both portfolios have equal market values, the user
portfolio's higher VaR numbers indicate that it carries significantly
more risk than the S&P 500 portfolio.
For example, we can say with 95% confidence that on any given
day in the future, the currently held user portfolio could lose up to
$1,159, and the S&P 500, up to $776. Since the user portfolio's
daily VaR is presented "with 95% confidence", our user must
understand that on any given day in the future there is a 5%
probability of maximum financial loss exceeding $1,159.

S&P 500
User Portfolio
Portfolio
Market Value of Portfolio
$95,910 $95,910
(as of latest market closing)
Daily Value at Risk $1,159 $776
Monthly Value at Risk $5,311 $3,557
Annual Value at Risk $18,399 $12,322

VaR is one of several important measurements that you can use to

analyze and assess the risk level of your investment portfolio. Fin
Portfolio recommends using VaR together with Risk-Adjusted
Return and Market Risk Exposure in order to form a
comprehensive view of your portfolio's risk.

Market Risk Exposure

To explain the concepts of alpha, beta and R2, and to show how
they can be used to analyze and assess your portfolio's risk level.
• Alpha – The difference in the expected return of your
portfolio, given the portfolio's beta, and the actual return the
portfolio achieved. The higher your Alpha, the better your
portfolio has done in achieving "excess" returns. It is
generally considered the higher the alpha, the higher the
"value added" to the portfolio by the portfolio manager.
(Note: The market portfolio alpha is always 0.0)
• Beta – Measures the portfolio's sensitivity to movements in
the market portfolio, or benchmark index (e.g., S&P 500
always has a Beta of 1.0). A beta > 1.0 means that the asset
or portfolio is more volatile (risky) than the benchmark
index, and a beta < 1.0 means the asset or portfolio is less
volatile.
• R2 – Indicates the percentage of a portfolio's movement that
is explained by the movement in the market portfolio or
benchmark index. R2 ranges from 0 to 100%, with a score of
100 indicating that all movements of the portfolio are
completely explained by the market portfolio or benchmark
index. In general, the higher the R2, the more reliable a
portfolio's alpha and beta measurements will be.
• A portfolio's Beta is calculated by comparing a portfolio's
volatility to the market's volatility over time. The more
sensitive a portfolio's returns are to movements in the market,
 the higher the portfolio's beta will be. Higher Betas therefore
imply higher risk.

• Using a portfolio's Beta and the expected return on the

market portfolio (e.g. SP500), we can estimate a return for
the portfolio. If the actual return on the portfolio differs from
the estimated return, we have an Alpha. A positive Alpha
tells us the actual return exceeded the estimated, whereas a
negative Alpha indicates the actual return did not meet the
estimated return.
• R2 helps us understand how useful the Beta and Alpha
numbers are for any given portfolio. The closer to 100%, the
more meaningful our Beta and Alpha measurements are.

A PracticalThe chart below illustrates the user portfolio's

exposure to market risk.

User S&P 500

Market Exposure Measurement
Portfolio Portfolio
Beta 1.4 1.0
Alpha 7.2 0
R2 77% 100%
A beta of 1.4 suggests that the user's portfolio is more volatile than
the S&P 500. An alpha of 7.2 tells us that the portfolio exceeded
its expected return, given the portfolio's beta. Finally, the user
portfolio's R2 measurement suggests that 77% of its volatility can
be explained by volatility in the market. The user portfolio's high
R2 lends credibility to its alpha and beta measurements.

These measurements are a useful means of comparing your

portfolio's risk level with that of the market portfolio, or
benchmark index (e.g. S&P 500). It is recommended that using
Market Risk Exposure together with Risk-Adjusted Return and
VaR in order to form a comprehensive view of your portfolio's
risk. If you are able to maintain a portfolio with a low beta, a high
alpha and a high R-squared, you are a doing well. Such a portfolio
is achieving a better return than its level of market risk suggests it
should.
 Professional Management
 Diversification
 Convenient Administration
 Return Potential
 Low Costs
 Liquidity
  Transparency
 Flexibility
 Choice Of Schemes
 Tax Benefits
 Well Regulated
 Risk And Return
 Other Benefit

The advantages of investing in a Mutual Fund are:

• Professional Management
• Diversification
• Convenient Administration
• Return Potential
• Low Costs
• Liquidity
• Transparency
• Flexibility
• Choice of schemes
• Tax benefits
 • Well regulated
• Risk and Return

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.
Mutual Funds employ the services of skilled professionals who
have years of experience to back them up. They use intensive
research techniques to analyze each investment option for the
potential of returns along with their risk levels to come up with the
figures for performance that determine the suitability of any
potential investment.

Diversification

Mutual Funds invest in a number of companies across a broad

cross-section of industries and sectors. This diversification reduces
the risk because seldom do all stocks decline at the same time and
in the same proportion. You achieve this diversification through a
Mutual Fund with far less money than you can do on your own.
Investments are spread across a wide cross-section of industries
and sectors and so the risk is reduced. Diversification reduces the
risk because all stocks don’t move in the same direction at the
same time. One can achieve this diversification through a Mutual
Fund with far less money than one can on his own.

Convenient Administration

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 potentials

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. Returns in the mutual funds are generally
better than any other option in any other avenue over a reasonable
period of time. People can pick their investment horizon and stay
put in the chosen fund for the duration. Equity funds can
outperform most other investments over long periods by placing
long-term calls on fundamentally good stocks. The debt funds too
will outperform other options such as banks. Though they are
affected by the interest rate risk in general, the returns generated
are more as they pick securities with different duration that have
different yields and so are able to increase the overall returns from
the portfolio.
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. Mutual Funds offer a relatively less
expensive way to invest when compared to other avenues such as
capital market operations. The fee in terms of brokerages, custodial
fees and other management fees are substantially lower than other
options and are directly linked to the performance of the scheme.
Investors individually may lack sufficient funds to invest in high-
grade stocks. A mutual fund because of its large corpus allows
even a small investor to take the benefit of its investment strategy.

Liquidity

Fixed deposits with companies or in banks are usually not

withdrawn premature because there is a penal clause attached to it.
The investors can withdraw or redeem money at the Net Asset
Value related prices in the open-end schemes. In closed-end
schemes, the units can be transacted at the prevailing market price
on a stock exchange. Mutual funds also provide the facility of
direct repurchase at NAV related prices. The market prices of these
schemes are dependent on the NAVs of funds and may trade at
more than NAV (known as Premium) or less than NAV (known as
Discount) depending on the expected future trend of NAV, which
in turn is linked to general market conditions. Bullish market may
result in schemes trading at Premium while in bearish markets the
funds usually trade at Discount. This means that the money can be
withdrawn anytime, without much reduction in yield.

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

Being under a regulatory framework, mutual funds have to disclose

their holdings, investment pattern and all the information that can
be considered as material, before all investors. This means that the
investment strategy, outlooks of the market and scheme related
details are disclosed with reasonable frequency to ensure that
transparency exists in the system. This is unlike any other
investment option in India where the investor knows nothing as
nothing is disclosed. We 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
Investment in mutual funds also offers a lot of flexibility with
features such as regular investment plans, regular withdrawal plans
and dividend reinvestment plans enabling systematic investment or
withdrawal of funds. Even the investors, who could otherwise not
enter stock markets with low investible funds, can benefit from a
portfolio comprising of high-priced stocks because they are
purchased from pooled funds. Through features such as regular
investment plans, regular withdrawal plans and dividend
reinvestment plans, we can systematically invest or withdraw
funds according to your needs and convenience.

Choice of Schemes

Mutual Funds offer a family of schemes to suit our varying needs

over a lifetime. Mutual funds invest according to the underlying
investment objective as specified at the time of launching a
scheme. So, we have equity funds, debt funds, gilt funds and many
others that cater to the different needs of the investor. The
availability of these options makes them a good option. While
equity funds can be as risky as the stock markets themselves, debt
funds offer the kind of security that is aimed for at the time of
making investments. Money market funds offer the liquidity that is
desired by big investors who wish to park surplus funds for very
short-term periods. Balance Funds cater to the investors having an
appetite for risk greater than the debt funds but less than the equity
funds. The only pertinent factor here is that the fund has to be
selected keeping the risk profile of the investor in mind because
the products listed above have different risks associated with them.
So, while equity funds are a good bet for a long term, they may not
find favour with corporates or High Net worth Individuals (HNIs)
who have short-term needs.

TAX BENEFITS

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.

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. Unlike the company fixed deposits, where
there is little control with the investment being considered as
unsecured debt from the legal point of view, the Mutual Fund
industry is very well regulated. All investments have to be
accounted for, decisions judiciously taken. SEBI acts as a true
watchdog in this case and can impose penalties on the AMCs at
fault. The regulations, designed to protect the investors’ interests
are also implemented effectively.

Risk Return Grid

Risk
Suitable Benefits offered by
Tolerance/Return Focus
Products MFs
Expected
Bank/ Company
Liquidity, Better
Low Debt FD, Debt based
Post-Tax returns
Funds
Medium Partially Balanced Funds,Liquidity, Better
Debt, Some DiversifiedPost-Tax returns,
Partially Equity Funds andBetter Management,
 some debt Funds,
Equity Mix of shares andDiversification
Fixed Deposits
Capital Market,Diversification,
Equity FundsExpertise in stock
High Equity
(Diversified aspicking, Liquidity,
well as Sector) Tax free dividends

Other Benefits

 Voluntary Benefit
 Group Benefit

Voluntary benefit

There are various voluntary benefits provided by the mutual fund.

There are nearly 40 mutual fund companies offering near about
500 products as per the requirement of individual, group and
corporate. There are number of schemes which are designed
keeping in mind the requirement of the individuals. For example,
regular income, capital appreciation, etc. the schemes like unit
linked insurance plan provides benefit of insurance as well as
income and also makes the investor eligible for tax rebate. Such
kinds of voluntary benefits are provided by the mutual fund.

Group benefit
The numbers of schemes are offered keeping in mind the
requirements of the group such as group insurance along with the
investment. Many schemes offer services and tools to help
effectively manage employee lost time and improve workplace
productivity it also provide benefit like Round out employee
benefit packages by providing them access to property and liability
coverage through various mutual fund schemes along with income
and growth option for meeting the group requirement.
 Are Mutual Funds Safe
 Now Is Not The Right Time
 I Want My Principal To Be Safe At All Times
 I Want To Know What Returns I Will Get It
 Shouldn’t I Buy A Scheme With A Low NAV
 The Diversification Myth
 The Momentum Myth
 The Market Timing Myth
 Stocks Make More Money
 Smarter Investors Use Stocks Only
 Mutual Funds Are Too Expensive
 Mutual Funds Lack Excitement
 MYTHS ABOUT MUTUAL FUND
Myth I: ‘Are Mutual Funds Safe?’
 Mutual Funds can never run away with investors’
money.
 Pick a good fund house that has a track record and
accountability.
 Build a portfolio with the right mix of equity and
income funds.
 Watch your portfolio progress towards your goal

Myth II: “Now is not the right time”…

‘Now’ will always appear to be the wrong time
 Market has fallen, not the right time
 Market is drifting, not the right time
 Market has risen sharply, not the right time
Now is the right time because “it is time in the markets, not timing
the market that matters”

Myth III: “I want my principal to be safe at all times”

 For principal safety at any cost, recognize there is a
cost…. You give up growth and inflation eats into
your returns.
  Principal is safe, in theory, only when you lend
money. In real life, it depends on the borrower’s
ability and willingness to pay you back.

Myth IV: “I want to know what returns I will get it”

 Yes, if you want guaranteed returns… you’ll get it…
guaranteed, mediocre returns.
 In equity funds, no one can tell you beforehand “X
returns”. But over time, equities have outperformed
all other major asset classes.

Myth V: “Shouldn’t I buy a scheme with a low NAV?”

 It is immaterial whether the NAV of a scheme is
high or low V/S. other schemes.
 The NAV of a scheme on a given day reflects the
market prices of the scheme’s investment on that day
 The growth in the market prices of the investments
will result in the scheme’s NAV

Myth VI: The Diversification Myth

If you own at least 10 different mutual funds you’ll have a
diversified portfolio.
 Owning 10 mutual funds won’t assure you of
anything but a lot of work trying to stay on the top of
them all.
 In fact, you can have a well-diversified portfolio
with just 4 to 6 funds or you can have a portfolio of
15 funds with very little diversification.
 In past, we have seen investors buying into 5
different tech funds and then claiming that they have
diversified
 Mutual funds own too many stocks to be of any
serious benefit to anyone. A focused portfolio of 8-
10 stocks will generate a more attractive return than
a mutual fund portfolio of 30-40 stocks.
 We are not sure if there is any theory to prove or
disprove that concentrated portfolios (8-10 stocks)
do better than diversified portfolios (30-40 stocks in
the Indian context). Of course, investment guru
Warren Buffet has successfully managed a small
portfolio over a long period of time.
 But not too many investors can claim to have his
investment discipline, insight and experience. In the
 absence of these important traits, it would be a
delusion to expect a concentrated portfolio to
outperform a diversified portfolio, at least not over
the long-term (3-5 years).
 Remember fund managers are experienced money
managers and their mandate is to outperform the
benchmark index of the fund. And if they have
chosen to go diversified, that tells you a little about
how to go about making money in the stock markets.

Myth VII: The Momentum Myth

The easiest way to beat the market to buy last year’s top-
performing funds
 The fact is that last year’s best fund just as likely to
be this year’s dogs. Blindly following this strategy is
very dangerous for most investors.
 The very top-performing funds are usually those that
took a lot of risk.

Myth VIII: The Market Timing Myth

The safest strategy is to move everything into money market funds
when the market is declining and switch everything back into stock
funds when the market is rising.
  This is a loser’s game. It has proven over and over
that investors are incapable of timing the market or
identifying major bull or bear markets.

Myth IX: Stocks make more money

 Stock investors will only tell you about their positive

ventures. You aren't going to hear about their recent
50% loss in a tech stock. There is definitely a
correlation between willingness to talk about returns
and how positive they have done recently.
 There are plenty of mutual funds that offer risky high
returns. Take Pro funds for example. They offer a
fund that doubles the OTC performance.

Myth X: Smarter Investors Use Stocks Only

 Imagine you are a wealthy investor like Bill Gates or

Warren Buffet. Do you really think wealthy
investors invest strictly in one or two stocks? No
way! They diversify amongst hundreds of different
stocks. This is exactly the purpose of a mutual fund.
  Less wealthy investors can purchase shares of a
mutual fund or mutual funds to obtain a well-
diversified portfolio consisting of hundreds of
stocks. Any basic investment course will spend
much time proving the advantages of diversification.
By diversifying between different stocks and even
bonds, you can take advantage of reducing risk and
stabilizing returns.
 When you purchase a fund, you are hiring a
professional manager who is highly experienced,
watches the market constantly, and has access to
information most stock investors cannot afford.

Myth XI: Mutual funds are too expensive

 Mutual funds aren't cheap. On an average, the

recurring expenses for a diversified equity fund
ranges from 2.25% to 2.50% of net assets. Add to
this a one-time entry load of about 2.25% (for most
diversified equity funds) and you will understand
why mutual funds are more expensive vis-à-vis
investing directly in stocks.
 The 2.50% (maximum) recurring expenses charged
by the mutual fund go towards meeting the
 brokerage costs, custodial costs and the fund
manager's salary. These are expenses that stock
investors incur in any case (except for the fund
manager's salary).
 Consider this: when you have a competent fund
manager, who combines his time, effort and
expertise to research stocks and sectors to pick his
best 30-40 stocks and also buys and sells them for
you, you have someone who is doing a lot of work
for you and is charging only a maximum of 2.50% of
your investments.
 Of course, we agree that this must be followed by
sheer out performance of the benchmark index and
even peers, as you don't want to pay for
underperformance.
 The good news is that quite a few diversified equity
funds have managed to put in what can be termed as
'a very good performance' over 3-5 years vis-à-vis
the benchmark index and peers.
 Investing is serious business that is best approached
with a methodical approach. Mutual funds allow for
that and investors must try to benefit from them.

Myth XII: Mutual funds lack excitement

 Who wants to invest in a staid investment like a
mutual fund that probably grows half as fast as some
'exciting' stocks like Infosys, Satyam or Dr Reddy's
during a bull run? The poser is relevant.
 Underperformance almost always gets the thumbs
down, no matter what the reason. After all, every
investor wants his money to work for him and if a
stock does that better, why invest in a mutual fund?
 Mutual funds may lack the excitement of a stock, but
it is the kind of excitement that investors can do
without. If an Infosys posts 19.0% net profit growth
as it did in March 2003 (FY03) and still crashes 40%
over the next two days; how many investors want to
live with that kind of 'excitement'?
 And remember Infosys is not a Himachal Futuristic;
it's a solid stock with solid fundamentals. Mutual
funds may not scorch the investor's portfolio in a bull
run like some 'exciting' stocks, but you can be sure
they won't burn a huge crater in the investor's
portfolio either, when individual stocks are crashing
by 40%, for instance.
 Global Scenario
 Market Trends
 Future Scenario
Global Scenario

Some basic facts:

 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. is expected to trade on-line by
2003.

(Source: The Financial Express September 99)

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.

(Source: The Financial Express September 99)

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: 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.

Market Trends

 Future Scenario
 Global Scenario

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, and 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.

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 is preferred by corporates 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
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, the Canada based Dundee mutual
fund is planning to launch a gold and a real estate fund before the
year-end.
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 funds.

The mutual fund industry is awaiting the introduction of

DERIVATIVES in the country as this would enable it to hedge its
risk and this in turn would be reflected in its Net Asset Value
(NAV).

SEBI is working out the norms for enabling the existing mutual
fund schemes to trade in Derivatives. Importantly, many market
players have called on the Regulator to initiate the process
immediately, so that the mutual funds can implement the changes
that are required to trade in Derivatives.

Market Trends

A lone UTI with just one scheme in 1964 now competes with as
many as 400 odd products and 34 players in the market. In spite of
the stiff competition and losing market share, UTI still remains a
formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones
for the industry. New players have come in, while others have
decided to close shop by either selling off or merging with others.
Product innovation is now 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.

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. Funds collection, which averaged at
less than Rs.100bn per annum over five-year period spanning
1993-98 doubled to Rs.210bn in 1998-99. In the current year
mobilization till now have exceeded Rs.300bn. Total collection for
the current financial year ending March 2000 is expected to reach
Rs.450bn.
What is particularly noteworthy is that bulk of the mobilization has
been by the private sector mutual funds rather than public sector
mutual funds. Indeed private MFs saw a net inflow of Rs.7819.34
crore during the first nine months of the year as against a net
inflow of Rs.604.40 crore in the case of public sector funds.

Mutual funds are now also competing with commercial banks in

the race for retail investor’s 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. The collection in the first half of the financial year
1999-2000 matches the whole of 1998-99.

India is at the first stage of a revolution that has already peaked in

the U.S. The U.S. boasts of an Asset base that is much higher than
its bank deposits. In India, mutual fund assets are not even 10% of
the bank deposits, but this trend is beginning to change. Recent
figures indicate that in the first quarter of the current fiscal year
mutual fund assets went up by 115% whereas bank deposits rose
by only 17%. (Source: Think-tank, The Financial Express
September 99) 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.

BANKS MUTUAL FUNDS

Returns Low Better
Administrative exp.High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation Minimum balance between 10th. Everyday
& 30th. Of every month
Guarantee Maximum Rs.1 lakh on deposits None
INVESTMENT OPTIONS: MUTUAL FUNDS STAND OUT

Savings form an important part of the economy of any nation. With

the savings invested in various options available to the people, the
money acts as the driver for growth of the country. Indian financial
scene too presents a plethora of avenues to the investors. Though
certainly not the best or deepest of markets in the world, it has
reasonable options for an ordinary man to invest his savings. Let us
examine several of them:

Banks

Considered as the safest of all options, banks have been the roots
of the financial systems in India. Promoted as the means to social
development, banks in India have indeed played an important role
in the rural upliftment. For an ordinary person though, they have
acted as the safest investment avenue wherein a person deposits
money and earns interest on it. The two main modes of investment
in banks, savings accounts and Fixed deposits have been
effectively used by one and all. However, today the interest rate
structure in the country is headed southwards, keeping in line with
global trends. With the banks offering little above 9 percent in their
fixed deposits for one year, the yields have come down
substantially in recent times. Add to this, the inflationary pressures
in economy and you have a position where the savings are not
earning. The inflation is creeping up, to almost 8 percent at times,
and this means that the value of money saved goes down instead of
going up. This effectively mars any chance of gaining from the
investments in banks.

Post Office schemes

Just like banks, post offices in India have a wide network. Spread
across the nation, they offer financial assistance as well as serving
the basic requirements of communication. Among all saving
options, Post office schemes have been offering the highest rates.
Added to it is the fact that the investments are safe with the
department being a Government of India entity. So the two basic
and most sought for features, those of return safety and quantum of
returns were being handsomely taken care of. Though certainly not
the most efficient systems in terms of service standards and
liquidity, these have still managed to attract the attention of small,
retail investors. However, with the government announcing its
intention of reducing the interest rates in small savings options,
this avenue is expected to lose some of the investors. Public
Provident Funds act as options to save for the post retirement
period for most people and have been considered good option
largely due to the fact that returns were higher than most other
options and also helped people gain from tax benefits under
various sections. This option too is likely to lose some of its sheen
on account of reduction in the rates offered.

Company Fixed Deposits

Another oft-used route to invest has been the fixed deposit

schemes floated by companies. Companies have used fixed deposit
schemes as a means of mobilizing funds for their operations and
have paid interest on them. The safer a company is rated, the lesser
the return offered has been the thumb rule. However, there are
several potential roadblocks in these. First of all, the danger of
financial position of the company not being understood by the
investor lurks. The investors rely on intermediaries who more often
than not, don’t reveal the entire truth. Secondly, liquidity is a major
problem with the amount being received months after the due
dates. Premature redemption is generally not entertained without
cuts in the returns offered and though they present a reasonable
option to counter interest rate risk (especially when the economy is
headed for a low interest regime), the safety of principal amount
has been found lacking. Many cases like the Kuber Group and
DCM Group fiascoes have resulted in low confidence in this
option.

The options discussed above are essentially for the risk-averse,

people who think of safety and then quantum of return, in that
order. For the brave, it is dabbling in the stock market. Stock
markets provide an option to invest in a high risk, high return
game. While the potential return is much more than 10-11 percent
any of the options discussed above can generally generate, the risk
is undoubtedly of the highest order. But then, the general principle
of encountering greater risks and uncertainty when one seeks
higher returns holds true. However, as enticing as it might appear,
people generally are clueless as to how the stock market functions
and in the process can endanger the hard-earned money.

For those who are not adept at understanding the stock market, the
task of generating superior returns at similar levels of risk is
arduous to say the least. This is where Mutual Funds come into
picture.

Mutual Funds are essentially investment vehicles where people

with similar investment objective come together to pool their
money and then invest accordingly. Each unit of any scheme
represents the proportion of pool owned by the unit holder
(investor). Appreciation or reduction in value of investments is
reflected in net asset value (NAV) of the concerned scheme, which
is declared by the fund from time to time. Mutual fund schemes are
managed by respective Asset Management Companies (AMC).
Different business groups/ financial institutions/ banks have
sponsored these AMCs, either alone or in collaboration with
reputed international firms. Several international funds like
Alliance and Templeton are also operating independently in India.
Many more international Mutual Fund giants are expected to come
into Indian markets in the near future.
Top 10 Indian asset management companies

Ranked by assets, in U.S. millions, as of Dec. 31, 2005.

RankManager Assets Category
1 UTI Asset Mgmt. $5,600 Bank-sponsored
2 Prudential ICICI Asset Mgmt. $4,900 Indian JV
3 HDFC Asset Mgmt. $3,900 Indian JV
4 Franklin Templeton AM India $3,700 Foreign JV
5 Reliance Capital Asset Mgmt. $3,400 Private-sector
6 Birla Sun Life Asset Mgmt. $2,800 Indian JV
Bank-sponsored
7 SBI Funds Mgmt. $2,400
Indian JV
8 Tata Asset Mgmt. $2,000 Private-sector
DSP Merrill Lynch Fund
9 $1,900 Indian JV
Managers
10 Standard Chartered Asset Mgmt. $1,800 Foreign JV

Source: Cerulli Associates’ year-end 2005 Global Update

 AnandRathi founded in the year 1994
Mr. Anand Rathi - Group Chairman
180 Branches
120,000 Clients

AnandRathi

AnandRathi (AR) is a leading full service securities firm

providing the entire gamut of financial services. The firm, founded
in 1994 by Mr. AnandRathi, today has a pan India presence as well
as an international presence through offices in Dubai and Bangkok.

AR provides a breadth of financial and advisory services including

wealth management, investment banking, corporate advisory,
brokerage & distribution of equities, commodities, mutual funds
and insurance - all of which are supported by powerful research
teams.

The firm's philosophy is entirely client centric, with a clear focus

on providing long term value addition to clients, while maintaining
the highest standards of excellence, ethics and professionalism.
The entire firm activities are divided across distinct client groups:
Individuals, Private Clients, Corporates and Institutions.

Management Team

The senior Management comprises a diverse talent pool that brings

together rich experience from across industry as well as financial
services.

Mr. Anand Rathi - Group Chairman

Chartered Accountant
Past President, BSE
He held several Senior Management positions with one of India's
largest industrial groups

Mr. Pradeep Gupta - Managing Director

Plus 15 years of experience in Financial Services

Mr. Amit Rathi - Managing Director

Chartered Accountant & MBA
Plus 9 years of experience in Financial Services

Milestones

• 1994: The company started activities in consulting and

Institutional equity sales with staff of 15
• 1995: The company set up a research desk and
empanelled with major institutional investors

• 1997: The company introduced investment banking

businesses

• Retail brokerage services was launched by the company

• 1999: The company led and managed the first IPO and
executed first M & A deal

• 2001: The company initiated Wealth Management

Services

• 2002: The company started retail business expansion

recommences with ownership model

• 2003: The company’s wealth Management assets crossed

Rs1500 crores

• The retail Branch network exceeds 50

• Insurance broking was launched by the company

• The company launched the Wealth Management services in

Dubai

• 2004: The retail Branch network was expanded across 100

locations within India
 Commodities brokerage and real estate services was
introduced
Wealth Management assets crossed Rs3000crores

• Institutional equities business was relaunched and senior

research team was put in place

• 2005: The Retail Branch network expanded across 180

locations within India and
Real Estate Private Equity Fund was Launched

Anand Rathi Core Strengths

Breadth of Services

In line with the client-centric philosophy, the firm offers to its

clients the entire spectrum of financial services ranging from
brokerage services in equities and commodities, distribution of
mutual funds, IPOs and insurance products, real estate, investment
banking, merger and acquisitions, corporate finance and corporate
advisory.

Clients deal with a relationship manager who leverages and brings

together the product specialists from across the firm to create an
optimum solution to the client’s needs.
In-Depth Research

The research expertise is at the core of the value proposition that

offers to its clients. Research teams across the firm continuously
track various markets and products. The aim is however common -
to go far deeper than others, to deliver incisive insights and ideas
and be accountable for results.

Product and Services

 IPOs
 Mutual fund
 Commodities
 Equities
 Insurance
 Real state
 Promote By Sivan Securities And Global Technology
Ventures Ltd.
Established In Year-2000
75000 Individual Clients
300 Corporate and Institutional Clients
40 Outlets spread across 20 Major Towns and Cities
Mr V. G Sidhartha (Chairman)

WAY 2 WEALTH

Way2Wealth is a premier Investment Consultancy Firm that has

been launched with the aim of making investment simpler, more
understandable and profitable for the investors. Way2Wealth
brings a wide range of product offerings from Fixed Income
Securities, Life Insurance and Mutual Funds to Equity and
Derivatives (on the National Stock Exchange) for the convenience
and benefit of its customers. Way2Wealth has over 40 easily
accessible Investment Outlets spread across 20 major towns and
cities in the country.

Way2wealth is in the financial services industry, where holistic

knowledge is at a premium, change is constant and inevitable, and
the speed of response determines the creation of wealth, or
otherwise. Individuals who are dynamic and result oriented will
find their own niche in this environment. The growing crop of
professionals in this industry mandates the new entrants to have a
pleasing personality, excellent communication skills and a
willingness to do good to the customers. Most importantly the
individuals should possess a natural flair for understanding and
selling financial products.

Sivan Securities started in 1984, has a long and illustrious track

record of being amongst the premier Financial Intermediaries in
the country as well as being an incubator for IT start-up firms.

The Venture Capital division came to be known as Global

Technology Ventures (GTV has provided venture capital to
companies such as Kshema Technologies, MindTree, Ivega etc.)
and the Financial Intermediary Division was spun off as
Way2Wealth in the year 2000.
Way2Wealth is promoted by Sivan Securities and Global
Technology Ventures Ltd.

Over the years, Sivan has developed a strong reputation for

navigating its investors through all the ups and downs in the
market. Way2Wealth has inherited these same values in addition to
a base of 75,000 individual customers, over 300
corporate/institutional clients.

Other companies in the group include Amalgamated Bean Coffee

Trading Company Ltd. (one of the largest Coffee Exporters in
India) and Café Coffee Day, a chain of youth hangout coffee
parlors.

Way2Wealth has a very credible management team, who has well

over 100 man-years of experience amongst themselves.

Management

Top quality management with over 100 man years of cumulative

experience in the field.

Mr. V.G. Siddhartha – Chairman

The visionary behind Way2Wealth, he founded Sivan Securities in

1984 and has been involved in the Indian Capital Markets since
then. He is also actively involved in other technology companies,
coffee trading and retailing businesses.
Mr. Surendra Kancheti . Chief Operating Officer

Mr. C.K. Nithyanand – Director

Mr. K.Rajaram – Director

Mr. Ketan Sheth - Director – Research

Mr. Kamal Manchanda – Regional Director

PRODUCTS

 Fixed Income Securities

 Life Insurance
 Mutual Funds
 Equity
 Derivatives

Mission
Way2Wealth is a premier Investment Consultancy Firm, launched
with the mission “to be the pre-eminent destination for
personalized financial solutions helping individuals creates
wealth”.

Philosophy
We believe that “our knowledge combined with our investors trust
and involvement will lead to the growth of wealth and make it an
exciting experience”.

Network

Headquartered in Bangalore, Way2Wealth has five regional offices

located in Delhi, Mumbai, Hyderabad, Chennai and Bangalore.
Additionally the company has a network of 50 Investment outlets
with the state of the art infrastructure to cater to the needs of retail
investors. These outlets are spread across more than 20 major
towns and cities in the country Our Heritage

Strength

Way2Wealth Investment outlets are designed to be places where

retail investors can come in touch with Investment opportunities in
an atmosphere of convenience and comfort. The look and feel of
the offices across India project a consistent branch image for the
company. The features that enable a unique facility for retailing
financial services include among others:

Easily visible branches set up in the commercial spaces of potential

investment zones ranging between 750sft to 1000sft.
  Most branches are located in the ground floor sporting huge
glass frontage promoting easy accessibility and reflecting
our attitude of complete transparency.
 The major portion of the branch area dedicated for customer
use. The furniture is in CKD formats to add flexibility in
using the branch for Investors purposes.
 Connectivity to NSE for trading facilities.
 TV and other electronic mediums to facilitate real time
update and dissemination of information to our customers.
 Each branch comprises of trained and qualified Investment
advisors to take care of the needs of the customers.

The Way2Wealth Research Desk investment decisions are made

on sound analysis of facts, past performance and credible market
information. Our research cell focuses on providing data and
analysis to help customers make sound investment decisions.

The Research cell is managed by a highly qualified team that is

handpicked and trained extensively in the proprietary Way2Wealth
Investment Philosophy centered on finding the best investment
solutions for our customers. Based in the commercial capital
enables the team to have a pulse of the trends allowing
dissemination of the most up-to-date and latest information.
The Way2Wealth research cell measures up to international
standards of technology and on-site resources.

Every investor has unique needs. So the company has created a

wide range of services, where you will always find exactly what
you are looking for. Aiding you in this effort is the quintessential
Way2Wealth Investment Planner. These hand-selected planners
are made up of professionals with the expertise and experience to
meet your unique financial needs. These financial planners reflect
our commitment to provide financial advice based solely on your
objectives without traditional conflicts of interest.

Way2Wealth network provides professional help in the following

areas: -

 Personalized Investment plan for your short term, medium

term and long term goals
 Expert advice on Investment products ranging from the Fixed
Return Investments and Life Insurance to the highly volatile
Shares and Derivatives
 Avail Tax saving, Retirement planning and VRS investment
services
 Facilitate Equity and Derivative trading on the National Stock
Exchange
 Make investments in Initial Public offerings (IPO) of
Companies, Mutual funds and Government of
India/Infrastructure Bonds

The company also have a specialized team catering to the distinct

needs of our Corporate and Institutional clients out of their five
regional offices.th advantage!

 Personalised Investment Solutions: All our customers receive

individual attention
 Full choice of Investments: Mutual funds, Life Insurance,
Fixed Income Instruments, Equity and Derivatives
 Unbiased advice: We do not have any products of our own
 Processing support: We take care of all your paper work and
provide service at your doorstep.
 Investor eligibility criteria: Customers with a minimum
investment amount as low as Rs. 2500 per month can avail of
our services.
 Founded As Partnership Firm In 1987
Become Public Ltd. In 1994
Co-Promoter – Kerela State Industrial Development Corporation
Ltd. In 1995
Renamed As Geojit Financial Services Ltd. In 2003
Mr. C. J. George -Managing Director
250000 Clients
300 Branches

GEOJIT SECURITIES LTD.

History

Mr. C.J. George and Mr. Ranajit Kanjilal founded Geojit as a

partnership firm in the year 1987. In 1993, Mr. Ranajit Kanjilal
retired from the firm and Geojit became a proprietary concern of
Mr. C .J. George. In 1994, it became a Public Limited Company by
the name Geojit Securities Ltd. The Kerala State Industrial
Development Corporation Ltd. (KSIDC), in 1995, became a co-
promoter of Geojit by acquiring 24% stake in the company, the
only instance in India of a government entity participating in the
equity of a stock broking company. Geojit listed at The Stock
Exchange, Mumbai (BSE) in the year 2000. In 2003, the Company
was renamed as Geojit Financial Services Ltd. (GFSL). The board
of the company consists of professional directors; including a
Kerala government nominee with 2/3rd of the board members
being Independent Directors. With effect from July 2005, the
company is also listed at The National Stock Exchange (NSE).
Geojit is a charter member of the Financial Planning Standards
Board of India and is one of the largest DP brokers in the country.

Board of directors

Mr. A. P. Kurian Non - Executive & Independent

Chairman
Mr. C. J. George Managing Director & Chief
Promoter
Mr. Jiji Thomson Non - Executive & Independent
Director
Sheikh Sultan Bin Saud Al Qassemi Non - Executive &
Independent Director
Mr. P. C. Cyriac Non - Executive & Independent
Director
Mr. Mahesh Vyas Non - Executive & Independent
Director
Mr. Rakesh Jhunjhunwala Non - Executive Director
Mr. Ramanathan Bupathy Non - Executive & Independent
Director
Mr. Punnoose George Non - Executive Director

Management

Mr. C. J. George Managing Director

Mr. Punnose George
Mr. Satish Menon
Mr. Binoy .V.Samuel
Mr. A. Balakrishnan
Mrs. Jaya Jacob Alexander
Director
Chief Operating Officer
Chief Financial Officer
Chief Technology Officer
Chief, Human Resources
Mr. K. Venkitesh Head - Channel Sales and
Distribution
Ms. Farzana Khan Head-Online Products,
Services and Operations

Milestones

The company crossed the following milestones to reach its present

position as a leading retail broking house in India.

1986
 Geojit becomes a member of the Cochin Stock Exchange.

1994
 The Kerala State Industrial Development Corporation
(KSIDC), an arm of the Government of Kerala, becomes a co-
promoter of the company by acquiring 24% equity stake in
Geojit Financial Services Ltd., based on the evaluation report
of Ernst & Young. This is the only venture in India where a
state owned development institution is participating in the
equity of a stock broking company. Geojit became a corporate
broking house.

1995
 Geojit came out with a small Initial Public Offer (IPO) of
Rs.9.5 million, which was oversubscribed by 15 times. Geojit's
issued and subscribed equity capital increased to Rs.30 million
and KSIDC's equity stake comes down to 17%.
 Geojit becomes a member of the National Stock Exchange
(NSE) and installs its first trading terminal in Cochin, Kerala.
1996
 The company launched Portfolio Management Services after
obtaining required registration (Portfolio Management) from
Securities Exchange Board of India (SEBI).

1997
 Geojit became a Depository Participant under National
Securities Depository Limited (NSDL) and begins providing
Depository Services through its branches.

1999
 Geojit became a member of The Stock Exchange, Mumbai
(BSE) and activated the Bombay Online Terminals (BOLT) in
different branches.
 The customer base of Geojit crossed the 50,000 mark.
2000
 Geojit became the first broking firm in the country to offer
online trading facility. The then SEBI Chairman, Mr.
D.R.Mehta inaugurated the facility on 1st February, 2000.
 Commenced Derivative Trading after obtaining registration as
a Clearing and Trading Member in NSE.
 Established the first Bank Gateway in the country for Internet
Trading.
2001
 Geojit's customer base crossed 100,000.
 Became India's first DP to launch depository transactions
through Internet.
 Established Joint Ventures in the UAE for serving NRI clients.
 The company issued bonus shares in the ratio of 1:1.
2002
 Geojit tied up with MetLife for the marketing and distribution
of insurance products across the country.
 The company became the first online brokerage house to
launch integrated internet trading system for both cash and
derivatives segments.
 Sheikh Sultan Bin Saud Al Oassemi, a member of the ruling
family of Sharjah, UAE, joined the Board of Directors of
Geojit.
2003
 Geojit Commodities Limited, a wholly owned subsidiary of
Geojit, became member of National Multi-Commodity
Exchange of India Ltd., National Commodity & Derivatives
Exchange Ltd., Multi Commodity Exchange and launches
Commodity Futures Trading in rubber, pepper, gold, wheat and
rice.
 Geojit Commodities Limited launched Online Futures Trading
in multiple commodities namely, agri-commodities, precious
metals like gold and silver, other metals like steel, aluminum,
etc. and energy futures namely, crude oil and furnace oil.
 Geojit raised more than Rs.100 million through issue of
preferential shares.
2005
 Barjeel Geojit Securities LLC becomes a member of Dubai
Gold Commodity Exchange.
 Customer base of Geojit crossed 250,000.
 Geojit's reach spread through a network of more than 300
branches.
 The company issued bonus shares in the ratio of 1:1.
 Geojit Credits, a subsidiary of Geojit Financial Services Ltd.
registers with Reserve Bank of India as a Non-Banking
Financial Company (NBFC).
 The company got listed on National Stock Exchange of India
Limited.
 The company implemented Employees Stock Option Scheme.
 The company opened a first of its kind - all women's branch in
Cochin.

2006

 Geojit relaunched Internet trading on Reuters TIB Mercury

Platform.

Overseas Joint Ventures

 Barjeel Geojit Securities, LLC, Dubai, is a joint venture of

Geojit with Al Saud Group belonging to Sultan bin Saud Al
Qassemi having diversified interests in the area of equity
markets, real estates and trading. Barjeel Geojit is a financial
intermediary and the first licensed brokerage company in UAE.
It has facilities for off-line and on-line trading in Indian capital
market and also in US, European and Far-Eastern capital
markets. It also provided Depository services and dealt in
Indian and International Funds. An associate company, Global
Financial Investments S.A.O.G provides similar services in
Oman.
 Doha Bank-Geojit in Qatar: Geojit has a tie up with Doha
Bank in Qatar, which offered capital market services from the
India Desk.

Strengths

Geojit, a member of NSE and BSE, has a network of over 300

branches in India and abroad, rendering quality equity trading
services. Geojit not only has a strong offline presence but also
provides automated online trading services.

Geojit, is a depository participant of NSDL. Investors can open

demat accounts with NSDL through Geojit.One can approach the
nearest branch of Geojit for opening an account. Agreement
charges (statutory charges) along with Annual Maintenance
Charge (AMC) are collected upfront while opening an account. It
takes two to three days to open a demat account. Upon activation
of the demat account, a Welcome Letter is sent to the customer
along with the Delivery Instruction Slip book.

DP facilities offered by Geojit

 De-materialization

 Re-materialization
  Repurchase

 Pledge

 Transfer

 IPOs

 Commodity De-mat Account

 Speed-e

 Internet Services

Commodities Services provided by Geojit Financial Services

Ltd.

Geojit Commodities, a subsidiary of Geojit Financial Services

Limited is mainly engaged in the business of Commodities Futures
Trading. Geojit Commodities is a member of:

 National Multi – Commodity Exchange of India limited

(NMCE)
 National Commodity & Derivatives Exchange Limited
(NCDEX)
 Multi – Commodity Exchange (MCX)
  India Pepper and Spice Trade Association (IPSTA)
 Singapore Commodity Exchange (SICOM)
 Dubai Gold Commodity Exchange (DGCX).

Geojit undertakes the distribution of variety financial instruments

such as mutual funds, bonds, life insurance products, fixed deposits
etc. The wealth centre team understands the universe of investment
options, analyzes the risk and return from these options and
recommends investment options to clients to help them achieve
their financial goals.

Other services

Geojit has a tie up with all the Mutual Funds across the country.
Geojit offers life insurance products of the following life insurance
companies:

 Metlife India Life Insurance Company

 LIC of India
 ICICI Prudential

For general insurance, Geojit has partnered with the following:

 Bajaj Allianz General Insurance Company

 National Insurance Company Ltd
Geojit also helps its customers in investing in 8% RBI taxable
bonds, Capital gain bonds (Sec 54 EC bonds), fixed deposits
(KPFC, KTDFC) etc. through its tie- up with the required
organizations.
Bajaj Capital sets up its first Investment Centre in 1964.
Mr. K K Bajaj – Chairman
 Mr. Rajiv Bajaj – Managing Director
12000 NRI Client
700000 Individual Clients
109 Branches

Bajaj Capital Group

The Bajaj Capital Group is one of India’s premier Investment

Advisory and Financial Planning companies. The company has
also SEBI-approved Category I Merchant Bankers.

Company offers personalized Investment Advisory and Financial

Planning services to individual investors, corporate houses,
institutional investors, Non-Resident Indians (NRIs) and High Net
worth Clients, among others.

As one of India’s largest distributors of financial products, the

company offers a wide range of investment products such as
mutual funds, life and general insurance, bonds, post office
schemes, etc. offered by reputed public and private and
government organisations.

Bajaj Capital is one of India’s leading Financial Services

companies offering Free Advice on Investments, Insurance, Tax
Saving, Retirement Planning, Financial Planning, Children’s
Future Planning and other services. The company also has a wide
range of products and services for Corporates, High Net worth
Individuals, and NRIs… all under one roof.

At Bajaj Capital, we believe in dreaming big. Dreams inspire us to

excel. They ignite hope and kindle in us the passion to stretch our
limits. We also believe that nothing can or should stop us from
realizing our dreams… and financial constraints should be the last
thing to stop anyone.

For over four decades, we have been helping people realize their
aspirations by helping them make their wealth grow, and plan their
financial lives.

Today, the company is one of the largest financial planning and

investment advisory companies in India, with a strong presence all
over the country. The company takes pride in serving the
customers – both individual and institutional – and are known for
their strong professionalism and work ethics.

Product and services

The company offers a comprehensive range of services including

financial planning and investment advice, and the entire gamut of
financial instruments and investment products of almost all major
companies, both public and private. In addition, the company also
provides investment assistance by helping the customers complete
all the formalities, and help them keep regular track of their
investments.

 Mutual Funds
 IPOs
 Insurance
 Distribution
 Saving Schemes

These services and products are delivered through our network of

109 Bajaj Capital Investment Centers located all over the country.

Company is also a SEBI-approved Category I Merchant Banker.

The company raises resources for over 1,000 top institutions
and corporate houses every year, and offers specialized
services to Non-Resident Indian (NRIs) and High Net worth
Clients.

The History of Bajaj Capital

Bajaj Capital has contributed to the growth of the Indian Capital

Market at every step.
In 1965, the company were the first to innovate the Companies
Fixed Deposit. Today, the company is playing an active role in the
growth of the Indian Mutual Fund industry.

The company is also working closely with private insurance

companies to deepen India's insurance market.

Here is a brief gist of the company’s journey through the years.

1964: Bajaj Capital sets up its first Investment Centre™ in New

Delhi to guide individual investors on where, when and how to
invest.

India's first Mutual Fund, Unit Trust of India (UTI) is incorporated

in the same year.

1965: Bajaj Capital is incorporated as a Company. In the same

year, the company introduces an innovative financial instrument –
the Company Fixed Deposit. EIL Ltd. (Oberoi Hotels, then known
as Associated Hotels of India Ltd.) becomes the first company to
raise resources through Company Fixed Deposits.

1966: Bajaj Capital expands its product range to include all UTI
schemes and Government saving schemes in addition to Company
Fixed Deposits.
1969: Bajaj Capital manages its first Equity issue (through an
associate company) of Grauer & Wells India Ltd.; right from
drafting the prospectus to marketing the issue.

1975: Bajaj Capital starts offering 'need-based' investment advice

to investors, which would later be known as 'Financial Planning' in
the investment world.

1981: SAIL becomes the first government company to accept

deposits, followed by IOC, BHEL, BPCL, HPCL and others; thus
opening the floodgates for growth of retail investment market in
India.

Bajaj Capital plays an active role in all the schemes as 'Principal

Brokers'

1986: Public Sector Undertakings (PSUs) begin making public

issues of bonds MTNL, NHPC, IRFC offer a series of Bond Issues.
Bajaj Capital is among the top ranks of resource mobilizes.

1987: SBI leads the launch of Public Sector Mutual Funds in India.
Bajaj Capital plays a significant role in fund mobilisation for all
these players.
1991: SBI issues India Development Bonds for NRIs. Bajaj
Capital becomes the top mobilize with collections of over US $20
million.

1993: The first private sector Mutual Fund – Kothari Pioneer – is

launched, followed by Birla and Alliance in the following years.
Bajaj Capital plays an active role and is ranked among the top
mobilizes for all these schemes.

1995: IDBI and ICICI begin issuing their series of Bonds for retail
investors. Bajaj Capital is the co-manager in all these offerings and
consistently ranks among the top five mobilizes on an all-India
basis.

1997: Private sector players lead the revival of Mutual Funds in

India through Open-ended Debt schemes. Bajaj Capital
consolidates its position as India's largest retail distributor of
Mutual Funds.

1999: Bajaj Capital begins marketing Life and General Insurance

products of LIC and GIC (through associate firms) in anticipation
of opening up of the Insurance Sector. Bajaj Capital achieves the
milestone of becoming the top 'Pension Scheme' seller in India and
launches marketing of GIC's Health Insurance schemes.
2000: Bajaj Capital implements its vision of being a 'One-stop
Financial Supermarket.' The Company offers all kinds of financial
products, including the entire range of investment and insurance
products through its Investment Centres. Bajaj Capital offers 'full-
service merchant banking' including structuring, management and
marketing of Capital issues. Bajaj Capital reinvents 'Financial
Planning' in its international sense and upgrades its entire team of
Investment Experts into Financial Planners.

2002: The company focuses on creating investor awareness for

Financial Planning and need-based investing. To achieve this goal,
the company introduced the International College of Financial
Planning. The graduates of this institute become Certified
Financial Planners (CFPs), a coveted professional qualification.

2004: Bajaj Capital obtains the All India Insurance Broking

Licence. Simultaneously, a series of wealth creation seminars are
launched all over the country, making Bajaj Capital a household
name.

2005: Bajaj Capital launches 360° Financial Planning, a software-

based programme aimed at encouraging scientific and holistic
investing.

Management
Mr. K.K. Bajaj
Chairman

Mr. Rajiv Bajaj

Managing Director

Mr. Sanjiv Bajaj

Joint Managing Director

Mr. Anil Chopra

CEO & Director

Bajaj Capital's Mission Statement

The focus of the company organisation is to be the most useful,

reliable and efficient provider of Financial Services. It is our
continuous endeavour to be a trustworthy advisor to the clients,
helping them achieve their financial goals.

Our Aims

 To serve the clients with utmost dedication and integrity so

that the company exceeds their expectations and build
enduring relationships.
 To offer unparalleled quality of service through complete
knowledge of products, constant innovation in services and
use of the latest technology.
 To always give honest and unbiased financial advice and earn
cilents' everlasting trust.
 To serve the community by educating individuals on the
merits of Financial Planning and in turn help shape a
financially strong society.
 To create value for all stake holders by ensuring profitable
growth.
 To build an amicable environment that accords respect to
every individual and permits their personal growth.
 To utilize the power of teamwork to function as a family and
build a seamless organisation.

Strengths

 Sound, research-based advice

 Prompt, courteous service
 Wide range of products and services
 41 years’ experience as Investment Advisors and Financial
Planners
 Countrywide network of 109 branches
 Over 12,000 NRI clients across the globe
 Personalised wealth management advice
 24 x 7 online accessibility
 Strong team of qualified and experienced professionals
including CAs, MBAs, MBEs, CFPs, CSs, Insurance
experts, Legal experts and others
 SEBI-Approved Category I Merchant Bankers
 Group Co BCIBL is an IRDA-licensed Direct Insurance
Broker
Subsidiary of Kotak Mahindra Group formed in 1994
2500 Crores of Assets Under Management
122 Branches
 1,70,000 Customers
187 Cities Coverage
Mr. Uday Kotak- Chairman

KOTAK MAHINDRA GROUP

Kotak Mahindra is one of India's leading financial institutions,

offering complete financial solutions that encompass every sphere
of life. From commercial banking, to stock broking, to mutual
funds, to life insurance, to investment banking, the group caters to
the financial needs of individuals and corporates.

The group has a net worth of over Rs. 2,500 crore, employs around
6,700 people in its various businesses and has a distribution
network of branches, franchisees, representative offices and
satellite offices across 250 cities and towns in India and offices in
New York, London, Dubai and Mauritius. The Group services over
1.6 million customer accounts.

THE JOURNEY SO FAR ...

In October 2005, Kotak Group acquired the 40% stake in Kotak
Prime held by Ford Credit International (FCI) and FCI acquired the
stake in Ford Credit Kotak Mahindra (FCKM) held by Kotak
Group.

In May 2006, Kotak Group bought 25% stake held by Goldman

Sachs in Kotak Capital and Kotak Securities.

Kotak Securities

Kotak Securities Ltd., is one of India's largest brokerage and

securities distribution house in India. Over the years Kotak
Securities has been one of the leading investment broking houses
catering to the needs of both institutional and non-institutional
investor categories with presence all over the country through
franchisees and co-ordinators

Kotak Securities Limited

Kotak Securities Limited, a subsidiary of Kotak Mahindra Bank, is

the stock broking and distribution arm of the Kotak Mahindra
Group. The company was set up in 1994. Kotak Securities is a
corporate member of both The Bombay Stock Exchange and The
National Stock Exchange of India Limited. Its operations include
stock broking and distribution of various financial products -
including private and secondary placement of debt and equity and
mutual funds. Currently, Kotak Securities is one of the largest
broking houses in India with wide geographical reach. The
company has four main areas of business: (1) Institutional Equities,
(2) Retail (equities and other financial products), (3) Portfolio
Management and (4) Depository Services.

• Institutional Business

This division primarily covers secondary market broking. It

caters to the needs of foreign and Indian institutional investors
in Indian equities (both local shares and GDRs). The division
also incorporates a comprehensive research cell with sectoral
analysts who cover all the major areas of the Indian economy.

• Client Money Management

This division provides professional portfolio management

services to high net-worth individuals and corporates. Its
expertise in research and stock broking gives the company the
right perspective from which to provide its clients with
investment advisory services.

• Retail distribution of financial products

 Kotak Securities has a comprehensive retail distribution
network, comprising approximately 7000 agents, 13 branches
and over 20 franchisees across India. This network is used for
the distribution and placement of a range of financial products
that includes company fixed deposits, mutual funds, Initial
Public Offerings, secondary debt and equity and small savings
schemes.

• Depository Services

Kotak Securities is a depository participant with the National

Securities Depository Limited and Central Depository Services
(India) Limited for trading and settlement of dematerialised
shares. Since it is also in the broking business, investors who
use its depository services get a dual benefit. They are able to
use its brokerage services to execute transactions and its
depository services to settle these.

Kotak Securities Ltd. is India's leading stock broking house with a

market share of around 8%. Kotak Securities Ltd. has been the
largest in IPO distribution.

The accolades that Kotak Securities has been graced with include:
 Prime Ranking Award (2003-04)- Largest Distributor of IPO's
 Finance Asia Award (2004)- India's best Equity House
 Finance Asia Award (2005)-Best Broker In India
 Euro money Award (2005)-Best Equities House In India

The company has a full-fledged research division involved in

Macro Economic studies, Sectoral research and Company Specific
Equity Research combined with a strong and well networked sales
force which helps deliver current and up to date market
information and news.

Kotak Securities Ltd is also a depository participant with National

Securities Depository Limited (NSDL) and Central Depository
Services Limited (CDSL), providing dual benefit services wherein
the investors can use the brokerage services of the company for
executing the transactions and the depository services for settling
them.

Kotak Securities has 122 branches servicing more than 1,70,000

customers and a coverage of 187 cities. Kotaksecurities.com, the
online division of Kotak Securities Limited offers Internet Broking
services and also online IPO and Mutual Fund Investments.
Kotak Securities Limited manages assets over 2500 crores of
Assets Under Management (AUM) .The portfolio Management
Services provide top class service , catering to the high end of the
market. Portfolio Management from Kotak Securities comes as an
answer to those who would like to grow exponentially on the crest
of the stock market ,with the backing of an expert.

Kotak Securities, an affiliate of Kotak Mahindra Bank, is the

stock-broking and distribution arm of the Kotak Mahindra Group.
The institutional business division, which brings you AKSESS,
primarily covers secondary market broking. It caters to the needs
of foreign and Indian institutional investors in Indian equities (both
local shares and GDRs). The division also has a comprehensive
research cell with Sectoral analysts covering all the major areas of
the Indian economy.

Product and Services

 Depositories Services
 IPOs
 Stock Broking
 Mutual Fund
 Financial Investments
 Portfolio Management Services
 Motilal Oswal Securities Ltd. Set up in the Year 1987
150000 Clients
900 outlets
340 cities Coverage
Mr. Motilal Oswal Chairman and Managing Director

Motilal Oswal Securities Ltd.

Motilal Oswal Securities is a leading research and advisory based

stock broking house of India, with a dominant position in both
institutional and retail broking. Asiamoney Brokers Poll 2005 has
ranked us the best Indian brokerage firm. There are various other
categories where we have been rated number one – most
independent research, sales and service etc by the Brokers Poll.

In March 2006, AQ Research, a firm that analyses the accuracy of

a broker’s research call, declared Motilal Oswal Securities the best
research house for Indian stocks.

Motilal Oswal Securities has witnessed rapid organic growth due

to favorable market conditions as well as efforts put in by the
company itself. FY05 and FY06 saw the company grow
inorganically through acquisition of three significant regional
broking firms from Andhra Pradesh, Karnataka and Kerala. Over a
period of time many more regional broking firms may be acquired
to gain solid footing in various regions of India.

The company was founded in 1987 as a small sub-broking unit,

with just two people running the show. Focus on customer-first-
attitude, ethical and transparent business practices, respect for
professionalism, research-based value investing and
implementation of cutting-edge technology have enabled us to
blossom into an almost two thousand-member team.

The institutional business unit has relationships with several

leading foreign institutional investors (FIIs) in the US, UK, Hong
Kong and Singapore. In a recent media report the company was
rated as one of the top-10 brokers in terms of business transacted
for FIIs.

The retail business unit provided equity investment solutions to

more than 150,000 investors through 900 outlets spanning 340
cities and 24 states. The company provides advice-based broking
(equities and derivatives), portfolio management services (PMS),
e-Broking, depository services, commodities trading, IPO and
mutual fund investment advisory services. Its Value PMS Scheme
gave a 402.74% return since inception ( Feb 2003) , ( Sensex is
270.69% & Nifty is 245.11%). The perfomance of Value Hedging
since inception ( Oct 2005) is 32.76%.

Such an outstanding performance can be only attributed to our

single-minded focus on research-based value investing. Motilal
Oswal Securities invests almost 5-10% of its revenue on equity
research and hires and trains the best resources to become advisors
to its valued clients.

The unique Wealth Creation Study, authored by Mr Raamdeo

Agrawal, Managing Director, is now in its eleventh year. Investors
keenly await this annual study for the wealth of information it has
on how companies created wealth during the preceding five years.
The organization finds its strength in its team of young, talented
and confident individuals. Qualified professionals carry out
different functions under the able leadership of its promoters,
Mr.Motilal Oswal and Mr. Raamdeo Agrawal. Stringent employee
selection process, focus on continuous training and adoption of
best management practices drive the quest to achieving our Vision.

Most History & Milestones

The story of Most goes back many years, when Mr. Motilal Oswal
and Mr. Raamdeo Agrawal met each other as students in a Mumbai
suburban hostel in the early eighties. Both the young chartered
accountants hailing from a rural & an unpretentious background
had a common dream viz 'to build a professional organization with
strong value systems, to provide reliable & honest investment
advice to investors'. Thus was born their first enterprise called
"Prudential Portfolio Services" in 1987

2006 :Places 9.29% with two leading private equity investors -

New Vernon Private Equity Limited and Bessemer Venture
Partners Issues 14% of companies equity to employees as ESOPs
Acquires a leading south Indian brokerage firm - Peninsula Capital
Markets
Enters Private Equity and plans entry into Investment Banking
businesses
Value PMS gives 390% returns to its investors between Feb 2003
and March 2006
Relaunches its e-Broking service through a nationwide campaign.
First advice-based online trading proposition in the Indian markets
Another milestone in distribution - 1019 outlets, 375 cities, serving
1.61 lakh clients
The company has a 1400 member team working to achieve the
company's vision

2005 :Asiamoney Brokers Poll 2005 rates Motilal Oswal

Securities - Best Local Brokerage, Most Independent Research
House, Best in Sales and Service
Launches two new Portfolio Management Schemes - Value
Hedging for derivatives and Discover Value for the Rs5 lakh to
Rs50 lakh category
Acquires local brokerage Gayatri Capitals from Andhra Pradesh
and Varghese from Bangalore
Deepest distribution in the stock broking segment with 700 outlets
in 320 cities and 1.2 lakh clients
2004: Presence expanded to 270 outlets in 150 cities and 20 states
Value PMS delivers a whopping 160% post tax returns for the
period ended April 2004
Bulls Eye PMS - A momentum based PMS launched
Start of the Solid Research Solid Advice campaign

2003: Most Portfolio Management Services launched with Mr.

Raamdeo Agrawal as the Portfolio Manager. Uniquely structured
performance related fees.
Inquire team is successful in capturing the uptrend in Banking,
Auto and Infrastructure sectors.
15,000 Depository clients acquired.
9 own branches setup at 7 cities to provide Equity Advisory
Services. More in the pipeline.
150 outlets in 110 cities across 18 states & one Union Territory in
India manned by 1000 people servicing over 15,000 Retail and
Institutional Investors.

2002: Mr. Navin Agarwal, Head of Equity Research &

Institutional sales, is inducted in the Board of Directors
Most consolidates its retail operations & upgrades its IT / Back
Office infrastructure to cater to its growing network of branches,
Franchisees and Channel Partners.
Retail network completes coverage of 100 cities in India.
Direct servicing of HNI clients is initiated.
10,000 Depository clients acquired.

2001: Legendary marketing guru Shunu Sen’s services taken to

revitalise retail marketing strategy and branding efforts.
Starts offering Derivatives products and advisory services on both
BSE as well as NSE

2000: Both Mr. Motilal Oswal and Mr. Raamdeo Agrawal receive
Rashtriya Samman Patra from Central Board of Direct Taxes for
being amongst the top 50 tax payers in India from FY94-FY98
Acquires its 100th Franchisee / Channel Partner and emerges as a
leading player in the Indian Broking Sector
Becomes a Depository Participant of Central Depository Services
Limited (CDSIL)

1999: Mr. Raamdeo Agrawal starts attending legendary billionaire

investor Warren Buffett’s Annual General Meetings of Berkshire
Hathway Inc. He still continues to attend it every year.
The Wealth Creation Study started in 1996 culminates into Wealth
Creation Seminar and Awards function in 1998.
First Stock Broking house to brand its services as a research and
advise based broker.
“Wealth Creation” Campaign started.
www.MotilalOswal.com launched. First broking house in India to
go on the web.
Becomes a Depository Participant of National Securities
Depository Limited (NSDL).
Inducts Mr. Ivan Mathias, former country head of Watson Wyatt
Worldwide, on its Board to Directors to shape HR initiatives.

1998: Mr. Motilal Oswal joins the Governing Board of The Stock
Exchange, Mumbai.

1996: Wealth Creation Study started. First of its kind study

initiated to identify biggest and fastest wealth creating companies
in Indian Stock markets.

1995:”Motilal Oswal” gets incorporated as Motilal Oswal

Securities Ltd.

1994: MOSt acquires NSE Membership and plans for major

expansion of its retail network.
Inquire (Indian Equity Research) is formally created at a 2500 sq.
ft office in South Mumbai with bigger and better quality
infrastructure than the corporate office. Since then nearly 20% of
revenue is allocated to research. First Domestic Stock broking
house to have such a strong Research focus
”Motilal Oswal” enters Institutional Broking business.
1990: After just three years in the business, ”Motilal Oswal” is
formed through acquisition of membership on The Bombay Stock
Exchange (BSE). Three more memberships taken in later years.

1987: Mr. Motilal Oswal and Mr. Raamdeo Agrawal lay the
foundation of a great partnership by starting a sub-broking firm.
The venture stands out from the rest due to their approach of
Research-based broking even when sub-brokers.

MOSt Business Associate

Motilal Oswal Securities Ltd. (MOSt) is arguably one of the best

brands among Indian Domestic broking houses enjoying an
unmatched and unparallel brand recall. Financially sound, with an
excellent track record of consistent market growth in all key
business segments. MOSt is spread across 24 states in 200 cities
through 300 Business Associates and 52 branches.
To reach out to more investors across India, MOSt builds
partnership with high calibre and like minded individuals and
companies who share similar business philosophy, ethics and
values, a sound client base and having the zeal and potential to
capture a larger market share within their allotted territory.
Product and Services

 Depository Services
 Derivatives Services
 Equity Research and Services
 Mutual Fund
 IPOs
 Stock Broking
 Distribution

Management Team

MOSt management team is regularly engaged in finding ways to

improve operational efficiencies and customer satisfaction.

Generally CAs, CFAs, ICWAs, CSs, MBAs and IT professionals

are managing crucial functions, to bring the best products and
services - from research & advice to trade execution & settlement.
At MOSt the company practices meritocracy and each of the team
members is provided extensive training.

Mr. Motilal Oswal

Chairman and Managing Director
Mr. Raamdeo Agrawal
Joint Managing Director

Training & Manpower Development: MOSt conducts various

training and development programs regularly to enhance the
capabilities of its team. As much as 5% of the salary bill is spent
on such programs, which is amongst the highest for a broking
organization in India. MOSt is truly a learning organization with
lead being taken by the Directors, who regularly participate in top
management learning programs like Strategic Management
Program at Indian School of Business, Hyderabad, Strategy
Summits with Management Gurus like Tom Peters and Dr. Lester
Thurow, Dean, Sloan School of Management, (MIT) and Brand
Management Seminar by Al Ries etc.

MOSt Vision
MOSt Guiding Principles & Core Values

 Customer interest is paramount

 Ethical and transparent business practices
 Respect for professionals, associates and business partners
 Research based value investing
 Cutting edge technology to ensure world-class customer
service
 DBS Cholamandalam Distribution Limited Established In 2000
Cholamandalam DBS Finance Limited (CDFL) in 1978
The Murugappa Group DBS Bank Are The Promoter.
120 Branches
Cholamandlam – Managing Director

DBS Cholamandalam Distribution Limited (DCDL).

DBS Cholamandalam Distribution Limited (DCDL) is an

independent Financial Advisory and Investments Company
offering customised financial planning solutions to individuals and
corporates. The Company distributes a wide array of financial
services products - both in-house and third party - to corporate,
high net worth and retail clients.
The company specializes in investment advisory services covering
mutual funds, corporate fixed deposits, post office savings
schemes, general and life insurance, PAN processing and bonds.
Tax planning, retirement planning, portfolio advice, and portfolio
review and rebalancing are some of our specialty service areas.

Established in 2000, DCDL combines reach in over 35 cities

across India and already mobilises over Rs.2500 crores of
investments in a year.

The company’s team of AMFI and IRDA certified personal

financial advisors are trained to identify customer needs and to
match them with appropriate products. A research team supports
the advisors with up-to-date analysis on the vast range of options
available in the market. The company fosters sustainable and long-
term prosperity through financial discipline and informed,
intelligent decision-making by customers.

The team of researchers and financial advisors evaluate the

individual needs of every customer and accordingly advice them
on the investment tools that best suit their individual requirement.
DCDL has a proven track record of advising customers on the best
Fixed Deposit and General Insurance products available in the
market.
Cholamandalam Securities Ltd.
Cholamandalam Securities Ltd. (CSec) is a full service, securities
brokerage firm offering a wide array of stock broking and equity
research services to domestic and foreign institutional investors,
supported by value added investment research. The clientele
includes select individual clients, major Insurance Companies and
leading domestic Mutual Funds and Banks in the public and
private sector. With singular focus on helping customers meet
financial goals, C-Sec has a proven and enviable track record of
success in the field, making it a popular choice among smart
investors who wish to secure their financial future.

Cholamandalam DBS is a financial services joint venture between

the Rs 6250 crore Murugappa Group and DBS Bank, Singapore, to
offer consumer finance in the Indian market. A pan-Indian,
composite financial services provider, the Financial Services
Group comprises the parent company, Cholamandalam DBS
Finance Limited (Chole DBS), and its subsidiaries and associates.
The shares of CDFL are listed in the Mumbai (BSE) and National
(NSE) Stock Exchanges.
Incorporated in 1978, the Company began operations as a Non
Banking Finance Company (NBFC) offering equipment finance to
small and medium sized companies in South India. Today, Chole
DBS is one of India's largest domestically owned NBFCs with a
gross asset base (including securitised assets) of over Rs 2075
crores. Chola DBS offers personal loans, vehicle finance, corporate
and mortgage finance, capital market finance and fixed deposits.

Chola DBS offers finance for a wide range of vehicles - HCVs,

LCVs, cars, MUVs and cargo three-wheelers. The Company
operates from over 120 locations across India. The Company has
built up a portfolio of high quality. The Company has an unbroken
track record of dividend payment for over 25 years.

Promoters of cholamandlam investment and finance ltd.

DBS : Headquartered in Singapore, DBS is one of the largest

financial services groups in Asia. The largest bank in Singapore
and the fifth largest banking group in Hong Kong as measured by
assets, DBS has leading positions in consumer banking, treasury
and markets, asset management, securities brokerage, equity and
debt fund raising. Beyond the anchor markets of Singapore and
Hong Kong, DBS serves corporate, institutional and retail
customers through its operations in Thailand, Malaysia, Indonesia,
India and The Philippines. In China, the bank has branches and
representative offices in Shanghai, Beijing, Guangzhou, Shenzhen,
Fuzhou, Tianjin and Dongguan. The Bank's credit ratings are one
of the highest among banks competing in the Asia-Pacific region,
and the highest among banks in Singapore.

Murugappa Group : Murugappa Group, one of India's largest

family-promoted, professionally managed corporate with over
28,000 employees. A pioneer and market leader in several fields
with over 40 manufacturing operations across 12 states in India,
the group has a strong presence in farm inputs, engineering and
cycles, sugar, abrasives, finance, general insurance, sanitaryware,
plantations, bio-products and nutraceuticals.

Owing to Murugappa Group's pre-eminent position in the industry

and the consumer equity that it had painstakingly built, the horizon
offered opportunities in the financial sector. To harness this, the
group set up Cholamandalam DBS Finance Limited (CDFL) in
1978 with the primary objective of offering asset finance through
leasing and hire purchase to corporates and then to retail
customers. It has since evolved itself into a large, composite
financial services organization. Today, Cholamandalam comprises
not only the original flagship company, but also several financial
solutions companies offering stock broking, mutual funds,
investment advisory services and risk management and
consultancy services.
Ever since its inception and all through its growth, the company
has kept a clear sight of its values. The basic tenet of these values
is a strict adherence to ethics and a responsibility to all those who
come within its corporate ambit - customers, shareholders,
employees and society.

Management
Cholamandalam DBS, in its efforts to pursue principles of
corporate governance, is governed by a statutory board of the
company which has entrusted the responsibility of managing the
operations of this company to a professional Managing Director.
He in turn, has a team of independent professional managers to
take the company to great heights. This harmonious and
professional outlook has emerged as a big factor in support of
Cholamandalam DBS becoming a dominant player in the industry
today.
The various business divisions (Strategic Business Units) of the
company are managed by Business Heads who report to the
Managing Director. These Business Heads form part of the
Business Group Managing Committee (BGMC), which meets once
every month to discuss strategic issues and monitor progress.

Strengths

 Cholamandlam Securities ltd is a wholly owned subsidiary of

Cholamandalam Investment and Finance Co. Ltd.
 CSec is a Corporate Member on the National Stock Exchange
of India Ltd. (NSE), the Bombay Stock Exchange Ltd (BSE)
and the Madras Stock Exchange Ltd. (MSE). CSec is also a
depository participant with NSDL.
 Cholamandalam's winning combination of exceptional talent
and experience allows us to deliver profitable investment
strategies & quality, personalized service.
 Cholamandalam has full-fledged offices in all metros and mini
metros, supported by the best communication links to provide
online trade execution and confirmation for the clients.
 CSec is a part of the Cholamandalam Financial Services Group
(FSG), which began operations in 1978 as a Non-Banking
Finance Company (NBFC) offering equipment finance to small
and medium sized companies in South India.
 FSG is a composite financial services group offering a range of
services - General Insurance, Distribution Services, Fixed
Deposits, Mutual Funds, Vehicle Finance, Corporate and
Mortgage Finance and Risk Services, in addition to Securities.

Products and Services

Company offers complete range of financial instruments that

address all the financial requirements, whether one is an individual
or a firm. From saving instruments to long term wealth creations –
the offering covers it all. This wide range of products is delivered
to the customers with a genuine understanding of the specific need
and warm, personalised service.

 Depository Services
 Portfolio management services
 Stock broking services
 Wealth management services for NRIs
 Saving Schemes
 Mutual Fund
 India Infoline Was Founded By a Group Of Professionals In
1995
Mr. Nirmal Jain- Chairman
Mr. R Venkataraman - Co-Promoter and Executive Director
170000 Clients
155 Branches
India Infoline Ltd.

India Infoline was founded by a group of professionals in 1995, a

seemingly distant past in the Internet age. The company’s
meticulous research was published and distributed in printed form
to a client base comprising the who's who of Indian business
including leading MNCs, investment banks and consulting firms.
The quality of research was highly acclaimed and soon became the
industry benchmark. Over the last few years, the research coverage
has grown to cover practically all companies,sectors, economy and
financial markets. The breadth and depth of our content is
unmatched - stock markets, mutual funds, personal finance,
taxation and economy.

India Infoline Ltd is listed on both the leading stock exchanges in

India, viz. the Stock Exchange, Mumbai (BSE) and the National
Stock Exchange (NSE). The India Infoline group, comprising the
holding company, India Infoline Ltd and its subsidiaries, straddles
the entire financial services space with offerings ranging from
Equity research, Equities and derivatives trading, Commodities
trading, Portfolio Management Services, Mutual Funds, Life
Insurance, Fixed deposits, GoI bonds and other small savings
instruments to loan products and Investment banking. India
Infoline also owns and manages the websites,
www.indiainfoline.com and www.5paisa.com .

For the nine months ended December 31, 2005, India Infoline Ltd
had a total income of Rs 1323.40 Mn up 179% for the same period
for the previous year with a PAT of Rs 324.00 Mn, which is a
growth of 146% for the same period for the previous year.

India Infoline Ltd, being a listed entity, is regulated by SEBI

(Securities and Exchange Board of India). It undertakes equities
research which is acknowledged by none other than Forbes as 'Best
of the Web' and '…a must read for investors in Asia'. India
Infoline's research is available not just over the internet but also on
international wire services like Bloomberg (Code: IILL), Thomson
First Call and Internet Securities where it is amongst the most read
Indian brokers.

The various subsidiaries are in different lines of business and

hence are governed by different regulators. The subsidiaries of
India Infoline Ltd are:

India Infoline Securities Pvt. Ltd.

India Infoline Securities Pvt Ltd is a 100% subsidiary of India
Infoline Ltd, which is engaged in the businesses of Equities
broking and Portfolio Management Services. It holds memberships
of both the leading stock exchanges of India viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange
(NSE). It offers broking services in the Cash and Derivatives
segments of the NSE as well as the Cash segment of the BSE.

A SEBI authorized Portfolio Manager, it offers Portfolio

Management Services to clients. These services are offered to
clients as different schemes, which are based on differing
investment strategies made to reflect the varied risk-return
preferences of clients.

India Infoline Commodities Pvt Ltd

India Infoline Commodities Pvt Ltd is a 100% subsidiary of India

Infoline Ltd, which is engaged in the business of commodities
broking. It holds memberships of both the leading Commodity
exchanges in India viz. the Multi-Commodities Exchange (MCX)
and the National Commodity and Derivatives Exchange, India
(NCDEX)
India Infoline.com Distribution Co Ltd

India Infoline.com Distribution Co Ltd is a 100% subsidiary of

India Infoline Ltd and is engaged in the business of distribution of
Mutual Funds, IPOs, Fixed Deposits and other small savings
products. It is one of the largest 'vendor-independent' distribution
houses and has a wide pan-India footprint of over 150 branches
coupled with a huge number of 'feet-on-street', which helps sources
and service customers across the length and breadth of India. Its
unique value proposition of free doorstep expert advice coupled
with free pick-up and delivery of cheques has been met with an
enthusiastic response from customers and fund houses alike.

India Infoline Insurance Services Ltd

India Infoline Insurance Services Ltd is also a 100% subsidiary of

India Infoline Ltd and is a registered Corporate Agent with the
Insurance Regulatory and Development Authority (IRDA). It is the
largest Corporate Agent for ICICI Prudential Life Insurance Co
Ltd, which is India's largest private Life Insurance Company.
India Infoline Insurance Brokers Ltd

India Infoline Insurance Brokers Ltd is a 100% subsidiary of India

Infoline Ltd and is a newly formed subsidiary which will carry out
the business of Insurance broking. The company has applied to
IRDA for the insurance broking licence and the clearance for the
same is awaited.

India Infoline Investment Services Ltd

India Infoline Investment Service Ltd is also a 100% subsidiary of

India Infoline Ltd. The company has an NBFC licence from the
Reserve Bank of India (RBI) and offers margin-funding facility to
the broking customers.

Marchmont Capital Advisors Pvt Ltd

Marchmont Capital Advisors Pvt Ltd is a 100% subsidiary of India

Infoline Ltd. It is engaged in the business of Investment banking
and advisory. The company has applied to SEBI for our Merchant
Banking licence and are awaiting an approval on the same from
SEBI. The company plans to leverage upon our research
capabilities, corporate relationship, distribution network of over
150 branches and our network with small and mid size corporates
as well as capabilities to execute cross border deals to build the
investment banking business. The company expected significant
numbers of small and medium- sized companies to be turning to
the capital markets and becoming involved in mergers and
acquisitions. Investment banking targeted at this segment is a
logical extension of the company's existing services.

Money tree Consultancy Services Pvt Ltd

Money tree Consultancy Services Pvt Ltd is a company in which
India Infoline Ltd has a 75% stake. It is engaged in the business of
loan products, distributing home loans and personal loans in two
major cities of India. The company has plans to ramp up the scale
of operations and take the business to a pan-India level.

Across its 155 branches spread across India, around 3,500 people
work with India Infoline Ltd. The company has been driven by the
philosophy of 'Owner mindset' and each of our employee carries
out his/ her duties as if the owner. This philosophy is not just an
esoteric value and has been given an actual form by way of an
active ESOPs scheme

5paisa Products and services

5paisa is the trade name of India Infoline Securities Private
Limited (5paisa), member of National Stock Exchange and The
Stock Exchange, Mumbai. 5paisa is a wholly owned subsidiary of
India Infoline Ltd, India’s leading and most popular finance and
investment portal. 5paisa has emerged as one of leading players in
e-broking space in India. Our key product offerings are as follows:

Investor Terminal (IT)

Investor Terminal is recommended for infrequent investors, who

fall into the "Buy and Hold" school of investing, made very
popular by Warren Buffet - the Oracle of Omaha. A typical retail
investor is a busy corporate executive or a businessmen who makes
equity investments for long term and does not trade everyday. He
prefers a trading interface which works behind proxy and firewalls
as they access the Internet and the stock markets from their work
place, where a direct connection is difficult because of corporate
IT security policies. This product does not have intra-day tick by
tick charts.

Trader Terminal (TT)

Trader Terminal is for the dedicated day traders, who churn their
portfolio on minor movements in the market, sometimes several
times a day. Their rapid and high volume trading requires a
powerful interface for lightning fast order execution. They monitor
marked to market positions on a minute-to-minute basis, with
facilities for panic exit. They need all the analysis - fundamental
and technical, market gossip, price and volume information and
much more - all at one click.

The Management

 Mr. Nirmal Jain- chairman

 Mr. R Venkataraman - co-promoter and Executive Director

The Board of Directors

 Mr Sat Pal Khattar - Non Executive Director

 Mr Sanjiv Ahuja - Independent Director
 Mr Nilesh Vikamsey - Independent Director
 Mr Kranti Sinha - Independent Director
Product and services
 E-broking service
 Insurance
 Advisory service
 Mutual fund
 Stock market
 Personal finance
 Portfolio management services

Strengths

 Company has been in information services for the last seven

years and have assiduously built the data and skill sets
necessary for the business.
 Company has leveraged their content to create the India
Infoline brand, which is synonymous with high quality and
credible information on business and finance.
 The top management team represents a skill set, which is
mutually exclusive but collectively exhaustive.
 The strength of the organization has been to continuously
innovate and reinvent itself.
 High quality, reliable information and advisory support
  Network of in-house Financial Advisors to cater to tailor made
requirements of investors
 Investor Points all over the country for personalized service.
 State of the art technology to ensure security and
confidentiality.
 Housekeeping support, like portfolio tracking and online
accounts statements.

Approach to Research

Company follows a simple approach to research as follows:

 Data collection
 Analysis
 Communication
 Feedback

Company’s vision

 To be the premier provider of investment advisory and

financial planning services in India
 To be a leading investment intermediary for transactions
through both online and offline medium
 Networth Stock Broking Limited was incorporated in 1993
110000 CLIENTS
Mr. S.P.Jain - Chairman & Managing Director
110 Outlets

Networth Stock Broking Limited

Incorporated in 1993, Networth Stock Broking Limited (NSBL)

has been a listed company at The Stock Exchange, Mumbai (BSE)
since 1995.

A Member, at the National Stock Exchange of India (NSE) and the

Stock Exchange, Mumbai (BSE) on the Capital Market and
Derivatives (Futures & Options) segment, NSBL has been
traditionally servicing Institutional clients and in the recent past
has forayed into retail broking, establishing branches across the
country. Presence is being marked in the Middle East, Europe and
the United States too, as part of our attempts to cater to global
markets. We are a Depository participant at Central Depository
Services India (CDSL) with plans to become one at National
Securities Depository (NSDL) by the end of this quarter. We have
our customers participating in the booming commodities markets
with our membership at the Multi Commodity Exchange of India
(MCX) and National Commodity & Derivatives Exchange
(NCDEX), through Networth Stock.Com Ltd. With its strong
support and business units of research, distribution & advisory,
NSBL aims to become a one stop solution to the broking and
investment needs of its clients, globally.

A strong team of professionals, experienced and qualified pool of

human resources drawn from top financial service & broking
houses form the back bone of our sizeable infrastructure. Highly
technology oriented, the company's scalabality of operations and
the highest level of service standards has ensured rapid growth in
the number of locations & the clients serviced in a very short span
of time.

'Networthians', as each one of our 500 plus and ever growing team
members are addressed, is a dedicated team motivated to
continuously progress by imbibing the best of global practices,
indianising such practices, and to constantly evolve a
comprehensive suite of products & services trying to meet every
financial / investment need of the clients. 'TAKE CHARGE'
symbolises and reflects upon our spirit and the committment to
allow two of our most valuable assets - clients and our team
members, to be participative in the relationship that they have with
us besides being encouraged to "own" the growth that our
association results in.

At Networth, we recognize the underlying trust and confidence

placed by our clients in us, besides realising the sensitive, matured
and professional approach required to handle the resources of
clients and guide them in meeting their requirements. We proudly
state on all our endeavours being directed towards contributing to
the growth of our clients, services, the investor community and the
overall market.

Management

S.P.Jain, Chairman & Managing Director

Sathyan Rajan, Director & Head – Sales

Raj Bhandari, Director & Head – Dealing

Girish Dev, Head – Operations & Technology

Suhas Bade, Director

Bhavesh Bhatt, Head – Distribution
J.Gopal, Vice President & Southern region Head
Satish Pasari, Vice President & Western region Head

Product and Services

A range of investment choices to help you become a more
successful investor
Building a portfolio that helps you achieve your goals. That’s why
we offer an array of Investment choices – from Stocks and Mutual
Funds to Bonds and Life Insurance.

Creating an appropriate mix of assets is the key. How can you feel
confident that you have the right array of investments to meet your
needs? With the Networth as your investment partner, you can
choose your level of support, from powerful research services to
personalized advice.

A Networth Financial Consultant can help by analyzing your

current holdings, goals and risk tolerance and, when appropriate,
making specific investment recommendations.
VISION

Networthians’ mission is to be a World-Class Indian Bank. The

objective is to build sound customer franchises across distinct
businesses so as to be the preferred provider of banking services
for target retail and wholesale customer segments, and to achieve
healthy growth in profitability, consistent with the bank's risk
appetite. The company is committed to maintain the highest level
of ethical standards, professional integrity, corporate governance
and regulatory compliance. Networthians’ business philosophy is
based on four core values - Operational Excellence, Customer
Focus, Product Leadership and People.
 300 Branches
110 Cities Coverage
250,000 Clients
Saurabh Mittal is a Director at Indiabulls

Indiabulls

Indiabulls is India's leading retail financial services company with

over 300 locations in more than 110 cities. While our size and
strong balance sheet allow us to provide you with varied products
and services at very attractive prices, our over 4400 Client
Relationship Managers are dedicated to serving your unique needs.

Indiabulls is lead by a highly regarded management team that has

invested crores of rupees into a world class Infrastructure that
provides our clients with real-time service & 24/7 access to all
information and products. Our flagship Indiabulls Professional
NetworkTM offers real-time prices, detailed data and news,
intelligent analytics, and electronic trading capabilities, right at
your finger-tips. This powerful technology is complemented by our
knowledgeable and customer focused Relationship Managers. We
are Creating a world of Smart Investor.

Indiabulls offers a full range of financial services and products

ranging from Equities to Insurance to enhance your wealth and
hence, achieve your financial goals.

Indiabulls' Client Relationship Managers are available to you to

help with your financial planning and investment needs. To
provide the highest possible quality of service, Indiabulls provides
full access to all our products and services through multi-channels .

Management

Sameer Gehlaut is the Chairman, CEO and Whole Time Director

of Indiabulls.

Rajiv Rattan is the President, CFO and Whole Time Director of

Indiabulls.

Saurabh Mittal is a Director at Indiabulls.

Mission and vision

Indiabulls Resources Ltd, a 100 per cent subsidiary of Indiabulls

Financial Services Ltd., has been established with the objective of
evolving as an independent oil company over time. Our immediate
short-term goal is to partner with oil companies who are willing to
come to India and bid in the current NELP-6 round. We are ready
to invest along with such companies for exploration blocks of
mutual interest.

With our impeccable track record of managing projects, we are

confident that we can be of immense help to international oil
companies to quickly establish and implement operations in India.
While we are currently India-focused, we would also be willing to
look at acquiring equity stakes in international properties.

Indiabulls Financial Services Ltd is a public company and listed on

the National Stock Exchange, Bombay Stock Exchange,
Luxembourg Stock Exchange and London Stock Exchange. The
market capitalization of Indiabulls is approx US $ 800 million, and
the consolidated net worth of the company is approx US $ 400
million. Indiabulls and its group companies have attracted US $
300 million of equity capital in Foreign Direct Investment (FDI)
since March 2000.
Indiabulls ranks at 82nd position in the list of most valuable
companies in India. Indiabulls is promoted by three engineers from
the Indian Institute of Technology (IIT) Delhi. Foreign
Institutional Investors (FIIs) and foreign funds hold over 60 per
cent shareholding of Indiabulls. Some of the large shareholders of
Indiabulls are the largest financial institutions of the world such as
Fidelity Funds, Capital International, Goldman Sachs, Merrill
Lynch, Lloyd George and Farallon Capital. There are
approximately over 40,000 shareholders of the company.

Indiabulls Financial Services is a retail financial services company

providing a diverse array of financial products and services,
through its nationwide network of over 300 Indiabulls offices, and
services over 2,50,000 clients spread across 110 cities in India.
Indiabulls, along with its subsidiary companies, offer consumer
loans, brokerage and depository services, personal loans, home
loans and other financial products and services to the retail
markets.

Through its group companies, Indiabulls is also engaged in real

estate development. The group companies recently made winning
bids for the Jupiter and Elphinstone Mills in Mumbai in an auction
carried out by the National Textiles Corporation (NTC), a
Government of India undertaking. The company will now develop
modern commercial complexes in the heart of Mumbai - the
financial capital of India. Indiabulls' foreign partner, Farallon
Capital made the first real estate related FDI investment in
Indiabulls Properties Pvt. Ltd to buy Jupiter Mills immediately
after the new FDI guidelines were introduced by the Government
of India for real estate development in March 2005.

Indiabulls, which has a workforce of over 10,000 full time

employees, reported US $ 60 million in Profit Before Tax and US
$ 45 million in Net Profit for the first nine months of the current
financial year.

Indiabulls has grown its business by over 100% CAGR since

inception. The growth of Indiabulls in a highly competitive market
is a testimony of its quality services.

Philosophy

We have created a unique organization that is designed for you –

the Smart Investor – We passionately believe in the Smart Investor
who wants to make his own educated investment choices and
demands world class access to a full range of services and products
ranging from Equities to Insurance, combined with the highest
level of integrity, service and professionalism.

Indiabulls is a full service investment firm offering clients access

to a tremendous range of financial services from 135 locations
across 95 cities. We have a strong team of over 1000 Client
Relationship Managers focussed on serving your unique needs.
Our world class infrastructure, built with tens of crores of
investment, provides our clients with real-time service, multi-
channel & 24/7 access to all information and products. As we've
expanded and developed to serve the needs of all kinds of
investors, we've been guided by one underlying philosophy: You
come first.

Company is proud to have Indiabulls Professional NetworkTM that

offers real-time prices, equity analysis, detailed data and news,
intelligent analytics, and electronic trading capabilities, right at
your finger-tips. This powerful technology is complemented by
thier knowledgeable and customer focussed Relationship Managers
who are available to help with investor’s financial planning and
investment needs.
.
LIMITATIONS

Due to limited resources everywhere constraints play an examiner

of the management skills of the researchers. I have faced the
problems and obstacles in the process of this project, which are as
follows –

 The project work on the topic – Mutual fund and asset

allocation was a very interesting topic but it needs a lot of
statistical work and database management, which call for a
depth interpretation in order to draw out the necessary
details. Lack of sufficient experience of the researcher had
been one of the impediments of the report.
 Time problem was the other main constraint in the project
work for the student. I needed more time for the best results.
 Major of the information sources were not enough to get the
required data.
 Different experts used different methods of calculating the
risk and return of the different investment, there are many
methods for measuring the same thing.
 Different investment alternatives were available so it is
difficult to compare them each of them has its own advantage
and disadvantage.
 BIBLIOGRAPHY

Books and Magazines: -

Financial Management -I M Pandey
Investment analysis and
Portfolio management -Prasana Chandra
Wise Money - May 2007 Issue
Wise Money -April 2007 Issue
Wise Money -June 2007Issue
Wise Money -March2007 Issue

Websites: -

www.google.india.com
www.smcindiaonline.com
www.smcebroker.com
www.moneychimp.com
www.amfiindia.com
www.msn.com
www.yahoo.com
www.investopedia.com
WHAT I LEARNT DURING SUMMER TRAINING
Reliance Money is driven by an overarching vision of ‘powering
imagination’ that propels the company forward in its aim to build a
leadership position as the most preferred and significant
Investment Solution services provider.

The methodology of allocating the investors fund in such a way so

that the risk should be minimized and focused is made on
generating the return in this high volatility market.

The training was methodical. Giving a comprehensive

understanding of the objective, vision, mission and values of the
organization started it. The training comprised of sessions
involving non-technical aspects such as behavioral skills,
interpersonal skills, communication skills etc.

Initially, I was made to understand the different investment

alternative available, techniques and processes of investing in
those alternatives, so that I can build upon it keeping in mind the
different options available. Once I got a fair idea of the techniques
and process, I was encouraged to take up some of the
enhancements. My guide, Mr. Sumeet chhatwal(Center Manager),
my immediate guide Mr. Amit Batra(Associate of Reliance Money
ltd) and the other team members were very cooperative throughout
and helped me at every stage. The feedback from the team
members helped me to improve continuously and adhere to the
quality standards. My guide made sure that I was made a part of
each and every phase of the investment process. During the course
of training I learnt new techniques and I feel confident of my
contribution towards the success of our organization in the future.

I am very much grateful to Mr. Sumeet Chhatwal for keeping faith

in me and provide the right environment to do the project and also
for trusting me by allotting me a job where my learning has been
enhanced.
 WORK CULTURE AT RELAINCE MONEY

Surrounded by a world of flux and change, the surest way to enrich

your existence is to continuously learn and grow. Our practices
around the world offer the resources to help you evolve:
personally, professionally and intellectually.

Inside the office, our collaborative, people-focused culture

encourages mutual respect, open communications and ongoing
learning. Broaden your career path and your mind through our
globally based education initiatives, performance management
programs, mentoring programs and regular performance feedback.

Outside the office, you'll have time for the people you care about
most. In many locations, we offer flexible work arrangements and
other work/life harmony programs, as well as a variety of benefits
tailored to meet your individual needs.
Think... For us at Reliance Money Ltd, this is more than a
mere statement - it is a theme around which, our business
models are built.

At Reliance Money, our aim is not only getting the job done, but
ensuring that the teams evolve into smarter knowledge pool. We
believe in stimulating intelligence that is built around creative
thinking. Consistent training on latest technologies and industries
is an integral part of working @ adag Group.

Getting work done is important, however enjoying while you're

doing it, is more important. At Reliance Money, the environment is
challenging, driven to better results, while at the same time it also
aimed at building our people into world-class information
technology professionals.
 WORD OF THANKS

At the end we thank to all those persons who have directly or indirectly helped us to
complete this project successfully without whose cooperation it was not possible to
complete the project due to various constraints.At last we would like to give special
thanks to Dr. D.K.Garg sir for giving us opportunity to do final project.

I thank to all those readers who will study this project in the future.

I welcome any type of suggestions or comments from the readers.

Thanking you.

TIWARI DEEPAK
ENR-MMR 1031

DEEPENDRA KUMAR
ENR-MMR 1055