ACKNOWLEDGEMENT

An old Chinese proverb says; “When eating your bamboo sprouts, remember the men

who planted them.”

Now that my sprouts are ready to eat, it is time for me to express my deepest gratitude to

all those who have made it possible. Many of the ideas that have leaded to design and

develop this project report resulted from a distillation of experience and opinions of many

people. It is prudent to commence this report with a sincere tribute to all those who have

played an indispensable role in the accomplishment of this work by providing whenever

and wherever their able guidance was required.

I take this opportunity to thank my college, Indian Business Academy, Bangalore, for giving
me a chance to do a summer project, adding the experience of practical knowledge so
important to understand and to try and bridge the gap between theoretical and practical
knowledge.

Firstly, I would like to thanks to Mr. Raveendran E. K. (Zonal Head-South, Investment

products) who not only served as a guide to me, but also encouraged and challenged me to put
in nothing but my best, throughout the project. His enthusiasm was contagious and it was
stimulating to work alongside him.

I express my sincere gratitude to my project guide Mr. Deepak M. N. (Relationship Manager,

Investment Products) for guiding me through out the project

A special note of thanks to Dr. Subhash Sharma (Dean, IBA) for his constant inputs and his
patient guidance which not only helped the quality of my study but also the learning from it.

Jitendra Kumar

Indian Business Academy, Bangalore

 Executive Summary

Investment, like a medical check-up, is something we keep putting off even when we know
that it’s very much required and it’s better to start early. Most of us would agree that we tend to
sit over investment decisions, much to the chagrin of money managers.

I approached the investors keeping this “something laid back attitude” in mind. I advised them
that the key to building wealth is to start investment early. Start early. Keep investing
regularly, and that’s for the longer duration. These regular amounts of savings no matter, how
ever, small they may be shall possibly go a long way into creating a substantial amount of
wealth over a long term. This was for people who were looking at Mutual Fund as a Recurring
Deposit.

And to people who are looking to “park” their funds for a higher return than a savings account
or a fixed deposit where advised to diversify their risk by investing Lump sum amounts in
different schemes.

This report gives an explanation on Mutual Funds from the scratch. Right from what is a
mutual fund to the different returns under heads like Growth Option or Dividend Option. It
also gives an understanding of the different terms used in a Mutual Fund to make them simpler
to understand.

Section 1

Before an investor invests in Mutual Fund, it is very important to have a basic knowledge
about Mutual Fund. Chapter One under Section One deals with the ABC of Mutual Funds.
There are many jargons used in a Mutual Fund and this section defines few of the basic jargons
to help understand about Mutual Funds.

Chapter Two deals with the types of Mutual Funds available which are differentiated based on
investment objectives, nature of participation etc.

Chapter Three gives a complete understanding of how to go about investing in Mutual Funds.
It explains Key Information Memorandum (KIM) and the Offer Document (OD), two of the
most important documents, in detail.

Chapter Four gives a view of the rights and obligations of an investor. The saying “Ignorance
is no excuse” is also applicable to Mutual Funds.

Chapter Five deals with the very important tax aspects, the Net Asst Value (NAV) and the
pricing of Mutual Funds

Chapter Six deals with the advantages and disadvantages of Mutual Funds, in general.

Section 2
The chapter under this section deals in detail about the history of Mutual Funds and tracks the
investment increase in Mutual Funds.

Section 3

This section deals in detail with the Indian Debt and the Money Market and the economic
fundamentals with respect to Mutual Funds in different chapters.

Section 4

This section gives a detailed introduction about Mahindra & Mahindra Financial Services
Limited.

Section 5

This section gives a brief introduction of Birla Sun Life Equity Growth fund and HDFC
Growth Fund with a comparative analysis of both these funds.

Section 6

This section deals with the Findings, Recommendations and Conclusions observed about
Mutual Funds during the project duration.
Table of Contents

Chapter No. Topic Page No.

Acknowledgement 1

Executive Summary 2

SECTION – 1

1. ABC of Mutual Funds 6

2. Types of Mutual Funds 12

2. Investing in Mutual Funds: Understanding the Process 21

3. Rights and Obligations of Investor 26
4. Tax Aspects, NAV and Pricing of Mutual Funds 33
5. Advantage and Disadvantage of Mutual Funds 38

SECTION - 2

7. History of Mutual Funds in India 43

SECTION - 3

8. Concepts related to Indian Debt Market 51

9. Concepts related to Indian Money Market 57

9. Economic Fundamentals 59

SECTION – 4

11. An introduction to Mahindra & Mahindra Financial Services 62

Limited

SECTION – 5

12. Brief Introduction of Birla Sun Life Equity Growth Fund 71

13. Brief Introduction of HDFC Growth Fund 75
14. Comparative Analysis 82

SECTION – 6

15. Findings, Recommendations & Conclusions 87

Bibliography 90

SECTION ONE

ABC OF MUTUAL FUND

AND

MUTUAL FUND INDUSTRY IN INDIA

Chapter One ABC OF MUTUAL FUND

Mutual Fund: Concept

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal.

A mutual fund is created when investors put their money together. It is therefore a pool of
investor’s funds. The most important characteristic of a mutual fund is that the contributors and
the beneficiaries of the fund are the same class of people, viz. the investors. The term mutual
means that the 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 market 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 investors. 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 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. 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

Characteristics of a Mutual Fund

• A mutual fund actually belongs to the investors who have pooled their funds.
• Investment professionals manage the fund for a fee for the investors who own the
Mutual Fund.
• Funds are invested in a portfolio of marketable securities reflecting the investment
objectives.
• Value of the portfolio & holdings alter with change in the market value of investments.
• The value of portfolio is updated every day.

Business Structure of a Mutual Fund

There are many entities involved in the organization of a Mutual Fund as shown below

Sponsors
 • Promoter of the Mutual Fund
• Establishes the Mutual Fund
• Registers the Mutual Fund with SEBI
• Sponsor appoints the trustee, custodians and the AMC with prior approval of SEBI, and
in accordance with SEBI regulations.
• Should be in Financial Service Business with 5 year track record and a 3 year profit
making record with 40% capital contribution in AMC

Trustees

• Fiduciary Relationship for investor funds

• Appointed by Sponsor with SEBI approval
• Registered ownership of investments is with the trust
• At least 4 trustee out of which 2/3 should be independent
• Trustee of one Mutual Fund can not be trustee of another Mutual Fund

Asset Management Company

• Responsible for operational aspects of the Mutual Fund

• Investment management agreement with trustees and periodic reporting
• Rs. 10 crore of net worth to be maintained at all times.
• At least 50% of the board members should be independent.
• Can not have any other business interests and is structured as a private limited
company.
• AMC of one Mutual Fund can not be trustee of another Mutual Fund.

Other Constituents

Custodian

The custodian is holder of the investments on behalf of the Mutual Fund / Trustees.

Registrar / Transfer Agent

The Registrar or Transfer Agent is the investment back-office who takes care of filing
applications, making allotments, receiving redemption requests etc.
Auditors

There should be a separate auditor for the AMC and the Mutual Fund.

Depository Participant (DP) in Mutual Funds:

Depository Participants hold the securities of the Mutual Fund in dematerialized form. They
work with the custodian and handle the operational aspects of actually making / receiving
delivery of securities into account of the mutual funds. On instructions from the custodian, they
deliver/receive securities from the company in dematerialized form. They also communicate
the custodian’s instructions on corporate actions of the company.

Selling and Distributing Agents:

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

NET ASSET VALUE (NAV)

The NAV of a fund is the cumulative market value of the fund’s assets net if it’s liabilities. In
other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, the
amount that the shareholders would collectively own after paying all the liabilities would be he
NAV. 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.

NAV = Net Assets of the Scheme / Number of Outstanding Units

The most important part of the calculation is the valuation of the assets owned by the fund.

Net Assets of the Scheme =

Market value of Investments + Receivables + Other Accrued Income + Other Assets Accrued
Expenses – Other Payables – Other Liabilities

LOAD

Load is a charge on the NAV

 • Entry load is charged on NAV and increases the sale price
• Exit load is charged on NAV and reduces the purchase price

Entry Load

If the entry load for a scheme is 2.25% and the NAV of the scheme is Rs. 24.50, the investor
who wants to buy the units will not be able to buy at Rs. 24.50. He will pay:

• 24.5 + (24.5*2.25/100) = 24.5 + 0.5512 = 25.0512

Exit Load

If a fund imposes an exit load of 1 %, the investor who purchases his units, will get a price that
is:

• 24.5 – (24.5*1/100) = 24.5 – 0.245 = 24.255

Chapter Two TYPES OF MUTUAL FUND

Depending on the investment portfolio that is created, the following are thee types of products
offered by Mutual Funds:

o Equity Funds
o Debt Funds
o Balanced Funds

Equity Funds

Equity Funds are those funds that invest pre-dominantly in equity shares of companies. There
are varieties of ways in which an equity portfolio can be created for investors.

The following choices in equity funds are:

1. Simple Equity Funds

2. Primary Market Funds
3. Sectoral Funds
4. Index Funds
5. Other Equity Funds
 1. Simple Equity Funds:

These funds invest a pre-dominant portion of the funds mobilized in equity and equity related
products. In most cases about 80 – 90% of their investments are in equity shares. These funds
have the freedom to invest both in primary and secondary markets for equity.

One variation of the simple funds is the ELSS (Equity Linked Saving Schemes). These
funds, named variously in the mutual fund industry, are equity funds formed under a special
scheme notified by Government of India in 1990. According to the provisions of this
notification, investment in a specially formed mutual fund, that invests at least 90% of

its funds in equity and equity- linked investments is eligible for tax rebates, up to a maximum
of Rs. 1, 00,000, under section 80C of the Income Tax Act.

The caveat here is investors have to hold their units for a lock – in period of three years, in
order to avail the tax rebate.

2. Primary Market Funds:

The primary market funds invest 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 issue or through private
placements.

3. Sectoral Funds:

Sectoral funds choose to invest in one or more chosen sectors of the equity markets. These
sectors could vary depending on the investor preference and the return risk attributes of the
sector. For example, during the technology boom in stock markets, when prices of IT
companies were rising sharply, investor who wanted to participate in this sector could do so, by
investing in Sectoral funds, whose investment objective was to invest in few chosen sectors
such as Information Technology, Media and Telecommunications. Sectoral funds are not as
diversified as simple equity funds, as they tend to focus on fewer sectors in equity markets.
They can exhibit very volatile returns.

4. Index Funds:

In simple equity fund, the fund manager has the mandate to create an investment portfolio of
equity shares, according to his understanding of the valuations and returns in equity markets.
The portfolio in this case can be composed from the universe of equity shares available to the
fund manager. In other words the fund manager takes a view on the companies that are
expected to perform well, and invest in these companies. This style of creating an equity fund
is called active fund management. The risk in active fund management is that the fund
manager’s view of companies and their performance can turn out to be right or wrong.
An alternative approach to creating an equity portfolio for investors is to avoid taking views on
the performance of companies, and instead focus on creating a diversified portfolio, that simply
replicates an existing market index. In order o track the return performance of markets, market
indices of a subset of trading stocks is created. The CNX Nifty is one such index of 50 large
and liquid stocks, in the same proportion as in the index, he is creating an Index Fund. This
strategy is also called passive fund management. The costs of this strategy are lower, and the
fund performance virtually tracks the market index. An index fund provides an ideal exposure
to equity markets, without the investor having to bear the risk and costs arising from the market
views that a fund manager may take.

5. Other Variations of Equity Funds:

Equity funds can also be created to invest in equity shares of companies with specific
attributes. For example, these are small stock funds, which invest only in equity shares of small
companies. These are PSU Schemes which specialize in investing only in PSU stocks. There
are Top 200 Schemes, which invest in companies within the universe of Top 200 equity stocks.
There is a select equity fund, which invests from the universe of stocks comprising the A group
companies of the Bombay Stock Exchange. There is a 30 stock fund that limits the number of
stocks in its portfolio to 30 stocks. All these products try to define sub-set in equity market, in
terms of size and other attributes, and tend to focus on that segment.

Debt Funds

Debt funds are those that are pre-dominantly invest in debt securities. Since most debt
securities pay periodic interest to investors, these funds are also known as Income Funds.
However, it must be remembered that funds investing in debt products can also offer a growth
option to their investors. The portfolio is pre-dominantly made of debt securities. The universe
of the debt securities comprises of long term instruments such as bonds issued by central and
state governments, public sector organizations, public financial institutions and private sector
companies, and short term instruments such as call money lending; Commercial Papers,
Certificate of Deposit and Treasury Bills. Debt fund tend to create a variety of options for more
of these segments of the debt market in their investment portfolio.

The following choices available for the debt fund investors are:
 1. Liquid Funds and Money Market Funds
2. Gilt Funds
3. Simple Debt Funds
4. Sectoral Debt Funds
5. Serial Funds or a Fixed Term Plans

1. Liquid Funds and Money Market Funds

These Debt Funds invest only in instruments with maturities less than a year such as Treasury
Bills (TB), Certificate of Deposits (CD), Commercial Paper (CP) and Inter Bank Call Money.
The investment portfolio is very liquid, and enables investors to hold their investments for very
short horizons of a day or more. The fund pre-dominantly invests in money market instruments
and provides investors the returns that are available on these instruments. In some cases, the
funds also provide investors with cheque writing facility (only self cheques), as an additional
facility or liquidity.

2. Gilt Funds

A Gilt Fund invests only in securities that are issued by the government, and therefore does not
carry any credit risk. These funds invest in short and long term securities issued by
government. These funds are preferred by the institutional investors who have to invest only in
government securities, which are otherwise large – ticket whole sale market.

3. Simple Debt Funds

Theses funds invest in a portfolio of debt securities chosen from the universe of debt securities
indicated above. The fund manager has the freedom to choose from the universe of debt
securities, government and others, as well as the long and short term.

4. Sectoral Debt Funds

These funds invest in a pre specified subset of the debt markets.

For example, there are debt funds that would invest only in AAA rated debt securities issued
by the corporate sector.

5. Serial Plans or Fixed Term Plans

This is a variation to simple debt fund of debt market, where the objective is to match the
holding period horizon of the investor, within the maturity of the investments. A variety of
serial plans that enable investors to choose from 14 days to 5 days are available. The
investment portfolio can be made up either purely of government debt, which matures on a
date that matches the horizon of the plan, or a combination of debt securities.

Balanced Schemes

Those funds which are invested in both debt and equity market are known as Balanced Funds.
A typical balanced fund would be almost equally invested in both the markets. The variations
are fund invested that invest pre-dominantly in equity (about 70%) and keep a smaller part of
their portfolio in debt securities. These funds seek to enhance the income potential of their
equity component, by bringing in debt. Similarly, there are pre-dominantly debt funds (over
70% in debt securities) which invest in equity, to provide some growth potential to their funds.
A Balanced Fund also tends to provide investor exposure to both equity and debt market in a
one product. Therefore the benefits of diversification get further enhanced, as equity and debt
market have different risk and return profiles.

Various other types of Mutual Funds

Mutual Funds are investment portfolio that invests in financial market instruments. Theses
portfolios are created by pooling investor’s contributions, usually dominants in units. There are
varieties of ways in which mutual funds are created, to cater to varied the risk and return
requirements of investor. Depending on the investment portfolio that is created, and the
segments of the various markets in which the funds are invested, there is a choice of funds to
the investors.

Mutual Funds can offer further generic choices to investors in terms of nature of participation
and nature of income distributions and that are as follows:

• Nature of Participation: Open Ended, Closed Ended and Interval Based Funds.
• Nature of Income Distributions: Dividend, Growth and Reinvestment of Dividends.
Investor can also choose from varying periodicity for distributions of Dividend – Daily,
Weekly, Monthly, Quarterly or Annual, as the case may be.

Open Ended Schemes

 o Initial issue for limited funds
o Continuous sale and repurchase
o Size of fund keeps changing as investors enter and exit
o NAV based pricing

Closed Ended Schemes

• Sale of units only during NFO

• Listing on exchange & liquidity for investors
• Size of fund is kept constant
• Option of selling the units back to the Mutual Fund

Interval Schemes

• Combines features of Open ended & Closed ended

• Open for sale or redemption during pre-determined intervals
• NAV based pricing

Composition of the Industry between Open and Closed Ended Funds

In earlier days of Mutual Fund industry, most MFs were closed ended, and were listed in the
stock exchange. One of the reasons fund managers chose to have close ended funds, was the
apprehension that the underlying may not be liquid enough to support frequent changes in the
size of investment portfolio. However, closed ended funds presented a set of other problems.

Investor perceived MF to be akin to equity shares, because the issue process was similar to that
of equity shares: a limited initial offer period and subsequent listing in stock exchanges. This
perception created unrealistic return expectations from mutual funds. The next problem was the
discount at which MFs were priced, to the NAV, in the secondary

markets. Most MF units were priced at steep discounts (15 to 45%). Since the mid 1990s, MFs
have been open repurchase windows, at NAV linked prices, for their closed ended funds. As at
the end of March 001, 75% of the assets was managed by the Indian Mutual Fund Industry
were Open ended funds.

The Options for Structuring Returns to an Investor in a Mutual Fund

Mutual funds offer a variety of options to the investors, in the manner in which the returns
from their investment are structured. At a broad level, the investors have two options and that
are:
 • Dividend Option
• Growth Option
• Re – Investment Option

Dividend Option

Investor, who chooses a dividend option on their investments, will receive dividends from the
mutual fund, as and when such dividends are declared. Dividends are paid in the form of
warrants, or are directly credited to investors’ bank account. There are further choices in the
distribution of dividend. In a normal dividend plan, periodicity of dividend is left to the fund
managers, who may pay annual and/or interim dividend. Though investors know that they
would earn a dividend income from their investment, the timing of the payout is decided by the
fund managers. The variants to the normal dividend plans are pre-specific distribution
schedules. Mutual Funds provide investors the option of receiving dividend at predetermined
frequencies, which can vary from daily, weekly, monthly, quarterly, half yearly and annual.
Investors can choose the frequency of the dividends which suits their requirements. Not all
mutual funds provide all of these frequencies as choices. Though, investor can choose an
income distribution frequency from the choices available in a particular mutual fund product.
Investors choosing this option, have a fixed number of units invested I the fund, and earn
incomes in the investments. The NAV of these investors’ holdings will vary with changes in
the value of 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 require periodic income distributions can choose a growth option, where
the incomes earned are retained in the investment portfolio, and allowed to grow, rather than
being distributed to the investors. Investors with long term investment horizons, and limited
requirements for income, choose this option. The return to the investor who chooses a growth
option is rate at which his initial investment has grown over a period for which he was invested
in the fund. The NAV of the investor choosing this option will vary with the value of
investment portfolio, while the number of units held will remain constant.

Re- Investment Option

Mutual Fund also provides another option to investor in the form of re-investment of the
dividends declared. Investors re-invest the dividends that are declared by the mutual fund, back
into the fund itself, at NAV that is prevalent at the time of re-investment. In this option, the
number of units held by the investors will change with every re-investment. The value of the
units will be similar to that under the dividend option. The choice of income options is
dependent 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 investors.
Chapter Three INVESTING IN MUTUAL FUNDS

Understanding the process

The Mutual Fund is required to file with SEBI a detailed information memorandum, in a
prescribed format that provides all the information about the fund and the scheme. The
document is also called as prospectus or the OFFER DOCUMENT (OD), and is very detailed
and contains most of the relevant information that an investor would be needed. An abridged
version of the document, in a prescribed format is appended to the application form which is
also called as the KEY INFORMATION MEMORANDUM (KIM). Investors have the right
to ask for a free copy of the Offer Document.

The Offer Document – Its Importance and the Broad Contents

The offer document is very detailed and can run into pages or more. It usually contains all
information about the scheme that is being sold, namely, the objectives of the scheme, the asset
allocation, and the sale and repurchases procedures, the load and expanse structure and
accounting and valuation policies. Apart from this core information, the offer document also
contains details regarding the structure of the mutual fund, it also consists, and the performance
of existing schemes of mutual fund. It also contains operational details about how to apply and
the want are the rights and obligation of the investors. In the case of closed ended schemes the
offer document is issued during the New Fund Offer (NFO). In the case of open ended funds
the offer document is valid through out the life of the scheme, and is required to be revised at
least once in 2 years.

Generally an offer document is valid until it is changed, and such changes have to be notified
to SEBI and investors.

Examples of some major changes are:

• Change in the AMC or sponsor of the mutual fund

• Changes in the load structure
• Changes in the fundamental attributes of the schemes
• Changes in the investment options to the investors, inclusion or deletions of options.
In all these cases, SEBI requires that investors be notified through individual communication
and through publication of changes in a national daily. SEBI also provides for investors to exit
the fund, before the changes are enforced, at NAV without any exit load. SEBI also provides
for addendum to offer documents, whenever any changes as mentioned above are made.
Addendum is also required for abridged financial information, in the case of open ended funds,
once these numbers begin to be available.

Importance of Offer Document for the Investors

Offer document is very important for the following reasons-

• Information about the scheme, and its fundamental attributes, are specified in the offer
documents. Therefore it forms the basics for the investor decisions.
• Offer documents is a legal documents that specifies the details of the offer made by the
mutual fund, and before the mutual fund product, an investor must read and understand
the terms of the offer.

The Broad Contents of the Offer Documents

The following are the summary contents of the offer documents:

a. Preliminary Information
o Summary information about the MF, the scheme and the terms of the offer.
o Mandatory disclaimer clauses as required by SEBI.
o Glossary of terms in the offer document, which defines the terms used.
o Standard and scheme specific risk factors pertaining to the scheme being
offered.
b. Fund Specific Information
o Constitution of fund, details of sponsor, trustees and AMC
o Financial History of sponsors for 3 years, in summary form.
o Director of boards and the trustees and the AMC
o Details of Key personnel of the AMC.

o Details of Fund constitutions.

c. Scheme Attributes
o Fundamental attributes of the scheme. This includes type, investment objective,
investment pattern, and terms of the scheme with regard to liquidity, fees and
 expanses, valuation norms and accounting policies and investment restrictions,
if any.

d. Details of the scheme being offered

o Dates of NFO and details regarding sale and repurchase.
o Minimum subscription and face value.
o Initial issue expanses, for both current scheme and past scheme.
o Special facilities to investors and plans being offered.
o Eligibility for investing and documentation required.
o Procedures for applying and subsequent operation relating to transfer,
redemption, nomination, pledge and mode of holding of units.

e. Loads, Fee Structure and Expanses

o Load and the annual recurring expanses proposed for the scheme being offered
and for the other schemes being managed by the AMC, with comparison of
actual with terms in the original offer document.
o Condensed financial information of past schemes for the past 3 years.

f. Unit Holder Rights

o Rights of unit holders with regards to services, information and protection rights
and problem resolution.
o Details of information disclosure and their periodicity.
o Documents available for inspection.
o Details of pending litigation and penalties.

g. Associate Transactions
o Summary information on associated companies being used as constituents and
service providers with details of fees paid.
o Summary information of associates investing in schemes of the mutual funds.
o 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
The Cover page of the offer document should contain the following information:

o Name of the mutual fund

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

Mandatory Statement to be disclosed on the cover page of the Offer Document

The following statement must appear on the cover page of the offer document:

• A statement to the effect that offer document sets forth concisely, the information about
the scheme that the prospective investor ought to know before investing and 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 (Mutual fund) Regulations, as amended till date and filled by 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.

The Fundamental Attributes of a Scheme:

• Types of scheme
• Investment objective
• investment pattern
• Terms of scheme with regard to liquidity
• Fees and expanses
• Valuation norms and accounting policies
• Investment restrictions
Key Information Memorandum

Since the offer document is very detailed, it is not feasible for the mutual funds to provide
them all prospective investor. SEBI regulation allows mutual funds to summaries

The key points in a summary document called as Key Information Memorandum. It is

mandatory that the key information memorandum is made available to all investors, along with
the Application Form.

Chapter Four RIGHTS AND OBLIGATION OF

INVESTORS

Investors buy the Units of a 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 offers units at a price of 10 Rs, each. An investor wanting to
invest Rs. 1000 in this scheme, will buy 100 (1000/10) units.

In an existing mutual fund scheme, the price is announced by the mutual fund every day, and is
based on the NAV of the fund. The investor can either buy a fixed number of units, or can
invest a fixed sum of money. For example, if the sale price of XYZ equity fund was Rs. 23.49
on December 14,2005, an investor wanting to buy 1000 units will be able to do so, by investing
Rs.23490. On the other hand, if the investor decides to invest Rs.25000 on December 14, 2005,
given a price, he will be allotted 1064.2826 units. This calculation assumes that there is no
sales load(Entry/Exit) applicable to the investor.

All mutual fund schemes specify the minimum amount that has to invested and the multiples
thereof. For example, if a mutual fund may specify that minimum investment is Rs.1000 and
subsequent investment have to be in the multiple of 500. These restrictions are usually not
applicable to inter-scheme and inter option switchers and reinvestments.

Buying Units form a Mutual Fund

The buying procedures for the investors are different for different scheme. These are usually of
two types:

• Buying Units for an Open Ended Scheme

• Buying Units for a Closed Ended Scheme

Buying Units for an Open Ended Scheme

If the scheme is open ended, the investor on any given day, at the price quoted by the mutual
fund. Usually mutual funds have a distribution network, made up of distribution agents,
investors service centers and branched networks. An investor can buy units of the fund from
any of these agencies, who sell units on behalf of the mutual fund.

Buying Units for a Closed Ended Scheme

If the fund is closed ended, the mutual fund has a new fund offer period. During this period,
investors can buy units at a price which is fixed, for the whole period. In many cases the price
is Rs.10 or Rs. 100 per unit. After a closure of the NFO, the mutual fund closes further direct
sales to investors. Investors who want to invest in a closed ended fund, after the NFO have to
buy units from the stock markets. Closed-ended funds have to list their units on a stock
exchange to enable this. In the financial papers, the quoted price of traded mutual funds is
usually published. However, it is quite possible that the units are not regularly traded on the
stock exchange, resulting in units not being available when an investor wants to buy them.

Distribution Channel for the Mutual Fund

There are four channels which are currently used by the mutual fund and that are:

• Individual Agents
• Distribution Agents
• Banks and NBFCc.
• Direct marketing channels.

Mutual funds have their own internal guidelines on the appointment and terms of these
distributing agencies. These are at present no mandatory registrations for distributors are
applicable. There is also no regulatory requirement regarding who can be an agent, or the fees
and commissions payable to them.

The Commission Structure for Mutual Funds Agents

Mutual Fund agent’s commission has two components: Initial Commission and Trial
Commission. Initial commission is paid as fixed percentage of amount mobilized by the agents.
Some agents tend to pass on the initial commission to the investor in the form of an incentive
or rebate. This practice of rebating is widely condemned by the industry, though till now there
is no regulation to ban it.
Trial commission is paid periodically, on the funds that remain invested in the scheme. Every
agent has a unique member by which he is identified. This number is quoted on the application
forms collected by him. Mutual funds pays trail on the period, for which an investor brought in
by the agent, stays invested in the scheme. Trial is an effective way to restrict the practice of
rebating and link commissions to the period for which the fund mobilized is actually available
to the mutual fund. The rates of commission are decided by the mutual fund themselves, and
are not subject to regulation by SEBI or AMFI.

The Category of investors who are Eligible to buy Mutual Funds

The following categories of investors are usually eligible to invest in Mutual Funds:

o Resident Individual
o Indian companies
o Indian trust and Charitable institutions
o Banks
o Non-banking Finance Companies
o Insurance companies
o Provident Funds
o Non- Resident Indians
o Overseas Corporate Bodies
o SEBI Registered Foreign Institutional Investors

Agents should check the list of eligible investors, before accepting an application form from a
prospective investor.

Holding Rights for the Investors have in Respect of Service Standards

Some of the important rights that investors in mutual funds have are:

• Investors are entitled to receive dividends declared in a scheme, with in 30 days.

• Redemption proceeds have to be sent to the investors with in 10 business days form the
date of receipt of such request by the AMC. Delays in this respect will lead to the AMC
paying a penal interest on the proceeds, at a rate specified by the SEBI from time to
time. The Current rate is 15% and is to be borne by the AMC and not the fund.
• If the investor fails to claim the dividend or redemption proceeds, he has the rights to
claim it upto a period of 3 years, from the due date, at the prevailing at the end of 3rd
year.
• Mutual fund has to allot the units within 30 days of the NFO and also open the scheme
for redemption, if it is an open ended scheme.
 • Mutual fund has to publish their half yearly results in at least one national daily and
publish their entire portfolio, at least once in 6 months. Such disclosures should be done
with 30 days from the six monthly account closing dates of the fund.
• Trustees will have to insure that the information having a material on the unit holder’s
investments should be made public by the mutual fund.
• If 75% of the unit holders so decide:

 A scheme can be wound up

 Meeting of unit holders can be called
 Appointment of the AMC of the mutual fund can be terminated.

• If there is any change in any fundamental attribute of the scheme, the unit holders have
to be notified through a letter. They also have the right to repurchase at NAV, without
any load, before such a change is effected.
• Units holders have the right to inspect the following documents:

 Copies of trust deed, investment management agreement and agreements

worth fund considerations.
 Memorandum and articles of association of the AMC.
 Unabridged balance sheet of the mutual fund schemes sponsor and AMC
 Text of SEBI regulations

Limitations of the Rights of Investors

These are the limitation of the investors:

• Investor can not sue a trust, as they are not distinct from the trust, which is only a
registered owner of their fund.
• Investors can lodge complaints against trustees (with a registrar of the public trusts) or
the AMC (with the company law board). Investors also lodge complaints against with
SEBI for non compliance with SEBI regulations, by sponsor, AMC or the trustees.
• Investors cannot be compensated of the performance of fund is below expectations.
Investors have to fully bear the risk associated with the schemes. Only explicit
guarantees provided in the offer documents by sponsor or AMC is enforceable under
the law.
• There are no legal remedies to a prospective investor. In order to enjoy any of the above
rights, he must be registered investor in the fund.
Investment Plans and their Types

Investment plans are the different ways to invest or reinvest in a scheme by the investors.

These are the services offered by the different mutual funds to their investors. These plans
provide variable degree of convenience could be in form of freedom to invest at regular
intervals or making withdrawals periodically. Similarly flexibility may be offered by allowing
investor to transfer from one scheme to another. There are four types of investment plans
available for the investors:

• Systematic Investment Plan (SIP)

• Automatic Reinvestment Plan (ARP)
• Systematic Transfer Plan (STP)
• Systematic Withdrawal Plan (SWP)

Systematic Investment Plan (SIP)

This is a plan based on the concept of “Rupee Costing Averaging Method”. In this plan the
investor is allowed to invest a fixed amount at regular intervals. This gives the investor a way
to save and invest in a disciplined and phased manner. The investment could be made by
giving post-dated cheques in advance or by the facility of direct debit to the investor’s salary
accounts.

Automatic Reinvestment Plan (ARP)

As we already know that a scheme may have two broad options- dividend option and growth
option. In the dividend option the income earned by the fund is distributed to the unit holders.
The automatic reinvestment plan allows the investors to reinvest the amount of dividend of
receiving in cash. This reinvestment will happen at the ex-dividend NAV reinvestment the
investor will receive additional units equivalent to the amount of dividend divided distributed
tax (if any).

Systematic Transfer Plan (STP)

This plan gives investor the facility to transfer on periodic basis a specific amount from one
scheme to another scheme of the mutual fund. A transfer from one scheme means redemption
of units from that scheme and it would be considered as an investment in units from that
scheme to which the transfer is made. This redemption, investment and investment would
happen at applicable NAV’s. This plan gives investor the leverage to manage his funds among
different scheme to achieve his objectives.

Systematic Withdrawal Plan (SWP)

This is a plan whereby an investor can make systematic withdrawals from his fund investment
accounts on periodic basis. This facility helps him to ensure regular cash inflow. In this plan
the investor agrees a certain amount to be withdrawn is treated as redemption of units by
investor and the units are calculated using are calculated using the applicable NAV as specified
in the offer document.

Chapter Five TAX ASPECTS, NAV AND

PRICING

Investors receive two types of incomes from his investment in mutual fund, namely dividends
declared from time to time by mutual fund and capital gain arising out of redemption of mutual
fund units. Both these incomes are subjected to the provisions on the Income Tax Act, 1961.

In the investor chooses the dividend option, the dividend income is tax free. If the investor
chooses the growth option, the different between the acquisitions the redemption price is
subjected to capital gain tax, as explained above. If the investor chooses the re-investment is
treated as dividend income, and tax free. He will receive additional units to the extent of
reinvestment less dividend distribution tax based on whether it is scheme with>50% in debt or
>50% in equity. On the sale of additional units he will be subjected to capital gained.

Mutual fund which is registered under the SEBI (mutual fund) Regulations, 1996 is fully
exempted 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. Investment in units
of mutual funds is not considered as wealth tax act and therefore shall not be chargeable to
wealth tax.
Income Tax Provisions for the Dividends Income

The following are the tax provisions, applicable after the Finance Act 2003-04:

Dividends:

• Dividends from mutual funds for the year 2003-04 are tax free in the hand of the
investors.
• In the case of the mutual fund scheme with more than 50% in debt, a dividend
distribution tax on 10% plus surcharge has to be paid by the mutual funds.

• In case of mutual fund with more than 50% in equity, the dividend distribution tax is
not to be paid.

Investment in ELSS

Investment in specific Equity Liked Savings scheme, as notified by the Government of India, is
eligible for tax rebate under section 80C, upto a maximum limit of Rs.100000 on the
investment. The rebate is available according to the taxable income of the investor.

Taxes on Capital Gain:

Mutual funds are securities under the Securities Contract Regulation Act. Therefore, any
holdings that is for less than 12 months is considered short –term, holdings beyond 12 months
are considered as long term. If units are redeemed by an investor, at a price that is higher than
the acquisition price, the investor earn a capital gain. If the holding period is higher than 12
months, such gains are short term capital gain, are subject to tax, at the same marginal rate of
taxation the investor is subjected to. The cost of acquisition includes costs incurred on the
transaction, i.e. brokerage or commission.

If the holding period is higher than 12 months, the investor has an option to calculate his long
term capital gains tax in either of the following two ways:

• The investor can index the acquisition price according to the cost of inflation index
published by the CBDT and pay a capital gains tax at 20% (+Surcharge)
• If the investor chooses not to index the acquisition price, he can pay capital gains tax
on the entire difference between acquisition price and redemption value, at a rate of
10% (+Surcharge)
If the investor chooses the dividend option, the dividend income is tax free. If the investor
chooses the growth option, the difference between the acquisition and redemption price is
subjected to capital gain tax, as explained above. If the investor chooses the re-investment
option, the amount of dividend distribution tax based on whether it is a scheme with >50%

in debt or 50% in equity. On the sale of these additional units he will be subject to capital
gains.

Dividend Stripping

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

Section 94(7) of Income Tax Act, 1961 has prohibited this. It provided that if a buys units
within a period of 3 months before record date and sells the same within the a period of 3
months after such record date, than any loss arising from such buying and selling shall be
ignored in the computation of the taxable income of that person.

NAV, Load and Pricing of the Mutual funds

Net Asset Value (NAV):

The Net Asset Value of the fund is the cumulative market value of the assets fund net of its
liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in
the fund, this is the amount that the shareholders would collectively own. This gives rise to the
concept of net asset value per unit, which is the value, represented by the ownership of one unit
in the fund. It is calculated simply by dividing the net asset value of the fund by the number of
units.

NAV = NET ASSET OF THE SCHEME / NUMBER OF OUTSTANDING UNITS

The most important part of the calculation is the valuation of the assets owned by the fund.

Net Assets of the scheme = Market value of investment + Receivables + Other Accrued
Income + Other Assets – Accrued Expenses + Other payables – Other Liabilities

Most Mutual Funds make NAV of their schemes available over phone, using the 24- Hour
voice mail facility. At the end of the business day, fund NAV are also made available on the
websites on the funds, and on the AMFI website (www. amfiindia.com). Business newspaper
also publishes the NAV’s on the next day in the security prices pages.

Load:
Load is a factor that is applied to NAV of a scheme to arrive at the price. If a commission is
paid to the agents, to bring in new business, this represents a cost incurred by the mutual fund,
for the additional sales. the fund may therefore that investors, who are already in the scheme,
need not bear this cost. Therefore it may decide to impose this cost on the new investors by
increasing the price at which they can buy units. This is called the “Entry Load” or the “Sales
Load”.

Similarly, if an investor stays in a fund for a short while and decides to repurchase his units,
the fund may incur some cost in liquidating the portfolio and paying off this investor. The fund
may want to impose the cost of this operation on existing investor, in the form of a load. This is
called an “Exit Load”.

Mutual funds have a choice. Mutual funds may decide to impose no loads, or only the sales
load, the exit load. If there are no loads, then the cost associated with sales and repurchase are
borne by the AMC, and not imposed on the mutual fund scheme.

Maximum Load a Mutual Fund Can Charge

SEBI regulates the load mutual fund can charge. There are two regulatory requirements:

• The sale price can not be more than 7% of NAV and repurchase price can not be less
than 7% of NAV. That is maximum load can be only 7%.

• The repurchase price can not be less than the 7% limit applies to the sale and
repurchase price, though the fund is free to impose the load on either them or both. In
case of closed ended scheme the repurchase price of units shall not be lower than 95%
of the NAV.

Load is defined as a percentage (%).

CDSC is a variable exit load, charged depending on duration of stay in the fund. Loads are
subject to SEBI Regulation and vary depending on Industry practice.
Chapter Six ADVANTAGES AND DISADVANTAGES

OF MUTUAL FUNDS

Advantages of Mutual Funds

Professional Management

MF provide the services of experienced and skilled professionals, backed by a dedicated

investment research team that analyses the performance and prospects of companies and
selects suitable investments to achieve the objectives of the scheme.

Diversification

MF invests 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.

Convenient Admiration

Investing in a MF reduces paperwork and helps avoid many problems such as bad deliveries,
delayed payments and follow up with brokers and companies. MF saves time and makes
investing easy and convenient.

Return Potential

Over a medium to long term, MF have the potential to provide a higher return as funds are
invested in a diversified basket of selected securities

Low Costs

MF are a relatively less expensive way to invest compared to directly investing in the capital
markets because the benefits of scale in brokerage, custodial and other fees translate into lower
costs for investors.

Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value related
prices from the MF. In closed end schemes, the units can be sold on a stock exchange at the
prevailing market price or the investor can avail the facility of direct repurchase at NAV
related prices by the MF.

Transparency

Regular information is made available on the value of the investments in addition to disclosure
on the specific investments made by the scheme, the proportion invested in each class of assets
and fund manager’s investment strategy and outlook.

Flexibility

Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, MFs allow systematic investment of funds according to needs.

Affordability

Investors individually may lack sufficient funds to invest in high grade stocks. A MF because
of its large corpus allows even a small investor to take benefit of its investment strategy.

Choice of Schemes:

MFs offer a family of schemes to suit varying needs over a lifetime.

Well Regulated

All MFs are registered with SEBI and they function within the provision of strict regulation
designed to protect the interest of investors. The operations of MFs are monitored by SEBI.

Disadvantages of Mutual Funds

No Control over costs

Often various cost incurred by Asset Management Company are billed to the unit holders.
More so, advertisements costs, costs incurred for sending periodic communication, custodian
fees etc. are transferred to unit holders.

No Tailor Made Portfolio

There are no tailor made portfolios, the unit holders are required to invest in schemes bought
out by Mutual Fund companies which have specific objectives, investment strategies and set
portfolio.

Risk Scale of Mutual Funds

Sector based schemes have the highest risk and Gilt schemes have the least risk on a scale of
10.

What are a Mutual Fund’s Expenses?

• Investment Management Fees

• Custodian’s Fees
• Trustee Fees
• Registrar & Transfer Agent’s Fees
• Marketing & distribution Fees
• Operating Expenses
• Audit Fees
• Legal Expenses
• Costs of mandatory advertisements and communications to investors.
 SECTION TWO

MUTUAL FUND INDUSTRY IN INDIA

Chapter Seven MUTUAL FUNDS INDUSTRY

IN INDIA

History of mutual funds in India

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 of India. The history of mutual
funds can be broadly divided into four distinct phases-

First phase – 1964-1987

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the regulatory and 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. 6700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector funds)

1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI mutual fund was the first non-UTI Mutual Fund established in June 1987 followed
by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India Mutual Fund (Jun 90), Bank of Baroda Mutual Fund
(Oct92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in
December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004
crores.

Third Phase – 1993-2003 (Entry of Private Sector funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year
in which the first Mutual Fund Regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now registered
with Franklin Templeton) was the first private sector 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 fund 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 UTI with Rs. 44,541 crores of assets under management was way ahead of other mutual
funds.

Fourth Phase – Since February 2003

In Feb 2003, following the repeal of the UTI 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 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 the 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 (AUM)

Note:-

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit
Trust of India effective from Feb 2003. The asset 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 Feb 2003 onwards.

Structure of the Indian Mutual Fund Industry

The Indian mutual fund industry is dominated by the Unit Trust of India which has a total
corpus of Rs. 700 billion collected from more than 20 million investors. The UTI has many
funds/schemes in all categories i.e. equity, balanced, income etc with some being open ended
and some being close ended. The Unit scheme 1964 commonly referred to as US 64, which is a
balanced fund, is the biggest scheme with a corpus of about Rs. 200 billion. UTI was floated
by financial institutions and is governed by a special Act of Parliament. Most of its investors
believe that UTI is government owned and controlled, which, while legally incorrect, is true for
all practical purposes.

The second largest category of mutual funds is the one floated by nationalized banks.
CANBank Asset Management floated by Canara Bank and SBI Funds Management floated by
the State Bank of India are the largest of these. GIC AMC floated by General Insurance
Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other
prominent ones. The aggregate corpus of funds managed by this category of AMCs is about
Rs. 150 billion.

The third largest category of mutual funds is the one floated by the private sector and by the
foreign asset management companies. The largest of these are Prudential ICICI AMC and Birla
Sun Life AMC. The aggregate corpus of assets managed by this category of AMCs is in excess
of Rs. 250 billion.

Recent trends in Mutual Fund Industry

2005 – The Year of equity funds: Mutual Funds (MFs) have proved that it is the best investment
option available for retail investors. Conservative companies have also started investing in
equity Mutual Fund in a big way as it offers more safety than direct equity market investing.

Encouraged by record foreign capital inflows and strong support by the local funds, the Sensex
breached one milestone after the other, to touch a high of 9442.8 in 2005. The

Sensex gained close to 2800 points or more than 42% in the 12 months and was easily among
the best-performing index in the world. MFs have also able to perform inline with the Sensex.

MFs remained the net buyers in equities at the end of the year with investment of Rs. 12000
crores in a year 2005 where as MFs have invested over Rs. 40331 crores in debt segment.

In the year 2005 Equity Diversified Funds have given 48% compounded annualized average
returns and they have outperformed S&P CNX Nifty and BSE 500 Indices by healthy margins,
which have generated 38% & 44% compounded annualized returns respectively. If investors
can hold MFs for longer duration they can give better returns than the market.

Impact of Mutual Fund Industry

The industry is also having a profound impact on financial markets. While UTI has always
been a dominant player on the bourses as well as the debt markets, the new generation 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.
What is particularly noteworthy is that bulk of the mobilization has been by the private sector
mutual funds rather than the 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 crores in case of public sector MFs.

Mutual Funds are now also competing with commercial banks in the race for retail investors
savings and corporate float money. The power shift towards mutual funds has

become obvious. Many investors are realizing that investments in savings account are as good
as locking up their deposits in a closet. The fund mobilization trend by mutual fund 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 revolution that has already peaked in the US. The US boasts of an
asset base that is much higher than its bank deposits. In India, mutual fund assets are not even
10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in
the first quarter of the current fiscal year mutual fund assets went up by 115% whereas bank
deposits rose by only 17%. This is forcing a large number of banks to adopt the concept of
narrow banking wherein the deposits are kept in gilt funds 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 can not be ignored. It is just that
Mutual Funds are going to change the way banks do business in the future.

BANKS VERSUS MUTUAL FUNDS

Basis Banks Mutual

Funds
Returns Low Better
Administrative High Low
Exp.
Risk Low Moderate
Investment Less More
Options
Network High penetration Low but
improving
Liquidity At a cost Better
Quality of Not transparent Transparent
assets
Interest Minimum balance Everyday
th th
calculation between 10 & 30 of
month
Guarantee Maximum Rs.1 lakh None
 on deposits

FUTURE SCENARIO

The assets 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 mergers and acquisitions. Here
too some of them will close down 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 and large number of offers from various asset management
companies in the time to come. Some big names like Fidelity have entered the market while
Principal and Old mutual fund are looking at Indian market seriously. One important reason for
it is that most players already have presence here and hence these big names would hardly like
to get left behind.

SECTION THREE
 CONCEPTS RELATED

TO

THE DEBT AND MONEY MARKET

Chapter Eight THE DEBT MARKET

In the Indian context, given that government securities constitute around 80% of the Indian
Debt Market, debt issuance is necessarily quasi-synonymous with floatation of government
bonds.

The Indian debt market is conventionally classified into three segments viz. Government
securities Market, Public Sector Undertaking (PSU) Bonds Market and the Corporate Debt
Market. They issue fixed income securities to borrow money from the investors.

Features

Debt market is a financial market where long-term (one year or more) debt securities are issued
and traded. Typical Debt Market instruments available to the investor include Government
Bonds, Corporate Bonds, PSU Bonds etc.

Major Borrowers

• Government of India
• Corporate

Why does the Government / Corporate Borrow?

 • Financing of Gross Fiscal deficit
• Capital Expenditure
• Repayment of External Borrowings
• Servicing of Outstanding Borrowings

Fixed Income Securities

They are investments that provide a return in the form of fixed periodic payments.

7.15% GOI 2015

Coupon Rate Issuer Maturity Date

Overview of Bonds

• A Bond is a written conditional promise to pay a specific principal sum at a determined

future date and interest (coupon payments) on fixed intervals.
• One of the factors that make the bonds appealing is that they pay a set amount of
interest on regular basis.
• Bonds are a type of investment vehicle that can provide investors with two kinds of
returns: current income (coupon payments) and capital gains. Bonds are considered to
be one of the main sources of refinancing.
• The market for newly-issued bonds is referred to as the primary market. After a bond
has been issued, investors can sell their bonds at any time until maturity. The market
where bonds are bought and sold (exchanged or traded) among investors is called as the
secondary market.

A Bond can be described by following attributes:

• Te issue date is the date on which the life of a bond starts. The term to maturity defines
the period of time, or life of the bond. The bond’s maturity date is the date on which the
last payment is due.
• The face value (also called par value or principal sum) of a bond represents t he amount
that will be repaid to the bondholder at maturity.
• The coupon rate is the nominal annual rate of interest that is paid to the bondholder on a
regular basis. It is usually expressed as a percentage of the face value (coupon
 rate). The coupon rate is either fixed or variable can be paid annually or semi-
annually.

• The purchase price is the price the investor pays to buy the bond, i.e., to receive this
series of cash flows (coupon and face value).

Risk Factors associated with Bonds

A bond faces various types of risk between the date when it is issued and the date when it
matures. Various risks that are associated with bonds are as follows:

1. Credit Risk

Credit risk refers to the financial soundness of the issuer or borrower. it is a risk that the
borrower will be unable to fulfill its commitment in form of periodic interest payments
and repayment of the principal amount. Government bonds have no credit risk.
Corporate bonds have got varying level of credit risk depending upon the issuer’s
financial profile. Credit risk also includes the risk of downgrade, which may impact the
valuation of the particular bond.

2. Interest Rate Risk

There exists an inverse relationship between interest rates and the price of bonds. As
interest rate moves up the prices of bonds come down and vice versa. This risk exists
because new bonds are likely to be issued with higher coupon rate as interest rates
increase, making the old or outstanding bonds less attractive. The longer a bond’s
maturity, the greater the impact of change in interest rates can have on its price.

3. Liquidity Risk

This is the risk that it will be difficult to sell a bond in the secondary market. This is
more likely to be associated with corporate bonds or debentures than government
securities as debentured are less likely to be traded in the secondary market than
government securities.

4. Inflation Risk

A factor affecting all securities is purchasing power risk also known as inflation risk.
This is the chance that the purchasing power of invested rupees will decline or the risk
that the return on your investments will not keep pace with rising consumer prices. If
the yield on an investment is lower than the rate of inflation the investor’s money will
have less purchasing power as time passes.
5. Reinvestment Risk

This is the risk that investor may not be able to reinvest the cash flows generated from
the bond at the same rate as the yield from the bond. This risk is especially relevant in a
falling interest rate environment.

6. Call Risk

A callable bond has a provision that allows the issuer to call, or repay, the bond before
the maturity date of the bond. In case of a falling interest rate environment, it is
beneficial for the issuer to buy back its callable bonds and issue new bonds at lower
coupon rates. If this happens, the investor’s interest payments cease and they receive
their principal early. If the principal value is then reinvested, investors will have to
accept a lower coupon rate, one that is more consistent with prevailing interest rates.
This will lower monthly interest payments.

7. Prepayment Risk

Some classes are subject to prepayment risk, which is somewhat similar to call risk.
This is the risk that issuer of a security will repay principal prior to the bond’s maturity
date, thereby changing the expected payment schedule of the bonds. This is especially
prevalent in the mortgage-backed securities market, where a drop in mortgage rates can
initiate a refinancing wave. When homeowners refinance their mortgages, the investors
in the underlying pool of mortgage backed bonds receive their principal back sooner
than expected, and must reinvest at lower, prevailing rates.

Measures of Bond Price Volatility

Bond Price Volatility refers to the fluctuations in the price of a bond due to changes in
the various underlying factors. An optimal bond portfolio should be able to effectively
factor in such volatilities and keep resulting price risk to a minimal. However,
estimation of such volatilities in the bond price is not easy. Moreover, volatility in the
prices of such securities varies with the yield, maturity and the duration of these
respective securities. Thus to effectively estimate volatility of a portfolio, various
measures of such estimation need to be resorted to.

Price Value of a Basis Point

Price value of a basis point refers to the change in the price of the bond if the yield
changes by 1 basis point (0.01%). If the price of security A falls by 20 paise when the
yield rises by 0.01%and the price of security B fall by 25 paise for the same rise in the
yield, then security B would be said to be more volatile than security A. this volatility,
of course, holds well even on the positive side; that is when price of security B rises
more than that of security A for the same fall in yield. Therefore, a portfolio manager’s
job is to optimize positive volatility while minimizing the downside volatility.
Yield value of a Price change

Yield Value of a Price change refers to the change in the yield of a security for a
specified change in the price of security. The smaller the yield value, the price volatility
would be greater since even a small change in the yield would change the price
considerably.

Duration of the Bond

Duration of the Bond, in simple terms, is the measure of time to its maturity. It is a
measure of the bond’s price risk. Higher the duration of the bond, higher is the bond’s
sensitivity to the market interest rate movements. The concept is of extreme importance
in the context of bond volatility. In case of a bond having fixed term to

maturity with no intermittent coupon payments, the duration of bond is simply its tenor
to maturity.

However in case of coupon paying bonds, the investor receives interest payments
before the maturity date and hence the duration of the bond is lower than its tenor. The
present values of the cash flows are taken as the weights for calculating the duration of
the bond.

Modified Duration

Modified Duration establishes a direct mathematical relationship between bond price

and the interest rate changes. It is a direct measure of the interest rate sensitivity of the
bond.

Mathematically, percentage change in bond price is the product of modified duration of

the bond and the change in its yield. The concept can be used effectively to manage
portfolio volatility since the modified duration of a bond and the sensitivity of its price
to interest rate movements are inversely related.

Convexity

Duration and Modified Duration of the bond assume a linear relationship between price
and yield. However, since the actual yield curve is usually convex, measurement of the
bond risk using its duration may not give a perfect picture. Convexity takes into
account the shape of the price yield relationship when making price sensitivity
calculations. It is the rate of change of duration with a change in the yield.
 Chapter Nine THE MONEY MARKET

Features

o Money market is a financial market where short term (one year or less) debt
securities are issued and traded.
o Typical Money Market instruments available to the investor include treasury
bills.
o (TB’s), Certificates of Deposits (CD’s), Commercial Papers (CP).
o Investments in the Money Market involve actual cash or short term debt
obligations.
o These debt obligations are much like cash because they are highly liquid.
o The Money Market provides the financial institutions and large corporations
with quick cash for short term needs.

Types of instruments

Call Money

Call Money is essentially a money market instrument wherein funds are borrowed / lent for a
tenor of one day/overnight (excluding Sunday/holidays).

Notice Money

Notice Money is an instrument where the tenor is more than 1 day and less than 15 days.

Inter bank Term Money

Money lent for a fixed tenor of 15 days or more is called term money.

Commercial Papers (CP)

Commercial Papers unsecured short term borrowings by Corporate, FIIs, Primary Dealer’s,
having a maturity of 15 days to one year. They are issued subject to minimum of Rs.5 lakh and
in multiples of Rs.5 lakh thereafter.

Certificates of Deposits (CD)

A CD is a document of title to a time deposit. CDs are discounted instruments issued by banks
and eligible financial institutions. They are freely transferable from one person to another by
endorsement and delivery. CDs are always traded at a spread over a Treasury Bill of the same
maturity as the investor carry some credit risk which is not associated with TB.

Treasury Bills (T-Bills / TB)

Treasury Bills are short term GOI Securities issued by government of India. They are issued
for different maturities viz. 91 days, 364 days. An auction for the 91 day Treasury bill is
conducted every Wednesday. The notified amount for the same is Rs.500 crore. An auction for
the 364 day T-bill is conducted every alternate Wednesday. The notified amount is Rs.1000
crore.

Reverse Repo Transaction

A sells security to B while agreeing to repurchase it at a later date.

This becomes a spot & forward agreement simultaneously.

Reverse Repo Interest Rates are an indicator as to the liquidity facto in the country’s liquidity,
control inflation in the short term. At present, the Reverse Repo Rate is 5 %.

The rate was hiked to the present level from 4.75% in the new annual policy released on April
28th 05.

Chapter Ten ECONOMIC FUNDAMENTALS

How Do Interest Rates affect the Economy?

• Lower interest rates make it easier for people to borrow in order to buy cars and homes.
Purchases of homes, in turn, increase the demand for other items, such as furniture and
appliances, thus providing an additional boost to the economy.
• Lower interest rates mean that consumers spend less on interest costs, leaving them
with more of their income to spend on goods and services.
• Lower interest rates make it easier farmers, manufacturers, and other businesses to
borrow to invest in equipment, inventories, and buildings.
• Also, the returns that investments will produce in future years are worth more today
when rates are low than when rates are high. That gives business more of an incentive
to invest when rates are low. Increased business investment, in turn, makes the
economy to grow faster, as productivity increases faster.
How Do Interest Rates affect the Bond Prices?

General interest rates are constantly changing, but the rate of interest on many bonds is fixed.
Instead, their market prices change when general interest rates go up or down.

The longer a bond’s maturity, the more its price tends to fluctuate as market interest rate
changes. However, while longer-term bonds tend to fluctuate in value more than shorter-term
bonds, they also tend to have higher yields to compensate for the risk.
 SECTION 4

AN INTRODUCTION

TO

MAHINDRA & MAHINDRA FINANCIAL SERVICES LIMITED

CHAPTER 11 AN INTRODUCTION TO

MMFSL

Mahindra Finance is a subsidiary of M&M. The Mahindra Group is a US $4.5 billion

conglomerate and a leading manufacturer of multi-utility vehicles with significant

 presence in key sectors like farm equipment, infrastructure, information technology

and financial services.

The Group completed 60 years in 2005. Set up in 1945 to make general-purpose utility
vehicles, M&M first became known as the maker of the iconic Jeep in India. The
company branched out into manufacturing light commercial vehicles and agricultural
tractors. Mahindra & Mahindra rapidly grew from being a maker of army vehicles and
tractors to a major automobile manufacturer with a growing global appetite. Now the
Group has a leading presence in many other key sectors -- Trade and Financial Services
(Mahindra Intertrade, Mahindra & Mahindra Financial Services Ltd.), Systems &
Technologies (Mahindra Engineering Services, Mahindra Ugine), Information
Technology (Tech Mahindra, Bristlecone), and Infrastructure Development (Mahindra
GESCO, Club Mahindra Holidays, Mahindra World City). Two Group companies
Mahindra Finance and Tech Mahindra made their debut on the bourses in 2006 in line
with the commitment that each of the business segments would have flagship
companies that will be listed.

The Group recently made a milestone entry into the passenger car segment with Logan,
a product of its JV with Renault SA. M&M is the fourth largest tractor company in the
world. Forbes has ranked the Mahindra Group in its Top 200 list of the World’s Most
Reputable Companies and in the Top 10 list of Most Reputable Indian companies.

Company Overview:

Mahindra Finance is one of India’s leading non-banking finance companies focused on

the rural and semi-urban sector providing finance for utility vehicles, tractors and cars
with largest network of branches covering these areas. It is a subsidiary of M&M, a
leading tractor and UV manufacturer with over 60 years experience in the Indian
market.

The company’s goal is to be the preferred provider of retail financing services in the
rural and semi-urban areas of India. The company’s strategy is to provide a range of
financial products and services to their customers through their nationwide distribution
network. They seek to position themselves between the organized banking sector and
local money lenders, offering their customers competitive, flexible and speedy lending
services. They principally finance UVs used both for commercial and personal
purposes, tractors and cars. While they predominantly finance M&M UVs and tractors,
they have continued to expand their lending in respect of non-M&M vehicles.
 In the three years ended March 31, 2005, they expanded their branch network from 195
to 255 branches providing services to customers in 25 states and two Union Territories
across India. During the same period, the cumulative number of customer contracts
entered into grew from 161,079 to 336,819. As of December 31, 2005, they had 295
branches in 25 states and two Union Territories in India and had entered into 430,300
customer contracts. In addition, on September 16, 2005 they entered into an agreement
with HPCL whereby they have granted permission to establish outlets in selected petrol
stations owned or franchised by them. The company intends to use these outlets to
make new loans and provide payment services in respect of existing loans. M&MFSL
(Mahindra & Mahindra Financial Services Ltd.) operates in various locations of the
country to have a faster response to the needs of all customers for finance and in
particular the Dealers & Customers for M&M products.

MMFSL has 398 branches (as on 31st Dec 2006) servicing its customers.

As their geographical reach and market penetration have expanded, so too have their
Loan Assets, which grew from Rs. 11,702.1 million as of March 31, 2003 to Rs.
17,106.3 million as of March 31, 2004, to Rs. 26,310.6 million as of March 31, 2005
and to Rs. 36,628.7 million as of December 31, 2005. As of December 31, 2005, their
net NPA constituted 3.7% of Total Assets.

Their total income increased from Rs. 2,459.6 million for Fiscal 2003 to Rs. 4,047.6 million for
Fiscal 2005 at a compound annual growth rate of 28.3% during the same period their profit
after tax increased from Rs. 441.8 million to Rs. 822.7 million at a compound annual growth
rate of 36.5%. As of December 31, 2005 their total income was Rs. 3,983.0 million, their profit
after tax was Rs. 610.7 and they had Rs. 4,026.1 million of share capital and reserves.

In May 2004, as a supplement to their lending business they started an insurance broking
business through their wholly owned subsidiary, Mahindra Insurance Brokers Limited. During
Fiscal 2005, in its first year of operations, MIBL earned an income of Rs 34.4 million and
achieved a profit after tax of Rs. 17.3 million.

CHART SHOWING THE ESTIMATED VALUE OF ASSETS

 Source: www.mahindrafinance.com

The above chart shows the estimated value of assets and in the year 2006 it was
4478(cr).

CHART SHOWING THE GROWTH IN INCOME

The above chart shows the growth income of the company from 2002-2006.It showed
an increasing trend with 596 crore in 2006.The companies income pattern shows a
favorable trend which indicates the effective management of the organization with loyal
customer community.
CHART SHOWING THE GROWTH IN PROFIT

Source: www.mahindrafinance.com

The above diagram shows the growth in income from the year 2002 to 2006.Both profit
before tax and profit after tax shows an increasing trend. It shows that the company is
having a sound financial position.

CHART SHOWING THE EPS

Source: www.mahindrafinance.com

The above diagram shows that the eps basic as well as diluted shows an increasing
trend from the year 2002-2006

CHART SHOWING THE TOTAL ASSETS

 Source: www.mahindrafinance.com

The above diagram shows an increasing trend in the total assets from 2002-2006.

Source: www.mahindrafinance.com

Products

1. Tractors
2. Mahindra Utility Vehicles
3. Mahindra Light Commercial Vehicles
4. Cars
5. Three Wheelers
6. Used Vehicles
7. Other Services
o Mutual Fund Distribution

Mahindra Finance also provides other services like mutual fund distribution and
financial advisory services. Mahindra Finance with due permissions from RBI,
distributes Mutual Fund products through its network and thus contributes to the asset
allocations of its customers while participating in their liability requirements as well.
 SECTION 5

A BRIEF INTRODUCTION AND COMPARATIVE ANALYSIS

OF

BIRLA SUN LIFE EQUITY GROWTH FUND

&

HDFC GROWTH FUND

CHAPTER 12 AN INTRODUCTION TO BIRLA

SUN LIFE EQUITY GROWTH FUND

About the fund

Birla Sun Life Equity Fund is a diversified equity fund enabling investors to capitalize on the
immense growth opportunities provided by the stock market while at the same time minimizing
the risk.

Launched in August 1998 (as Alliance Equity Fund and subsequently taken over by Birla
Mutual Fund on Sep 24, 2005), the fund is an open-ended growth scheme with a Multicap
theme. It dynamically shifts weightages between large-cap and mid-cap stocks depending on
the market outlook.

Significant portion of the scheme is invested in sectors with high growth prospects. Additional
focus is kept in identifying sunrise industries / concept stocks. The large in-house research
team is especially helpful in identifying such stocks. The fund also takes medium-term bets on
certain sectoral trends to ride on the growth momentum.

The Fund invests in a wide cross-section of sectors thereby offering adequate diversification to
investors.

Fund Performance Comparison

BIRLA SUN LIFE EQUITY 1 Year 3 Years 5 Years Since

FUND - GROWTH Inception
BIRLA SUN LIFE EQUITY 0.61% 30.17% 46.54% 35.82%
FUND - GROWTH
(NAV: Rs. 202.18)
BSE 200 4.85% 27.05% 33.13% 19.91%

Inception - 27-Aug-1998.

Returns calculated for Growth option as on 30-May-2008. Returns are CAGR for 1 year or
more and absolute for less than 1 year. Past performance may or may not be sustained in the
future. Load has not been considered for computation of returns.

Fund Performance Simulator

The below graph simulates the values of Rs.1 Lac invested in the above scheme and its
benchmark index.
Relative Performance on a base of 1 lac starting 20-Jun-2003. Performance as on 19-Jun-
2008. Rs 1 lac invested on 20-Jun-2003 in BIRLA SUN LIFE EQUITY FUND -
GROWTH is worth Rs. 680962 as on 19-Jun-2008. A similar investment in the benchmark
would have been worth Rs. 418480. Past performance may or may not be sustained in future.

NAV Movement

SIP Performance Simulator

The below table simulates the values of Rs.1000 invested systematically in the above scheme
and its benchmark indices.

BIRLA SUN LIFE EQUITY FUND - GROWTH

Investment Period Total Value (Rs.) of SIP in Returns (%)

Investment BSE 200 Birla Sun BSE 200 Birla Sun
(Rs.) Life Equity Life Equity
 Fund * Fund *
Since Inception 118000 381004.7 636474.77 22.79 32.94
Last 5 years 60000 108005.25 132074.69 24.19 32.58
Last 3 years 36000 44202.04 44691.28 14.27 14.88
Last 1 year 12000 10460 10209.08 -25.09 -27.95

Returns as on 19-Jun-2008. Inception Date: 27-Aug-1998.

Last monthly SIP installment date assumed to be the above date (or the previous day when
NAV was declared if the above day is not a working day). Returns are CAGR for 1 year or
more and absolute for less than 1 year.

Past performance may or may not be sustained in the future. Load & taxes have not been
considered for computation of returns.

* CAGR Returns are computed after accounting for the cash flow by using the XIRR method
(investment internal rate of return)
 CHAPTER
13
AN INTRODUCTION
TO HDFC GROWTH FUND

Investment Objective

The primary investment objective of the Scheme is to generate long term capital appreciation
from a portfolio that is invested predominantly in equity and equity related instruments.

Basic Scheme Information

Nature of Scheme Open Ended Growth Scheme

Inception Date September 11, 2000
Option/Plan Dividend Plan,Growth Plan. The Dividend Plan offers
Payout and Reinvestment Facility.
Entry Load Application routed through any distributor/agent/b
(as a % of the Applicable NAV)
(Other than Systematic Investment Plan (SIP)/ Systematic 
Transfer Plan (STP)) respect of each purchase / switch-in of Units le
crore in value, an Entry Load of 2.25% is paya

respect of each purchase / switch-in of Units e
greater than Rs.5 crore in value, no Entry Load

Application not routed through any distributor/ag

Nil

Exit Load 
(as a % of the Applicable NAV) respect of each purchase / switch-in of Units le
(Other than Systematic Investment Plan (SIP)/ Systematic Crore in value, an Exit Load of 1% is payable
Transfer Plan (STP)) redeemed / switched-out within 1 year from th
allotment.


respect of each purchase / switch-in of Units e
greater than Rs. 5 Crore in value, no Exit Load
Minimum Application Amount For new investors :Rs.5000 and any amount thereafter
(Other than Systematic Investment Plan (SIP)/ Systematic For existing investors : Rs. 1000 and any amount ther
Transfer Plan (STP))

Lock-In-Period Nil
Net Asset Value Periodicity Every Business Day.
Redemption Proceeds Normally despatched within 3 Business days
Tax Benefits Please click for details
(As per present Laws)

Plan Name NAV Date NAV Amount

Dividend Plan 19 Jun 2008 29.3710
Growth Plan 19 Jun 2008 59.6370

Investment Pattern

The corpus of the Scheme will be invested primarily in equity and equity related instruments.
The Scheme may invest a part of its corpus in debt and money market instruments, in order to
manage its liquidity requirements from time to time, and under certain circumstances, to
protect the interests of the Unit holders.

The asset allocation under the Scheme will be as follows :

Sr.No. Type of Instruments Normal Allocation Normal Deviation Risk Profile

(% of Normal
(% of Net Asset) Allocation)
1 Equity & Equity related 80 - 100 0 Medium to
instruments High
2 Debt Securities, Money 0 - 20 0 Low to
Market instruments & Cash Medium

(including money at call)

Pending deployment of funds of the Scheme in securities in terms of the investment objective
of the Scheme, the AMC may invest the funds of the Scheme in short term deposits of
scheduled commercial banks.

Investment Strategy

The investment approach will be based on a set of well established but flexible principles that
emphasise the concept of sustainable economic earnings and cash return on investment as the
means of valuation of companies.

Five basic principles serve as the foundation for this investment approach. They are as
follows :
 • Focus on the long term
There is substantive empirical evidence to suggest that equities provide the maximum
risk adjusted returns over the long term. In an attempt to take full advantage of this
phenomenon, investments would be made with a long term perspective.
• Investments confer proportionate ownership
The approach to valuing a company is similar to making an investment in a business.
Therefore, there is a need to have a comprehensive understanding of how the business
operates. The key issues to focus on are growth opportunities, sustainable competitive
advantage, industry structure and margins and quality of the management.
• Maintain a margin of safety
The benchmark for determining relative attractiveness of stocks would be the intrinsic
value of the business. The Investment Manager would endeavor to purchase stocks that
represent a discount to this value, in an effort to preserve capital and generate superior
growth.
• Maintain a balanced outlook on the market
The investment portfolio would be regularly monitored to understand the impact of
changes in business and economic trend as well as investor sentiment. While short-

term market volatility would affect valuations of the portfolio, this is not expected
to influence the decision to own fundamentally strong companies.

• Disciplined approach to selling

The decision to sell a holding would be based on either the anticipated price
appreciation being achieved or being no longer possible due to a change in fundamental
factors affecting the company or the market in which it competes, or due to the
availability of an alternative that, in the view of the Investment Manager, offers
superior returns.

In order to implement the investment approach effectively, it would be important to

periodically meet the management face to face. This would provide an understanding of their
broad vision and commitment to the long-term business objectives. These meetings would also
be useful in assessing key determinants of management quality such as orientation to minority
shareholders, ability to cope with adversity and approach to allocating surplus cash flows.
Discussion with management would also enable benchmarking actual performance against
stated commitments.

In summary, the Investment Strategy is expected to be a function of extensive research and

based on data and reasoning, rather than current fashion and emotion. The objective will be to
identify "businesses with superior growth prospects and good management, at a reasonable
price".

The Scheme may invest in listed / unlisted and/or rated / unrated debt or money market
securities subject to limits indicated in the investment pattern. Investment in unrated debt
securities will be made after obtaining the prior approval of the Board of the AMC and
Trustees as per the SEBI Regulations.

The Scheme may invest in listed / unlisted and / or rated / unrated debt or money market
securities subject to limits indicated in the investment pattern. Pursuant to SEBI Circular No.
MFD/ CIR/9/120/2000 dated November 24, 2000, the AMC may constitute

committee(s) to approve proposals for investments in unrated debt instruments. The AMC
Board and the Trustee shall approve the detailed parameters for such investments. The details
of such investments would be communicated by the AMC to the Trustee in their periodical
reports. It would also be clearly mentioned in the reports, how the parameters have been
complied with. However, in case any unrated debt security does not fall under the parameters,
the prior approval of Board of AMC and Trustee shall be sought.

Fund Manager:-

Mr Srinivas Rao Ravuri

Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

Portfolio – Top 10 Holdings (as on April 30, 2008)

Company Industry % to NAV
Equity & Equity Related
Reliance Industries Ltd. Petroleum Products 7.93
ITC Ltd. Consumer Non Durables 6.54
State Bank of India Banks 5.23
Divi?s Laboratories Ltd. Pharmaceuticals 4.84
ICICI Bank Ltd. Banks 4.08
Bharti Airtel Ltd. Telecom - Services 4.04
Housing Development Finance Corporation Ltd.$ Finance 3.89
Bharat Heavy Electricals Ltd. Industrial Capital Goods 3.66
Biocon Ltd. Pharmaceuticals 3.12
Sun Pharmaceutical Industries Ltd. Pharmaceuticals 2.97
Total of Top Ten Equity Holdings 46.30
Total Equity Related Holdings 86.18
Other Current Assets (Including Reverse Repos' / CBLO) 13.82
Grand Total 100.00
Net Assets (Rs. In Lakhs) 97580.44
Portfolio Holdings

Returns

HDFC Growth (NAV as at evaluation date, Rs. Per 62.813

Fund unit)
Date Period NAV Returns(%) $$ Benchmark
^ Returns(%)#
March 30, 2007 Last 427 days 45.461 31.83** 21.49**
November 30, Last Six months (182 days) 74.895 -16.13* -15.22*
2007
May 30, 2007 Last 1 Year (366 days) 52.3840 19.85** 13.87**
May 30, 2005 Last 3 Years (1096 days) 25.332 35.31** 35.02**
May 30, 2003 Last 5 Years (1827 days) 9.583 45.59** 38.8**
May 29, 1998 Last 10 Years (3654 days) N.A N.A. 16.09**
September 11, Since Inception (2818 10.000 26.87** 17.6**
2000 days)

* Absolute Returns ** Compounded Annualised Returns # SENSEX

~ Due to an over all sharp rise in the stock prices
^ Past performance may or may not be sustained in the future
SIP Returns

SIP Investments Since Inception 5 Year 3 Year 1 Year

Total Amount Invested (Rs.) 93,000.00 60,000.00 36,000.00 12,000.00
Market Value as on May 30, 2008 396.83 141.54 52.84 11.74
Returns (Annualised)*% 36.55% 35.20% 26.64% -3.94%
Benchmark Returns (Annualised) (%) # 28.21% 30.33% 22.66% -4.60%

Past performance may or may not be sustained in the future

• Load is not taken into consideration and the Returns are of Growth Plan / Option.
Investors are advised to refer to the Relative Performance table furnished as above for
non-SIP return.

NAV Movement

CHAPTER 14 COMPARATIVE ANALYSIS

Launch Category Rating Risk Return 1 year Expense

Fund Name Date grade Grade return Ratio
Birla Sun Life Aug- Equity: Avg. Above 1.33 1.98
Equity 1998 Diversified Avg.

HDFC Growth Aug- Equity: Below Avg. 6.26 2.10

2000 Diversified Avg.

Snapshot:- Both the funds are performing equally well and are rated same in the mutual fund
industry. As the returns for the Birla Sun life equity growth fund is above average compared to
its above average risk profile and HDFC growth fund is giving average returns with an average
risk profile. Both these funds are good options to invest. Since there is not a much difference in
the expense ratio of both the funds they both are actively managed funds. But the expense ratio
of both the funds is slightly greater than the average industry expense ratio of 1.5%.
Fund 1- 1- 6- 6- 1-Year 1-Year 3-Year 3-Year 5-Year 5-Year
Name Month Month Month Month Return Rank Return Rank Return Rank
Return Rank Return Rank (%) (%) (%)
(%) (%)
HDFC -11.87 58/205 -23.83 36/190 6.26 35/170 31.68 21/111 41.15 21/61
Growth
Birla -12.42 78/205 -28.42 89/190 1.33 64/170 29.96 31/111 46.63 7/61
Sun
Life
Equity

Performance Analysis:- HDFC growth fund has performed better when short term returns are
considered whereas 5 year returns show that Birla Sun life equity growth fund has given
greater returns. Whenever investing in mutual funds it is always advised to invest for longer
period because mostly funds give negative returns in shorter period. Looking at the

return profiles of both the funds HDFC is ranked 21 out of 61 mutual funds in the same
category for 5 year whereas Birla Sun Life Equity fund is ranked 7.

Portfolio:-

Fund Fund P/E Ratio P/B Ratio Market Turnover(%) Assets Top 5
Name Style Cap (Rs Cr) Holdings
(Rs Cr) (%)
Birla Sun 30.34 4.98 25,523.67 138.00 1,237.85 20.80
Life
Equity
HDFC 23.82 6.20 20,396.28 66.55 975.80 28.62
Growth

Risk & Volatility:-

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions or
a result of excess risk. This measurement is very useful because although one portfolio or fund
can reap higher returns than its peers, it is only a good investment if those higher returns do not
come with too much additional risk. The greater a portfolio's Sharpe ratio, the better its risk-
adjusted performance has been. It is calculated using the formula-
Alpha- It is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price
risk) of a mutual fund and compares its risk-adjusted performance to a benchmark

index. The excess return of the fund relative to the return of the benchmark index is a fund's
alpha. A positive alpha of 1.0 means the fund has outperformed its benchmark index

by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

R- Squared- A statistical measure that represents the percentage of a fund or

security's movements that can be explained by movements in a benchmark index.

R-squared values range from 0 to 100. An R-squared of 100 means that all movements of
a security are completely explained by movements in the index. A high R-squared (between 85
and 100) indicates the fund's performance patterns have been in line with the index. A fund
with a low R-squared (70 or less) doesn't act much like the index.

A higher R-squared value will indicate a more useful beta figure. For example, if a fund has an
R-squared value of close to 100 but has a beta below 1, it is most likely offering higher risk-
adjusted returns. A low R-squared means you should ignore the beta.

Beta- Beta measures the responsiveness of a security to movements in the market portfolio.

Fund Name Fund risk Standard Sharpe Beta Alpha R-Squared

grade Deviation Ratio

Birla Sun Life Avg. 26.82 1.07 1.00 2.02 0.88

Equity

HDFC Growth Below 24.27 1.17 0.91 4.11 0.89

Avg.
Investment Details:-

Fund Expense Front-End Back-End CDSC Mim Portfolio Tenure

Name Ratio % Load % Initial Manager (Yrs.)
Load % Inv. (Rs)
Birla Sun 1.98 2.25 0.00 Yes 5,000 Mahesh 3
Life Equity Patil
HDFC 2.10 2.25 0.00 Yes 5,000 Srinivas 2
Growth Rao Ravuri

NAV Details:-

Fund NAV As on Chg. from 52 Weeks As on 52 Weeks As On

Name previous High Low
Birla Sun 202.18 Jun 19, -4.02 315.96 Jan 4, 2008 198.65 Jun 10,
Life 2008 2008
Equity-G
HDFC 57.54 Jun 20, -2.09 82.13 Jan 7, 2008 53.97 Aug 23,
Growth-G 2008 2007
 SECTION 6

FINDINGS

RECOMMENDATIONS

&

CONCLUSIONS

FINDINGS

• Globalisation of the financial market has led to a manifold increase in the investment.
• The rate of return from the mutual funds is higher when compared to the other
investment options. Thus this clearly shows that mutual funds are a better investment
avenue to trade off between risk and return.
• Presently, the mutual funds are playing a vital role in the capital market in India.
 • Indian capital market has a very large investor population and ever increasing volume
of investment in mutual funds.

Recommendations:

• It has to improve the liquidity in the market in terms of depth and breadth.
• It has to provide a fair, efficient and transparent market to investors using a electronic
communication network.
• An ideal portfolio should be one that synchronizes with the market as well as the
investors needs. It is thus very important for an advisor to understand the financial
goals of an investor in depth.
• Lastly, since there has been an increase in the cost of living, investors should start
saving early so as to get maximum returns. This can be easily achieved by an investor if
right investment is made in the right kind of mutual funds thus ensuring a portfolio of
mutual funds would help an investor to trade off between risk and return.
• The example of model portfolio has demonstrated that the appropriate mix of growth,
income and balanced funds will give positive returns in accordance with the investor’s
objectives.
• The models based on safety, income, aggressive growth, income and moderate growth,
balanced growth and maximum growth have been designed to suit investors with
different profiles. This certainly proves that mutual funds help to get better returns by
optimizing risk.
Conclusions:

It is examined that investment performance of Indian Mutual funds in terms of performance

measure, some funds show conformity with the linear relationship of return and risk. Some
funds don’t demonstrate this relationship. However some funds exhibited superior performance
in terms of systematic risk but did not do so in respect of total risk.

Saving money is not enough. Each of us also need to invest one’s savings intelligently in order
to have enough money available for funding the higher education of one’s children, for buying
a house, or for one’s own golden years.

The study will guide the new investor who wants to invest in equity and mutual fund schemes
by providing knowledge about how to measure the risk and return of particular scrip or mutual
fund scheme. The study recommends new investors to go for mutual funds rather than equities,
because of high risk and market instability.
BIBLIOGRAPHY

WEBSITES

• www.amfiindia.com

• www.bseindia.com

• www.mutualfundindia.com

• www.investopedia.com

• www.google.com

• www.valueresearchonline.com

• www.myiris.com

• www.moneycontrol.com

• www.hdfc.com

• www.birlasunlife.com
 • www.nseindia.com

• www.mahindrafinance.com

JOURNAL

• Value Research Online