PREFACE

MBA is a stepping-stone to the management carrier and to develop good manager it is necessary that the theoretical must be supplemented with exposure to the real environment. Theoretical knowledge just provides the base and its not sufficient to produce a good manager thats why practical knowledge is needed. Therefore the research product is an essential requirement for the student of MBA. This research project not only helps the student to utilize his skills properly learn field realities but also provides a chance to the organization to find out talent among the budding managers in the very beginning. In accordance with the requirement of MBA course I have summer training project on the topic Comparitive Analysis of Mutual funds and Ulips. The main objective of the research project was to study the two instruments and make a detailed comparison of the two. For conducting the research project sample size of 50 customers of SBIMF and SBOP was selected. The information regarding the project research was collected through the questionnaire formed by me which was filled by the customers there.

INDUSTRY PROFILE
The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Yet it has been the subject of perhaps the most elaborate and prolonged regulatory effort in the history of the country. A little history: The mutual fund industry started in India in a small way with the UTI Act creating what was effectively a small savings division within the RBI. Over a period of 25 years this grew fairly successfully and gave investors a good return, and therefore in 1989, as the next logical step, public sector banks

and financial institutions were allowed to float mutual funds and their success emboldened the government to allow the private sector to foray into this area. The initial years of the industry also saw the emerging years of the Indian equity market, when a number of mistakes were made and hence the mutual fund schemes, which invested in lesser-known stocks and at very high levels, became loss leaders for retail investors. From those days to today the retail investor, for whom the mutual fund is actually intended, has not yet returned to the industry in a big way. But to be fair, the industry too has focused on brining in the large investor, so that it can create a significant base corpus, which can make the retail investor feel more secure. The Indian MF industry has Rs 5.67 lakh crore of assets under management. As per data released by Association of Mutual Funds in India, the asset base of all mutual fund combined has risen by 7.32% in April, the first month of the current fiscal. As of now, there are 33 fund houses in the country including 16 joint ventures and 3 whollyowned foreign asset managers. According to a recent McKinsey report, the total AUM of the Indian mutual fund industry could grow to $350-440 billion by 2012, expanding 33% annually. While the revenue and profit (PAT) pools of Indian AMCs are pegged at $542 million and $220 million respectively, it is at par with fund houses in developed economies. Operating profits for AMCs in India, as a percentage of average assets under management, were at 32 basis points in 2006-07, while the number was 12 bps in UK, 17 bps in Germany and 18 bps in the US, in the same time frame.

Major players in Indian mutual fund industry and their AUM

Mutual Fund Name No. of Schemes*
As on Corpus

ABN AMRO M F 337

July 31, 2008 7803 AIG GlobalM F 54 July 31, 2008 3513 SBI Mutual Fund 177 July 31, 2008 29151.00 Birla Mutual Fund 343 July 31, 2008 37497.00 BOB Mutual Fund 22 July 31, 2008 56.00 Canara Robeco Mutual Fund 54 July 31, 2008 4576.00 DBS Chola Mutual Fund 80 July 31, 2008 1853.00 Deutsche Mutual Fund 187 July 31, 2008 10792.00 DSP Merrill Lynch Mutual Fund 211 Feb 29, 2008 19483.00 Escorts Mutual Fund 26 Feb 29, 2008 177.00 Fidelity Mutual Fund 39 Mar 31, 2008 7464.00 Franklin Templeton Investments 230 July 31, 2008 24441.00 HDFC Mutual Fund 371 July 31, 2008 50,752.0 0 HSBC Mutual Fund 221 July 31, 2008 16,385.0 0 ICICI Prudential Mutual Fund 431 July 31, 2008 55,161.0 0 ING Mutual Fund 262 July 31,

2008 7091.00 JPMorgan Mutual Fund 9 July 31, 2008 3054.00 Kotak Mahindra Mutual Fund 185 July 31, 2008 18,782.0 0 LIC Mutual Fund 112 July 31, 2008 17,499.0 0

Lotus India Mutual Fund 216 July 31, 2008 7831.00 Morgan Stanley Mutual Fund 3 July 31, 2008 2,814.00 PRINCIPAL Mutual Fund 151 July 31, 2008 11,359.00 Quantum Mutual Fund 6 July 31, 2008 66.00 Reliance Mutual Fund 345 July 31, 2008 84,564.0 0 Sahara Mutual Fund 45 July 31, 2008 175.00 Mirae asset mutual fund 255 July 31, 2008 2546.00 Sundaram Mutual Fund 219 July 31, 2008 11,898.00 Tata Mutual Fund 389 July 31, 2008 20,443.0 0 Taurus Mutual Fund 14 July 31, 2008 289.00 UTI Mutual Fund

315 July 31, 2008 46,120.0 0

HISTORY OF MUTUAL FUND

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases: -

First Phase 1964-87

An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 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 Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund

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 Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund

Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which h ad in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

INTRODUCTION
ABOUT SBI MUTUAL FUND
SBI Funds Management is a joint venture between State Bank of India, the countrys largest bank and Societe Generale Asset Management (France), one of the worlds leading fund management companies. With over 20 years of rich experience in fund management, SBI Funds Management Pvt. Ltd. Is one of the largest investment management firms in India managing investment mandates of over 46 Lakh investors. With a network of over 130 points of acceptance spread across India our vast family of investors in expanding faster and further. SBI Mutual Fund has won the prestigious CNBC TV 18 Crisil Mutual Fund of the year Award 2007, apart from winning five awards for scheme performance. SB Mutual Fund has also won the Most Preferred Brand of Mutual Fund at the CNBC Awaaz Consumer Awards in 2006 and 2007. But above all, it is the trust of over 46 Lakh investors that eggs us on deliver innovative and stable investment services, day after day. It is the driving force for our team of investment experts to develop arid deliver products that help investors like you achieve their financial objectives.

THE CONCEPT AND ROLE OF MUTUAL FUNDS

2 MUTUAL FUNDS OPPORTUNITY

Most appropriate investment opportunity for small un estors.

Birth of Mutual Funds U. S. A.

Good Alternative to Direct Investing.

Size in USA> Bank Deposits.

Financial Intermediary.

UTI only player between 1964 87.

Helps in the wowth of Capital Markets. CONCEPT OF MUTUAL FUND A common pool of money into which investors place their contributions to be invested in accordance with a stated objective

The ownership of the fund is joint or mutual.

The fund belongs to all investors.

Ownership is proportionate to contribution made by one. ADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS OVER DIRECT INVESTMENTS

Portfolio Diversification

Professional Management

Reduction / Diversification of Risk

Liquidity

Flexibility & Convenience

Reduction in Transaction cost

Safety of regulated environment 3 DISADV&NTAUES OF INVESTING THROUGH MUTUAL FUNDS OVER DIRECT INVESTMENTS

No control over cost

No Tailor made portfolios

Managing a Portfolio funds. DISADV&NTAUES OF INVESTING THROUGH MUTUAL FUNDS OVER DIRECT INVESTMENTS

No control over cost

No Tailor made portfolios

Managing a Portfolio funds. INDUSTRY PROFILE ASSETS UNDER MANAGEMENT (Rs. In Crs) TYPES OF MUTUAL FUND Mutual fluids can be classified as:

Close ended / Open ended funds

Load fund I No-load funds

Tax-exempt / Non-tax exempt funds

CLOSE ENDED FUNDS Close ended fund:

o

Initial public offer

o

Investor cannot buy units later on from NW

o

Get listed on the stock exchange

o

Traded on stock exchange at a discount / premium to NAy

o

Redemption of units on expiry date

o

Unit capital constant

o

Close ended funds may allow buy back of units option OPEN ENDED FUNDS OPEN ENDED FUND:
o

Units available for sale / purchase at all times at NAV based prices
o

Units capital variable

o

Fresh subscriptions may be discontinued

o

Any time redemptions always allowed, except .when there is lock in period. LOAD FUNDS Load is one time fee payable by the investor when they enter / exit an open-eiided scheme. Loads are charged to recover initial issue expenses including 5

EXAMPLE ON LOADS AND RETURNS ROI without loads

Amount invested = Rs. 11 Amount received = Rs. 12 Gain = Rs.1 ROI =(1 x 100)/11 = 9.09%

CONTINGENT DEFERRED SALES CHARGE (CDSC)

Exit Charge may vary depending upon the holding period.

if Exit Charge varies with the holding period it is called contingent

deferred sales charge (CDSC) and it may vary as shown under.

Redemption during the first five years from the date of purchase

MUTUAL FUNDS CLASSIFIED ASP CLASS (NATURE) OF INVESTMENTS

Equity Funds

ANOTHER REORT

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ECONOMIC ENVIRONMENT
GROWTH OF MUTUAL FUND INDUSTRY IN INDIA

While the Indian mutual fund industry has grown in size by about 320% from March, 1993 (Rs. 470 billion) to December, 2004 (Rs. 1505 billion) in terms of AUM, the AUM of the sector excluding UTI has grown over 8 times from Rs. 152 billion in March 1999 to $ 148 billion as at March 2008.

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Though India is a minor player in the global mutual fund in dustry, its AUM as a proportion of the global AUM has steadily increased and has doubled over its levels in 1999. The growth rate of Indian mutual fund industry has been increasing for the last few years. It was approximately 0.12% in the year of 1999 an d it is noticed 0.25% in 2004 in terms of AUM as percentage of global AU M .
Some facts for the growth of mutual funds in India

100% growth in the last 6 years.

Number of foreign AMCs is in the queue to enter the Indian markets.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.

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

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Recent trends in mutual fund industry

The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by the nationalized banks and smaller private sector players.
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TECHNOLOGICAL ENVIRONMENT IMPACT OF TECHNOLOGY

Mutual fund, during the last one decade brought out several innovations in their products and is offering value added services to their investors. Some of the value added services that are being offered are:

Electronic fund transfer facility.

Investment and re-purchase facility through internet.

Added features like accident insurance cover, mediclaim etc.

Holding the investment in electronic form, doing away with the traditional form of unit certificates.

Cheque writing facilities.

Systematic withdrawal and deposit facility.

ONLINE MUTUAL FUND TRADING

The innovation the industry saw was in the field of distribution to make it more easily accessible to an ever increasing number of investors across the country. For the first time in India the mutual fund start using the automated trading, clearing and set tlement system of stock exchanges for sale and repurchase of open -ended de-materialized mutual fund units.

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Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were options introduced which have come in very handy for the investor to maximize their returns from their investments. SIP ensures that there is a regular investment that the investor makes on specified dates making his purchases to spread out reducing the effect of the short term volatility of markets. SWP was designed to ensure that investors who wanted a regular income or cash flow from their investments were able to do so with a pre - defined automated form. Today the SW facility has come in handy for the investors to reduce their taxes.

LEGAL AND POLITICAL ENVIRONMENT

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)

With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non -profit organization. Association of Mutual Funds in India (AMFI) was incorporated on 22 nd August 1995. AMFI is an apex body of all Asset Management Companies (AMC), which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of board of directors. AMFI has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and p romoting the interest of mutual funds as well as their unit holders .
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Systematic Investment Plan (SIP) and Systematic Withdrawal Plan (SWP) were options introduced which have come in very handy for the investor to maximize their returns from their investments. SIP ensures that there is a regular investment that the investor makes on specified dates making his purchases to spread out reducing the effect of the short term volatility of markets. SWP was designed to ensure that investors who wanted a regular income or cash flow from their investments were able to do so with a pre - defined automated form. Today the SW facility has come in handy for the investors to reduce their taxes.

LEGAL AND POLITICAL ENVIRONMENT

ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI)
With the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non -profit organization. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August 1995. AMFI is an apex body of all Asset Management Companies (AMC), which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of b oard of directors. AMFI has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interest of mutual funds as well as their unit holders .
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It has been a forum where mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. The association was created originally as a body that would lobby with the regulator to ensure that the fund viewpoint was heard. Today, it is usually the body that is consulted on matters long before regulations are framed, and it often initiates many regulatory changes that prevent malpractic es that emerge from time to time. AMFI works through a number of committees, some of which are standing committees to address areas where there is a need for constant vigil and improvements and other which are adhoc committees constituted to address specific issues. These committees consist of industry professionals from among the member mutual funds. There is now some thought that AMFI should become a self-regulatory organization since it has worked so effectively as an industry body.
OBJECTIVES:

To define and maintain high professional and ethical standards in all areas

of operation of mutual fund industry To recommend and promote best business practices and code of conduct

to be followed by members and others engaged in the activities of mutual fund and asset management including agencies connected or involved in the field of capital markets and financial services. To interact with the Securities and Exchange Board of India (SEBI) and to

represent to SEBI on all matters concerning the mutual fund industry. To represent to the Government, Reserve Bank of India and other bodies

on all matters relating to the Mutual Fund Industry.

15

To develop a cadre of well trained Agent distributors and to implement a

programme of training and certification for all intermediaries and other

engaged in the industry. To undertake nation wide investor awareness programme so as to

promote proper understanding of the concept and working of mutual funds. To disseminate information on Mutual Fund In dustry and to undertake

studies and research directly and/or in association with other bodies.

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MEMBERS O F AMFI:
o

Bank Sponsored 1. Joint Ventures - Predominantly Indian

1. Canara Robeco Asset Management Company Limited 2. SBI Funds Management Private Limited
2. Others

1. Baroda Pioneer Asset Management Company Limited 2. UTI Asset Management Company Ltd
o

Institutions

1. LIC Mutual Fund Asset Management Company Limited

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MEMBERS O F AMFI:

Bank Sponsored 1. Joint Ventures - Predominantly Indian

1. Canara Robeco Asset Management Company Limited 2. SBI Funds Management Private Limited
2. Others

1. Baroda Pioneer Asset Management Company Limited 2. UTI Asset Management Company Ltd
o

Institutions

1. LIC Mutual Fund Asset Management Company Limited

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o

Private Sector 1. Indian

1. Benchmark Asset Management Company Pvt. Ltd. 2. DBS Cholamandalam Asset Management Ltd. 3. Deutsche Asset Management (India) Pvt. Ltd. 4. Edelweiss Asset Management Limited 5. Escorts Asset Management Limited 6. IDFC Asset Management Company Private Limited 7. JM Financial Asset Management Private Limited 8. Kotak Mahindra Asset Management Company Limited(KMAMCL) 9. Quantum Asset Management Co. Private Ltd. 10. Reliance Capital Asset Management Ltd. 11. Sahara Asset Management Company Private Limited 12. Tata Asset Management Limited 13. Taurus Asset Management Company Limited

REGISTRATION OF MUTUAL FUND:

Application for registration 1. An application for registration of a mutual fund shall be made to the Board in Form A by the sponsor. Application fee to accompany the application 2. Every application for registration under regulation 3 shall be accompanied by nonrefundable application fee as specified in the Second Schedule. Application to conform to the requirements 3. An application which is not complete in all respects shall be liable to be rejected: Provided that, before rejecting any such application, the applicant shall be given an opportunity to complete such formalities within such time as may be specified by the Board. Furnishing information 4. The Board may require the sponsor to furnish such further information or clarification as may be required by it. Eligibility criteria 5. For the purpose of grant of a certificate of registration, the applicant has to fulfill the following, namely : (a) the sponsor should have a sound track record and general reputation of fairness and

integrity in all his business transactions. Explanation : For the purposes of this clause sound track record shall mean the sponsor should, (i) be carrying on business in financial services for a period of not less than five

years; and (ii) the networth is positive in all the immediately preceding five years; and

(iii) the networth in the immediately preceding year is more than the capital contribution of the sponsor in the asset management company; and (iv) the sponsor has profits after providing for depreciation, interest and tax in three out of the immediately preceding five years, including the fifth year; (b) in the case of an existing mutual fund, such fund is in the form of a trust and the trust deed has been approved by the Board; (c) the sponsor has contributed or contributes at least 40% to the net worth of the asset management company: Provided that any person who holds 40% or more of the net worth of an asset management company shall be deemed to be a sponsor and will be required to fulfill the eligibility criteria specified in these regulations; (d) the sponsor or any of its directors or the principal officer to be employed by the mutual fund should not have been guilty of fraud or has not been convicted of an offence involving moral turpitude or has not been found guilty of any economic offence; (e) appointment of trustees to act as trustees for the mutual fund in accordance with the provisions of the regulations; (f) appointment of asset management company to manage the mutual fund and operate the scheme of such funds in accordance with the provisions of these regulations; (g) appointment of a custodian in order to keep custody of the securities10[or gold and gold related instruments and carry out the custodian activities as may be authorized by the trustees.

Consideration of application 8. The Board, may on receipt of all information decide the application. Grant of Certificate of Registration 9. The Board may register the mutual fund and grant a certificate in Form B on the applicant paying the registration fee as specified in Second Schedule. Terms and conditions of registration 10. The registration granted to a mutual fund under regulation 9, shall be subject to the following terms and conditions: (a) the trustees, the sponsor, the asset management company and the custodian shall comply with the provisions of these regulations; (b) the mutual fund shall forthwith inform the Board, if any information or particulars previously submitted to the Board was misleading or false in any material respect; (c) the mutual fund shall forthwith inform the Board, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by it; (d) payment of fees as specified in the regulations and the Second Schedule. Rejection of application 11. Where the sponsor does not satisfy the eligibility criteria mentioned in regulation 7, the Board may reject the application and inform the applicant of the same. Payment of annual service fee: 12. A mutual fund shall pay before the 15th April each year a service fee as specified in the Second Schedule for every financial year from the year following the year of registration: Provided that the Board may, on being satisfied with the reasons for the delay permit the mutual fund to pay the service fee at any time before the expiry of two months from the commencement of the financial year to which such fee relates. Failure to pay annual service fee

13. The Board may not permit a mutual fund who has not paid service fee to launch any scheme.

CONSTITUTION AND MANAGEMENT OF ASSET MANAGEMENT COMPANY AND CUSTODIAN Application by an asset management company
14. (1) The application for the approval of the asset management company shall be made in Form D. (2) The provisions of regulations 5, 6 and 8 shall, so far as may be, apply to the application made under sub-regulation (1) as they apply to the application for registration of a mutual fund.

Appointment of an asset management company

15. (1) The sponsor or, if so authorised by the trust deed, the trustee, shall appoint an asset management company, which has been approved by the Board under subregulation(2) of regulation 21. (2) The appointment of an asset management company can be terminated by majority of the trustees or by seventy-five per cent of the unitholders of the scheme. (3) Any change in the appointment of the asset management company shall be subject to prior approval of the Board and the unitholders. Eligibility criteria for appointment of asset management company 16. (1) For grant of approval of the asset management company the applicant has to fulfill the following : (a) in case the asset management company is an existing asset management company it has a sound track record, general reputation and fairness in transactions. Explanation: For the purpose of this clause sound track record shall mean the networth and the profitability of the asset management company; (aa) the asset management company is a fit and proper person; (b) the directors of the asset management company are persons having adequate professional experience in finance and financial services related field and not found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws; (c) the key personnel of the asset management company27[have not been found guilty of moral turpitude or convicted of economic offence or violation of securities laws or worked for any asset management company or mutual fund or any intermediary
29[during

the period when its] registration has been suspended or cancelled at any time

by the Board; (d) the board of directors of such asset management company has at least fifty per cent directors, who are not associate of, or associated in any manner with, the sponsor or any of its subsidiaries or the trustees; (e) the Chairman of the asset management company is not a trustee of any mutual fund; (f) the asset management company has a networth of not less than rupees ten crores : Provided that an asset management company already granted approval under the provisions of Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 shall within a period of twelve months from the date of notification of these regulations increase its networth to rupees ten crores : Provided[further] that the period specified in the first proviso may be extended in appropriate cases by the Board up to three years for reasons to be recorded in writing :
Provided further that no new schemes shall be allowed to be launched or managed by such asset management company till the networth has been raised to rupees ten

crores. Explanation : For the purposes of this clause, networth means the aggregate of the paid up capital and free reserves of the asset management company after deducting therefrom miscellaneous expenditure to the extent not written off or adjusted or deferred revenue expenditure, intangible assets and accumulated losses. (2) The Board may, after considering an application with reference to the matters specified in sub-regulation (1), grant approval to the asset management company. Terms and conditions to be complied with 17. The approval granted under sub-regulation (2) of regulation 21 shall be subject to the following conditions, namely: (a) any director of the asset management company shall not hold the office of the director in another asset management company unless such person is an independent director referred to in clause (d) of sub-regulation (1) of regulation 21 and approval of the Board of asset management company of which such person is a director, has been obtained; (b) the asset management company shall forthwith inform the Board of any material change in the information or particulars previously furnished, which have a bearing on the approval granted by it; (c) no appointment of a director of an asset management company shall be made without prior approval of the trustees; (d) the asset management company undertakes to comply with these regulations; (e) no change in the controlling interest of the asset management company shall be made unless, (i) prior approval of the trustees and the Board is obtained; (ii) a written communication about the proposed change is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation and in a newspaper published in the language of the region where the Head Office of the mutual fund is situated; and (iii) the unitholders are given an option to exit on the prevailing Net Asset Value without any exit load;] (f) the asset management company shall furnish such information and documents to the trustees as and when required by the trustees. Procedure where approval is not granted 18. Where an application made under regulation 19 for grant of approval does not satisfy the eligibility criteria laid down in regulation 21, the Board may reject the application. Restrictions on business activities of the asset management company 19. The asset management company shall (1) not act as a trustee of any mutual fund; (2) not undertake any other business activities except activities in the nature of portfolio management services,] management and advisory services to offshore funds, pension funds, provident funds, venture capital funds, management of insurance funds,

financial consultancy and exchange of research on commercial basis if any of such activities are not in conflict with the activities of the mutual fund : Provided that the asset management company may itself or through its subsidiaries undertake such activities if it satisfies the Board that the key personnel of the asset management company, the systems, back office, bank and securities accounts are segregated activity-wise and there exist systems to prohibit access to inside information of various activities :
Provided further that asset management company shall meet capital adequacy requirements, if any, separately for each such activity and obtain separate approval, if necessary under the relevant regulations. (3) The asset management company shall not invest in any of its schemes unless full disclosure of its intention to invest has been made in the offer documents34[in case of schemes launched after the notification of these regulations : Provided that an asset management company shall not be entitled to charge any fees on its investment in that scheme.

Asset management company and its obligations

20. (1) The asset management company shall take all reasonable steps and exercise due diligence to ensure that the investment of funds pertaining to any scheme is not contrary to the provisions of these regulations and the trust deed. (2) The asset management company shall exercise due diligence and care in all its investment decisions as would be exercised by other persons engaged in the same business. (3) The asset management company shall be responsible for the acts of commission or omission by its employees or the persons whose services have been procured by the asset management company. (4) The asset management company shall submit to the trustees quarterly reports of each year on its activities and the compliance with these regulations. (5) The trustees at the request of the asset management company may terminate the assignment of the asset management company at any time:

custodian shall be entered into with the prior approval of the trustees.

CHARACTERISTICS OF MUTUAL FUNDS

The ownership is in the hands of the investors who have pooled in their funds.

It is managed by a team of investment professionals and other service providers.

The pool of funds is invested in a portfolio of marketable investments.

The investors share is denominated by units whose value is called as Net Asset Value (NAV) which changes everyday.

The investment portfolio is created according to the stated investment objectives of the fund.

ADVANTAGES OF MUTUAL FUNDS

The advantages of mutual funds are given below: -

Portfolio Diversification
Mutual funds invest in a number of companies. This diversification reduces the risk because it happens very rarely that all the stocks decline at the same time and in the same proportion. So this is the main advantage of mutual funds.

Professional Management
Mutual funds provide the services of experienced and skilled professionals, assisted by investment research team that analysis the performance and prospects of companies and select the suitable investments to achieve the objectives of the scheme.

Low Costs
Mutual funds are a relatively less expensive way to invest as compare to directly investing in a capital markets because of less amount of brokerage and other fees.

Liquidity
This is the main advantage of mutual fund, that is whenever an investor needs money he can easily get redemption, which is not possible in most of other options of investment. In open-ended schemes of mutual fund, the investor gets the money back at net asset value and on the other hand in close-ended schemes the units can be sold in a stock exchange at a prevailing market price.

Transparency
In mutual fund, investors get full information of the value of their investment, the proportion of money invested in each class of assets and the fund managers investment strategy

Flexibility
Flexibility is also the main advantage of mutual fund. Through this investors can systematically invest or withdraw funds according to their needs and convenience like regular investment plans, regular withdrawal plans, dividend reinvestment plans etc.

Convenient Administration
Investing in a mutual fund reduces paperwork and helps investors to avoid many problems like bad deliveries, delayed payments and follow up with brokers and companies. Mutual funds save time and make investing easy.

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

Well Regulated
All mutual funds are registered with SEBI and they function with in the provisions of strict regulations designed to protect the interest of investors. The operations of mutual funds are regularly monitored by SEBI.

DISADVANTAGES OF MUTUAL FUNDS

Mutual funds have their following drawbacks:

No Guarantees
No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell

Bond Funds Money Market Funds

MUTUAL FUNDS CLASSIFIED AS PER INVESTMENT OBJECTIVES

Growth Funds Income Funds Value Funds

MUTUAL FUNDS CLASSIFIED AS PER RISK PROFILES

High Risk Funds

Moderate Risk Funds

Low Risk Funds

RISK RETURN HEIRARCHY OF DIFFERENT FUNDS

Risk High Sector Funds Diversified Equity Funds Index Funds Balanced Funds Debt Funds 8

CHAPTER-II

FUND STRUCTURE AND CONSTITUENTS

MUTUAL FUND STRUCTURE

Mutual funds in U.S. are setup as investment companies

Mutual funds in UK. are either Unit Trusts (Trust) or Investment Trust (Companies)

Mutual funds are public trusts under the Indian Trusts Act, 1882

Mutual fund is a 3 tier structure:

o

Sponsor
o

Trustee and
o

AMC Mutual funds invest

o

In capital market instruments

o

On behalf of investors All gains and losses of funds are shared by the unit holders MF is a pass-through structure and it has tax implications

CONSTITUENTS OF A MUTUAL FUND

1. Sponsor 14

2. Trustees 3. Asset Management Company 4. Custodian / Depository Participant 5, R&T Agent 6. Distributors 7. Banker

ROLE OF SPONSOR
Sponsor is a person who sets up a Mutual Fund

Sponsor settles the Trust and executes Trust Deed

Sponsor contributes to the initial capital of the Trust

Sponsor appoints the Board of Trustees

Sponsor appoints Asset Management Company

Sponsor contributes minimum 40% of net worth of AMC

WHO CAN BE A SPONSOR?

Criteria of a Sponsor are
o

Positive net worth

o

Minimum 5 years track record

o

History of positive after tax profit for 3 out of 5 years including fifth year
o

Net worth more than contribution for AMC

o

Fit and Proper person 15

BOARD OF TRUSTEES & ROLE

Trustees appointed by the Sponsor with SEBI approval

At least two third trustees must be independent

The trustees have a fiduciary responsibility towards unit holders

Trustees not liable for acts done in good faith and if they have exercised adequate due diligence

Trustees oversee the functioning of AMC

Trustees approve each MF scheme floated by AMC

The investments in MFs are held by the trustees

Trustees receive fees for their services.

Obligation to undertake general & specific due diligence.

WHO CAN BE A TRUSTEE? Eligibility Conditions

Person of high repute and integrity

Not guilty of moral turpitude

Not convicted for economic offence under securities laws

Not a part of AMC e.g. Director, Employee or Officer of AMC 16

One can be trustee of two MFs if approved by Board of Trustees of both the mutual funds.

ASSET MANAGEMENT COMPANY

Constituted as a company under the Indian companies Act

Minimum Net worth of Rs.l0 crores for AMC

Minimum contribution of sponsor: 40% of share capital of AMC

At lest 50% of directors of AMC to be independent

AMC can do only the following businesses.

o

Asset management services

o

Portfolio management services

o

Portfolio Advisory services AMC can be terminated/changed with the consent of

o

Majority of Trustees or
o

At least 75% majority of unit holders

ROLE OF AMC
AMC is the fund Manager for managing Mutual fund Assets

AMC floats different MF schemes

AMC accountable to the Trustees

AMC charges Asset Management Fees subject to ceiling prescribed by SEBI. 17

Asset management Agreement between AMC and Trustee

OBLIGATIONS OF AMC
Limit of 5% of aggregate purchase and sales of securities under all its scheme per broker per quarter

As far as possible AMC to avoid services of its sponsor.

All security transactions with a sponsor and his associates to be disclosed.

Disclosure of transactions with a company which has invested more than 5% of NAV in any scheme.

CUSTODIAN / DEPOSITORY / PARTICIPANT

Custodian /DP:
o

Appointedby Board of Trustees

o

Keep record & account of securities I Investments

o

Collects benefits tinder securities

o

Sponsor & custodian I DP cannot be the same entity

o

Registered with RBI

REGISTRAR & TRANSFER AGENT

18

Registrar & Transfer Agent:

o

Issues, redeems, transfers units of MF schemes

o

Keeps unit holders accounts up to date

o

Registered with RB!

MERGER OF TWO AMCS Merger of 2AMCS:

o

Approval of Trustees of both AMCS required

o

SEBI approval required

o

Approval of High Court also required

o

Unit holders are informed and given option to exit without load

TAKE OVER OF AMC / SCHEME OF AMC

Take over of AMC by new sponsor
o

Trustees approval required

o

SEBI clearance required

o

Unit holder to be informed Merger of two schemes of different AMCS

o

Scheme of one mutual fund taken over by another mutual fund

Trustees approval required

SEBI approval required

Unit holders to be informed 19

FUND DISTRIBUTION & SALES PRACTICE

FUND DISTRIBUTION & SALES PRACTICE

WHO CAN INVEST IN A MUTUAL FUND SCHEME Residents

o

Resident Individuals / HUF

o

Indian companies
o

Partnership firms

Indian trusts/ Charitable institutions

o

Insurance companies
o

Banks
o

Financial Institutions
o

NBFC s
o

Provident funds
o

Mutual funds

Non residentso
NRI s & Persons of Indian origin
o

Overseas corporate bodies (OCB s) Foreign Entities

o

FII s registered with SEBI Foreign nationals cannot invest in MF

DIFFERENT DISTRIBUTION CHANNELS

1. Direct marketing by sales officers through a. Mailers

b. Call centers c. Branch networks

DISTRIBUTION CHANNELS TYPES

2. Individual agents as distributors and advisors 27

3. Institutional intermediaries
o

Fund distribution companies

o

Finance companies Investment Advisory companies

o

Banks and institutions

o

Post offices
o

Brokers and sub-brokers

o

Private sector MF prefer established fund distribution COS as fund distributors.

AMFI REGISTERED DISTRIBUTORS

AMFI Registration no.(ARN) card necessa before selling As on 3l/3/2005,
o

49837 candidates passed AMFI certification test

o

out of which 30028 candidates registered with AMFI Out of 30038 AMFI registered candidates,
o

Individuals are 24850

o

Corporate are 1946

o

Corporate employees are 3232

AGENTS COMMISSION
Commission can be paid upfront or trail commission Market practice 28

1.5 to 25% for Equity funds

o

0.25 to 1.25% for Debt funds

o

Still lower for liquid funds

o

Higher commission for ELSS AMFI has prohibited parting / sharing of commission (see AMFI Guidelines & Norms for Intermediaries [AGNI]. SEBI CIR of 2002. SEBI does not prescribe any ceiling on commission

PROCESS OF EFFECTIVE SELLING OF M F SCHEMES PRESCRIBED

FOR DISTRIBUTORS
Know the important characteristics of scheme

Know your client profile (age, risk tolerance, income level, etc.)

Understand clients needs (investment objective, return expectation,

o

cash flow requirement, etc.)

Assist in making the right choice

Encourage regular investment & commitment to invest

Personalized post sales service

AMFI CODE OF ETHICS FOR MFS

Funds to be managed in the interest of unit holders

Unit holders to be treated equally & fairly

Ensure meaningful disclosures

Avoid conflict of interest

Ensure segregate accounting 29

CHAPTER-V
Stick to ethical standards and fairness in dealings High standards of care, diligence, services and disclosure

announcements

SEBI ADVERTISEMENT CODE FOR MFS

No promises in the future without resources hacked guarantee

Standard measures to compare such as Annual Yield, CAGR etc.

Annualized yields for at least one, three, five years & since launch

For less than I year performance, Absolute return without

Annualisation

Past gains may not repeat in future

Risk factors prominently stated

No celebrities

No add-ons during offer period

Appropriate benchmark to be chosen

Any ranking of thud to be explained

PARTVII INVESTMENT POLICY AND RESTRICTIONS

INVESTMENT POLICY OF A FUND

Investment policy of a fund scheme is stated in OD For equity tuna
o

See kind of Sectoral allocation & companies to invest For debt find
o

See types of instruments.

o

Credit rating,
o

Proposed average maturity,

o

Minimum & maximum miii instruments percentage For balanced fund

o

See equity &debt proportions For money market fund

o

See types of instruments preferred & their rating profile

REGULATORY RESTRICTIONS ON INVESTMENTS BY FUNDS

Minimum no. Investors in scheme
o

20 &no single investors to hold over 25% of the corpus 56

Minimum portfolio diversification

o

investment in equity of a single company max 10% of the NAV (Except index funds, sector finds)
o

Al! non government debt to be mandatory rated by at least one rating company
o

Investment in rated debt instrument of a company

Max 15% of net assets

Max 20% of net assets with approval of board of trustees

REGULATORY RESTRICTIONS ON IN VESTMENTS BY FUNDS

Investment in unrated/below investment grade securities
o

Not exceeding 10% of net assets iii a single company

o

Not exceeding 25% of net assets of the fluid in all the companies Prior approval of Unrated mandatory for investments in unrated debt Instruments.

REGULATORY RESTRICTIONS ON IN VESTMENTS BY FUNDS

Investment in unlisted shares of companies
o

Close ended fund: not more than 10% of net assets

o

Open ended fund: not more than 5% of net assets Investments in equity shares under all schemes of a mf
o

Not more than 10% of paid up capital of a company

Investment by a mutual fund in ADRs / GDRs allowed 57 Investment by a MR in equities of listed overseas companies having share holding of at least 10%allowed Overall limit of u.s $l billion for such overseas investment for entire MY. industry Overall limit per M.F
o

Not exceeding 10% of net assets subject to maximum 50 million

REGULATORY RESTRICTIONS ON INVESTMENTS BY FUNDS

A mutual fund can invest
o

Maximum 5%of net assets under all its schemes

o

Into different fund schemes of the same AMC or of any other AMC except fund of funds schemes

The above limit doses not apply to fund of funds

Securities are to be bought or sold only on delivery basis no short selling allowed

Securities to be bought and sold for a relevant scheme

Purchases! sales cannot be aggregated and allocated later

MFs can lend securities under the SEBT approved stock lending scheme

A mutual fund can invest only iii marketable securities

A mutual fund cannot invest in unlisted securities of sponsor or sponsor group companies 58

A mutual fund can invest in listed securities of the sponsor / sponsor group companies up to 25% of net assets of the funds A mutual fund can transfer securities from one scheme to another scheme at market prices and on spot delivery basis Inter-scheme transfers allowed if objectives of both the schemes are same A mutual fund can park its money in deposits of scheduled commercial banks pending deployment into regular investments Borrowing by MFs restricted up to 20% of net assets for maximum 6 months for paying dividends/ redeeming units

Record of investment decisions to be maintained.

A FOP cannot invest in other FOF scheme

A liquid fund can not have mark to market Components> 10%. Maximum re pricing tenure 1 year 59