Overview of Mutual Fund Ind. HDFC AMC

Overview of Mutual Fund Industry: HDFC AMC, a case study
Submitted By
Sonal Doshi
UNDER THE GUIDANCE OF
Prof. Abhay Nagale
A PROJECT SUBMITTED IN PART COMPLETION OF PGDM TO THE
Chetanas Institute of Management & Research

Bandra (East), Mumbai 400 051.
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July 2011
OVERVIEW OF MUTUAL FUND INDUSTRY: HDFC AMC, A CASE STUDY
July 2011
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DECLARATION
This is to declare that the study presented by me to Chetanas Institute of Management and Research, in part completion of the PGDM under the title Overview of Mutual Fund Industry: HDFC AMC, a case study had been done under the guidance of ________________________.
Signature of the Student Sonal Doshi
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CERTIFICATE
This is to certify that the study presented by SONAL DOSHI to the Chetanas Institute of Management and Research, in part completion of the PGDM under the title Overview of Mutual Fund Industry: HDFC AMC, a case study has been done under the guidance of (Name of the Guide).
The project is in the nature of original work that has not so far been submitted for any Diploma of Chetanas Institute of Management & Research or any other University/ Institute. References of work and related sources of information have been given at the end of each chapter.
Signature of the Guide Name of the Guide
Signature of the Director Name of the Director
CERTIFICATE FROM COMPANY
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EXECUTIVE SUMMARY
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INVESTMENTS
INVESTMENT IS A SCIENCE AND NOT AN ART
Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. Investments, unlike works of art, cannot afford the luxury of experimenting. Investing is not guesswork. It takes more than just a 'tip', it needs training to plan, instinct to pick and sheer intellect to make it work for the investor. Human nature is fickle, his wants keep changing. An investment can be described as perfect if it satisfies all the needs of all investors. So, the starting point in searching for the perfect investment would be to examine investor needs. If all those needs are met by the investment, then that investment can be termed the perfect investment. Most investors and advisors spend a great deal of time understanding the merits of the thousands of investments available in India. Little time, however, is spent understanding the needs of the investor and ensuring that the most appropriate investments are selected for him. By and large, most investors have common needs from their investments: 1. Security of Original Capital; 2. Wealth Accumulation; 3. Comfort Factor; 4. Tax Efficiency; 5. Life Cover; 6. Income; 7. Simplicity; 8. Ease of Withdrawal; 9. Communication. Perfect investment would have been achieved if all the above-mentioned needs had been met to satisfaction. But there is always a trade-off involved in making investments. As long as the investment strategy matches the needs of investor according to the priority assigned to them, he should be happy. The Ideal Investment strategy should be a customized one for each investor depending on his risk-return profile, his satisfaction level, his income, and his expectations. Accurate planning gives accurate results. And for that there must be an efficient and trustworthy roadmap to achieve the ultimate goal of wealth maximization
Traditionally, Indian investors have been going for investment avenues ranging from low return-low risk Fixed Deposits to high risk-high-return Share Markets. Till nineties, investors were enjoying high interest rates in the range of 16-22 % on Fixed Deposits. With the outset of a liberalized era and opening of Indian economy interest rates softened and Fixed Deposits were no longer the preferred choices of many investors. They looked out beyond the traditional products. These risk savvy investors turned to the stock market which had been giving good returns on select scrips.
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The psyche of Indian investors has changed a lot in the past few years. They are becoming more risk-savvy. But side by side they have become more demanding too. Various institutions have come up with a variety of innovative products catering to the requirements of a variety of investors and Mutual Fund is one of the investment avenue preferred by recent investors. Mutual funds offer a better route to investing in equities for lay investors. A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. This project attempts at giving a brief idea about how the mutual fund industry has evolved over the years and its working, various MF players currently in India and its importance, challenges, other conventional products for investment and comparative analysis of it with respect to mutual fund, needs of investors, role of AMCs, distributors, individual financial advisors, banking channels and also highlighted role of HDFC AMC and its products.
TABLE OF CONTENTS CHAPTER NO. 1. 2. 3. 4. Introduction Review of Literature Research Methodology Mutual Funds- An Overview Contents Page no 10 16 17 19
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5. 6. 7. 8. 9. 10 11 12 13 14 15 16 17 18 19 20 21
History of Mutual Fund in India Structure of MF Company Regulatory Framework MF Products Distribution Channels in the MF Industry Types of Mutual Funds Cost Involved in MFs Conventional Products and MF- Comparison Benefits of Mutual Fund Investment Key Terms SWOT Analysis of Mutual Fund Company Limitations of MF HDFC AMC, an Overview Data Collection- Questionnaire Data Analysis Conclusion Bibliography
21 23 25 32 35 39 43 45 46 48 53 56 58 65 69 73 74
LIST OF TABLES AND FIGURES Sr. No 1 Contents Comparison of MF and conventional products Page No. 44
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2 3 4 5 6 7 8 9 10 11 12 13 14
SIP Sector wise diversification Equity Shareholding Pattern of HDFC AMC Individual Investor needs Power of Compounding Flowchart of MF Structure of MF Company MF Framework Types of MF Risk and Return Matrix AUM HDFC Products Top 25 outperformers
48 52 10 11 14 19 22 24 38 44 51 59 63
CHAPTER NO- 1
INTRODUCTION
1.1
Company Profile
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HDFC ASSET MANAGEMENT COMPANY LTD. HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI vide its letter dated July 3, 2000. In terms of the Investment Management Agreement, the Trustee has appointed the HDFC Asset Management Company Limited to manage the Mutual Fund. The paid up capital of the AMC is Rs. 25.169 crore. The present equity shareholding pattern of the AMC is as follows: PARTICULARS Housing Development Finance Corporation Limited Standard Life Investments Limited Other Shareholders (shares issued on exercise of Stock Options) % of the paid up equity capital 59.98 39.99 0.03
VISION STATEMENT To be a dominant player in the Indian Mutual Fund space recognized for its high levels of ethical and professional conduct and a commitment towards enhancing investor interests.
1.2
Definition and purpose of the project
Investing wisely is a function of your specific needs and goals. Each investor has different objectives that need to be met depending on age, income, planned activities, and attitudes about risk. How can you work with your investment advisor to best determine which investments are right for you?
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Goals and Needs You may have specific goals and requirements that you want your investment portfolio to fulfill. For example, you may be funding college for children, business expansion, travel plans, or retirement needs. You should identify these goals and needs clearly with your investment advisor so that his or her recommendations for your portfolio can assist you in meeting them. Age Your age is an important consideration when deciding how much risk to assume. Portfolio assets that are riskier and that will fluctuate more over time may be appropriate for younger investors but not for others. An individual who does not expect to liquidate the assets in his or her portfolio for a number of years has more time to recover from a market downturn, while an investor close to retirement may be more likely to prefer stable assets and capital preservation. Age also affects the choice between income-earning securities and those oriented toward capital gains. An investor who is employed and near peak earning power will probably want to minimize paying taxes, and will therefore lean toward investments that do not provide current income. Income Both your absolute income level and your income requirements influence your investment objectives in several ways. First, income, like age, influences the choice between dividend-paying or interest-paying investments, and those whose primary return is in the form of capital gains. You may prefer income-producing investments if you need to supplement or replace earned income. Your income level also affects your investment choices because it determines your tax rate. Low-tax-bracket investors generally those whose income is lower will be more likely to prefer income-producing investments. Hightax-rate investors are more likely to choose tax-deferred or tax-sheltered assets. Income also may influence risk preferences. High income investors may be more willing to choose higher
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risk investments since they can more easily contribute additional investment capital should they sustain losses. Taxes Your after-tax return is the return that matters. You should fully inform your investment advisor about your tax rate and any special tax circumstances that might apply to you. This will determine whether you should seek tax exempt or tax-sheltered securities as a part of your portfolio. The appropriateness of income or capital gains should be discussed in the context of your personal situation, so you may want your investment advisor to consult with your accountant. Occupation Your occupation also can affect portfolio objectives. Some professions produce more stable incomes than others, enabling the investor to tolerate more investment fluctuations. Your profession also may determine other assets. For example, does your job provide an adequate retirement plan, or must you fund your retirement from your investment portfolio? If your employer provides a stock-purchase plan, this may be a substantial part of your personal wealth, and you should consider it as a diversification issue when you make other portfolio choices. If you receive tax-qualified or tax-deferred assets from your job, these also will influence your investment decisions. Time Horizon An important consideration in setting investment objectives is your time horizon. When do you expect to liquidate a portfolio? Should you choose assets of short or long maturity? Do you have time to recover from a declining market, or is capital preservation important to meet an immediate financial need? Liquidity Liquidity is the ease with which you can convert your assets to cash at fair market value. It is essential that you recognize the need to convert your assets into cash at the appropriate times. Do you require a portfolio that can be liquidated easily, or can you afford to wait? Since greater liquidity generally results in lower return, it is necessary to give serious consideration to the inherent tradeoffs. Tolerance for Risk Your tolerance for risk is a very personal decision, and a question that is difficult for many investors to answer. In general, markets tend to provide higher returns in exchange for bearing higher risks. Often you will find that the investments with the highest long-term returns are very volatile in the short run. It is important to be honest with yourself in assessing whether you are comfortable with market volatility, and the level you can tolerate. While it is easy in hindsight to wish you had invested in a risky segment of the market that has performed well recently, a more realistic view is to look forward at the risk that might occur in the future. Putting It All Together, A professional investment advisor can work with you to answer all of these questions and prepare a written statement of investment objectives.
1.3
Scope and Objectives of the Project
The main objectives of study are as follows:
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1. 2. 3. 4. 5. 6.
To evaluate investment performance of mutual funds in terms of risk and return. To examine the funds sensitivity to the market fluctuations. To find out the financial performance of mutual fund schemes. To analyze the performance of various schemes of mutual funds. To provide valuable suggestions and recommendations. To understand the needs of investors and role of AMC and distributors.
The Scope of the project report is to focus on Mutual Fund as a latest investment avenue preferred by investors and also to do comparative analysis of mutual fund with respect to other options like Fixed Deposits, investment in gold, real estate, stocks, etc.
1.1
Outline of Project
Savings form an important part of the economy of any nation. With the savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents a plethora of avenues to the investors. Though certainly not the best or deepest of markets in the world, it has reasonable options for an ordinary man to invest his savings. Let us examine several of them: Banks Considered as the safest of all options, banks have been the roots of the financial systems in India. Promoted as the means to social development, banks in India have indeed played an important role in the rural upliftment. For an ordinary person though, they have acted as the safest investment avenue wherein a person deposits money and earns interest on it. The two main modes of investment in banks, savings accounts and fixed deposits have been effectively used by one and all. However, today the interest rate structure in the country is headed southwards, keeping in line with global trends. With the banks offering little above 9 percent in their fixed deposits for one year, the yields have come down substantially in recent times. Add to this, the inflationary pressures in economy and you have a position where the savings are not earning. The inflation is creeping up, to almost 8 percent at times, and this means that the value of money saved goes down instead of going up. This effectively mars any chance of gaining from the investments in banks. Post Office schemes Just like banks, post offices in India have a wide network. Spread across the nation, they offer financial assistance as well as serving the basic requirements of communication. Among all saving options, Post office schemes have been offering the highest rates. Added to it is the fact that the investments are safe with the department being a Government of India entity. So the two basic and most sought for features, those of return safety and quantum of returns were being handsomely taken care of. Though certainly not the most efficient systems in terms of service standards and liquidity, these have still managed to attract the attention of small, retail investors. However, with the government announcing its intention of reducing the interest rates in small savings options, this avenue is expected to lose some of the investors. Public Provident Funds act as options to save for the post retirement period for most people and have been considered good option largely due to the fact that returns were higher than most other options and also helped people gain from tax benefits under various
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sections. This option too is likely to lose some of its sheen on account of reduction in the rates offered. Company Fixed Deposits Another oft-used route to invest has been the fixed deposit schemes floated by companies. Companies have used fixed deposit schemes as a means of mobilizing funds for their operations and have paid interest on them. The safer a company is rated, the lesser the return offered has been the thumb rule. However, there are several potential roadblocks in these. First of all, the danger of financial position of the company not being understood by the investor lurks. The investors rely on intermediaries who more often than not, dont reveal the entire truth. Secondly, liquidity is a major problem with the amount being received months after the due dates. Premature redemption is generally not entertained without cuts in the returns offered and though they present a reasonable option to counter interest rate risk (especially when the economy is headed for a low interest regime), the safety of principal amount has been found lacking. Many cases like the Kuber Group and DCM Group fiascoes have resulted in low confidence in this option. The options discussed above are essentially for the risk-averse, people who think of safety and then quantum of return, in that order. For the brave, it is dabbling in the stock market. Stock markets provide an option to invest in a high risk, high return game. While the potential return is much more than 10-11 percent any of the options discussed above can generally generate, the risk is undoubtedly of the highest order. But then, the general principle of encountering greater risks and uncertainty when one seeks higher returns holds true. However, as enticing as it might appear, people generally are clueless as to how the stock market functions and in the process can endanger the hard-earned money. For those who are not adept at understanding the stock market, the task of generating superior returns at similar levels of risk is arduous to say the least. This is where Mutual Funds come into picture. Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. This project report contains: Introduction to Mutual Funds Types of Mutual Funds Role of regulator and AMC Comparative analysis of conventional products with respect to mutual funds Role of HDFC AMC and its products Questionnaire to analyze buyers behavior for mutual fund investment.
Power of Compounding The Power of Compounding can give astounding results. The chart shows how saving at a more than average rate of 20% can make the savings increase substantially over the next 20 years. A 1 lakh savings today can increase to close to Rs. 38 lakhs in 20 years time. Here we assume that annual compounding is done at the same rate as the investment rate throughout the period of investment.
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Figure 01
Designing an investment strategy is a structured process that begins with analyzing the needs of the customer and profiling them according to the risk appetite of the investor. The next step involves internalizing and mapping these needs and matching them with the available avenues for investing.
CHAPTER NO- 2
REVIEW OF LITERATURE
Mutual Funds is a topic which is of enormous interest not only to researchers all over the world, but also to investors. Mutual funds as a medium-to-long term investment option are preferred as a suitable investment option by investors. However, with several market entrants the question is the choice of mutual fund. The study focuses on this problem of mutual fund selection by investors. Though the investment objectives define investors preference among fund types (balanced, growth, dividend etc.) the choice of fund based on a sponsors reputation remains to be probed. Indian mutual fund industry has two distinct types of sponsors, public-sector and private-sector. The numbers of funds floated by publicsector
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sponsors are minimal compared to private-sector players. There is a hypothetical assumption that private-sector outperforms public-sector due to several factors such as responsibility, commitment and so on. We focus on testing this hypothesis on the mutual fund industry. Although many studies document the investment performance of mutual funds irrespective of whether they are public-sector sponsored or private-sector sponsored, researchers do not investigate the influence of portfolio characteristics and the variable effect of diversification on mutual fund performance. Literature on mutual fund performance evaluation is enormous. A few research studies that have influenced the preparation of this paper substantially are discussed in this section. Sharpe, William F. (1966) suggested a measure for the evaluation of portfolio performance. Drawing on results obtained in the field of portfolio analysis, economist Jack L. Treynor has suggested a new predictor of mutual fund performance, one that differs from virtually all those used previously by incorporating the volatility of a fund's return in a simple yet meaningful manner. Michael C. Jensen (1967) derived a risk-adjusted measure of portfolio performance (Jensens alpha) that estimates how much a managers forecasting ability contributes to funds returns. As indicated by Statman (2000), the e SDAR of a fund portfolio is the excess return of the portfolio over the return of the benchmark index, where the portfolio is leveraged to have the benchmark indexs standard deviation. S.Narayan Rao , et. al., evaluated performance of Indian mutual funds in a bear market through relative performance index, risk-return analysis, Treynors ratio, Sharpes ratio, Sharpes measure , Jensens measure, and Famas measure. The study used 269 open-ended schemes (out of total schemes of 433) for computing relative performance index. Then after excluding funds whose returns are less than risk-free returns, 58 schemes are finally used for further analysis. The results of performance measures suggest that most of mutual fund schemes in the sample of 58 were able to satisfy investors expectations by giving excess returns over expected returns based on both premium for systematic risk and total risk.
CHAPTER NO- 3
RESEARCH METHODOLOGY
3.1.1 RESEARCH DESIGN The research design has been considered as a "blueprint" for research, dealing with at least four problems: what questions to study, what data are relevant, what data to collect, and how to analyze the results. The study undertaken is Descriptive and Analytical in nature. The investor profile based on the career stage, income levels, Future goals and risk appetite are identified and also their asset holding is understood to recommend diversification of investment or reallocation with balancing between Equity and Debt type for which analysis with calculation based formula have been used in the research. 3.1.2 & 3 Data Collection Sources and method A formal data collection process is necessary as it ensures that data gathered is both defined and accurate and that subsequent decisions based on arguments embodied in the findings are valid. The process provides both a baseline from which to measure from and in certain cases a target on what to improve. Types of data collection
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1. Questionnaires
2.
Personal Interview
Any research is supported and backed by similar reports, articles, opinions which form the secondary data source for the report. Hence this report includes facts from Newspaper articles, various opinions from Asset Management company fund manager, Company websites etc. These secondary data is then further enhanced and justified through primary research to provide current and real time information. Hence primary research was done by collecting information through interviews with financial planners, brokers, investors, Primary data are those, which are collected afresh and for the first time, and thus happen to be original in character. This method was used by means of Investor Meets, wherein face-toface contact with the investors and Sub-Brokers took place. The reason behind choosing this method was to have detailed information on the subject. It also provided opportunity for selecting the sample for interview. The interview conducted were a mixture of structured and unstructured interviews. Scope was kept open for detailed discussion at the discretion of the interviewee. Where there was a time crunch a structured procedure was followed wherein predetermined questions were put forward. The other method was adopted in primary data collection was Questionnaires. This was used to assist a more structured form of information. The information thus obtained was standard and in a more unbiased form. It assisted to collect data from a large sample size. The pattern adopted was a general form of questionnaire. Questions are in dichotomous (yes or no answers), multiple choice and open ended question. Open ended questions are restricted due to the difficulty faced in analyzing. Secondary data means data that are already available i.e., the data which is already collected and analyzed by other. To get a better understanding and to have a larger exposure on the subject this method was used. Methods use was data available on World Wide Web, articles in newspapers, financial industry reports, Financial Planning board of India reports and article, reports published by Government of India, etc. Support was also provided by the Industry project guide by giving inputs from his years of experience. 3.1.4. Data Collection Instrument Questionnaire : A questionnaire is a research instrument consisting of a series of questions and other prompts for the purpose of gathering information from respondents. The questionnaire was designed for this project report. It consists of both structured and unstructured questions for analyzing the buyers behavior in mutual funds. The target respondents were potential investors, brokers, distributors, individual financial advisors. The sample size was 30 and it helps in data analysis. 3.1.5 Sampling Plan: Selection of study area: The study area is in Mumbai. Selection of the sample size: 30 Sample element: Investors and Brokers from HDFC AMC Private limited. The various parameters on which the research was to be conducted are:
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Awareness of Mutual Funds Risk Appetite Savings and Expenses Alignment of life goals and financial goals Investment distribution in various asset classes Decision influencing investment
3.1.6 Sampling: Convenience method of sampling is used to collect the data from the respondents due to lack of time and Age group classification is followed to understand the financial needs at various career stages of any investor.
CHAPTER NO- 4 Mutual Funds: An overview
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A mutual fund is the ideal investment vehicle for todays complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered
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with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
The flow chart below describes broadly the working of a mutual fund: Figure 02
Investors
Passed back to
Returns
pool their money with

Fund Manager
Generates
Securities
Invest in
Ideally Mutual Funds should be doing the following:
M U T
Mobilizing savings from public Understand people need for savings Transfers money from customers investments of Contending companies. investment avenues in to
U Utilizes possible realize returns. A L F
analyses better risk-return relationship. lowers saving costs. future securities promises offered.
U uses experts advice for tracking better portfolios. N Net Asset Valuation is calculated on daily basis.
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Develops financial markets.
CHAPTER NO- 5
S Strives to provide bett3r & safe returns to investors.

HISTORY OF MUTUAL FUND INDUSTRY 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 in India can be broadly divided into four distinct phases.
First Phase 1964-87 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.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 Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990). At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
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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.
Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
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CHAPTER NO- 6
STRUCTURE OF MUTUAL FUND COMPANY
Figure
AN OVERVIEW OF THE STRUCTURE OF MUTUAL FUND COMPANY A mutual fund is initiated by a sponsor, which organizes & markets the fund. It defines the objectives of the funds, the risk-return relationship. The cost involved, the rules for the entryexit routes, etc. the sponsor has to get an approval from the SEBI, which ascertains the track record and financial strength of the sponsor. A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders of the fund. I.e. cash, noncash benefits such as bonus, dividends and rights. The custodian can be a bank or sound financial institutions. The mutual fund scheme is a trust registered under the Indian trust Act. The board of trustees manages the trust.
SPONSOR COMPANY 1. It establishes the mutual fund and gets it registered with SEBI (Securities Exchange Board of India). 2. It is required to contribute at least 40% of minimum net worth (Rs. 10 Crores) of AMC (Asset Management Company).
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3. It holds a majority stake in the AMC. 4. It executes the trust deed in favor of the trustees. TRUST 1. A board of trustees & Promoted by the sponsor manages the trust. 2. It can appoint /dismiss the AMC & ascertains whether the schemes floated and managed by the AMC are in accordance with the deed & SEBI guidelines. 3. It looks after the capital property of mutual fund schemes. 4. It submitted the half yearly reports to SEBI on activates of the mutual fund. 5. The trustees ensure that the AMC has acted as per the due diligence in accordance with the rules and regulations of SEBI and mutual fund scheme. 6. It ensures that the transactions of the mutual, fund are in accordance with the trust deed. 7. It appoints the custodian & supervises its activities. 8. It regularly review all the transactions carried out by the mutual fund company and the asset management company. ASSET MANAGEMENT COMPANY 1. The AMC is appointed by the trustees to float schemes for th4e mutual fund Company and manage the raised capital. 2. It is registered under the SEBI and must act as per the SEBI guidance. 3. The net worth of AMC should be in form of cash and all assets must be held in the name of AMC. 4. It cannot give loans or acquired assets assuming unlimited liability. 5. It is required to disclose scheme particulars & base of NAV calculations. It must also submit quarterly reports to the mutual funds company. CUSTODIAN 1. It is appointed by the trustees of a mutual fund, 2. It undertakes the function of safekeeping of the securities on behalf of the mutual fund company. In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd.
CHAPTER NO- 7
REGULATORY FRAMEWORK
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Regulatory Framework The regulatory framework has been put in place since 1993 and over the years we have evolved a model which part from being indigenous is also matching with international standards. This paper presents the salient features of the Indian model, recent policy initiatives and the future vision of the regulator. The mutual funds globally are structured in two ways either as a trust or as a corporate body. In both these structures, there is an entity, which undertakes the conceptualizations, designing and marketing of schemes, raises money from the public under the schemes and manages the money on behalf of the its owners. This entity is the investment manager or Asset management Company (AMC). To segregate the collected funds from these entity own funds the corpus is placed in a legal vehicle. It is the character of this legal; vehicle that determinate character of the fund itself. If this vehicle is as corporate entity then the fund acquirers the name of an investment company as in the US and UK and of the entity is a Trust, the fund acquires the name of mutual funds as in UK and India.
Figure 04
Role of AMFI One of the most effective industry bodies today is probably the AMFI. It has been a forum where the mutual funds have been able to present their views, debate and participate in creating their own regulatory framework. The association has created originally as a body that would lobby with the regulator to insure that the fund view point has heard. Today, it is usually the body that is consulted on the matters long before regulations are framed, and it often initiates many regulatory charges that prevent malpractices that emerged from time to time. This year some of the major initiatives were the framing of the risk management structure, a code of conduct and registration structure for mutual fund intermediaries which were subsequently mandated by SEBI. In addition AMFI was involved in a number of enhancement and developments to the regulatory framework. AMFI works through a number
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of committees, some of which are standing committees to address areas where there is a need foe constant vigil and improvements and other which are adhoc committees constituted to address specific issues. These committees constitute of industry professionals from among the member mutual funds. There is now some thought that AMFI should become a selfregulatory organization since it has worked so effectively as an industry body.
ROLE OF SEBI In the year 1992 SEBI Act was passed. The objectives of SEBI are to protect the interest of investors in securities, to promote development and regulate the securities market. As far as MUTUAL FUNDS are concerned, SEBI formulate policies and regulations for the mutual funds to protect the interest of investors. SEBI notified the regulations for the mutual funds in 1993. Thereafter MF sponsored by the private sector entities were allowed to enter the capital market. These regulations were fully revised in 1996 and amended regularly thereafter. SEBI has also issued guidelines for the mutual funds from time to time to protect the interest of investors. All mutual funds, whether promoted my public or private sector entities, including those promoted by foreign entities, are govern by the same set of regulations. These all regulations are subject to monitoring and inspections by SEBI.
SEBI REGULATION ON THE INVESTMENT OF A MUTUAL FUND: The investments of a mutual fund are subjected to a set of regulations prescribed by SEBI. Presently following restrictions apply. No term loan shall be granted by a mutual fund scheme. A mutual fund, under all its schemes taken together, will not own more than 10 % of any companys paid up capital carrying voting rights. A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees, provided
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Transfers of investment from one scheme to another scheme of mutual fund permitted provided that: a. Such transfers are done at the prevailing market price for quoted Instruments on spot basis. b. The securities so transferred shall be in conformity with the investment objectives of the schemes to which such transfer has been made. c. The registration and accounting of the transactions is completed and ratified in the next meeting of the board of trustees.
A mutual fund may borrow to meet liquidity needs, for the purpose of repurchase, redemption of units, or repayment of interest or dividend to the unit holders. Such borrowings shall not exceed 20% of the net asset of the scheme and the duration of the borrowing shall not exceed 6 months. The fund may borrow from permissible entities at prevailing market rates and may offer the assets of the schemes as collateral for such borrowings. A mutual fund will buy and sell securities on the basis of deliveries. It cannot make short sales or engage in carry forward transactions. A scheme shall not make any investment in
a. Any unlisted security of an associates or group company of the sponsor. b. Any security issued by way of private placement by an associate or group company of the sponsor c. The listed securities of group companies of the sponsor in excess of 25% of the net assets. The investment manager may invest in a scheme from time to time. The percentage of such investments to the total net assets may vary from time to time and can be upto 100% of the net assets of the schemes. A scheme shall not invest more than 10% of its NAV in the equity shares or equity related instruments of any one company. ROLE OF AMC The role of the AMC is to manage investors money on a day to day basis. Thus it is imperative that people with the highest integrity are involved with this activity. The AMC cannot deal with a single broker beyond a certain limit of transactions. The AMC cannot act as a Trustee for some other Mutual Fund. The responsibility of preparing the OD lies with the AMC. Appointments of intermediaries like independent financial advisors (IFAs), national and regional distributors, banks, etc. is also done by the AMC. Finally, it is the AMC which is responsible for the acts of its employees and service providers. As can be seen, it is the AMC that does all the operations. All activities by the AMC are done under the name of the Trust, i.e. the mutual fund. The AMC charges a fee for providing its services. SEBI has prescribed limits for this. This fee is borne by the investor as the fee is charged to the scheme, in fact, the fee is charged as a percentage of the schemes net assets. An important point to note here is that this fee is included in the overall expenses permitted by SEBI. There is a maximum limit to the amount that can be charged as expense to the scheme, and this fee has
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to be within that limit. Thus regulations ensure that beyond a certain limit, investors money is not used for meeting expenses.
ROLE OF A REGISTRAR AND TRANSFER AGENTS: Registrars and Transfer Agents (RTAs) perform the important role of maintaining investor records. All the New Fund Offer (NFO) forms, redemption forms (i.e. when an investor wants to exit from a scheme, it requests for redemption) go to the RTAs office where the information is converted from physical to electronic form. How many units will the investor get, at what price, what is the applicable NAV, how much money will he get in case of redemption, exit loads, folio number, etc. is all taken care of by the RTA.
ROLE OF CUSTODIAN: A custodians role is safe keeping of physical securities and also keeping a tab on the corporate actions like rights, bonus and dividends declared by the companies in which the fund has invested. The Custodian is appointed by the Board of Trustees. The custodian also participates in a clearing and settlement system through approved depository companies on behalf of mutual funds, in case of dematerialized securities. In India today, securities (and units of mutual funds) are no longer held in physical form but mostly in dematerialized form with the Depositories. The holdings are held in the Depository through Depository Participants (DPs). Only the physical securities are held by the Custodian. The deliveries and receipt of units of a mutual fund are done by the custodian or a depository participant at the instruction of the AMC and under the overall direction and responsibility of the Trustees. Regulations provide that the Sponsor and the Custodian must be separate entities. INVESTMENT MANAGERS: At the heart of the investment management industry are the managers who invest and divest client investments. A certified company investment advisor should conduct an assessment of each client's individual needs and risk profile. The advisor then recommends appropriate investments
1. ASSET ALLOCATION: The different asset classes and the exercise of allocating funds among these assets is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects. The skill of a successful investment manager resides in constructing the asset allocation, and separately the individual holdings, so as to outperform certain benchmarks.
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2. LONG TERM RETURN:
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns. For example, over very long holding periods (eg. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash. 3. DIVERSIFICATION: Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz and effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio, and cross-correlations between the returns.
4. PERFORMANCE MEASUREMENT: Fund performance is the acid test of fund management, and in the institutional context accurate measurement is a necessity. For that purpose, institutions measure the performance of each fund. It is probably appropriate for an investment firm to persuade its clients to assess performance over longer periods (e.g., 3 to 5 years) to smooth out very short term fluctuations in performance and the influence of the business cycle.
5. RISK ADJUSTED PERFORMANCE:
Performance measurement should not be reduced to the evaluation of fund returns alone, but must also integrate other fund elements that would be of interest to investors, such as the measure of risk taken. Several other aspects are also part of performance measurement: The need to answer all these questions has led to the development of more sophisticated performance measures, many of which originate in modern portfolio theory. ROLE OF INDEPENDENT FINANCIAL ADVISORS As with most things in the modern world, the financial services industry moves at a rapid pace. Financial markets change constantly and become increasingly more complex. Regulators review the opportunities to obtain high quality products and control the basis
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on which advice is given. Financial institutions compete aggressively with each other to bring new and improved products to the market Choosing the most suitable financial products will often play an essential role in helping to secure your financial future. But with literally thousands of different products on offer, and hundreds of financial services companies, one of the most important decisions you can make about your future is who to seek financial advice from. In essence, the role of an Independent Financial Adviser (IFA) is clearly defined - they work for you, not the product provider as is the case with tied' advisors. Of course, in order to assist you, they will need to know your current position and what it is you want to achieve. Only then can an IFA create a strategy to meet your needs and your budget. IFAs are your guide to the market and will undertake detailed research and comparisons relating to financial products available and then recommend a way forward.
TOOLS FOR ANALYSIS

1. Standard deviation:
It is used to measure the variation in individual returns from the average expected return over a certain period. Standard deviation is used in the concept of risk of a portfolio of investments; higher standard deviation means a greater fluctuation in expected return.
2. Beta:
Beta measures the systematic risk and shows how prices of securities respond to the market forces. It is calculated by relating the return on a security with return for the market. By convention, market will have beta 1.0 Mutual fund is said to be volatile, more volatile or less volatile. If beta is greater than 1 the stock is said to be riskier than market. If beta is less than 1, the indication is that stock is less risky in comparison to market. If beta is zero then the risk is the same as that of the market. Negative beta is rare.
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3. Sharpe index:
Sharpe index measures risk premium of a portfolio, relative to the total amount for risk in the portfolio. Sharpe index summarizes the risk and return of a portfolio in a single measure that categorizes the performance of funds on the risk-adjusted basis. The larger the Sharpe Index, the portfolio over performance the market and vice versa Sharpe index = portfolio average return (rp) risk free rate of interest (rt)/ std deviations of the portfolio return
4. Treynors Index :
Treynors model is on the concept of the characteristics straight line. The characteristics line has drawn a relationship between the market return and a specific portfolio without taking into consideration any direct adjustment for risk. It is also known as reward to volatility ratio and is defined as:
Treynors index = portfolio average return (rp) risk free rate f interest (rt) / beta coefficient of portfolio.
CHAPTER NO- 8
MUTUAL FUND PRODUCTS
1. Equity Fund
2. 3. 4. 5. 6. 7. 8.
Index Fund Diversified Large Cap Fund Mid Cap Fund Sectoral Fund Growth Fund ELSS Fund Fund of Funds
1. Equity Fund: Equity Funds are defined as those funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities. This is important from taxation point of view, as funds investing 100% in international equities are also equity funds from the investors asset allocation point of view, but the tax laws do not recognise these funds as Equity Funds and hence investors have to pay tax on the Long Term Capital Gains made from such investments
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(which they do not have to in case of equity funds which have at least 65% of their Average Weekly Net Assets invested in Indian Equities). Equity Funds come in various flavours and the industry keeps innovating to make products available for all types of investors. Relatively safer types of Equity Funds include Index Funds and diversified Large Cap Funds, while the riskier varieties are the Sector Funds. However, since equities as an asset class are risky, there are no guaranteeing returns for any type of fund. International Funds, Gold Funds (not to be confused with Gold ETF) and Fund of Funds are some of the different types of funds, which are designed for different types of investor preferences. Equity Funds can be classified on the basis of market capitalisation of the stocks they invest in namely Large Cap Funds, Mid Cap Funds or Small Cap Funds or on the basis of investment strategy the scheme intends to have like Index Funds, Infrastructure Fund, Power Sector Fund, Quant Fund, Arbitrage Fund, Natural Resources Fund, etc.
2. Index Fund: Equity Schemes come in many variants and thus can be segregated according to their risk levels. At the lowest end of the equity funds risk return matrix come the index funds while at the highest end come the sectoral schemes or specialty schemes. These schemes are the riskiest amongst all types schemes as well. However, since equities as an asset class are risky, there are no guaranteeing returns for any type of fund. Index Funds invest in stocks comprising indices, such as the Nifty 50, which is a broad based index comprising 50 stocks. There can be funds on other indices which have a large number of stocks such as the CNX Midcap 100 or S&P CNX 500. Here the investment is spread across a large number of stocks. In India today we find many index funds based on the Nifty 50 index, which comprises large, liquid and blue chip 50 stocks. The objective of a typical Index Fund states This Fund will invest in stocks comprising the Nifty and in the same proportion as in the index. The fund manager will not indulge in research and stock selection, but passively invest in the Nifty 50 scrips only, i.e. 50 stocks which form part of Nifty 50, in proportion to their market capitalisation. Due to this, index funds are known as passively managed funds. Such passive approach also translates into lower costs as well as returns which closely tracks the benchmark index return (i.e. Nifty 50 for an index fund based on Nifty 50). Index funds never attempt to beat the index returns, their objective is always to mirror the index returns as closely as possible. The difference between the returns generated by the benchmark index and the Index Fund is known as tracking error. By definition, Tracking Error is the variance between the daily returns of the underlying index and the NAV of the scheme over any given period. 3. Diversified Large Cap Funds:
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Another category of equity funds is the diversified large cap funds. These are funds which restrict their stock selection to the large cap stocks typically the top 100 or 200 stocks with highest market capitalization and liquidity. It is generally perceived that large cap stocks are those which have sound businesses, strong management, globally competitive products and are quick to respond to market dynamics. Therefore, diversified large cap funds are considered as stable and safe. However, since equities as an asset class are risky, there are no guaranteeing returns for any type of fund. These funds are actively managed funds unlike the index funds which are passively managed, In an actively managed fund the fund manager pores over data and information, researches the company, the economy, analyses market trends, takes into account government policies on different sectors and then selects the stock to invest. This is called as active management. 4. Mid Cap Funds: After large cap funds come the midcap funds, which invest in stocks belonging to the mid cap segment of the market. Many of these midcaps are said to be the emerging bluechips or tomorrows largecaps. There can be actively managed or passively managed mid cap funds. There are indices such as the CNX Midcap index whic h tracks the midcap segment of the markets and there are some passively managed index funds investing in the CNX Midcap companies.
5. Sectoral Funds: Funds that invest in stocks from a single sector or related sectors are called Sectoral funds. Examples of such funds are IT Funds, Pharma Funds, Infrastructure Funds, etc. Regulations do not permit funds to invest over 10% of their Net Asset Value in a single company. This is to ensure that schemes are diversified enough and investors are not subjected to undue risk. This regulation is relaxed for sectoral funds and index funds. 6. Growth Funds: Growth schemes invest in those stocks of those companies whose profits are expected to grow at a higher than average rate. For example, telecom sector is a growth sector because many people in India still do not own a phone as they buy more and more cell phones, the profits of telecom companies will increase. Similarly, infrastructure; we do not have well connected roads all over the country; neither do we have best of ports or airports. For our country to move forward, this infrastructure has to be of world class. Hence companies in these sectors may potentially grow at a relatively faster pace. Growth schemes will invest in stocks of such companies.
7. ELSS Funds:
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Equity Linked Savings Schemes (ELSS) are equity schemes, where investors get tax benefit up to Rs. 1 Lakh under section 80C of the Income Tax Act. These are open ended schemes but have a lock in period of 3 years. These schemes serve the dual purpose of equity investing as well as tax planning for the investor; however it must be noted that investors cannot, under any circumstances, get their money back before 3 years are over from the date of investment.
8. Fund of Funds: These are funds which do not directly invest in stocks and shares but invest in units of other mutual funds which they feel will perform well and give high returns. In fact such funds are relying on the judgment of other fund managers.
CHAPTER NO- 9
DISTRIBUTION CHANNELS IN THE MUTUAL FUND INDUSTRY:
In India, AMCs work with five distinct distribution channels those are direct, banking, retail, corporate and individual financial adviser. The Direct Channels: In the direct channel, customers invest in the schemes directly through AMC. In most cases, the company does not provide any investment advice, so these investors have to carry out their own research and select schemes themselves. The fund companies provide several tools to investors who invest through this channel. This includes monthly a/c statement, processing of transaction, and maintenance of records. In this channel most investors can invest through websites, or receive information through telephonic services provided by the company. About 10-20% of the total sales of an AMC come through this direct channel The Banking Channel: The large customer base of banks, in developed countries, has played an important role in the selling MFs. In the recent years, this channel has also opened up in India. Banks operating in India , including public sector, private and foreign banks have established tie-up with various fund companies for providing distribution and servicing.
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The banking channel is likely to develop as the most vital distribution channel for fund companies there are several reasons for the same. Customers remain invested in banks for long periods of time and therefore banks maintain a relationship of trust with their customers. Customers rely on advice provided to them by bankers as they always look out for better investment avenues. Managers are guiding to customers about various funds. An additional advantage that banks provide is that the concerned customer becomes a permanent contact of the banks and therefore can be reached during launch of (new fund offer) NFO or new schemes any time in the future. The Retail Channel: A customer can deal with directly with a sub broker belonging to a distribution company, instead of taking trouble of dealing with several agents. Distribution companies sell the schemes of several fund houses simultaneously and brokerage is paid by the AMC whose funds they sell. The retail channels offer the benefits of specialist knowledge and established client contact and, therefore private fund houses generally prefer this channel. Some of the major players in India in this in this channel are national players like Karvey, Birla Sunlife IL&FS and Cholamandalam. The key factor for this channel to sell a companys fund used to be the brokerage paid. The banking and retail channel generally contribute to about 50-70% of the total Asset under Management (AUM). The Corporate Channel: The corporate channel includes a variety of institutions that invest in shares on the companys name. These are businesses, trust, and even state and local governments. For institutional investors, fund managers prefer to create special funds and share classes. Corporate can either invest directly in mutual funds, or through an intermediary such as a distribution house or a bank. Corporate exhibit varying degrees of awareness of mutual fund products. Most of the established corporate, such as the TVS industries in Hyderabad, are well- versed with the performance and composition of various funds. The smaller companies and start-up firms, however, need to be educating on several aspects of mutual funds. In order to provide information to such clients, fund companies usually organize presentation for these companies or set-up meetings with the finance managers. Role of Financial Service Distributors As mutual funds have become a hot favorite among the people the role of financial distributors have become even more important to act as a link between the investors and the Asset Management Companies. As mutual fund distributor one need to help the investor with lot of financial planning before he decide where to invest his funds. In todays scenario in India the saving habit is ingrained in households. However most individuals have low awareness about the investment options, rarely take an organized approach to their finances and investments and tend to get emotionally carried away by the market sentiment. Financial markets and investment opportunities are becoming too complex for the average investors to know what to do. With good investment advice from financial service distributors, the client
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can take more informed decisions and make right investments that are consistent with their goal. Sound planning enhances the financial well being of clients and any service that makes peoples life between will always be in demand. The following are the fundamental traits of a successful financial distributor. Building trust with client by empathizing with them and understanding their aspirations concerns and needs good listening skills and the ability to ask right questions. Good knowledge of financial products and options, their risk-return profile and a strong understanding of the behavior and track record of varies investment and asset classes. Familiarity with taxation and estate planning issue. An understanding of various stages in a clients life and wealth cycle and the asset allocations that make sense for each of these stages. A specific investment strategy and the progress made towards achieving these objectives. Clear focus on financial well being of the client rather than on the individual transactions. Regular contact with clients especially during the times when the clients portfolio has declined in value and they are feeling dillusioned. This is the time to remind the clients that the only measure of a successful investment is how well it helps in achieving clients goals. Independent judgment and balanced thinking which is a key value that must be shared with clients when they overreact and get overly elated or dejected based on market sentiment. Thus the scope of study includes studying the products and services offered by the financial service distributors, whether they are as per the need of investors or not, to understand their challenges of attracting a potential investors. In ideal sense the financial planner should link his remuneration to the overall achievement of client goals, rather than relying on a fee from each transaction.
FINANCIAL EXPRESS: JUNE 8, 2011 Mumbai: Mutual fund (MF) distributors arent enthusiastic about the recommendations given by the seven-member MF committee headed by Prashant Saran, whole time member of the Securities and Exchange Board of India (Sebi). The panel which is looking into the problems faced by the MF industry had last week proposed introduction of fixed transaction fees as against entry loads to the regulator to incentivise distributors to sell equity MFs. The panel suggested that, distributors could charge R100-150 from the investors as a onetime transaction fee. However many distributors believe that, this amount is very less for service customers. A senior official from a leading national distribution agency said, For an independent financial advisor (IFA), R100-150 is not a viable fee, particularly if he is distributing in the metro cities since his client servicing costs are relatively higher.
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MF investments into equity funds on an average are about R20, 000. By that logic, distributors fees under the proposed new fees structure would amount to 0.5% of invested amount. At the time of existence of entry load, the fees averaged about 2.25% of invested amount. In monetary terms, for the above example, a distributor would have got R500, before ban was imposed on entry loads. Some of the fund houses are giving over 1% upfront (commissions) on selling systematic investment plans (SIPs) which comes to around R240 for SIP investments of R2000 per month for one year. Also after one year we get trial commissions which are over 50 basis points. So I fail to understand why the panel has decided such low transaction fees said a distributor. However the distributors are happy about the tied agent model and feel it could have some positive impact on the MF industry. The tied agent model mimics the distribution model of the insurance industry, wherein distributors sell schemes of select fund houses. Currently, there are no such restrictions on fund distribution. Market participants believe that tied agent model can bring some stability in the distribution business. If the tied agent model is brought, then there will be some additional monetary benefits to the IFAs as they will be selling funds of a particular fund house, just as insurance agents do. But we need to wait for the final guidelines from the regulator regarding the issue, said a leading IFA in Mumbai. Since the ban on entry load from August 2009, the MF industry has been facing heavy redemptions in equity funds. During the financial year 2010-11, equity schemes saw net redemptions of over R13, 400 crore. UK Sinha, former UTI chairman, on taking reins at Sebi as its chairman, had formed the MF committee to look into the problems of the MF industry. While the committee had made the suggestion, it is for the Sebi chairman to decide on whether such measures need to be brought in the first place.
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CHAPTER NO- 10
Types of Mutual Funds
Mutual fund schemes may be classified on the basis of its structure and its investment objective.
Figure 05
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I.
By Structure: Open-ended Funds An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
Closed-ended Funds A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
Interval Funds Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices.
I. By Investment Objective: Growth Funds The aim of growth funds is to provide capital appreciation over the medium to longterm. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. Income Funds The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Balanced Funds The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. I. Money Market Funds The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments
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such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. Load Funds A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work. I. Other Schemes: Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30, 2000. I. Special Schemes Industry Specific Schemes Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc. Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50 Sectoral Schemes Sect oral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.
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CHAPTER NO- 11
COST INVOLVED IN MUTUAL FUNDS An investor must know that there are certain costs involved while investing in mutual funds. OPERATING EXPENSES: These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment managers, audit fees to charted accountant, custodial fees, register and transfer agent fees, trustee fees, agent commission. Operating expenses also known as expenses ratio which is annual expenses expressed as a percentage of these expenses is required to be reported in the schemes offer document or prospectus.
Expenses ratio =
Operating expenses Average net assets
For instance, if funds Rs. 100 crores and expenses Rs. 20 lakhs. Then expenses ratio is 2% expenses ratio is available in the offer document and fro historical per unit statistics included in the financial results of the fund which are published by annually, un audited for the half year ending September 30th and audited for the physically year end 1st March 30th
SALES CHARGES: These are known commonly sale loads; these are charged directly to investor. Sales loads are used by mutual fund for the payment of agents commission, distribution and marketing expenses. These charges have no effect on the performance of the scheme. Sales loads are usually expression percentage and or of two types front-end and back end.
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FRONT END LOAD: It is a onetime fixed fee paid by an investor when buying a Mutual funds scheme. It determines public offer price which intern decides how much of your initial investment actually get invested the standard practice of arriving a public offer price is as follows Public offer price = net asset value/ (1- front end load) Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs. 10,20. So only 980 units are allowed to the investor. Number of units alloted = amount invested/ public offer price 10,000/10,20= 980 units at a NAV of Rs. 10. This means units worth 9800 are allotted to him an initial investment Rs.10, 000 front end loads tend to decrease as initial investment amount increase.
TRANSACTION COST: Some funds may also impose a switch over fee which is charge on transfer of investment from one scheme to another within a same mutual funds family and also to switch from one plan to another within same scheme. The real estate mutual funds sector is now being considered as the engine of economic growth.
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CHAPTER NO- 12
Conventional Products and Mutual Fund- Comparison
Instrument EPF PPF NSC FDs SENIOR CITIZEN SAVING SCHEMES MUTUAL FUNDS ULIP NPS DIRECT EQUTIY GOLD REAL ESTATE
Tax benefit Y Y Y Y Y Y Y Y Y NA Y
Return 8.5 8 8 5.7-8.5 9 MARKET MARKET MARKET MARKET MARKET MARKET LINKED LINKED LINKED LINKED LINKED LINKED
Duration LT LT LT ST LT LT N ST LT LT LT ST LT
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Figure
Indian mutual fund industry has immense potential to grow even if it is able to reach 20% levels of the countries like Brazil and Indian investors are better informed about the benefits of investment as compared to alternative investment avenues.
CHAPTER NO- 13
Benefits of Mutual Fund investment
1. Professional Management Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. 2.Diversification Fund with far less money than Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual you can do on your own. 3. Convenient Administration
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Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. 1. Return Potential Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. 2. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. 3. Liquidity In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. 4. Transparency You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. 5. Flexibility Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience. 6. 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. 7. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. 8. Well Regulated
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All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
CHAPTER NO- 14
KEY TERMS
Net Asset Value (NAV) The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention. Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Net Asset value is equal to Sum of market value of shares/debentures + Liquid assets/cash held, if any + Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid
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SIP( SYSTAMATIC INVESTMENT PLAN) Here is a illustration using hypothetical figures indicating how SIP can work for investors. Suppose a investor would like to invest Rs. 1000 under SIP on a monthly basis Amount Invested Initial Investment 1 2 3 4 5 6 7 8 9 10 11 Total 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 1000 12000 Purchase NAV (Rs.) 10 8.20 7.40 6.10 5.40 6.00 8.20 9.25 10 11.25 13.40 14.40 No. of Purchased 100 121.95 135.14 163.93 185.19 166.67 121.95 108.11 100 88.89 74.63 69.44 1435.90 Units
Average unit cost Average unit price
Rs. 12,000/1435.9 = Rs.8.36 109.6/12 = Rs. 9.13 Rs. 14.90
Unit price at beginning of next quarter Market value of investment
1435.9 * 14.90 = Rs. 21395
Using the SIP strategy the investor can reduce the average cost per unit. The investor gets the advantage of getting more units when the market is turned down.
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27 Apr, 2011, 06.50AM IST, Shailesh MenonShailesh Menon,ET Bureau SIPs giving a new lease of life for MFs Systematic investment plan (SIP) mode of investing is gaining popularity among investors. "It took 25 years for investors to understand that MFs are long-term investment products. We've now begun seeing increased inflows through SIPs. This will be the game-changer for the industry in the years to come," said Dhirendra Kumar, managing director of fund research firm Value Research.
SIP: THE GAME-CHANGER A look at data sourced from asset management companies reveals that the number of SIPs has grown over 45% over the past 15 months. New SIP additions among funds serviced by fund registrar CAMS have gone up to 17.7 lakh in 2010-11 from 5.2 lakh folios in 2009-10 . The industry added 2.2 lakh folios in the April-June quarter, 4.2 lakh folios during July September , 5.8 lakh during October-December and 4.8 lakh during the January-March quarter. "SIPs will be the game-changer for MFs in the coming years," said A Balasubramanian , CEO of Birla Sun Life MF. "Fund houses will have to get their basics right to survive. They will have to promote SIPs, increase distribution reach and bring in more retail investors to debt funds." If one takes a long-term view, SIPs have gradually gained popularity among retail investors. The number of live SIPs has gone up to 41.1 lakh in February 2011 from 18.1 lakh accounts in March 2009. Weighted average investment in one SIP account is about Rs 2,300 a month. The duration of investment on an average has gone up to about 36 months from 12-14 months. With about 93% of SIP transactions happening electronically or through automatic clearing, fund houses do not fear about missed payments. "The sad part, however, is that distributors are not willing to sell SIPs. They are not incentivised enough to sell them," said Mr Kumar of Value Research. "At the current commission rates, I do not expect the industry to grow. Distributors will not approach smaller investors as the brokerage they receive from smaller investors will not be worth the effort."
SWP (SYSTEMATIC WITHDRAWL PLAN)
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A SWP means an option given by the mutual fund scheme to allow an investor to withdraw an amount periodically from his A/C for his expenses. This works like a monthly income plan &is suitable for those pensioners who need money for their daily sustenance.
KNOW YOUR CLIENT (KYC) : In order to comply with regulatory provisions under the Prevention of Money Laundering Act 2002, Rules issued thereunder and related guidelines/circulars issued by SEBI, KYC formalities are required to be completed for all the investors, including Guardians and Power of Attorney holders, for any investment in mutual funds, irrespective of the amount, for carrying out the transactions such as new/ additional purchase, switch transactions, new SIP/ STP/ DTP registrations received from effective date i.e. January 1, 2011. The applications received for the aforesaid transactions without complying with KYC procedure are liable to be rejected. However, the said procedure is not applicable for redemption/ repurchase. For the convenience of investors in mutual funds, all mutual funds have made special arrangements with CDSL Ventures Ltd. (CVL), a wholly owned subsidiary of Central Depository Services (India) Ltd. (CDSL). Accordingly, CVL, on behalf of all mutual funds will carry out the process of KYC and issue an acknowledgement. Investors have to provide the relevant documents and information ONLY ONCE for complying with KYC, instead of providing the required documents again and again to different mutual funds in which one would like to invest. After that Investors could invest in the schemes of all mutual funds by merely attaching a copy of the KYC acknowledgement slip with the application form / transaction slip when investing for the first time in every folio (Post KYC) in each Mutual Fund house, without the necessity to submit the KYC documents again. This facility is being provided absolutely FREE OF COST to the investors. DOCUMENTS AND INFORMATION TO BE PROVIDED BY INVESTORS: Investors in mutual fund schemes have to provide: (1) Proof of Identity (2) Proof of Address (3) PAN Card (4) Photograph
ASSET UNDER MANAGEMENT (AUM) Assets Under Management (AUM) represents the money which is managed by a mutual fund in a scheme. Adding AUMs for all schemes of a fund house gives the AUM of that fund house and the figure arrived at by adding AUMs of all fund houses represents the industry AUM. AUM is calculated by multiplying the Net Asset Value of a scheme by the number of
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units issued by that scheme. A change in AUM can happen either because of fall in NAV or redemptions. In case of sharp market falls, the NAVs move down, because of which the AUMs may reduce.
Source: www.amfiindia.com FUND FACT SHEET
Figure 07
Investors must read the Offer Document (OD) before investing. If not the OD, at least the Key Information Memorandum (KIM), which has to be provided with the application form. After an investor has entered into a scheme, he must monitor his investments regularly. This can be achieved by going through the Fund Fact Sheet. This is a monthly document which all mutual funds have to publish. This document gives all details as regards the AUMs of all its schemes, top holdings in all the portfolios of all the schemes, loads, minimum investment, performance over 1, 3, 5 years and also since launch, comparison of schemes performance with the benchmark index (most mutual fund schemes compare their performance with a benchmark index such as the Nifty 50) over the same time periods, fund managers outlook, portfolio composition, expense ratio, portfolio turnover, risk adjusted returns, equity/ debt
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split for schemes, YTM for debt portfolios and other information which the mutual fund considers important from the investors decision making point of view. In a nutshell, the fund fact sheet is the document which investors must read, understand and keep themselves updated with.
CHAPTER NO- 15
SWOT ANALYSIS OF A MUTUAL FUND COMPANY
STRENGTHS Diversification When you buy stock in one company, there is no diversification. If the company does well, the market price increase, one makes a profit when the stock is sold. If the company does not do well and the price drops, one loses money when the stocks sold. But if one invests in the common stock of two-three companies, gains from one or more companies can offset losses in the others. Therefore the greater one diversifies; the more are the chances of minimum losses. (Sector wise Diversification) Sectors Consumer durable Information technology Pharmaceuticals Automobiles Power % 35 32 20 10 3 100 This means if invertors give Rs. 100 to a mutual fund fir investing, the mutual fund invested 35% of Rs. 100 in consumer durables as given above. Therefore if the market price of the consumer durable scrips dips by 10%, Rs. 35 invested will give the investors Rs. 31.5/-. therefore , provided the value of the other sector scrips remain constant, the investor will face a loss of only Rs 3.50/- the total value that he will be receive will be Rs. 96.50/-
Lower service cost Mutual fund companies offer high and reliable services at low costs. Expert management The mutual funds are managed by professionally qualify fund managers. They are a team of members using f their expertise in deciding the portfolio of companies I which they can invest their money. Easy liquidity
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A mutual fund provides easy liquidity to investors. They have open-ended schemes for investors, which allow one to use an exit-route by which one can easily obtain money from the mutual fund company. The mutual funds companies call this redemption. Transparency Mutual funds companies regularly disclose information regarding NAV, the investment in different industries, and also the several companies in which the investment has been done along with the schemes, investment objectives and the strategy of the fund manager. Regulated All mutual funds are required to be registered under SEBI and the Act as per the provisions and guidelines of SEBI. WEAKNESSES Redemptions Mutual funds companies keep some assets in cash or cash equivalents, just to pay the ongoing redemptions. If the stock market declines, the redemption generally increases dramatically. In order to pay the investors, the fund portfolio manager has to liquidate some stock positions. Selling the stock, forces the price down the price of the stock, which can attract even more redemptions. Market risk/ uncertainties Where more investors money comes into the loan portfolio of mutual funds managers, the manager buys more stock for the portfolio. The buying causes the stock price to increase, which causes the price of funs to rise. But market ineffectiveness can catch up & turn the situation around and make it worse. Similarly a bearish market can bring down the price of the stock. Inflation risk Inflation risk is a rise in price level of goods & services. Investment means to provide an income with a return higher than the inflation rate. Credit risk Mutual funds invest money in the bonds of companies. Credit risk refers to the possibility that the issuer of an individual bond will default (inability to make timely payments of principal & Interest). Exchange rate risk Where the mutual fund would be investing into the securities of foreign companies, it (the portfolio) would be greatly affected by the fluctuations in foreign exchange while converting values into domestic currency. Enter & exit costs Mutual funds generally do charge processing fees as entry and exit cost from the investors. This is sometimes as a deterrent on the part of investors. OPPORTUNITIES Increasing demand from the investors
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Due to safe returns offered, management from expert and qualified fund managers also less risk on account of not being directly connected to the stock market volatility, there is a high demand from the investors for mutual fund companies. THREATS Competition The competitors for mutual funds companies can be banks and insurance companies. Banks are offering safe returns to investors in the form of bank fixed deposits with a stable return. Losing confidence Due to the recent controversies over the most-hyped UTI US-64 fall out, investors mighty slowly lose confidence in mutual fund companies.
CHAPTER NO- 16
Limitations of Mutual Fund It is true that globally, most mutual fund managers underperform the asset class that they are investing in, over the very long-term. It is not true that the fund managers are dumb; this under performance is largely the result of limitations inherent in the concept of mutual funds. These limitations are as follows: Entry and exit costs: Mutual funds are a victim of their own success. When a large body like a fund invests in shares, the concentrated buying or selling often results in adverse price movements i.e. at the time of buying, the fund ends up paying a higher price and while selling it realizes a lower price. This problem is especially severe in emerging markets like India, where, excluding a few stocks, even the stocks in the Sensex are not liquid, let alone stocks in the NSE 50 or the CRISIL 500. So, there is simply no way that a fund can beat the Sensex or any other index, if it blindly invests in the same stocks as those in the Sensex and in the same proportion. For obvious reasons, this problem is even more severe for funds investing in small capitalization stocks. However, given the large size of the debt market, excluding UTI, most debt funds do not face this problem Wait for time before investment: It takes time for a mutual fund to invest money. Unfortunately, most mutual funds receive money when markets are in a boom phase and investors are willing to try out mutual funds. Since it is difficult to invest all funds in one day, there is some money waiting to be invested. Further, there may be a time lag before investment opportunities are identified. This ensures that the fund underperforms the index. For open-ended funds, there is the added problem of perpetually keeping some money in liquid assets to meet redemptions. The problem of impracticability of quick investments is likely to be reduced to some extent with the introduction of index futures. Fund management costs:
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The costs of the fund management process are deducted from the fund. This includes marketing and initial costs deducted at the time of entry itself, called "load". Then there is the annual asset management fee and expenses, together called the expense ratio. Usually, the former is not counted while measuring performance, while the latter is. A standard 2% expense ratio means that, everything else being equal, the fund manager underperforms the benchmark index by an equal amount. Cost of churn: The portfolio of a fund does not remain constant. The extent to which the portfolio changes is a function of the style of the individual fund manager i.e. whether he is a buy and hold type of manager or one who aggressively churns the fund. It is also dependent on the volatility of the fund size i.e. whether the fund constantly receives fresh subscriptions and redemptions. Such portfolio changes have associated costs of brokerage, custody fees, registration fees etc. that lowers the portfolio return commensurately. Change of index composition: World over, the indices keep changing to reflect changing market conditions. There is an inherent survivorship bias in this process, with the bad stocks weeded out and replaced by emerging blue chips. This is a severe problem in India with the Sensex having been changed twice in the last 5 years, with each change being quite substantial. Another reason for change index composition is Mergers & Acquisitions. The weightage of the shares of a particular company in the index changes if it acquires a large company not a part of the index. Tendency to take conformist decisions: From the above points, it is quite clear that the only way a fund can beat the index is through investment of some part of its portfolio in some shares where it gets excellent returns, much more than the index. This will pull up the overall average return. In order to obtain such exceptional returns, the fund manager has to take a strong view and invest in some uncommon or unfancied investment options. Most people are unwilling to do that. They follow the principle "No fund manager ever got fired for investing in Hindustan Lever" i.e. if something goes wrong with an unusual investment, the fund manager will be questioned but if anything goes wrong with the blue chip, then you can always blame it on the "environment" or "uncontrollable factors" knowing full well that there are many other fund managers who have made the same decision. Unfortunately, if the fund manager does the same thing as several others of his class, chances are that he will produce average results. This does not mean that if a fund manager takes "active" views and invests in heavily researched "uncommon" ideas, the fund will necessarily outperform the index. If the idea does not work, it will result in poor fund performance. But if no such view is taken, there is absolutely no chance that the fund will outperform the index.
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CHAPTER NO- 17
HDFC ASSET MANAGEMENT CO. LTD- OVERVIEW
HDFC Mutual Fund is one of the largest mutual funds and well-established fund house in the country with consistent and above average fund performance across categories since its incorporation on December 10, 1999. While our past experience does make us a veteran, but when it comes to investments, we have never believed that the experience is enough.
TRUSTEES HDFC Trustee Company Limited, a company incorporated under the Companies Act, 1956 is the Trustee to HDFC Mutual Fund vide the Trust deed dated June 8, 2000, as amended from time to time. HDFC Trustee Company Ltd is wholly owned subsidiary of HDFC
REGISTRAR & TRANSFER AGENTS COMPUTER AGE MANAGEMENT SERVICES PVT LTD.
CUSTODIAN
HDFC BANK LTD CITIBANK N.A. THE BANK OF NOVA SCOTIA
Key Statistics As on 30th June 2011 Average Asset under Management: Rs. 92,673.42 Crs. No. of investors: 47,80,046 No. of ARN certified distributors - 33,611 The Board of Directors of HDFC Trustee company Limited consists of the following eminent persons.

Mr. Anil Kumar Hirjee Mr. Vincent Joseph OBrien Mr. Shishir K. Diwanji Mr. Ranjan Sanghi
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AUDITORS DELOITTE HASKINS & SELLS
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Investor Corner The first and most important step in your life as an investor is to define your goals at the onset of your investing activity. This will map the road ahead for you in terms of time, amount, type of asset and risk. Investor must also decide how much he is willing to save. Here are a few things that might help Investors : Retirement In how many years? How much money will he need? How long will he need it for? Daughters/Sons wedding When and how much? Daughters/Sons education When and how much? Purchase of big ticket items e.g. House, Car etc. Again, when and how much?
A simple way to get an overall perspective is to draw a time line starting from today with the amount you have saved up till now labeled at time zero. Going forward one can label their major outflows as and when they occur till retirement and then the steady outflows for their retirement income. Please remember the worst enemy Inflation and factor this into your targets. Remember that in an inflationary environment an apple will cost more tomorrow than today. For example:
Let us say that you have Rs. 5,00,000 saved up today. In addition to this you figure that in year 10 you will need Rs. 5,00,000 for your daughters wedding. Also you decide with your wife that you will retire in thirty years time and will need Rs. 6,00,000 per year for 15 years after that. You also decide that you want to play it safe and want to invest only in debt products. Taking an annual rate of return of 7.00% you will have to save Rs. 38,042 per year for thirty year and you will be able to withdraw Rs. 4,61,958 (5,00,000 38,042) for your daughters wedding in year 10. Another scenario with 9.00% is available as well. Now let us assume that you and your wife require Rs. 20,00,000 per annum for 15 years after Qua rterl retirement and want to spend Rs. 15,00,000 on your daughters wedding. Knowing this you y Fixe Debt Inter d decide to take the additional risk of investing your money in Mat equities that historically do tend / Liqu val Inco id Fun urity Exc to provide double-digit returns in the long run. Assuming an Plan annual rate of return on 13.00% me Fun d han Equi Fun ds Gene Inves ge ty / would have to save Rs. 36,328 per year for thirty years to achieve your goals. per annum you d rate Provi t Trad Gro Inves regul de prim ed wth An example with a 15.00% return is provided as well. t in ar high arily
Fun mon ds d ey
t et HDFC PRODUCTS prim and arily debt Chil in instru dren equit ment 'sand y s Gift equit provi Fun y de d relat optim ed um Child instru balan ren's ment ce of Gift s. yield. Fund Inves mark inco level in me of Debt throu liquid / gh ity by Mon inves ey tmen ting Mark ts in et in Debt mon Instr / ey ume Mon mark nts ey et and Mark and Gove et debt rnme Instr instru nt ume ment Secu nts s. rities.
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Parent
Incorporated in Dec 1999, HDFC AMC Ltd. is co-owned (60:40) by HDFC and Standard Life Investments Limited. In June 2010, it was revealed that a dealer from the AMC has been charged with front-running by market regulator SEBI. While investigations continue, in its interim order SEBI indicated that the AMCs funds may have suffered substantially. Although HDFC did launch NFOs, it certainly did not go overboard with trendy NFOs. Perhaps the only glaring exception was the launch of HDFC Infrastructure Fund (a closed-end thematic fund launched in March 2008). Too many NFOs launched during strong markets can signify prioritising short-term asset gathering to an unhealthy degree--we dont believe that is the case here. Although a part of manager compensation is linked to the fund companys profitability, performancelinked pay accounts for roughly 40%-50% of the investment staffs total compensation. Longer time frames (for instance, a three-year period and the managers start date on the fund) are considered, which we think helps align managers interests with those of long-term investors. The AMC has an ESOP program in place to retain talent. PEOPLE Prashant Jain is an extremely experienced investor who owns one of the longest track records in the Indian mutual fund industry. Presently, Jain is named as a manager on five funds (comanaging two of them); he is also designated as the executive director and CIO. Jain has played a key role in shaping the research infrastructure that works well around him. He is supported by an analyst team comprising six members who have an average experience of roughly 4.5 years with the AMC. Analyst responsibilities are divided on sectoral lines. The intention is to ensure that analysts become specialists in their respective sectors, which in turn will lead to detailed coverage of all quality companies. Apart from Jain, there are three equity fund
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managers who also share research responsibilities. The equity fund management team has been reasonably stable for over four years now. Investment philosophy The single most important factor that drives HDFC Mutual Fund is its belief to give the investor the chance to profitably invest in the financial market, without constantly worrying about the market swings. To realize this belief, HDFC Mutual Fund has set up the infrastructure required to conduct all the fundamental research and back it up with effective analysis. Our strong emphasis on managing and controlling portfolio risk avoids chasing the latest "fads" and trends.
Process: Investment Approach The fund invests almost all of its assets in BSE 200 stocks, but the manager takes significant bets versus the benchmark on stocks and sectors to deliver outperformance. Conversely, in market periods when Jain fails to uncover enough stocks that can generate alpha or believes that valuations are stretched, he will not shy away from aligning the portfolio with the benchmark index. Jain uses a growth-at-areasonable-price strategy. He picks stocks on a bottom-up basis, but he also takes into account the macroeconomic environment; in effect, he applies a mix of top-down and bottom-up factors, with the latter being more important. Jain puts a lot of emphasis on understanding businesses and investing in stocks at the right price. Analysts rate stocks from their sectors, based on their estimates of intrinsic value. Also, they are required to maintain a history of their ratings, alongside reasons for changing ratings. This helps lead to introspection and constant evaluation of the research process. Jain recognizes that sell-side research can be a useful source for tapping new investment ideasstocks that are either not in the AMCs portfolios or have been underrepresented therein. Analysts are encouraged to identify competent sell-side analysts who can provide them with attractive investment ideas. However, investment decisions are not based on sell-side researchs buy/sell recommendations; that onus lies with the analysts. Analyst recommendations are made with a twoto three-year investment horizon; however, it isnt uncommon for stocks to feature in the portfolio for significantly longer time frames.
Process: Portfolio Positioning

From June 2003 through May 2011, Jain has predominantly invested in large-cap stocks; they accounted for roughly 73% of the portfolio--broadly in line with a typical India Large Cap category peer, which has roughly 70% in large caps. The portfolio (composed of 60-70 stocks) tends to be more diffuse than that of a typical peer (40 stocks); the top 10 holdings account for roughly 40%-45% of assets, in line with the category norm. But, when it comes to sectoral allocations, Jain doesnt shy away from taking concentrated bets or investing against the grain. For instance, in 2010 the health-care sector accounted for 8% of the portfolio, a significant overweight vis--vis
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the benchmark index BSE 200 (4%). Conversely, he underweighted the basic materials sector (3%) versus the BSE 200 (10%). Because Jain is primarily focused on outperforming the BSE 200 Index, he doesnt ignore benchmark heavyweight stocks while constructing the portfolio. Stocks such as Reliance, Infosys, TCS, SBI, an ICICI, among others have consistently found a place in the portfolio.
Performance Analysis
From the funds migration date to HDFC Mutual Fund (June 2003) through May 2011, it has gained an annualised 34%, beating both its benchmark index (by 9 percentage points per annum) and the category average (by 7 percentage points per annum). Across eight calendar years (2003 to 2010), it found itself in the top quartile of its category on six occasions. Calendar years 2006 and 2007 stand out as blips in an otherwise impressive performance record. The funds rather ordinary performance in those years can be attributed to Jains aversion to investing in momentum stocks, which were then the flavour of the season. The funds showing in the downturn of 2008 is noteworthy, however. Despite posting a painful loss of 45%, it fared better than both the benchmark index and the category average (by 6 percentage points). Jain stood by his strategy of not taking cash calls (average holding 3%), at a time when the typical peers allocation to cash/current assets stood at 14%. The fund benefitted due to investments in stocks from the relatively resilient healthcare and consumer defensives sectors. More recently, in the sideways market of 2010, the fund (up 25%) had one of its best years, outscoring 92% of the competition. Jains investments in the financial services and software sectors paid off, as did investments in stocks like Titan Industries.
Risk & Return

The fund has performed well on the risk/return front. From June 2003 to May 2011, its standard deviation (a statistical measure of risk) is only marginally higher than the category average. Investors have been more than compensated on the risk-adjusted return front; the fund has one of the best Morningstar Risk-Adjusted Return scores in the category, besting 98% of the competition. The funds downside capture ratio during that period is impressive--during periods of market downturns, it suffered 78% of the benchmark indexs downside and 87% of the downside suffered by a typical peer. The fund hasnt missed out in rising markets, either--its upside capture ratio versus the benchmark index is 101% and 107% versus the category average.
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CHAPTER 04.14AM Source: 2 May, 2011,NO- 18 IST, Sameer BhardwajSameer Bhardwaj,ET Bureau
Figure 09
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DATA COLLECTION
Questionnaire
Dear Respondent,
Respondent No: _ _ _
I am a student of Chetanas Institute of Management & Research and I am doing a research on buyer behavior of Mutual Fund. This study is being conducted purely for academic purpose only.
Secrecy of the information will be maintained. Q.1. List 5 Mutual Fund companies that you are aware of:
A. _______________________
b. ____________________________
c. _______________________
d. ____________________________
e. ______________________
Q.2 Have you invested in Mutual Fund? Yes No
Q.3
Which company have you invested in? UTI Franklin Templeton Others (Please specify) HDFC DSF Merrill Lynch __________________________
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Q4.
What would be the reason for choosing the Company? Past Performance NAV Credibility Fund Manager Brand Name Others (please specify) _______________
Q.5. what are the reasons for investing in mutual funds? Good Returns Savings Regular Returns Tax Planning
Others (please specify) ___________________
Q.6. Through which channel would you buy the policy? Stock Broker Direct from Company
Others (please specify) ___________________
Q.7
Why do you prefer specified Channel? ____________________________________________________________ ____________________________________________________________
Q.8
Do you think personalized advice-based Mutual Fund selling should be
encouraged? Yes No
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Q. 11 Ra te th e fol lo wi ng pa ra me Q.10. which type of Mutual Fund you like to invest? te rs on th e ba sis of sa tis fa cti on el -----------------------------------------------------------------------------------------lev -----------------------------------------------------------------------------------------Yes No Others (please specify) ___________________ Equity Debt Balanced Money Market Q.9 For what period do you normally invest in a mutual fund? Less than 6 months 2 years More than 3 years 6 months 1 year 3 years
(1 Le as t, 2av er ag e, 3go od, 4ve
Q.13. what do you think is the credibility of HDFC AMC? Highly credible Less credible Very credible Not credible
Q.14
What would be the impact of Mutual Fund sector opening up?
ry Overview of Mutual Fund Industry: HDFC AMC, a case study
Page 63
More choice to the consumer More complication and confusion
Better quality of service
Others (Please Specify)_________________________________
Q.15
Which player would you choose in the present scenario? Why?
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Q16 Which age group do you belong to? 18 25 26 30 31 35 35 & above
Q17 which income groups do you belong to? 50,000 1,00,000 1.00,000 2,00,000 2,00,000 3,00,000 3,00,000 & Above
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CHAPTER NO- 19
DATA ANALYSIS
Sample size: 30
Reasons
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CONCLUSION
An Indian investor who is looking forth to an investment which allows him to beat the inflation rate, and still not expose him to aggravated risks, and helps him achieve his financial plan, has his work cut out. The stock markets have shown high volatility and the risks associated with direct equity investments have escalated too, in such a scenario one investment choice that really stands apart is mutual funds. A professionally managed mutual fund industry has emerged as the most appropriate investment vehicle for small investors, who neither have the in-depth knowledge nor the resources to build a safe and diversified portfolio that have the potential to provide steady returns over a long period of time. Investors lately have recognized the benefits of investing through mutual funds .The growing dominance of the mutual funds is clearly evident in the capital markets. Fund houses which are sitting on huge amount of cash - collected during their respective new fund offerings - have been using any dip in the market lately to enter into a big way, in turn providing a cushion to the markets. The investors loss of confidence in mutual funds since 2000, when most of the scheme lost money, has been regained due to the good performance from 2003 till now, and the past has been forgotten. Investors have started realizing the important of mutual funds as an investment avenue which offer everything an investor looks for which includes convenience, transparency, professional management, risk containment and above all decent returns. The journey has just begun and industry is poised to turn a new leaf as witnessed by the increasing penetration and awareness of mutual funds products across the nation. MFs are also doing their best to allure investors by offering innovative products. The mutual funds industry has grown by leaps and bounds in last couple of years. Following the strengthening of regulatory framework there is now greater transparency and credibility in the functioning of mutual funds and has been successful in regaining investors faith. But to sustain the momentum it should start focusing on the areas where greater accountability and transparency could propel the industry towards a new growth trajectory. As of now big challenge for the mutual fund industry is to mount on investor awareness and to spread further. These initiatives would help towards making the Indian mutual fund industry more vibrant and competitive. To make this happen it calls for a greater role not only part of the regulator
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but also on industry and distributors and ensure that investor confidence is maintained through consistent performance and best business practices. The HDFC AMC tops with its five funds. Fidelity and Reliance AMCs shared the second spot with four funds each. The ones from Birla Sun Life, Franklin and Religare shared the third spot with two funds each. Canara, IDFC, ING, Principal, Sahara and UTI AMCs have one fund each in the list.
BIBLIOGRAPHY 1. NCFM Study Material (AMFI Mutual Fund Guide) 2. http://www.mutualfundsindia.com 3. http:// www.amfiindia.com
1.
http://www.sebi.gov.in
2. http://www.valueresearchonline.com 3. www.hdfcfund.com
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Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Definition and purpose of the project

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Scope and Objectives of the Project

The main objectives of study are as follows:

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

pool their money with

Ideally Mutual Funds should be doing the following:

U Utilizes possible realize returns. A L F

Overview of Mutual Fund Industry: HDFC AMC, a case study

Develops financial markets.

S Strives to provide bett3r & safe returns to investors.

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

STRUCTURE OF MUTUAL FUND COMPANY

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

2. LONG TERM RETURN:

5. RISK ADJUSTED PERFORMANCE:

Overview of Mutual Fund Industry: HDFC AMC, a case study

TOOLS FOR ANALYSIS

Overview of Mutual Fund Industry: HDFC AMC, a case study

MUTUAL FUND PRODUCTS

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

DISTRIBUTION CHANNELS IN THE MUTUAL FUND INDUSTRY:

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Overview of Mutual Fund Industry: HDFC AMC, a case study

Types of Mutual Funds

Overview of Mutual Fund Industry: HDFC AMC, a case study

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