eBook Mutual Fund Basics for Entrepreneurs

8/9/2019 eBook Mutual Fund Basics for Entrepreneurs

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MUTUAL FUND BASICS

FORENTREPRENEURS

by :

DR. T.K. JAIN

AFTERSCHOOL

centre for social entrepreneurship

sivakamu veterinary hospital road

bikaner 334001 rajasthan, india

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My words....

Here I present a basic structure of mutual funds in

India. I wish that more people should become

entrepreneurs. An ordinary Indian entrepreneurwishes to remain an honest entrepreneur and

contribute to the development of nation but we

have to strengthen those institutions which truly

promote entrepreneurship, not just degree

granting institutions. Let us work together topromote knowledge, wisdom, social development

and education. We believe in free education for

all, free support for all, entrepreneurship

opportunities and training for all. Let us work

together for these goals. ... I alone cant do much, I

need support of perosns like you .......... ...

T.K. Jain

http://www.afterschool.tk/http://www.afterschool.tk/


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Mutual fund is a trust that pools the savings of a

number of investors who share a common financial

goal. This pool of money is invested in accordance

with a stated objective. The joint ownership of the

fund is thus Mutual, i.e. the fund belongs to all

investors. The money thus collected is then

invested in capital market instruments such as

shares, debentures and other securities. The

income earned through these investments and the

capital appreciations realized are shared by its unit

holders in proportion the number of units owned

by them. Thus a Mutual Fund is the most suitableinvestment for the common man as it offers an

opportunity to invest in a diversified, professionally

managed basket of securities at a relatively low

cost. A Mutual Fund is an investment tool that

allows small investors access to a well-diversifiedportfolio of equities, bonds and other securities.

Each shareholder participates in the gain or loss of

the fund. Units are issued and can be redeemed as

needed. The funds Net Asset value (NAV) is

determined each day.



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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.

When an investor subscribes for the units of a

mutual fund, he becomes part owner of the assets

of the fund in the same proportion as his

contribution amount put up with the corpus (the

total amount of the fund). Mutual Fund investor is

also known as a mutual fund shareholder or a unit

holder.

Any change in the value of the investments made

into capital market instruments (such as shares,

debentures etc) is reflected in the Net Asset Value

(NAV) of the scheme. NAV is defined as the market

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value of the Mutual Fund scheme's assets net of its

liabilities. NAV of a scheme is calculated by

dividing the market value of scheme's assets by the

total number of units issued to the investors.

ADVANTAGES OF MUTUAL FUND

Portfolio Diversification

Professional management

Reduction / Diversification of Risk

Liquidity

Flexibility & Convenience

Reduction in Transaction cost

Safety of regulated environment

Choice of schemes

Transparency

DISADVANTAGE OF MUTUAL FUND

No control over Cost in the Hands of an Investor



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No tailor-made Portfolios

Managing a Portfolio Funds

Difficulty in selecting a Suitable Fund Scheme

HISTORY OF THE INDIAN MUTUAL FUND

INDUSTRY

The mutual fund industry in India started in 1963

with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve

Bank. Though the growth was slow, but it

accelerated from the year 1987 when non-UTI

players entered the Industry.

In the past decade, Indian mutual fund industry

had seen a dramatic improvement, both qualities

wise as well as quantity wise. Before, the monopoly



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of the market had seen an ending phase; the Assets

Under Management (AUM) was Rs67 billion. The

private sector entry to the fund family raised the

Aum to Rs. 470 billion in March 1993 and till April

304; it reached the height if Rs. 1540 billion.

The Mutual Fund Industry is obviously growing at

a tremendous space with the mutual fund industry

can be broadly put into four phases according to

the development of the sector. Each phase is briefly

described as under.

First Phase 1964-87

Unit Trust of India (UTI) was established on 1963

by an Act of Parliament 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



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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 1993-303 (Entry of Private

Sector Funds)



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1993 was the year in which the first Mutual Fund

Regulations came into being, under which all

mutual funds, except UTI were to be registered and

governed. The erstwhile Kothari Pioneer (now

merged with Franklin Templeton) was the first

private sector mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were

substituted by a more comprehensive and revised

Mutual Fund Regulations in 1996. The industry

now functions under the SEBI (Mutual Fund)

Regulations 1996. As at the end of January 303,

there were 33 mutual funds with total assets of Rs.

1,21,805 crores.

Fourth Phase since February 303

In February 303, 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 303, representing broadly, the assets of US



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64 scheme, assured return and certain other

schemes

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. consolidation and growth. As at the

end of September, 304, there were 29 funds, which

manage assets of Rs.153108 crores under 421

schemes.

STRUCTURE OF THE INDIAN MUTUAL

FUND INDUSTRY

Mutual fund is a trust that pools the savings of a number of

investors who share a common financial goal. This pool of

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money is invested in accordance with a stated objective. The

joint ownership of the fund is thus Mutual, i.e. the fund

belongs to all investors. The money thus collected is then

invested in capital market instruments such as shares,

debentures and other securities. The income earned through

these investments and the capital appreciations realized are

shared by its unit holders in proportion the number of units

owned by them. Thus a Mutual Fund is the most suitable

investment for the common man as it offers an opportunity

to invest in a diversified, professionally managed basket of

securities at a relatively low cost. A Mutual Fund is an

investment tool that allows small investors access to a well-

diversified portfolio of equities, bonds and other securities.

Each shareholder participates in the gain or loss of the fund.

Units are issued and can be redeemed as needed. The funds

Net Asset value (NAV) is determined each day.

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



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in accordance with quantum of money invested by them.

Investors of mutual funds are known as unit holders.

When an investor subscribes for the units of a mutual fund,

he becomes part owner of the assets of the fund in the same

proportion as his contribution amount put up with the

corpus (the total amount of the fund). Mutual Fund investor



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is also known as a mutual fund shareholder or a unit holder.

Any change in the value of the investments made into capital

market instruments (such as shares, debentures etc) is

reflected in the Net Asset Value (NAV) of the scheme. NAV

is defined as the market value of the Mutual Fund scheme's

assets net of its liabilities. NAV of a scheme is calculated by

dividing the market value of scheme's assets by the total

number of units issued to the investors.

The largest categories of Mutual Funds are the ones floated

by the private sector and by Foreign Asset Management

Companies. The largest of these are Prudential ICICI AMC

and Birla Sun Life AMC. The aggregate corpus of assets

managed by this category of AMCs is in excess of Rs.350 bn.

Earlier the Indian Mutual Fund industry was dominated by

the Unit Trust of India which has a total corpus of Rs.700 bn

collected from more than 20 million investors. The UTI hasmany funds/schemes in all categories i.e. equity, balanced,

income etc. with some being open-ended and some being

closed-ended. The Unit Scheme 1964 commonly referred to

as US 64, which is a balanced fund, is the biggest scheme

with a corpus of about Rs.200 bn. UTI was floated by

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financial institutions and is governed by a special Act of

Parliament. Most of its investors believe that the UTI is

government owned and controlled, which, while legally

incorrect, is true for all practical purposes.

The second largest categories of mutual funds are the ones

floated by nationalized banks. Can bank Asset Management

floated by Canara Bank and SBI Funds Management floated

by the State Bank of India are the largest of these. GIC AMC

floated by the General Insurance Corporation and Jeevan

Bima Sahayog AMC floated by the LIC are some of the other

prominent ones. The aggregate corpus of funds managed by

this category of AMCs is about Rs.200 bn.

ABOUT MUTUAL FUNDS

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

of investors who share a common financial goal. The moneythus collected is then invested in capital market instruments

such as shares, debentures and other securities. The income

earned through these investments and the capital

appreciation realized is shared by its unit holders in

proportion to the number of units owned by them. Thus a



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Mutual Fund is the most suitable investment for the

common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a

relatively low cost. The flow chart below describes broadly

the working of a mutual fund.

The structure of Mutual Funds in India is governed by

SEBI (Mutual Fund) Regulations, 1996.

It is mandatory to have a three tier structure of Sponsor

Trustee Asset Management Company.


SEBI

AMC

Unitholders

Saving

s

Units

Trust

Investments

Returns

Trust

AMCCustodian

Registrar


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The trust is established by a Sponsor or more than one

sponsor who is like a promoter of a company. He appoints

the Trustees who are responsible to the investors of the

fund.

The Trustees of the mutual fund hold its property for the

benefit of the unit holders.

Asset Management Company (AMC) approved by SEBI is

the business face of the mutual fund as it manages all the

affairs of the fund by making investments in various types

of securities.

Custodian, who is registered with SEBI, holds the

securities of various schemes of the funds in its

custody.

WHY MUTUAL FUNDS?



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An investor normally prioritizes his investment needs

before undertaking an investment. So different goals will

be allocated different proportions of the total disposable

amount. Investments for specific goals normally find their

way into the debt market as risk reduction is of prime

importance. This is the area for the risk-averse investorsand here, mutual funds are generally the best option. The

reasons are not difficult to see.

One can avail of the benefits of better returns with added

benefits of anytime liquidity by investing in open-ended

debt funds at lower risk. Many people have burnt their

fingers by investing in fixed deposits of companies whowere assuring high returns but have gone bust in course of

time leading to distraught investors as well as pending

cases in the Company Law Board.



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This risk of default by any company that one has chosen to

invest in, can be minimized by investing in mutual funds

as the fund managers analyze the companies financials

more minutely than an individual can do as they have the

expertise to do so. They can manage the maturity of their

portfolio by investing in instruments of varied maturity

profiles. Since there is no penalty on pre-mature

withdrawal, as in the cases of fixed deposits, debt funds

provide enough liquidity. Moreover, mutual funds are

better placed to absorb the fluctuations in the prices of the

securities as a result of interest rate variation and one can

benefits from any such price movement.

Apart from liquidity, these funds have also provided verygood post-tax returns on year to year basis. Even

historically, we find that some of the debt funds have

generated superior returns at relatively low level of risks.

On an average debt funds have posted returns over 10

percent over one-year horizon. The best performing fundshave given returns of around 14 percent in the last one-

year period. In nutshell we can say that these funds have

delivered more than what one expects of debt avenues

such as post office schemes or bank fixed deposits.

Though they are charged with a dividend distribution tax



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on dividend payout at 10 percent (plus a surcharge of 10

percent), the net income received is still tax free in the

hands of investor and is generally much more than all

other avenues, on a post tax basis.

Moving up in the risk spectrum, we have people who

would like to take some risk and invest in equity

funds/capital market. However, since their appetite for

risk is also limited, they would rather have some exposure

to debt as well. For these investors, balanced funds

provide an easy route of investment. Armed with the

expertise of investment techniques, they can invest in

equity as well as good quality debt thereby reducing risks

and providing the investor with better returns than hecould otherwise manage. Since they can reshuffle their

portfolio as per market conditions, they are likely to

generate moderate returns even in pessimistic market

conditions.

This risk of default by any company that one has chosen toinvest in, can be minimized by investing in mutual funds

as the fund managers analyze the companies financials

more minutely than an individual can do as they have the

expertise to do so. They can manage the maturity of their

portfolio by investing in instruments of varied maturity



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profiles. Since there is no penalty on pre-mature

withdrawal, as in the cases of fixed deposits, debt funds

provide enough liquidity. Moreover, mutual funds are

better placed to absorb the fluctuations in the prices of the

securities as a result of interest rate variation and one can

benefits from any such price movement.

Next come the risk takers. Risk takers by their very

nature, would not be averse to investing in high-risk

avenues. Capital markets find their fancy more often than

not, because they have historically generated better

returns than any other avenue, provided, the money was

judiciously invested. Though the risk associated is

generally on the higher side of the spectrum, the return-potential compensates for the risk attached.

Capital markets interest people, albeit not all for there are

several problems associated. First issue is that of

expertise. While investing directly into capital market one

has to be analytical enough to judge the valuation of thestock and understand the complex undertones of the

stock. One needs to judge the right valuation for exiting

the stock too. It is very difficult for a small investor to

keep track of the movements of the market. Entrusting the

job to experts, who watch the trends of the market and



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analyze the valuations of the stocks will solve this problem

for an investor. Mutual funds specialize in identification

of stocks through dedicated experts in the field and this

enables them to pick stocks at the right moment. Sector

funds provide an edge and generate good returns if the

particular sector is doing well.

Next problem is that of funds/money. A single person

cant invest in multiple high-priced stocks for the sole

reason that his pockets are not likely to be deep enough.

This limits him from diversifying his portfolio as well as

benefiting from multiple investments.

Here again, investing through MF route enables an

investor to invest in many good stocks and reap benefitseven through a small investment. This not only diversifies

the portfolio and helps in generating returns from a

number of sectors but reduces the risk as well. Though

identification of the right fund might not be an easy task,

availability of good investment consultants andcounselors will help investors take informed decision.

How are the Mutual Funds Structured?

The Mutual Funds are structured in two forms: Company



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form and Trust form.

Company Form : These forms of mutual funds are

more popular in US.

Trust Form : In India, mutual funds are organized as

Trusts. The Trust is either managed by a Board of

Trustees or by a Trustee Company.

There must be at least 4 members in the Board of

Trustees and at least 2/3 of the members of the board

must be independent.

NOTE: Trustee of one mutual fund cannot be a trustee

of another mutual fund.

Unit Trusts Constituents:

A Mutual Fund is set up in the form of a Trust which has the

following constituents:-

1. Fund Sponsor

2.Mutual Fund as Trust

3.Asset Management Company



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4.Other Fund Constituents

4.1. Custodian and Depositors

4.2.Brokers

4.3.Transfer Agent

4.4.Distributors

FUND SPONSOR

What a promoter is to a company, a sponsor is to a mutual

fund. The sponsor initiates the idea to set up a mutual fund.

It could be a financial services company, a bank or a

financial institution. It could be Indian or foreign. It could

do it alone or through a joint venture. In order to run amutual fund in India, the sponsor has to obtain a license

from SEBI. For this, it has to satisfy certain conditions, such

as on capital and profits, track record (at least five years in

financial services), default-free dealings and a general

reputation for fairness. The sponsor must have been profit



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making in at least 3 years of the above 5 years.

The Sponsor appoints the Trustees, Custodian and the AMC

with the prior approval of SEBI and in accordance with SEBI

Regulations. Like the company promoter, the sponsor takes

big-picture decisions related to the mutual fund, leaving

money management and other such nitty-gritty to the other

constituents, whom it appoints. The sponsor should inspire

confidence in you as a money manager and, preferably, be

profitable. Financial muscle, so long as it is complemented

by good fund management, helps, as money is then not an

impediment for the mutual fund- it can hire the best talent,

invest in technology and continuously offer high service

standards to the investors.

In the days of assured return schemes, sponsors also had to

fulfill return promises made to the unit holders. This

sometimes meant meeting shortfalls from their own pockets,as the government did for UTI. Now that assured return

schemes are passed, such bailouts wont be required. All

things considered, choose sponsors who are good money

managers, who have a reputation for fair business practices

and who have deep pockets.



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TRUST

The Mutual Fund is constituted as a Trust in accordance

with the provisions of the Indian Trusts Act, 1882 by the

Sponsor. The trust deed is registered under the Indian

Registration Act, 1908. The Trust appoints the Trustees who

are responsible to the investors of the fund.

TRUSTEES

Trustees are like internal regulators in a mutual fund, and

their job is to protect the interests of the unit holders.

Trustees are appointed by the sponsors, and can be either

individuals or corporate bodies. In order to ensure they are

impartial and fair, SEBI rules mandate that at least two-

thirds of the trustees be independent, i.e., not have any

association with the sponsor.

Trustees appoint the AMC, which subsequently, seeks their

approval for the work it does, and reports periodically to

them on how the business being run. Trustees float and

market schemes, and secure necessary approvals. They



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check if the AMCs investments are within defined limits and

whether the funds assets are protected. Trustees can be held

accountable for financial irregularities in the mutual fund.

Rights of the Trustees:

Trustees appoint the AMC in consultation with the

sponsor and according to the SEBI Regulations.

All Mutual Fund Schemes floated by the AMC have to

be approved by the Trustees.

Trustees can seek information from the AMC regarding

the operations and compliance of the mutual fund.

Trustees can seek remedial actions from AMC, and in

cases can dismiss the AMC.

Trustees review and ensure that the net worth of the

AMC is according to the stipulated norms, every

quarter.

Obligations of the Trustees:



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Trustees must ensure that the transactions of the

mutual fund are in accordance with the trust deed.

Trustees must ensure that the AMC has systems and

procedures in place.

Trustees must ensure due diligence on the part of AMCin the appointment of constituents and business

associates.

Trustees must furnish to the SEBI, on half yearly basis a

report on the activities of the AMC.

Trustees must ensure compliance with SEBI

Regulations.

ASSET MANAGEMENT COMPANY (AMC)

An AMC is the legal entity formed by the sponsor to run a

mutual fund. The AMC is usually a private limited company

in which the sponsors and their associates or joint venture



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partners are the shareholders. The trustees sign an

investment agreement with the AMC, which spells out the

functions of the AMC. It is the AMC that employs fund

managers and analysts, and other personnel. It is the AMC

that handles all operational matters of a mutual fund from

launching schemes to managing them to interacting with

investors.

The people in the AMC who should matter the most to you

are those who take investment decisions. There is the head

of the fund house, generally referred to as the Chief

Executive Officer (CEO). Under him comes the Chief

Investment Officer (CIO), who shapes the funds investment

philosophy, and fund managers, who manages its schemes.

They are assisted by a team of analysts, who track markets,

sectors and companies.

Although these people are employed by the AMC, its you,

the unit holders, who pays their salaries, partly or wholly.Each scheme pays the AMC an annual fund management

fee, which is linked to the scheme size and results in a

corresponding drop in your return. If a schemes corpus is

up to Rs.100 crores it pays 1.25% of its corpus a year; on

over Rs.100 crores, the fee is 1% of the corpus. So, if a fund



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house has two schemes, with a corpus of Rs.100 crores and

Rs.200 crores respectively, the AMC will earn Rs.3.25 crore

(1.25+2) as fund management fee that year.

If an AMCs expenses for the year exceed what it earns as

fund management fee from its schemes, the balance has to

be met by the sponsor. Again, financial strength comes into

play: a cash-rich sponsor can easily pump in money to meet

short falls, while a sponsor with less financial clout might

force the AMC to trim costs, which could well turn into an

exercise in cutting corners.

Regulatory requirements for the AMC:

Only SEBI registered AMC can be appointed as

investment managers of mutual funds.

AMC must have a minimum net worth of Rs.10 croresat all times.

An AMC cannot be an AMC or Trustee of another

Mutual Fund.



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AMCs cannot indulge in any other business, other than

that of asset management

At least half of the members of the Board of an AMC

have to be independent.

The 4

th

schedule of SEBI Regulations spells out rightsand obligations of both trustees and AMCs.

Obligations of the AMC:

Investments have to be according to the investmentmanagement agreement and SEBI regulations.

The actions of its employees and associates have to be

as mandated by the trustees.

AMCs have to submit detailed quarterly reports on the

working and performance of the mutual fund.

AMCs have to make the necessary statutory disclosures



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on portfolio, NAV and price to the investors.

Restrictions on the AMC:

AMCs cannot launch a scheme without the prior

approval of the trustees.

AMCs have to provide full details of the investments by

employees and Board members in all cases where the

investment exceeds Rs.1 lakh.

AMCs cannot take up any activity that is in conflict with

the activities of the mutual fund.

Conditions under which two AMCs can be merged:

SEBI Regulations require the following:

SEBI and Trustees of both the funds must approve of

the merger.

Unit holders should be notified of the merger, and

provided the option to exit at NAV without load.

Conditions under which an AMC can be taken over:



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SEBI approval is required for the change of ownership and

unit holders have to be informed of the takeover.

Scheme take over:

If an existing mutual fund scheme is taken over by another

AMC, it is called as scheme take over. The two mutual funds

continue to exist. Trustee and SEBI approval and

notification of the unit holders are required for scheme take

over.

CUSTODIAN

A custodian handles the investment back office of a mutual

fund. Its responsibilities include receipt and delivery of

securities, collection of income, distribution of dividends

and segregation of assets between the schemes. It also track

corporate actions like bonus issues, right offers, offer for

sale, buy back and open offers for acquisition. The sponsorof a mutual fund cannot act as a custodian to the fund. This

condition, formulated in the interest of investors, ensures

that the assets of a mutual fund are not in the hands of its

sponsor. For example, Deutsche Bank is a custodian, but it

cannot service Deutsche Mutual Fund, its mutual fund arm.



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BROKERS

Role of Brokers in a Mutual Fund:

They enable the investment managers to buy and sell

securities.

Brokers are the registered members of the stock

exchange.

They charge a commission for their services.

In some cases, provide investment managers with

research reports.

Act as an important source of market information.

REGISTRAR OR TRANSFER AGENTS



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Registrars, also known as the transfer agents, are

responsible for the investor servicing functions. This

includes issuing and redeeming units, sending fact sheets

and annual reports. Some fund houses handle such

functions in-house. Others outsource it to the Registrars;

Karvy and CAMS are the more popular ones. It doesnt really

matter which model your mutual fund opt for, as long as it is

prompt and efficient in servicing you. Most mutual funds, in

addition to registrars, also have investor service centers of

their own in some cities.

Some of the investor related services are:-

Processing investor applications.

Recording details of the investors.

Sending information to the investors.

Processing dividend payout.

Incorporating changes in the investor information.



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Keeping investor information up to date.

DISTRIBUTORS

Role of Selling and Distribution Agents:

Selling agents bring investors funds for a commission.

Distributors appoint agents and other mechanisms to

mobilize funds from the investors.

Banks and post offices also act as distributors.

The commission received by the distributors is split into

initial commission which is paid on mobilization of funds

and trail commission which is paid depending on the time

the investor stays with the fund.

TYPES OF MUTUAL FUNDS

Mutual fund schemes may be classified on the basis of its



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structure and its investment objective.

By Structure:

Open-ended Funds

An open-end fund is one that is available for subscription all

through the year. These do not have a fixed maturity.

Investors can conveniently buy and sell units at Net Asset

Value ("NAV") related prices. The key feature of open-end

schemes is liquidity.

Closed-ended Funds

A closed-end fund has a stipulated maturity period which

generally ranging from 3 to 15 years. The fund is open for

subscription only during a specified period. Investors can

invest in the scheme at the time of the initial public issue

and thereafter they can buy or sell the units of the scheme

on the stock exchanges where they are listed. In order to

provide an exit route to the investors, some close-ended

funds give an option of selling back the units to the Mutual

Fund through periodic repurchase at NAV related prices.

SEBI Regulations stipulate that at least one of the two exit

routes is provided to the investor.



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Interval Funds

Interval funds combine the features of open-ended and

close-ended schemes. They are open for sale or redemption

during pre-determined intervals at NAV related prices.

By Investment Objective:

Growth Funds

The aim of growth funds is to provide capital appreciation

over the medium to long- term. Such schemes normally

invest a majority of their corpus in equities. It has been

proven that returns from stocks, have outperformed most

other kind of investments held over the long term. Growth

schemes are ideal for investors having a long-term outlook

seeking growth over a period of time.

Income Funds

The aim of income funds is to provide regular and steady

income to investors. Such schemes generally invest in fixed

income securities such as bonds, corporate debentures and

Government securities. Income Funds are ideal for capital

stability and regular income.



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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 acombination of income and moderate growth.

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

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



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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 acommission for entry or exit. That is, no commission is

payable on purchase or sale of units in the fund. The

advantage of a no load fund is that the entire corpus is put

to work.

Other Schemes:

Tax Saving Schemes

These schemes offer tax rebates to the investors under

specific provisions of the Indian Income Tax laws as theGovernment 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



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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.

Special Schemes

Industry Specific Schemes

Industry Specific Schemes invest only in the industriesspecified in the offer document. The investment of these

funds is limited to specific industries like InfoTech, FMCG,

and Pharmaceuticals etc.

Index Schemes

Index Funds attempt to replicate the performance of a

particular index such as the BSE Sensex or the NSE 50.

Sectoral Schemes:-

Sectoral Funds are those, which invest exclusively in a

specified industry or a group of industries or various

segments such as 'A' Group shares or initial public

offerings.



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BENEFITS OF MUTUAL FUND INVESTMENT

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



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objectives of the scheme.

Diversification

Mutual Funds invest in a number of companies across a

broad cross-section of industries and sectors. This

diversification reduces the risk because seldom do all stocks

decline at the same time and in the same proportion. You

achieve this diversification through a Mutual Fund with far

less money than you can do on your own.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps

you avoid many problems such as bad deliveries, delayed

payments and follow up with brokers and companies.

Mutual Funds save your time and make investing easy and

convenient.

Return 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.



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Low Costs

Mutual Funds are a relatively less expensive way to invest

compared to directly investing in the capital markets

because the benefits of scale in brokerage, custodial and

other fees translate into lower costs for investors.

Liquidity

In open-end schemes, the investor gets the money back

promptly at net asset value related prices from the Mutual

Fund. In closed-end schemes, the units can be sold on a

stock exchange at the prevailing market price or the investor

can avail of the facility of direct repurchase at NAV related

prices by the Mutual Fund.

Transparency

You get regular information on the value of your investmentin 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.



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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.

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.

Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying

needs over a lifetime.

Well Regulated All Mutual Funds are registered with SEBI and they

function within the provisions of strict regulations designed

to protect the interests of investors. The operations of

Mutual Funds are regularly monitored by SEBI.



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RISKS ASSOCIATED WITH MUTUAL

FUNDS

The most important relationship to understand is the risk-

return trade-off. Higher the risk greater the

returns/loss and lower the risk lesser the

returns/loss.Hence it is up to you, the investor to decide



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how much risk you are willing to take. In order to do this

you must first be aware of the different types of risks

involved with your investment decision.

MARKET RISK

Sometimes prices and yields of all securities rise and fall.

Broad outside influences affecting the market in general lead

to this. This is true, may it be big corporations or smaller

mid-sized companies. This is known as Market Risk. A

Systematic Investment Plan (SIP) that works on the

concept of Rupee Cost Averaging (RCA) might help

mitigate this risk.

CREDIT RISK

The debt servicing ability (may it be interest payments or

repayment of principal) of a company through its cashflowsdetermines the Credit Risk faced by you. This credit risk is

measured by independent rating agencies like CRISIL who

rate companies and their paper. An AAA rating is

considered the safest whereas a D rating is considered poor

credit quality. A well-diversified portfolio might help



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mitigate this risk.

INFLATION RISK

Things you hear people talk about: Rs. 100 today is worth

more than Rs. 100 tomorrow. Remember the time when a

bus ride costed 50 paisa? Mehangai Ka Jamana Hai.

The root cause , Inflation. Inflation is the loss of purchasing

power over time. A lot of times people make conservative

investment decisions to protect their capital but end up with

a sum of money that can buy less than what the principal

could at the time of the investment. This happens when

inflation grows faster than the return on your investment. A

well-diversified portfolio with some investment in equities

might help mitigate this risk.

INTEREST RATE RISK

In a free market economy interest rates are difficult if not

impossible to predict. Changes in interest rates affect theprices of bonds as well as equities. If interest rates rise the

prices of bonds fall and vice versa. Equity might be

negatively affected as well in a rising interest rate

environment. A well-diversified portfolio might help

mitigate this risk.



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POLITICAL RISK

Changes in government policy and political decision can

change the investment environment. They can create a

favorable environment for investment or vice versa.

LIQUIDITY RISK

Liquidity risk arises when it becomes difficult to sell the

securities that one has purchased. Liquidity Risk can be

partly mitigated by diversification, staggering of maturities

as well as internal risk controls that lean towards purchase

of liquid securities. You have been reading about

diversification above, but what is it? Diversification The

nuclear weapon in your arsenal for your fight against Risk. It

simply means that you must spread your investment across

different securities (stocks, bonds, money market

instruments, real estate, fixed deposits etc.) and different

sectors (auto, textile, information technology etc.). This kindof a diversification may add to the stability of your returns.

ACCOUNTING AND VALUATION



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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 Net Asset Value

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 numberof the units outstanding. The detailed methodology for the

calculation of the net asset value is given below:

NAV =Market value of investments



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+ Current assets and other assets

+ Accrued income

- Current liabilities and other liabilities

- Accrued expense

MAJOR PLAYERS IN MUTUAL FUNDS INDUSTRY

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with

ABN AMRO Trustee (India) Pvt. Ltd. as the Trustee

Company. The AMC, ABN AMRO Asset Management

(India) Ltd. was incorporated on November 4, 2003.

Deutsche Bank A G is the custodian of ABN AMRO Mutual

Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya



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Birla Group and Sun Life Financial. Sun Life Financial is a

global organization evolved in 1871 and is being represented

in Canada, the US, the Philippines, Japan, Indonesia and

Bermuda apart from India. Birla Sun Life Mutual Fund

follows a conservative long-term approach to investment.

Recently it crossed AUM of Rs. 10,000 Crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was

setup on October 30, 1992 under the sponsorship of Bank of

Baroda. BOB Asset Management Company Limited is the

AMC of BOB Mutual Fund and was incorporated on

November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two

sponsor namely Housing Development Finance Corporation

Limited and Standard Life Investments Limited.



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HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC

Securities and Capital Markets (India) Private Limited as

the sponsor. The Board of Trustees, HSBC Mutual Fund acts

as the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999with the same named Trustee Company. It is a joint venture

of Vysya and ING. The AMC, ING Investment Management

(India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential



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Plc. of America, one of the largest life insurance companies

in the US of A. Prudential ICICI Mutual Fund was setup on

13th of October, 1993 with two sponsors, Prudential Plc. and

ICICI Ltd. The Trustee Company formed is Prudential ICICI

Trust Ltd. and the AMC is Prudential ICICI Asset

Management Company Limited incorporated on 22nd of

June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with

Sahara India Financial Corporation Ltd. as the sponsor.

Sahara Asset Management Company Private Limited

incorporated on August 31, 1995 works as the AMC of

Sahara Mutual Fund. The paid-up capital of the AMC stands

at Rs 25.8 crore.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored

Mutual Fund to launch offshore fund, the India Magnum

Fund with a corpus of Rs. 225 cr. approximately. Today it is



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the largest Bank sponsored Mutual Fund in India. They have

already launched 35 Schemes out of which 15 have already

yielded handsome returns to investors. State Bank of India

Mutual Fund has more than Rs. 5,500 Crores as AUM. Now

it has an investor base of over 8 Lakhs spread over 18

schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust

Act, 1882. The sponsors for Tata Mutual Fund are Tata Sons

Ltd., and Tata Investment Corporation Ltd. The investment

manager is Tata Asset Management Limited and its Tata

Trustee Company Pvt. Limited. Tata Asset Management

Limited is one of the fastest in the country with more than

Rs. 7,703 Crores (as on April 30, 2005) of AUM.



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Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is

a subsidiary of KMBL. It is presently having more than

1,99,818 investors in its various schemes. KMAMC started

its operations in December 1998. Kotak Mahindra Mutual

Fund offers schemes catering to investors with varying risk -

return profiles. It was the first company to launch dedicated

gilt scheme investing only in government securities.

Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited,

established in Jan 14, 2003, manages the UTI Mutual Fund

with the support of UTI Trustee Company Private Limited.

UTI Asset Management Company presently manages a

corpus of over Rs.20000 Crore. The sponsors of UTI Mutual

Fund are Bank of Baroda (BOB), Punjab National Bank

(PNB), State Bank of India (SBI), and Life Insurance

Corporation of India (LIC). The schemes of UTI Mutual

Fund are Liquid Funds, Income Funds, Asset Management



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Funds, Index Funds, Equity Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under

Indian Trusts Act, 1882. The sponsor of RMF is Reliance

Capital Limited and Reliance Capital Trustee Co. Limited is

the Trustee. It was registered on June 30, 1995 as Reliance

Capital Mutual Fund which was changed on March 11, 2004.

Reliance Mutual Fund was formed for launching of various

schemes under which units are issued to the Public with a

view to contribute to the capital market and to provide

investors the opportunities to make investments in

diversified securities.

Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13,

2000 sponsored by Standard Chartered Bank. The Trustee is



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Standard Chartered Trustee Company Pvt. Ltd. Standard

Chartered Asset Management Company Pvt. Ltd. is the AMC

which was incorporated with SEBI on December 20,1999.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California

(USA) based company with a global AUM of US$ 409.2 bn.

(as of April 30, 2005). It is one of the largest financial

services groups in the world. Investors can buy or sell the

Mutual Fund through their financial advisor or through mail

or through their website. They have Open end Diversified

Equity schemes, Open end Sector Equity schemes, Open end

Hybrid schemes, Open end Tax Saving schemes, Open end

Income and Liquid schemes, Closed end Income schemes

and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India



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Morgan Stanley is a worldwide financial services company

and its leading in the market in securities, investment

management and credit services. Morgan Stanley

Investment Management (MISM) was established in the

year 1975. It provides customized asset management

services and products to governments, corporations,

pension funds and non-profit organizations. Its services are

also extended to high net worth individuals and retail

investors. In India it is known as Morgan Stanley

Investment Management Private Limited (MSIM India) and

its AMC is Morgan Stanley Mutual Fund (MSMF). This is

the first close end diversified equity scheme serving the

needs of Indian retail investors focusing on a long-term

capital appreciation.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with

Escorts Finance Limited as its sponsor. The Trustee



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Company is Escorts Investment Trust Limited. Its AMC was

incorporated on December 1, 1995 with the name Escorts

Asset Management Limited.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30,

1994 with Alliance Capital Management Corp. of Delaware(USA) as sponsorer. The Trustee is ACAM Trust Company

Pvt. Ltd. and AMC, the Alliance Capital Asset Management

India (Pvt.) Ltd. with the corporate office in Mumbai.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with

Niche Financial Services Pvt. Ltd. as the sponsorer and

Benchmark Trustee Company Pvt. Ltd. as the Trustee

Company. Incorporated on October 16, 2000 and

headquartered in Mumbai, Benchmark Asset Management

Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund



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Canbank Mutual Fund was setup on December 19, 1987 with

Canara Bank acting as the sponsor. Canbank Investment

Management Services Ltd. incorporated on March 2, 1993 is

the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of

Cholamandalam Investment & Finance Company Ltd. was

setup on January 3, 1997. Cholamandalam Trustee Co. Ltd.

is the Trustee Company and AMC is Cholamandalam AMC

Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund

on 19th June 1989. It contributed Rs. 2 Crores towards the

corpus of the Fund. LIC Mutual Fund was constituted as a

Trust in accordance with the provisions of the Indian Trust



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Act, 1882. . The Company started its business on 29th April

1994. The Trustees of LIC Mutual Fund have appointed

Jeevan Bima Sahayog Asset Management Company Ltd as

the Investment Managers for LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance

Corporation of India (GIC), a Government of India

undertaking and the four Public Sector General Insurance

Companies, viz. National Insurance Co. Ltd (NIC), The New

India Assurance Co. Ltd. (NIA), The Oriental Insurance Co.

Ltd (OIC) and United India Insurance Co. Ltd. (UII) and is

constituted as a Trust in accordance with the provisions of

the Indian Trusts Act, 1882.

Fidelity Investments

Fidelity Investments was founded in 1946. Fidelity

Investments is an international provider of financial services



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and investment resources that help individuals and

institutions meet their financial objejectives.

COMPETITION IN MUTUAL FUNDS INDUSTRY

The most important trend in the mutual fund industry is

the aggressive expansion of the foreign owned mutual

fund companies and the decline of the companies floated

by nationalized banks and smaller private sector players.Many nationalized banks got into the mutual fund

business in the early nineties and got off to a good start

due to the stock market boom prevailing then. These

banks did not really understand the mutual fund business

and they just viewed it as another kind of banking activity.

Few hired specialized staff and generally chose to transfer

staff from the parent organizations. The performance of

most of the schemes floated by these funds was not good.

Some schemes had offered guaranteed returns and their

parent organizations had to bail out these AMCs by paying

large amounts of money as the difference between the

guaranteed and actual returns. The service levels were

also very bad. Most of these AMCs have not been able to

retain staff, float new schemes etc. and it is doubtful



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whether, barring a few exceptions, they have serious plans

of continuing the activity in a major way.

The experience of some of the AMCs floated by private

sector Indian companies was also very similar. They

quickly realized that the AMC business is a business,

which makes money in a long term and requires deep-

pocketed support in the intermediate years. Some have

sold out to foreign owned companies, some have merged

with others and there is general restructuring going on.

CATEGORIES OF MUTUAL FUND:



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Mutual funds can be classified as follow :



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Based on their structure:

Open-ended funds: Investors can buy and sell the

units from the fund, at any point of time. Close-ended funds: These funds raise money from

investors only once. Therefore, after the offer

period, fresh investments can not be made into the

fund. If the fund is listed on a stocks exchange the

units can be traded like stocks (E.g., Morgan

Stanley Growth Fund). Recently, most of the New

Fund Offers of close-ended funds provided

liquidity window on a periodic basis such as

monthly or weekly. Redemption of units can be

made during specified intervals. Therefore, such

funds have relatively low liquidity.

Based on their investment objective:

Equity funds: These funds invest in equities andequity related instruments. With fluctuating share

prices, such funds show volatile performance, even

losses. However, short term fluctuations in the

market, generally smoothens out in the long term,

thereby offering higher returns at relatively lower



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volatility. At the same time, such funds can yield

great capital appreciation as, historically, equities

have outperformed all asset classes in the long

term. Hence, investment in equity funds should be

considered for a period of at least 3-5 years. It can

be further classified as:

i) Index funds- In this case a key stock market

index, like BSE Sensex or Nifty is tracked. Their

portfolio mirrors the benchmark index both in

terms of composition and individual stock

weightages.

ii) Equity diversified funds- 100% of the capital

is invested in equities spreading across different

sectors and stocks.

iii|) Dividend yield funds- it is similar to the

equity diversified funds except that they invest in

companies offering high dividend yields.

iv) Thematic funds- Invest 100% of the assets in

sectors which are related through some theme.



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e.g. -An infrastructure fund invests in power,

construction, cements sectors etc.

v) Sector funds- Invest 100% of the capital in a

specific sector. e.g. - A banking sector fund will

invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides

tax benefit to the investors.

Balanced fund: Their investment portfolio

includes both debt and equity. As a result, on the

risk-return ladder, they fall between equity anddebt funds. Balanced funds are the ideal mutual

funds vehicle for investors who prefer spreading

their risk across various instruments. Following are

balanced funds classes:

i) Debt-oriented funds -Investment below 65%

in equities.

ii) Equity-oriented funds -Invest at least 65% in



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equities, remaining in debt.

Debt fund: They invest only in debt instruments,

and are a good option for investors averse to idea of

taking risk associated with equities. Therefore, they

invest exclusively in fixed-income instruments like

bonds, debentures, Government of India securities;

and money market instruments such as certificates

of deposit (CD), commercial paper (CP) and call

money. Put your money into any of these debt

funds depending on your investment horizon and

needs.

i) Liquid funds- These funds invest 100% in

money market instruments, a large portion being

invested in call money market.

ii) Gilt funds ST- They invest 100% of their

portfolio in government securities of and T-bills.

iii) Floating rate funds - Invest in short-term



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debt papers. Floaters invest in debt instruments

which have variable coupon rate.

iv) Arbitrage fund- They generate income

through arbitrage opportunities due to mis-pricing

between cash market and derivatives market.

Funds are allocated to equities, derivatives and

money markets. Higher proportion (around 75%) is

put in money markets, in the absence of arbitrage

opportunities.

v) Gilt funds LT- They invest 100% of their

portfolio in long-term government securities.

vi) Income funds LT- Typically, such funds

invest a major portion of the portfolio in long-term

debt papers.

vii) MIPs- Monthly Income Plans have an



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exposure of 70%-90% to debt and an exposure of

10%-30% to equities.

viii) FMPs- fixed monthly plans invest in debt

papers whose maturity is in line with that of the

fund.

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