53355312 summer internship project on sip mutual fund
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SUMMER TRAINING REPORT ON
SYSTEMATIC INVESTMENT PLANNING WITHSPECIAL REFRENCE TO MUTUAL FUND
& TRAKING ERROR IN INDEX FUND
In
KARVY STOCK BROKING LTD. (At Aligarh)
Submitted By
Aditya Sharma
Roll No.:-0910970002
M.B.A. 3rd
SemesterSession: 2010-2011
In Partial Fulfillment for the Award of the DegreeMaster of Business Administration Degree program
of Gautam Buddh Technical University
Lucknow
Aligarh College of Engineering & Technology
Mathura Road, Aligarh (U.P.) 202001
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SUMMER TRAINING REPORT ON
SYSTEMATIC INVESTMENT PLANNINGWITH
SPECIAL REFRENCE TO MUTUAL FUND
& TRAKING ERROR IN INDEX FUND
In
KARVY STOCK BROKING LTD. (At Aligarh)
Submitted By
Aditya Sharma
Roll No.:-0910970002
M.B.A. 3rd
Semester
Session: 2010-2011
In Partial Fulfillment for the Award of the Degree
Master of Business Administration Degree program
of Gautam Buddh Technical University
Lucknow
Aligarh College of Engineering & TechnologyMathura Road, Aligarh (U.P.) 202001
A L I G A R H C O L L E G E O F E N G I N E E R I N G A N D T E C H N O L O G Y Page 2
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TABLE OF CONTENT
SR.NO.
PARTICULARS
PG. NO.
1 COMPANY PROFILE
2 Company profile 2
Objective of the study 11
3 SYSTEMATIC INVESTMENT PLAN
4 S.I.P. 13
5 Advantage of S.I.P. 15
6 MUTUL FUNDS
7 Mutul Funds 18
8 History 23
9 Indian Mutul funds 28
10 Categories of Mutul Funds 31
11 Working of Mutul funds 35
12 Mutul Funds Company 37
13 SEBI Guidelines 46
14 Structure of Indian Mutul funds 54
15 Mutul funds Cycle 58
16 Competitors Details 59
17 RESEARCH METHODOLOGY
18 Research Methodology 65
19 Research Objective 66
O F E N G I N E E R I N G A N D T E C H N O L O G Y
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20 Limitation of the Study 70
21 Research Analysis Interpretation 71
22 Finding 79
23
Conclusion
81
24 Recommendations 82
25 Annexure 84
26 Glossary 88
27 Bibliography 90
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Declaration
I, Aditya Sharma , student of Aligarh College of Engineering & Technology
2009-2011 ,declare that ever part of the project report SYSTEMATIC
INVESTMENT PLANNING WITH SPECIAL REFERENCE TO MUTUL
FUNDS & TRCKING ERROR IN INDEX FUNDS that I have submitted
isoriginal.
The findings and conclusions of this report are based on my personal
study and experience.
Date of Project Submission
(Aditya Sharma)
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Acknowledgment
I sincerely acknowledge the help received from various persons and sources in
collection of data and information in completing this satisfactory project.
The entire project report is titled SYSTEMATIC INVESTMENT PLANNING WITHSPECIAL REFERENCE TO MUTUL FUNDS & TRCKING ERROR IN INDEX
FUNDS.
The entire project report owes its credit to the chlorite guidance and
encouragement rendered by Industry mentor Rakesh guptaI record
my sincere thanks to him with deep gratitude.
I also take the opportunity to acknowledge my sincere and deep sense of
gratitude to the Industry mentor Arvind Sharmawhose perception and
sagacity is always opened for us.
Last but not the least I would like to thank all the faculties of theinstitute, and friends for their kind co-operation throughout the project.
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EXECUTIVE SUMMARY
This project has been a great learning experience for me at the same time it gave
me enough scope to implement my analytical ability and enhance my skills.
In few years Mutual Fund has emerged as a tool for ensuring ones financial well
being. Mutual Funds have not only contributed to the India growth story but have
also helped families tap into the success of Indian Industry. As information and
awareness is rising more and more people are enjoying the benefits of investing in
mutual funds. The main reason the number of retail mutual fund investors remains
small is that nine in ten people with incomes in India do not know that mutual funds
exist. But once people are aware of mutual fund investment opportunities, the
number who decide to invest in mutual funds increases to as many as one in five
people. The trick for converting a person with no knowledge of mutual funds to a
new Mutual Fund customer is to understand which of the potential investors are
more likely to buy mutual funds and to use the right arguments in the sales process
that customers will accept as important and relevant to their decision.
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COMPANY
PROFILE
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Karvy Stock Broking Ltd.
The Karvy group was formed in 1983 at Hyderabad, India. KARVY, is a premier integrated
financial services provider, and ranked among the top five in the country in all its business
segments, services over 16 million individual investors in various capacities, and provides
investor services to over 300 corporates, comprising the who is who of Corporate India.
KARVY covers the entire spectrum of financial services such as Stock broking,
Depository Participants, Distribution of financial products like mutual funds, bonds, fixed
deposit, Merchant Banking & Corporate Finance, Insurance Broking, Commodities
Broking, Personal Finance Advisory Services, placement of equity, IPOs,among others.
Karvy has a professional management team and ranks among the best in technology,
operations, and more importantly, in research of various industrial segments.
Karvy computer share limited is Indias largest registrar and transfer agent with a client base
of nearly 500 blue chip corporate, managing over 2 crores accounts. Karvy stock brokers
limited, member of national stock exchange of India and the Bombay stock exchange, rank
among the top five stock brokers in India with over six lakh active account it ranks among the
top five depositary participants in India, registered with NSDL and CSDL, Karvy commorade,
member of NCDEX and MCX ranks among the top three commodities brokers in the country. A
Karvy insurance broker is registered as a broker with IRDA and ranks among the top five
insurance agent in the country. Registered with AMFI as a corporate agent, Karvy is also among
top mutual fund mobilize with over Rs 5000 crores under management. Karvy realty services,
which started in 2006, have quickly established itself as a broker, who adds value in the realty
sector. Karvy global offer niche off to off shoring services to U.S clients.
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Karvy has 575 offices in 375 locations across India and overseas at Dubai and New
York. Over 9000 highly qualified people staff Karvy.
Vision of Karvy:
To achieve & sustain market leadership, Karvy shall aim for complete customer satisfaction, by
combining its human and technological resources, to provide world class quality services. In the
process Karvy shall strive to meet and exceed customer's satisfaction and set industry standards.
Mission statement:
Our mission is to be a leading and preferred service provider to our customers, and we aim
to achieve this leadership position by building an innovative, enterprising , and technology
driven organization which will set the highest standards of service and business ethics.
THE KARVY CREDO
Our Clients. Our Focus
Clients are the reason for our being.
Personalized service, professional care; pro-activeness are the values that help the
organisation nurture enduring relationships with clients.
Respect for the individual Each and every individual is an essential
building block of the organization.
Teamwork
None of us is more important than all of us
Responsible Citizenship
A social balance sheet is as rewarding as a business one.
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As a responsible corporate citizen, Karvysduty is to foster a better environment in the
society where we live and work. Abiding by its norms, and behaving responsibly
towards the environment, is some of our growing initiatives towards realizing it.
KARVY GROUP
I. Karvy Stock Broking Limited
Consists of five units namely stock broking servics, depository participant, advisory
services, distribution of financial products, advisory services and private client groups.
KARVY Stock Broking Limited is a member of: 1) National Stock Exchange (NSE) , 2)
Bombay Stock Exchange (BSE)
II. Karvy Comtrade Limited
Karvy Comtrade Limited is another venture of the prestigious Karvy group. The
company provides investment, advisory and brokerage services in Indian Commodities
Markets. And most importantly, it offer a wide reach through our branch network of over
225 branches located across 180 cities.
III. Karvy Insurance Broking Limited
lt is also a part of Karvy stock broking ltd. At Karvy Insurance Broking Limited both life
and non-life insurance products are provided to retail individuals, high net-worth clients
and corporates. Their wide national network, spanning the length and breadth of India,
further supports these initiatives. Their strengths include personalized service provided
by a dedicated team committed in giving hassle-free service to the clients.
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Karvy Investor Services Limited (KISL), a SEBI registered Merchant Banker has
emerged as a leading Investment Banking entity in the country with over a decade of
experience. KISL has built its reputation by capitalizing on its qualified professionals,
who have successfully executed a large number of complex and unique transactions. Its
clientele includesinclude leading corporates, State Governments, foreign institutional
investors, public and private sector companies and banks, in Indian and global markets.
V. Karvy Realty(India) Limited
Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group, Indias largest
financial services group. Karvy Realty (India) Limited is engaged in the business of real
estate and property services offering:
Buying/ selling/ renting of properties
Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in
properties Real estate portfolio advisory services.
VI. Karvy Financial Services Limited
VII. Karvy Computershare(P) Limited
Karvy Computershare Private Limited is a joint venture between
Computershare,Australia and Karvy Consultants Limited, India in the registry
management services industry.
Computershare, Australia is the worlds largest and only global share registry
providing financial market services and technology to the global securities industry.
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VIII. Karvy Global Services Limited
Karvy Global is a leading business and knowledge process outsourcing Services
Company offering creative business solutions to clients globally. It operates in
banking and financial services, inurance, healthcare and pharmaceuticals, media
, telecom and technology. It has its sales and business development office in
New York, USA and theoffshore global delivery center in Hyderabad, India.
IX. Karvy Data Management Services Limited
Karvy Data Management Services is the domestic BPO arm of the Karvy Group
and services corporates across various industry verticals and business horizons.
KDMS is committed to provide best in class, value driven business solutions to
its clients by way of its innovative techniques and technology framework. KDMSL
is a fully owned subsidiary of Karvy Stock Broking Limited (KSBL), incorporated
in April 2008 and is head quartered at Hyderabad.
X. Karvy Consultants Limited
The first securities registry to receive ISO 9002 certification in India. Registered
with SEBI as Category I Registrar, is Number 1 Registrar in the Country.
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KARVY Mutual Fund Services:
Mutual funds have servings for everybody. Whichever type of investor you are, you will surely
get a mutual fund meeting your requirements. But investing in mutual funds is no childs play
therefore Karvy mutual fund advisory services is there to guide in each and every step of
investment in mutual funds so that the dream of wealth creation doesnt turns into nightmares.
Its offerings includes: products of all the 33 major AMCs, research report about all the existing
funds as well as NFOs, customized mutual fund portfolios designed for individual as well as
institutional customers, it not only design the portfolios rather it offers continuous portfolio
revision too depending on changing market outlook and evolving trends, it further gives access
to its online consolidated portfolio statement. Thus Karvy with its various offerings makes the
investor feel safe in this dynamic environment of the Indian financial market.
Karvy Computershare mutual fund services offers investors services, distributor services and
client services. It can be said that Karvy is dedicated towards providing quality service to all
these three facets of the investment process.
Karvy being an intermediary is well registered with the Association of Mutual Funds of India
(AMFI). KARVY has got the registration no [ARN 0018] for mutual funds, which is mentioned on
every form. After the procurement of forms from various AMCs, the forms are passed on to its
various zonal and branch offices (as per their requirements) and then further processing is done
either directly or through sub-brokers.
Karvy operates through its sub- brokers, associates and its excellent pool of own direct employees.
The employees are offered salary by Karvy whereas the sub- brokers and associates get certain
commission. Karvy has 70 branches and 3 franchisees in the eastern region. All the work of mutual
funds is regulated from Rashbehari avenue branch, an extension of the JDR branch.
The main source of earning for KARVY is the brokerage offered by the various AMCs known as pay-
in. The amount offered may vary from AMC to AMC. Also, the franchisees have to pay a certain
amount every month. Now Karvy also pay a certain amount to the sub brokers and associates
known as pay-out. The payout is decided according to the procurement done by them.
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List of Mutual Fund Clients of KARVY:
1 Alliance Mutual Fund
2 Birla Mutual Fund
3 Bank of Baroda Mutual Fund
4 Can Bank Mutual Fund
5 Chola Mutual Fund
6 Deutsche Mutual Fund
7 DSP Merrill Lynch Mutual Fund
8 Franklin Templeton Investments
9 GIC Mutual Fund
10 HDFC Mutual Fund
11 HSBC Mutual Fund
12 IL & FS Mutual Fund
13 JM Mutual Fund
14 Kotak Mutual Fund
15 LIC Mutual Fund
16 Punjab National Bank Mutual Fund
17 Prudential ICICI Mutual Fund
18 Principal Mutual Fund
19 Reliance Mutual Fund
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20 State Bank of India Mutual Fund
21 Standard Chartered Mutual Fund
22 Sundaram Mutual Fund
23 SUN F&C Mutual Fund
24 Tata Mutual Fund
Quality policy:
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction,by combining its human and technological resources, to provide superior quality
financial services. In the process, Karvy will strive to exceed Customer's expectations.
Quality ObjectivesAs per the Quality Policy, Karvy will:
Build in-house processes that will ensure transparent and harmonious
relationships with its clients and investors to provide high quality of services.
Establish a partner relationship with its investor service agents and
vendors that will help in keeping up its commitments to the customers.
Provide high quality of work life for all its employees and equip them with
adequate knowledge & skills so as to respond to customer's needs .
Continue to uphold the values of honesty & integrity and strive to
establish unparalleled standards in business ethics.
Use state-of-the art information technology in developing new and
innovative financial products and services to meet the changing needsof investors and clients.
Strive to be a reliable source of value-added financial products and
services and constantly guide the individuals and institutions in making
a judicious choice of same.
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Strive to keep all stake-holders (shareholders, clients, investors,
employees, suppliers and regulatory authorities) proud and satisfied.
Achievements
Among the top 5 stock brokers in India (4% of NSE volumes)
India's No. 1 Registrar & Securities Transfer Agents
Among the top 3 Depository Participants
Largest Network of Branches & Business Associates
ISO 9002 certified operations by DNV
Among top 10 Investment bankers
Largest Distributor of Financial Products
Adjudged as one of the top 50 IT users in India by MIS
Asia Full Fledged IT driven operations.
VALUES:
Trust
Integrity
Dedication
Commitment
Transparency
Enterprise Hard work and team play
Learning & innovation
Empathy and humility
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OBJECTIVES OF THE STUDY
A big boom has been witnessed in Mutual Fund Industry in recent
times. A large number of new players have entered the market andtrying to gain market share in this rapidly improving market.
1. To find out the Preferences of the investors for Asset
Management Company.
2. To know the Preferences for the portfolios.
3. To know why one has invested or not invested in Mutual fund
4. To find out the most preferred channel.
5. To find out what should do to boost Mutual Fund Industry
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SYSTEMATIC INVESTMENT PLANNING
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SYSTEMATIC INVESTMENT PLANNING
What is Systematic Investment Plan (SIP)?
SIP is an investment option that is presently available only with mutual funds. The other
investment option comparable to SIP is the recurring deposit schemes from Post Offices
and Banks. Basically, under an SIP option, an investor commits to making a regular
(monthly) investment in a particular mutual fund/deposit.
How to invest in SIP?
The SIP option is available with all types of funds like equity, income or gift.
An investor can avail the SIP option by giving post-dated cheques of Rs.500 or
Rs.1000 according to the funds policy.
If an investor wants to put more than Rs.500 or Rs.1000 in any given month he
will have to fill in a new form for SIP intimating the fund that he is changing his
SIP structure. Also he will be allowed to change the SIP structure only in the
multiples of the SIP amount.
If an investor is investing in two different schemes of the same fund he can fill in
a common SIP form for all the schemes. However, if the first holders in those
schemes are different then they will have to fill different SIP forms, as the first
holder has to sign on the form.
The investor can get out of the fund i.e. redeem his units any time irrespective of
whether he has completed his minimum investment in that scheme. In that case,
his post-dated cheques will be returned back to him.
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Lets take an example:
An investor ARJUN wants to invest in fund A which can be an equity,
income or gift.
The policy of fund A for entering in an SIP is that the investor will have to
issue 6 post-dated cheques of Rs.500/- in case of monthly option or 4
cheques in a quarterly option. The minimum investment for all its schemes
is Rs.5000. ARJUN issues 6 post-dated cheques of Rs.500/- each in the
name of fund A with the first cheque being dated as on 7th
May 2001.
Now in the month of August 2001 ARJUN wants to change his SIP structure
from Rs.500/- to Rs.1000/-. In this case, he will have to intimate the fund and will
have to fill a new SIP form issuing new post-date cheques of Rs.1000/- each.
ARJUN is investing in three different schemes of fund A. In two of the schemes
ARJUN is the first holder and in the third scheme his wife is the first holder. In
this case, he can fill a common SIP form where he is the first holder and where
his wife is he first holder, e will have to fill in a new SIP form.
In the month of September 2001, ARJUN wants to exit from the fund. He will
just have to give a redemption request to the fund wherein is units will be
redeemed and his remaining post-dated cheques will be returned back to him
irrespective of whether he has completed his minimum investment in the fund.
Investing in SIP is also known as Rupee Cost Averaging. The advantage of rupee cost
averaging is that the Net Asset Value (NAV) is averaged out, as the investor will be entering the
fund at different NAVs, which may be higher or lower depending on the market condition.
Lets take the example of ARJUN wherein he has started investing in units every
month since he issued the first cheque on 7th
May 2001. In this example we assume
that he does not change his SIP structure and also does not redeem the units.
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Investment in fund A of Mr. ARJUN
Period
Investment(Rs.) NAV(Rs. per unit) Units allocated
7th
May01 500.00 10.00 50
7thJune01
500.00
13.00
38.5
7th
July01 500.00
10.50
47.6
7th
Aug01 500.00
9.50
52.6
7th
Sep01 500.00
8.00
62.5
TOTAL a=2500 b=251.2
Actual
average
NAV
(Rs.)
=
Rs.10.2
per
unit
NAV for ARJUN= Rs.9.95 per unit (a/b)
The above table shows clearly how rupee cost averaging works and how it was
beneficial to ARJUN. The actual average NAV of a fund is Rs.10.2/- per unit, but the
average NAV for ARJUN is Rs.9.95/- per unit, which is lower than the current NAV.
An investor who is not having a lump-sum amount to invest and also does not want to
take much risk on his investment should always select a Systematic Investment Plan
option. This will enable him to invest regularly i.e. improve investing discipline. Also, the
investor stands to benefit from rupee cost averaging.
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ADVANTAGES OF SIP
Power of Compounding
SIP helps you to start investing at an early age to meet the greater expenses ofyour life. Saving a small sum of money regularly makes money work with
greater power of compounding with significant impact on wealth accumulation.
Rupee Cost Averaging
SIP minimizes the effects of investing in volatile markets. It helps you average
out your cost by generating superior returns in the long run. It reduces the risk
associated with lump-sum investments. Since you get more units when the NAV
drops and fewer when it rises, the cost averages out over time. Thus the
average cost of your investment is often reduced.
Convenience and Regularity
SIP gives you the convenience to pay through Axis Bank Electronic clearance service
(ECS) or Auto Debit. You can decide the amount and the mutual fund scheme. A fixed
amount will automatically get debited from your account on a date specified by you.
Disciplined Approach towards Investment
Since you invest regularly, it makes you disciplined in your savings, which leads towealth accumulation. Disciplined investing is vital to earning good returns.
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MUTUAL FUNDS
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MUTUAL FUNDS
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of
a mutual fund as a company that brings together a group of people and invests their
money in stocks, bonds, and other securities. Each investor owns shares, which
represent a portion of the holdings of the fund.
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 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 determinedeach 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 in accordance with quantum of money invested by them. Investors of mutual funds
are known as unit holders.
You can make money from a mutual fund in three ways:
1) Income is earned from dividends on stocks and interest on bonds. A fund pays out
nearly all income it receives over the year to fund owners in the form of a distribution.
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2) If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit. Funds
will also usually give you a choice either to receive a check for distributions or to
reinvest the earnings and get more shares.
The competition among funds has led to the launch of newer products, tailor-made
to suit the requirements of investors. Mutual funds now offer products for the entire range of
needs of investors. The encouraging response to index funds and sector funds shows the
growing maturity among investors. Open-end funds, which provide liquidity to investors at daily
NAV related prices are growing in popularity. The funds have been adopting technology to
provide good service to investors and with the proposed introduction of electronic funds transfer
and the growing trend towards E-Commerce; the efficiency of service will increase even further.
In the coming years mutual funds as saving intermediaries will play a greater role in
bringing the gap between investors and issuers, especially in the area of equity funds.
At present these funds represents 13% of BSE market capitalization. This is expected to
go up with increasing flows into financial savings, especially the mutual fund with the
growth and stability in the capital market flows into equity funds are expected to go up.
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized is shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is the
most suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.
Mutual funds, also referred to as investment companies, offer an alternative investment choice for
individuals with a long-term horizon. The way they operate is that individual investor money are
pooled and invested in many different companies. Assets are professionally managed to meet
various investment objectives. They issue and sell shares to share holders and also redeem them
(buy them back) upon request. Prices of shares are set daily at the close of business, based on the
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value of all investments in the mutual funds portfolio. Their major advantages are diversification
and professional management, which are not readily available to small investors outside the
mutual fund arena. Money market mutual funds are short-term funds. They invest in short-term
cash and cash equivalent instruments, such as Treasury bills, certificates of deposit, and short
term notes. Mutual funds may own stocks and bonds of many different companies.
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.
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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 value of the Mutual Fund scheme's assetsnet 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.
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HISTORY OF MUTUAL FUNDS
In 1924 three Boston securities executives pooled their money together to create the
first mutual fund. The idea of pooling money together for investing purposes started in
Europe in the mid-1800s. The first pooled fund in the U.S was created in 1893 for the
faculty and staff of Harvard University on March 21st, 1924 the first official mutual fund
was born. It was called the Massachusetts Investors Trust.
However in India UTI was the first to introduce mutual funds in the Indian markets and it
commenced its operations from July 1964, Government allowed public sector banks
and institutions to set up mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The
objectives of SEBI areto protect the interest of investors in securities and to promote
the development of and to regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the
mutual funds to protect the interest of the investors. SEBI notified regulations for the
mutual funds in1993. Thereafter, mutual funds sponsored by private sector entities were
allowed to enter the capital market. The regulations were fully revised in 1996 and have
been amended thereafter from time to time. SEBI has also issued guidelines to the
mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including
those promoted by foreign entities are governed by the same set of regulations. There
is no distinction in regulatory requirements for these mutual funds and all are subject to
monitoring and inspections by SEBI. The risks associated with the schemes launched
by the mutual funds sponsored by these entities are of similar type. It may be mentioned
here that Unit Trust of India (UTI) is not registered with SEBI as a mutual fund (as on
January 15, 2002. The end of millennium marks 36 years of existence of mutual funds
in our country. The ride through these 36 years is not been smooth. Investor opinion is
still divided. While some are for mutual funds others are against it.
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Mutual fund schemes:Mutual funds offer a variety of schemes to investor so as to provide steady income or growth or
both. They differ according to the investment policies. The funds like individual investor have a
different goal. Of the investor who will first ascertain his investment objectives, thinking that the
units of a fund have an investment goal paralleling his objectives.
Mutual Funds Basics:
As you probably know, mutual funds have become extremely popular over the last 20 years.
What was once just another obscure financial instrument is now a part of our daily lives.
In fact, to many people, investing means buying mutual funds. After all, it's common knowledgethat investing in mutual funds is (or at least should be) better than simply letting your cash waste
away in a savings account, but, for most people, that's where the understanding of funds ends.
It doesn't help that mutual fund salespeople speak a strange language that, sounding sort of like
English, is interspersed with jargon like MER, NAVPS, load/no-load, etc.
Originally mutual funds were heralded as a way for the little guy to get a piece of the
market. Instead of spending all your free time buried in the financial pages of the
investment Journal, all you have to do is buy a mutual fund and you'd be set on your
way to financial freedom. As you might have guessed, it's not that easy. Mutual funds
are an excellent idea in theory, but, in reality, they haven't always delivered. Not all
mutual funds are created equal, and investing in mutual funds isn't as easy as throwing
your money at the first salesperson who solicits your business.
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Important Characteristics of a Mutual Fund:
A Mutual Fund actually belongs to the investors who have pooled their
Funds. The ownership of the mutual fund is in the hands of the Investors.
A Mutual Fund is managed by investment professional and other
Service providers, who earns a fee for their services, from the funds.
The pool of Funds is invested in a portfolio of marketable
investments. The value of the portfolio is updated every day.
The investors share in the fund is denominated by units. The value of the units
changes with change in the portfolio value, every day. The value of one unit of
investment is called net asset value (NAV).
The investment portfolio of the mutual fund is created according to The
stated Investment objectives of the Fund.
Advantages of Mutual Funds:
Professional Management -The primary advantage of funds (at least
theoretically ) is the professional management of your money. Investors
purchase funds because they do not have the time or the expertise to manage
their own portfolio. A mutual fund is a relatively inexpensive way for a small
investor to get a full-time manager to make and monitor investments.
Diversification -By owning shares in a mutual fund instead of owning individual
stocks or bonds, your risk is spread out. The idea behind diversification is to invest in
a large number of assets so that a loss in any particular investment is minimized bygains in others. In other words, the more stocks and bonds you own, the less any
one of them can hurt you (think about Enron). Large mutual funds typically own
hundreds of different stocks in many different industries. It wouldn't be possible for
an investor to build this kind of a portfolio with a small amount of money.
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Economies of Scale - Because a mutual fund buys and sells large amounts of
securities at a time, its transaction costs are lower than you as an individual would pay.
Liquidity -Just like an individual stock, a mutual fund allows you to request
that yourshares be converted into cash at any time.
Simplicity -Buying a mutual fund is easy! Pretty well any bank has its own line ofmutual
funds, and the minimum investment is small. Most companies also have automatic purchase
plans whereby as little as Rs 500 can be invested on a monthly basis.
Disadvantages of Mutual Funds:
Professional Management - Did you notice how we qualified the
advantage of professional management with the word "theoretically"? Many
investors debate over whether or not the so-called professionalsare any better
than you or I at picking stocks. Management is by no means infallible, and, even
if the fund loses money, the manager still takes his/her cut.
Costs -Mutual funds don't exist solely to make your life easier--all funds are in
it for aprofit. The mutual fund industry is masterful at burying costs under layers
of jargon. Because funds have small holdings in so many different companies,
high returns from a few investments often don't make much difference on the
overall return. Dilution is also the result of a successful fund getting too big.
When money pours into funds that have had strong success, the manager often
has trouble finding a good investment for all the new money.
Taxes -When making decisions about your money, fund managers don't consider your
personal tax situation. For example, when a fund manager sells a security, a capital-gain
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tax is triggered, which affects how profitable the individual is from the sale. It might
have been more advantageous for the individual to defer the capital gains liability.
Risk Involved in Mutual Funds
All investments involve some form of risk, which should be evaluated them potential
rewards when an investment is selected.
Market risk
At times the prices or yields of all the securities in a particular market rise or fall due to
broad outside influences. When this happens, the stock prices of both an outstanding,
highly profitable company and a fledgling corporation may be affected. This change in
price is due to market risk.
Interest rate risk
Sometimes referred to as loss of purchasing power.Whenever inflation
sprints forward faster than the earnings on your investment, you run the
risk that you will actually be able to buy less, not more. Inflation risk also
occurs when prices rise faster than your returns.
Credit risk
In short, how stable is the company or entity to which you lend your money when you
invest? How certain are you that it will be able to pay the interest you are promised, or
repay your principal when the investment matures?
Inflation risk
Changing interest rates affect both equities and bonds in many ways. Investors are
reminded that predicting which way rates will go is rarely successful. A diversified
portfolio can help in offsetting these changes.
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An industries key asset is often the personnel who run the business i.e. intellectual
properties of the key employees of the respective companies. Given the ever-changing
complexion of few industries and the high obsolescence levels, availability of qualified,
trained and motivated personnel is very critical for the success of industries in few
sectors. It is, therefore, necessary to attract key personnel and also to retain them to
meet the changing environment and challenges the sector offers. Failure or inability to
attract/retain such qualified key personnel may impact the prospects of the companies
in the particular sector in which the fund invests.
Exchange risks
A number of companies generate revenues in foreign currencies and may have
investments or expenses also denominated in foreign currencies. Changes in exchange
rates may, therefore, have a positive or negative impact on companies which in turn
would have an effect on the investment of the fund.
Investment risksThe sectoral fund schemes, investments will be predominantly in equities of select
companies in the particular sectors. Accordingly, the NAV of the schemes are linked to
the equity performance of such companies and may be more volatile than a more
diversified portfolio of equities.
Changes in government policyChanges in Government policy especially in regard to the tax benefits may impact the business
prospects of the companies leading to an impact on the investments made by the fund.
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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 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 2004; 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 Phase1964-87
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 Rs.6,700 crores of assets under management.
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Second Phase1987-1993 (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 Phase1993-2003 (Entry of Private Sector Funds)
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 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
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Fourth Phasesince 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 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, 2004, there were 29 funds,
which manage assets of Rs.153108 crores under 421 schemes.
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CATEGORIES OF MUTUAL FUND
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Mutual Funds Can Be Classified As Follow :
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 cannot 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 duringspecified intervals. Therefore, such funds have relatively low liquidity.
Based on their investment objective:
Equity funds: These funds invest in equities and equity 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 atrelatively lower 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.
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iii|) Dividend yield funds- it is similar to the equity diversified funds
except thatthey invest in companies offering high dividend yields.
iv) Thematic funds- Invest 100% of the assets in sectors which are related
through
some theme.
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
bankingsector 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 aresult,
on the risk-return ladder, they fall between equity and debt 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 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
largeportion being invested in call money market.
ii) Gilt funds ST- They invest 100% of their portfolio in government securities of
and T-bills.
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iii) Floating rate funds - Invest in short-term debt papers. Floaters invest
in debtinstruments 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
governmentsecurities.
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 exposure of 70%-90% to debt
and anexposure of 10%-30% to equities.
viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in
linewith that of the fund.
INVESTMENT STRATEGIES
1. Systematic Investment Plan: Under this a fixed sum is invested each
monthon a fixed date of a month. Payment is made through post dated
cheques or direct debit facilities. The investor gets fewer units when the
NAV is high and more units when the NAV is low. This is called as the
benefit of Rupee Cost Averaging (RCA).
2. Systematic Transfer Plan: Under this an investor invest in debt oriented fundand give instructions to transfer a fixed sum, at a fixed interval, to an equity
scheme of the same mutual fund.
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3. Systematic Withdrawal Plan: If someone wishes to withdraw from a
mutualfund then he can withdraw a fixed amount each month.
Working of a Mutual fund
The entire mutual fund industry operates in a very organized way. The investors, known
as unit holders, handover, their savings to the AMCs under various schemes. Theobjective of the investment should match with the objective of the fund to best suit the
investors needs. The AMCs further invest the funds into various securities according to
the investment objective. The return generated from the investments is passed on to the
investors or reinvested as mentioned in the offer document.
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Mutual Fund Companies in India
The concept of mutual funds in India dates back to the year 1963. The era between
1963 and 1987 marked the existence of only one mutual fund company in India with Rs.
67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust
of India (UTI). By the end of the 80s decade, few other mutual fund companies in India
took their position in mutual fund market.
The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank
Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of
India Mutual Fund.
The succeeding decade showed a new horizon in Indian mutual fund industry. By the
end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds
started penetrating the fund families. In the same year the first Mutual Fund Regulations
came into existence with re-registering all mutual funds except UTI. The regulations
were further given a revised shape in 1996.
Kothari Pioneer was the first private sector mutual fund company in India which has now
merged with Franklin Templeton. Just after ten years with private sector players penetration, the
total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India.
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Major Mutual Fund Companies in India
ABN AMRO MUTUL 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 Birla Group and Sun Life
Financial. Sun Life Financial is a global organisation 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 MUTUL
FUND:-
HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing
Development Finance Corporation Limited and Standard Life Investments Limited.
HSBC Mutual Fund:-
HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets
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(India) Private Limited as the sponsor. 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, 1999 with 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 Plc. of America, one of thelargest life insurance companies in the USA. 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 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.
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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's is one of the fastest in the country with
more than Rs. 7,703 crores (as on April 30, 2005) of AUM.
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 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
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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 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:-
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.
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Escorts Mutual Fund:-
Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its
sponsor. The Trustee 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 sponsor. 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 sponsor 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:-
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 Fu nd:-
Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company
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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 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.
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MUTUAL FUNDS- DOs and DONTs
We all have come across ads which say that Mutual Funds are subject to
market risk, please read the offer document carefully before investing.
Likewise there are many dos and donts one has to keep in mind before
getting into investing in mutual funds. The following points might help one
to optimize his/her investment decision
Assess yourself:
Self-assessment of ones needs; expectations and risk profile is of prime importance failing
which; one will make more mistakes in putting money in right places than otherwise. One
should identify the degree of risk bearing capacity one has and also clearly state the
expectations from the investments. Irrational expectations will only bring pain.
Try to understand where the money is going:
It is important to identify the nature of investment and to know if one is compatible with
the investment. One can lose substantially if one picks the wrongkind of mutual fund. In
order to avoid any confusion it is better to go through the literature such as offer
document and fact sheets that mutual fund companies provide on their funds.
Don't rush in picking funds, think first:
One first has to decide what he wants the money for and it is this investment goal that should be
the guiding light for all investments done. It is thus important to know the risks associated with
the fund and align it with the quantum of risk one is willing to take. One should take a look at the
portfolio of the funds for the purpose. Excessive exposure to any specific sector should be
avoided, as it will only add to the risk of the entire portfolio. Mutual funds invest with a certain
ideology such as the "Value Principle" or "Growth Philosophy". Both have their share of critics
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but both philosophies work for investors of different kinds. Identifying the proposed investment
philosophy of the fund will give an insight into the kind of risks that it shall be taking in future.
Invest. Dont speculate:
A common investor is limited in the degree of risk that he is willing to take. It is thus of key
importance that there is thought given to the process of investment and to the time horizon
of the intended investment. One should abstain from speculating which in other words
would mean getting out of one fund and investing in another with the intention of making
quick money. One would do well to remember that nobody can perfectly time the market so
staying invested is the best option unless there are compelling reasons to exit.
Dont put all the eggs in one basket:
This old age adage is of utmost importance. No matter what the risk profile of a person is, it
is always advisable to diversify the risks associated. So putting ones money in different
asset classes is generally the best option as it averages the risks in each category. Thus,
even investors of equity should be judicious and invest some portion of the investment in
debt. Diversification even in any particular asset class (such as equity, debt) is good. Not all
fund managers have the same acumen of fund management and with identification of the
best man being a tough task, it is good to place money in the hands of several fund
managers. This might reduce the maximum return possible, but will also reduce the risks.
Be regular:
Investing should be a habit and not an exercise undertaken at ones wishes, if one has to really
benefit from them. As we said earlier, since it is extremely difficult to know when to enter or exit themarket, it is important to beat the market by being systematic. The basic philosophy of Rupee cost
averaging would suggest that if one invests regularly through the ups and downs of the market, he
would stand a better chance of generating more returns than the market for the entire duration. The
SIPs (Systematic Investment Plans) offered by all funds helps in being systematic.
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All that one needs to do is to give post-dated cheques to the fund and thereafter one will not
be harried later. The Automatic investment Plans offered by some funds goes a step further,
as the amount can be directly/electronically transferred from the account of the investor.
Find the right funds:
Finding funds that do not charge much fees is of importance, as the fee charged ultimately goes
from the pocket of the investor. This is even more important for debt funds as the returns from
these funds are not much. Funds that charge more will reduce the yield to the investor. Finding
the right funds is important and one should also use these funds for tax efficiency. Investors of
equity should keep in mind that all dividends are currently tax-free in India and so their tax
liabilities can be reduced if the dividend payout option is used. Investors of debt will be charged
a tax on dividend distribution and so can easily avoid the payout options.
Keep track of your investments:
Finding the right fund is important but even more important is to keep track of the way they are
performing in the market. If the market is beginning to enter a bearish phase, then investors of
equity too will benefit by switching to debt funds as the losses can be minimized. One can
always switch back to equity if the equity market starts to show some buoyancy.
Know when to sell your mutual funds:
Knowing when to exit a fund too is of utmost importance. One should book profits
immediately when enough has been earned i.e. the initial expectation from the fund has
been met with. Other factors like non-performance, hike in fee charged and change in
any basic attribute of the fund etc. are some of the reasons for to exit.
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SEBI GUIDELINES FOR MUTUAL FUND
Mutual funds cannot invest more than 10 per cent of the total net assets of a scheme in the short-
term deposits of a single bank, the Securities and Exchange Board of India said on Monday.
Announcing guidelines for parking of funds in short-term deposits of scheduled
commercial banks (SCBs) by mutual funds, the regulator said that investment cap
would also take into account the deposit schemes of the bank's subsidiaries.
The SEBI has also defined 'short term' for funds' investment purposes as a period not
exceeding 91 days.
Besides, the parking of funds in short-term deposits of all SCBs has been capped at 15
per cent of the net asset value (NAV) of a scheme, which can be raised to 20 per cent
with prior approval of the trustees.
The parking of funds in short-term deposits of associate and sponsor SCBs together should
not exceed 20 per cent of total deployment by the MF in short-term deposits, it added.
The SEBI said that these guidelines are aimed at ensuring that funds collected in a scheme
are invested as per the investment objective stated in the offer document of an MF scheme.
The new guidelines would be applicable to all fresh investments whether in a new
scheme or an existing one. In cases of an existing scheme, where the scheme has
already parked funds in short-term deposits, the asset management company have
been given three-months time to conform with the new guidelines.
The SEBI has also asked the trustees of a fund to ensure that no funds are parked by a
scheme in short term deposit of a bank, which has invested in that particular scheme.
The SEBI guidelines say that asset management companies (AMCs) shall not be
permitted to charge any investment and advisory fees for parking of funds in short-term
deposits of banks in case of liquid and debt-oriented schemes.
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What are the new SEBI guidelines all about?
Relevant extract of the SEBI circular released on June 30, 2009 (SEBI/IMD/CIR No.
4/168230/09) is as follows:
'In order to empower the investors in deciding the commission paid to distributors in
accordance with the level of service received, to bring about more transparency in payment of
commissions and to incentivize long term investment, it has been decided that:
There shall be no entry load for all mutual fund schemes
The scheme application forms shall carry a suitable disclosure to the effect that the upfront
commission to distributors will be paid by the investor directly to the distributor, based on
his assessment of various factors including the service rendered by the distributor.
Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption
proceeds shall be maintained in a separate account which can be used by the AMC to
pay commissions to the distributor and to take care of other marketing and selling
expenses. Any balance shall be credited to the scheme immediately
The distributors should disclose all the commissions (in the form of trail commission or
any other mode) payable to them for the different competing schemes of various
mutual funds from amongst which the scheme is being recommended to the investor.
This circular shall be applicable for :
Investments in mutual fund schemes (including additional purchases and switch-in to a
scheme from other schemes) with effect from August 1, 2009
Redemptions from mutual fund schemes (including switch-out from other schemes) with
effect from August 1, 2009
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New mutual fund schemes launched on and after August 1, 2009; and Systematic
Investment Plans (SIPs) registered on or after August 1, 2009'
PERFORMANCE MEASURES OF MUTUAL FUNDS:
Mutual Fund industry today, with about 30 players and more than six hundred schemes,
is one of the most preferred investment avenues in India. However, with a plethora of
schemes to choose from, the retail investor faces problems in selecting funds. Factors
such as investment strategy and management style are qualitative, but the funds record
is an important indicator too.
Though past performance alone cannot be indicative of future performance, it is, frankly,
the only quantitative way to judge how good a fund is at present. Therefore, there is a
need to correctly assess the past performance of different Mutual Funds. Worldwide,
good Mutual Fund companies over are known by their AMCs and this fame is directly
linked to their superior stock selection skills.
For Mutual Funds to grow, AMCs must be held accountable for the ir selection of
stocks. In other words, there must be some performance indicator that will reveal the
quality of stock selection of various AMCs.
Return alone should not be considered as the basis of measurement of the performance of a
Mutual Fund scheme, it should also include the risk taken by the fund manager because
different funds will have different levels of risk attached to them. Risk associated with a fund, in
a general, can be defined as Variability or fluctuations in the returns generated by it. The higher
the fluctuations in the returns of a fund during a given period, higher will be the risk associated
with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces.
First, general market fluctuations, which affect all the securities, present in the market, called
Market risk or Systematic risk and second, fluctuations due to specific securities present in theportfolio of the fund, called Unsystematic risk. The Total Risk of a given fund is sum of these two
and is measured in terms of standard deviation of returns of the fund.
Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations
in the NAV of the fund vis--vis market. The more responsive the NAV of a Mutual Fund is to
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the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a
Mutual Fund with the returns in the market. While Unsystematic risk can be diversified through
investments in a number of instruments, systematic risk cannot. By using the risk return
relationship, we try to assess the competitive strength of the Mutual Funds one another in a
better way. In order to determine the risk-adjusted returns of investment portfolios, several
eminent authors have worked since 1960s to develop composite performance indices to
evaluate a portfolio by comparing alternative portfolios within a particular risk class.
The most important and widely used measures of performance are:
The TreynorMeasure
The Sharpe Measure
Jenson Model
Fama Model
The Treynor Measure:-
Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index. This Index is a ratio of return generated by the fund over and above
risk free rate of return (generally taken to be the return on securities backed by the
government, as there is no credit risk associated), during a given period and systematic
risk associated with it (beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where,
Ri represents return on fund,
Rf is risk free rate of return, and
Bi is beta of the fund.
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All risk-averse investors would like to maximize this value. While a high and
positive Treynor's Index shows a superior risk-adjusted performance of a fund, a
low and negative Treynor's Index is an indication of unfavorable performance.
The Sharpe Measure :-
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio,
which is a ratio of returns generated by the fund over and above risk free rate of
return and the total risk associated with it.
According to Sharpe, it is the total risk of the fund that the investors are
concerned about. So, the model evaluates funds on the basis of reward per unit
of total risk. Symbolically, it can be written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where,
Si is standard deviation of the fund,
Ri represents return on fund, and
Rf is risk free rate of return.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.
Comparison of Sharpe and Treynor
Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
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evaluating the risk return relationship for well-diversified portfolios. On the other
hand, the systematic risk is the relevant measure of risk when we are evaluating less
than fully diversified portfolios or individual stocks. For a well-diversified portfolio the
total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure)
and systematic risk (Treynor measure) should be identical for a well-diversified
portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified
fund that ranks higher on Treynor measure, compared with another fund that is
highly diversified, will rank lower on Sharpe Measure.
Jenson Model:-
Jenson's model proposes another risk adjusted performance measure. This measure
was developed by Michael Jenson and is sometimes referred to as the differential
Return Method. This measure involves evaluation