AN INTERIM REPORTON

SALES &DISTRIBUTION OF FINANCIAL PRODUCTS (MUTUAL

FUND)

For

Post-Graduate Program in Management

Mumbai

BY

KALPANA YADAV14BSP0619

Under the Guidance of

Mr. Sumit Kumar Mr. Hemant Purandere Company guide Professor Reliance money solutions IBS, Mumbai

Abstract

As a part of my PGPM curriculum, I’m pursuing my Summer Internship Program at Reliance money solutions.

At Reliance money solutions, I will gain in – depth knowledge about mutual funds.  I will study its different types and how it works. I would analyse different mutual funds and its performance in past 5 years. As a part of my internship I have to meet investors and based on their risk taking ability, vary the debt and equity ratio in their investment portfolio to maximize their return.

This report includes the following things-

Mutual fund and its structure Advantages of mutual funds Types of mutual funds My Work

This Interim project report consist of my work done till date. The report starts with the introduction to portfolio management.

Introduction

This report is aimed at getting an in-depth understanding mutual fund.

Limitation of the study:

External factors play a major role in mutual fund’s NAV fluctuation. Time Constraint: Due to shortage or less availability of time it may be

possible that all the related and concerned aspects may not be covered in the project.

Analysis done is limited to the availability of data. Comparison of Mutual Fund schemes is limited to selected asset

management companies. All the limitations of the tools used are applicable to this study

1. Mutual Fund Definition

A mutual fund is a type of professionally managed investment fund pools money from many investors to purchase securities. It is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies".

The funds are generally well diversified to offset potential losses. They offer an attractive way for savings to be managed in a passive manner without paying high fees or requiring constant attention from individual investors. Mutual funds present an option for investors who lack the time or knowledge to make traditional and complex investment decisions. By putting your money in a mutual fund, you permit the portfolio manager to make those essential decisions for you.

1.1 Structure of Mutual Fund:

(A) Historical structures of Mutual Fund in India

The first structure of Mutual fund was the one adopted by UTI in 1963. This was followed by SEBI MF guidelines in 1993. These guidelines were later replaced by comprehensive set of SEBI MF regulations 1996.

1) Unit trust of India  – The first Mutual fund of India was a Unit Trust of India which was formed as a body corporate under an act of Parliament. Different provisions of the UTI Act laid down the structure of management, scope of business, powers and functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust. However, it was different from the present day mutual funds in more than one ways. It was a trust, custodian, and investment manager all in one. It was capable of buying property and borrows/lending money for project finance. The management structure of UTI is thus distinct from the remaining mutual funds. First, unlike other mutual funds, it is a statutory body corporate and not a Trust under the Indian Trusts Act. Second, there is no separate asset management company with a separate Board of directors of AMC to manage the schemes.

2) Organisation Structure of Mutual Funds of Public Sector Banks  – In 1987, the public sector banks were allowed to set up mutual fund. State Bank of India was the first one to set up mutual fund. It preferred to adopt the Trust route and set up the Mutual fund as a Trust under the Indian Trust Act 1882. Later, other mutual funds followed the same and thus Trusts set up under the Indian Trusts Act became the adopted legal form of mutual funds in India. These mutual funds combined the role of Trustee, fund manager and custodian in the sponsoring bank. However there was little demarcation in the role and responsibilities and the structure was open to conflict of interests.

3) SEBI MF Regulations 1996  – Securities and Exchange Board of India (SEBI) was formed in 1992 and was given the regulatory responsibility of Capital markets and Mutual Funds. SEBI formed Mutual Funds regulations in 1993 which were later replaced by new regulations in 1996. SEBI, while framing the Mutual Fund Regulations, gave a lot of consideration to two major factors, one, that mutual funds garner large moneys from the pubic for investment in a dynamic market place which require specialisation on the part of persons performing these functions. Secondly, there could be potential conflicts of interest which were to be avoided by ensuring arm’s

length relationship between various functionaries. Such stipulation of arm’s length relationship ensures that the person who performs a function is answerable to another and does not assess his own performance. This is the structure which is followed by all the existing mutual funds in India.

(B) Current Structure of Mutual Funds in India

The Mutual Funds in India are regulated by SEBI MF Regulations, 1996. Under the regulations mutual fund is formed as a Public Trust under the Indian Trusts Act, 1882. These regulations stipulate a three tiered structure of entities i.e. sponsor (creation), trustees, and Asset Management Company (fund management) for carrying out different functions of a mutual fund, but place the primary responsibility on the trustees.

1) Sponsor  – SEBI regulations define Sponsor as any person who either itself or in association with another body corporate establishes a mutual fund. Sponsor sets up a mutual fund to earn money by doing fund management through its subsidiary company which acts as Investment manager of the fund. A sponsor can be compared with a promoter of a company. Sponsors activities include setting up a Public Trust under Indian Trust Act, 1882 (the mutual fund), appointing trustees to manage the trust with the approval of SEBI, creating an Asset Management Company under Companies Act, 1956 (the Investment Manager) and getting the trust registered with SEBI.

2) Trustees  – The trust is created through a document called the trust deed which is executed by the fund sponsor in favour of the trustees. Trustees manage the trust and are responsible to the investors in the mutual funds. They are the primary guardians of the unit-holders funds and assets. Trustees can be formed in either of the following two ways i.e. Board of Trustees or a Trustee Company. The provisions of Indian Trust Act, 1882, govern board of trustees or the Trustee Company. A trustee company is also subject to provisions of Companies Act, 1956

3) Asset Management Company  – The Asset Management Company (AMC) is the investment Manager of the Trust. The sponsor, or the trustees is so authorized by the trust deed, appoints the AMC as the Investment Manager of the trust (Mutual Fund) via an agreement called as Investment Management Agreement. An asset

management company is a company registered under the Companies Act, 1956. Sponsor creates the asset management company and this is the entity, which manages the funds of the mutual fund (trust). The mutual fund pays a small fee to the AMC for management of its fund. The AMC acts under the supervision of Trustees and is subject to the regulations of SEBI too.

Role of AMC – The AMC is an operational arm of the mutual fund .AMC is responsible for all carrying out all functions related to management of the assets of the trust. The AMC structures various schemes, launches the scheme and mobilizes initial amount, manages the funds and give services to the investors .In fact, AMC is the first major constituent appointed .Later on AMC solicits the services of other constituents like Registrar, Bankers, Brokers, Auditors, Lawyers etc and works in close co-ordination with them.

1.2 Advantages of Mutual fund:

Professional management 

Qualified professionals manage your money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme. It is a continuous process that takes time and expertise which will add value to your investment. Fund managers are in a better position to manage your investments and get higher returns.

Diversification: 

Diversification lowers your risk of loss by spreading your money across various industries and geographic regions. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds spread your investment across only one industry so they are less diversified and therefore generally more volatile.

More choice 

Mutual funds offer a variety of schemes that will suit investor’s over a lifetime. When you enter a new stage in your life, all you need to do is sit down with your financial advisor who will help you to rearrange your portfolio to suit your altered lifestyle.

Affordability

For a small investor, it is not possible for him to buy shares of larger companies. Mutual funds generally buy and sell securities in large volumes which allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. You can invest with a minimum of ₹500 in a Systematic Investment Plan on a regular basis.

Tax benefits

Investments held by investors for a period of 12 months or more qualify for capital gains and will be taxed accordingly. These investments also get the benefit of indexation.

Liquidity

With open-end funds, you can redeem all or part of your investment any time you wish and receive the current value of the shares. Funds are more liquid than most investments in shares, deposits and bonds. Moreover, the process is standardised, making it quick and efficient so that you can get your cash in hand as soon as possible.

Rupee cost averaging

With rupee-cost averaging, you invest a specific rupee amount at regular intervals regardless of the investment's unit price. As a result, your money buys more units when the price is low and fewer units when the price is high, which can mean a lower average cost per unit over time. Rupee-cost averaging allows you to discipline yourself by investing every month or quarter rather than making sporadic investments.

Transparency

The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare fund to another. As a unit holder, you are provided with regular updates, for example daily NAVs as well as information on the fund's holdings and the fund manager's strategy.

Regulations

All mutual funds are required to register with SEBI (Securities Exchange Board of India). They are obliged to follow strict regulations designed to protect investors. All operations are also regularly monitored by the SEBI.

2. Types Of Mutual Fund

2.1 Types of Mutual Fund by STRUCTURE:

(A)Close Ended Mutual Fund:

Close-ended fund has a stipulated maturity period for example 5 to 7 years. The fund is open for subscription only at the time of launch of the scheme. 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 the units are listed.

A close-ended fund trades like a stock on a stock market or over the counter while an open ended mutual fund is bought and sold directly with to the mutual fund.

Another cost to be aware of for a close-ended fund is the bid-ask spread. If you place an order to buy a close-ended fund and at the same time place an order to sell

the fund, the prices for both would be different. In other words, your cost to buy the close-ended fund and the price you would get for selling the close-ended fund would be different. For instance, you might sell at the bid price of ₹90.90, while you would buy at the ask price of ₹100. This ₹0.10 difference is known as the bid-ask spread and is considered the cost of doing business on the exchange or over the counter.

You can buy both close-ended funds and mutual funds through a broker. The broker processes the transaction on the stock exchange in the case of close-ended fund, or with the fund company in the case of mutual funds.

Net asset Value vs Price of Close Ended Fund:

NAV of a fund is the value of close-ended fund’s holdings (stocks, bonds, cash etc.) minus any liabilities divided by the total number of fund shares that are held by investors. Unlike a mutual fund, the NAV of close-ended funds is not the price you pay for a share of the fund.

Close-ended funds are often bought or sold at a discount to their NAV. For example if a close-ended fund owns 100 stocks that have a combined value of ₹1,00,00,000 with ₹0 liabilities and 1,00,000 outstanding shares, the fund has an NAV of ₹100. Investor might not value the portfolio manager’s ability to pick stocks, however, so they might only be willing to pay ₹90 per share of the fund. So, this fund would be trading at a discount of 10% to its NAV.

Reason for Fund Companies to choose the CEF Structure:

One reason can be that the fund company has a particular niche that is better served through close-ended funds. For example if a fund company wants to manage a fund that holds securities that are not easy to trade (illiquid, such as stocks of a very small company that is rarely traded on the stock exchange), then they might for a close-ended fund.

Another reason can be the fund managers close-ended funds are not forced to sell a particular security when an investor wants to sell his shares of the fund. For example, let say we have a manager who is running two funds that differ only in structure, one is close-ended fund and other is open-ended fund. Both the funds hold Tata Motors and Eicher Motor shares. If an investor wants to sell his shares of

the close-ended fund, there is no problem; the fund manager is able to continue to hold both stocks because the investor goes to an exchange to sell his shares to another investor. On the other hand, because investors in a mutual fund go to the fund company to redeem his shares, the fund manager must sell either Tata Motor or Eicher motor shares in order to meet redemption needs and raise cash for the investor.

(B)Open Ended Mutual Fund:

It is a fund operated by an investment company which raise money from shareholders and invest in group of assets, in accordance with the stated set of objectives. Open-ended funds raise money by selling shares of the fund to the public, much like any other type of company which can sell stock in itself to the public.

Mutual funds then take the money they receive from the sale of their sale (along with any money from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities.

For most open-ended funds, shareholders are free to sell their shares at any time, although the price of a share in an open-ended fund will fluctuate daily, depending upon the performance of the securities held by the fund.

Benefits of open-ended funds include diversification and professional money management. Open-ended funds offer choice, liquidity and convenience, but charge fees. In an open-ended mutual fund, there is no limit to the number of investors, shares or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. Also as mentioned before, value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net asset Value (NAV).

(C)Interval Schemes:

Interval schemes combine the benefits of open-ended and close-ended schemes. These essentially are close-ended funds, but become open ended at pre-specified

intervals by opening for sale and repurchase on a regular basis at intervals on pre-specifies dates. Investors can buy or sell the units of these schemes at an interval which is specifies in the schemes document. For example, in case of a Monthly Interval fund, investors can buy or sell the units every month on the specified dates. This means the scheme is open-ended only on the specified transaction date and is like a close-ended fund on other dates.

From the point of view of an Asset Management Company (AMC), there is another explanation. The AMC makes the scheme open periodically for sale and repurchase of units from its unit-holders, generally every one, three, six, or twelve months, as disclosed in the funds offer document. The dates on which it becomes open for transactions by unit holders is known as specified transaction dates. The minimum duration of the interval in any Interval Scheme is 15 days and the specified period is required to be of at least 2 working days.

2.2 Types of Mutual Fund by NATURE:

(A)Equity Mutual Funds:

These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. Equity investments are meant for longer time horizon, thus equity funds rank high on the risk-return matrix. The Equity funds are sub-classified depending upon their investment objective, as follows:

Diversified Equity Funds Large-Cap Funds Mid-Cap Funds Small-Cap Funds Sector Funds Equity Linked Saving Schemes (ELSS)

(B)Debt Mutual Funds:

The objective of these funds is to invest in debt papers, government authoritis, private companies, banks and financial institutions are some of the major issuers o debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are sub-classified as:

Gilt Funds Income Funds Monthly Income Plans (MIP) Short Term Plans Liquid Funds

(C)Balanced Funds:

They are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These aim to provide investors with best of both equity and debt funds. Here, equity part provides growth and the debt part provides stability in returns.

2.3 Types of Mutual Fund by INVESTMENT OBJECTIVE:

(A)Growth Schemes:

These schemes are also called as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

(B)Income Schemes:

These schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

(C)Index Schemes:

These schemes attempt to replicate the performance of a particular index such as the BSE Sensex or NSE 50. The portfolio of these schemes will consist of only

those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weight age and hence the returns from such schemes would be more or less equivalent to those of the Index.

5.Main Text:

MY WORK AT RELIANCE MONEY At RELIANCE MONEY , initially we were imparted process and product knowledge. We were given sufficient time to know about the products and also about sales and distribution channel. We had to work with the sales representatives of the Distributor and think of ways of improving the sales and distribution channel and implementing them. The main aim was to increase sales and for this different ways were tried and implemented. We were provided with database and had to make calls from the data. Company activity was also one of the major sources for generating business. Initially they even accompanied sales representatives to the clients place. Main objective was to know the need of the customer and how to fulfil that in the best way.

And there I learnt how to pitch our products to the client and to understand the customer's existing portfolio and how many types of customers are there in market ..their needs /requirements and what are the selling techniques they are using. I asked my queries also with my teammates, company guide Mr Sumit Sir. I understood this company with marketing concepts also like in respect of marketing mix , BCG Matrix , and who all are the Reliance's Competitors in the market. That is all what i did till now.