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INDUSTRY PROFILE
A bank is a financial institution licensed by a government. Its primary activities include
borrowing and lending money. Many other financial activities were allowed over time.
For example banks are important players in financial markets and offer financial services
such as investment funds. In some countries such as Germany, banks have historically
owned major stakes in industrial corporations while in other countries such as the United
States banks are prohibited from owning non-financial companies. In Japan, banks are
usually the nexus of a cross-share holding entity known as the zaibatsu. In France, bank
assurance is prevalent, as most banks offer insurance services (and now real estate
services) to their clients.
The level of government regulation of the banking industry varies widely, with countries
such as Iceland, the United Kingdom and the United States having relatively light
regulation of the banking sector, and countries such as China having relatively heavier
regulation (including stricter regulations regarding the level of reserves).
Origin of the word
The name bank is derived from the Italian word banco "desk/bench", used during the
Renaissance by Florentine bankers, who used to make their transactions above a desk
covered by a green tablecloth. However, there are traces of banking activity even in
ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where
moneylenders would set up their stalls in the middle of enclosed courtyards called
macella on a long bench called a bancu, from which the words banco and bank are
derived. As a moneychanger, the merchant at the bancu did not so much invest money as
merely convert the foreign currency into the only legal tender in Romethat of the
Imperial Mint.
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Traditional Banking Activities
Banks act as payment agents by conducting checking or Current Accounts for customers,
paying cheques drawn by customers on the bank, and collecting cheques deposited to
customers' current accounts. Banks also enable customer payments via other payment
methods such as telegraphic transfer, EFTPOS, and ATM.
Banks borrow money by accepting funds deposited on current accounts, by accepting
term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend
money by making advances to customers on current accounts, by making installment
loans, and by investing in marketable debt securities and other forms of money lending.
Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that provide
payment services such as remittance companies are not normally considered an adequate
substitute for having a bank account.
Banks borrow most funds from households and non-financial businesses, and lend most
funds to households and non-financial businesses, but non-bank lenders provide a
significant and in many cases adequate substitute for bank loans, and money market
funds, cash management trusts and other non-bank financial institutions in many cases
provide an adequate substitute to banks for lending savings to
Definition
Under English Common Law, a banker is defined as a person who carries on the business
of banking, which is specified as:
Conducting current accounts for his customers
Paying cheques drawn on him, and
Collecting cheques for his customers.
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In most English Common Law jurisdictions there is a Bills of Exchange Act that codifies
the law in relation to negotiable instruments, including cheques, and this Act contains a
statutory definition of the term banker: banker includes a body of persons, whether
incorporated or not, who carry on the business of banking' (Section 2, Interpretation).Although this definition seems circular, it is actually functional, because it ensures that
the legal basis for bank transactions such as cheques do not depend on how the bank is
organised or regulated.
"Banking Business" means the business of receiving money on current or deposit
account, paying and collecting cheques drawn by or paid in by customers, the making of
advances to customers, and includes such other business as the Authority may prescribe
for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).
"Banking Business" means the business of either or both of the following:
1. receiving from the general public money on current, deposit, savings or other
similar account repayable on demand or within less than [3 months] ... or with a
period of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers
Economic Functions
The economic functions of banks include:
1. Issue of money, in the form of banknotes and current accounts subject to cheque
or payment at the customer's order. These claims on banks can act as money
because they are negotiable and/or repayable on demand, and hence valued at par.
They are effectively transferable by mere delivery, in the case of banknotes, or by
drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments banks act as both collection and paying
agents for customers, participating in interbank clearing and settlement systems to
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collect, present, be presented with, and pay payment instruments. This enables
banks to economies on reserves held for settlement of payments, since inward and
outward payments offset each other. It also enables the offsetting of payment
flows between geographical areas, reducing the cost of settlement between them.3. credit intermediation banks borrow and lend back-to-back on their own account
as middle men
4. Credit quality improvement banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers. The
improvement comes from diversification of the bank's assets and capital which
provides a buffer to absorb losses without defaulting on its obligations. However,
banknotes and deposits are generally unsecured; if the bank gets into difficulty and
pledges assets as security, to rise the funding it needs to continue to operate, this
puts the note holders and depositors in an economically subordinated position.
5. Maturity Transformation banks borrow more on demand debt and short term
debt, but provide more long term loans. In other words, they borrow short and lend
long. With a stronger credit quality than most other borrowers, banks can do this
by aggregating issues (e.g. accepting deposits and issuing banknotes) and
redemptions (e.g. withdrawals and redemptions of banknotes), maintaining
reserves of cash, investing in marketable securities that can be readily converted to
cash if needed, and raising replacement funding as needed from various sources
(e.g. wholesale cash markets and securities markets)
Banking in India
Banking in India originated in the last decades of the 18th century. The oldest bank in
existence in India is the State Bank of India, a government-owned bank that traces its
origins back to June 1806 and that is the largest commercial bank in the country. Central
banking is the responsibility of the Reserve Bank of India, which in 1935 formally took
over these responsibilities from the then Imperial Bank of India, relegating it to
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commercial banking functions. After India's independence in 1947, the Reserve Bank
was nationalized and given broader powers. In 1969 the government nationalized the 14
largest commercial banks; the government nationalized the six next largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks
(that is with the Government of India holding a stake), 31 private banks (these do not
have government stake; they may be publicly listed and traded on stock exchanges) and
38 foreign banks. They have a combined network of over 53,000 branches and 17,000
ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks
hold over 75 percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively
Early history
Banking in India originated in the last decades of the 18th century. The first banks were
The General Bank of India which started in 1786, and the Bank of Hindustan, both of
which are now defunct. The oldest bank in existence in India is the State Bank of India,
which originated in the Bank of Calcutta in June 1806, which almost immediately
became the Bank of Bengal. This was one of the three presidency banks, the other two
being the Bank of Bombay and the Bank of Madras, all three of which were established
under charters from the British East India Company. For many years the Presidency
banks acted as quasi-central banks, as did their successors. The three banks merged in
1925 to form the Imperial Bank of India, which, upon India's independence, became the
State Bank of India.
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 asa consequence of the economic crisis of 1848-49. The Allahabad Bank, established in
1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the
first though. That honor belongs to the Bank of Upper India, which was established in
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1863, and which survived until 1913, when it failed, with some of its assets and liabilities
being transferred to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With
large exposure to speculative ventures, most of the banks opened in India during that
period failed. The depositors lost money and lost interest in keeping deposits with banks.
Subsequently, banking in India remained the exclusive domain of Europeans for next
several decades until the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoires
d Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in
1862; branches in Madra and Pondichery, then a French colony, followed. HSBC
established itself in Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking center.
The Bank of Bengal, which later became the State Bank of India.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established
in Lahore in 1895, which has survived to the present and is now one of the largest banks
in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the
social, industrial and other infrastructure had improved. Indians had established small
banks, most of which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange
banks and a number of Indian joint stock banks. All these banks operated in different
segments of the economy. The exchange banks, mostly owned by Europeans,
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concentrated on financing foreign trade. Indian joint stock banks were generally
undercapitalized and lacked the experience and maturity to compete with the presidency
and exchange banks. This segmentation let Lord Curzon to observe, "In respect of
banking it seems we are behind the times. We are like some old fashioned sailing ship,divided by solid wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the
Swedeshi movement. The Swadeshi movement inspired local businessmen and political
figures to found banks of and for the Indian community. A number of banks established
then have survived to the present such as Bank of India, Corporation Bank, Indian Bank,
Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in
Dakshina Kannada and Udupi district which were unified earlier and known by the name
South Canara ( South Kanara ) district. Four nationalised banks started in this district and
also a leading private sector bank. Hence undivided Dakshina Kannada district is known
as "Cradle of Indian Banking".
From World War I to Independence
The period during the Fist World War (1914-1918) through the end of the Second World
War (1939-1945), and two years thereafter until the Independence of India were
challenging for Indian banking. The years of the First World War were turbulent, and it
took its toll with banks simply collapsing despite the Indian Economy gaining indirect
boost due to war-related economic activities. At least 94 banks in India failed between
1913 and 1918 as indicated in the following table:
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YearsNumber of banks
that failed
Authorized capital
(Rs. Lakhs)
Paid-up Capital
(Rs. Lakhs)
1913 12 274 35
1914 42 710 109
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West
Bengal, paralyzing banking activities for months. India's independence marked the end of
a regime of the Laissez-faire for the Indian banking. The Government of India initiated
measures to play an active role in the economic life of the nation, and the Industrial
Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This
resulted into greater involvement of the state in different segments of the economy
including banking and finance. The major steps to regulate banking included:
In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of India.
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In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two bankscould have common directors.
However, despite these provisions, control and regulations, banks in India except the
State Bank of India, continued to be owned and operated by private persons. This
changed with the nationalisation of major banks in India on 19 July, 1969.
Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large
employer, and a debate has ensued about the possibility to nationalise the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalisation." The paper was received with positive
enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance
and nationalized the 14 largest commercial banks with effect from the midnight of July
19, 1969. Jayaprakash Narayam, a national leader of India, described the step as a
"masterstroke of political sagacity."Within two weeks of the issue of the ordinance, the
Paliament passed the Banking Companies (Acquisition and Transfer of Undertaking)
Bill, and it received the presidential approval on 9 August, 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. Thestated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the GOI controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank
of India with Punjab National Bank. It was the only merger between nationalized banks
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and resulted in the reduction of the number of nationalised banks from 20 to 19. After
this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the
average growth rate of the Indian economy.
The nationalised banks were credited by some; including Home minister P.
Chidambaram, to have helped the Indian economy withstand the global financial crisis of
2007-2009.
Liberalisation
In the early 1990s, the then Shri Narsimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known asNew Generation tech-savvy banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, Axis Bank (earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,
along with the rapid growth in the economy of India, revitalized the banking sector in
India, which has seen rapid growth with strong contribution from all the three sectors of
banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%, at present it has gone up to 49%
with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%;Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks.All this led to the retail boom in India. People not just demanded more
from their banks but also received more.
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Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banksin comparable economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government. The stated policy of the Bank on the
Indian Rupee is to manage volatility but without any fixed exchange rate-and this has
mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&A, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake
in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI announced
norms in 2005 that any stake exceeding 5% in the private sector banks would need to be
vetted by them.
In recent years critics have charged that the non-government owned banks are too
aggressive in their loan recovery efforts in connection with housing, vehicle and personal
loans. There are press reports that the banks' loan recovery efforts have driven defaulting
borrowers to suicide.
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COMPANY PROFILE
The Housing Development Finance Corporation Limited (HDFC) was amongst the first
to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a
bank in the private sector, as part of the RBI's liberalisation of the Indian Banking
Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank
Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations
as a Scheduled Commercial Bank in January 1995.
HDFC is India's premier housing finance company and enjoys an impeccable track
record in India as well as in international markets. Since its inception in 1977, the
Corporation has maintained a consistent and healthy growth in its operations to remain
the market leader in mortgages. Its outstanding loan portfolio covers well over a million
dwelling units. HDFC has developed significant expertise in retail mortgage loans to
different market segments and also has a large corporate client base for its housing
related credit facilities. With its experience in the financial markets, a strong market
reputation, large shareholder base and unique consumer franchise, HDFC was ideally
positioned to promote a bank in the Indian environment.
HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to
build sound customer franchises across distinct businesses so as to be the preferred
provider of banking services for target retail and wholesale customer segments, and to
achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank
is committed to maintain the highest level of ethical standards, professional integrity,corporate governance and regulatory compliance. HDFC Bank's business philosophy is
based on four core values - Operational Excellence, Customer Focus, Product Leadership
and People.
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Capital Structure
As on 31st March, 2009 the authorised share capital of HDFC Bank is Rs. 550
crore. The paid-up capital as on the said date is Rs. 425, 38, 41,090/- (42, 53, 84,109
equity shares of Rs 10/- each). The HDFC Group holds 19.38% of the Bank's equity andabout 17.70 % of the equity is held by the ADS Depository (in respect of the bank's
American Depository Shares (ADS) Issue). 27.69 % of the equity is held by Foreign
Institutional Investors (FIIs) and the Bank has about 5, 48,774 shareholders.
The shares are listed on the Bombay Stock Exchange Limited, and The National
Stock Exchange of India Limited. The Bank's American Depository Shares (ADS) are
listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's
Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under
ISIN No US40415F2002.
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC
Bank was formally approved by Reserve Bank of India to complete the statutory and
regulatory approval process. As per the scheme of amalgamation, shareholders of CBoP
received 1 share of HDFC Bank for every 29 shares of CBoP.
The merged entity will have a strong deposit base of around Rs. 1, 22,000 crore
and net advances of around Rs. 89,000 crore. The balance sheet size of the combined
entity would be over Rs. 1, 63,000 crore. The amalgamation added significant value to
HDFC Bank in terms of increased branch network, geographic reach, and customer base,
and a bigger pool of skilled manpower.
In a milestone transaction in the Indian banking industry, Times Bank Limited
(another new private sector bank promoted by Bennett, Coleman & Co. / Times Group)
was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first
merger of two private banks in the New Generation Private Sector Banks. As per the
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scheme of amalgamation approved by the shareholders of both banks and the Reserve
Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every
5.75 shares of Times Bank.
HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable
network of over 1416 branches spread over 550 cities across India. All branches are
linked on an online real-time basis. Customers in over 500 locations are also serviced
through Telephone Banking. The Bank's expansion plans take into account the need to
have a presence in all major industrial and commercial centres where its corporate
customers are located as well as the need to build a strong retail customer base for both
deposits and loan products. Being a clearing/settlement bank to various leading stock
exchanges, the Bank has branches in the centres where the NSE/BSE has a strong and
active member base.
The Bank also has a network of about over 3382 networked ATMs across these
cities. Moreover, HDFC Bank's ATM network can be accessed by all domestic and
international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and American Express
Credit/Charge cardholders.
Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to this,
Mr. Capoor was a Deputy Governor of the Reserve Bank of India.
The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25
years and before joining HDFC Bank in 1994 was heading Citibank's operations in
Malaysia.
The Bank's Board of Directors is composed of eminent individuals with a wealth
of experience in public policy, administration, industry and commercial banking. Senior
executives representing HDFC are also on the Board.
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Senior banking professionals with substantial experience in India and abroad head
various businesses and functions and report to the Managing Director. Given the
professional expertise of the management team and the overall focus on recruiting and
retaining the best talent in the industry, the bank believes that its people are a significantcompetitive strength.
HDFC Bank operates in a highly automated environment in terms of information
technology and communication systems. All the bank's branches have online
connectivity, which enables the bank to offer speedy funds transfer facilities to its
customers. Multi-branch access is also provided to retail customers through the branch
network and Automated Teller Machines (ATMs).
The Bank has made substantial efforts and investments in acquiring the best
technology available internationally, to build the infrastructure for a world class bank.
The Bank's business is supported by scalable and robust systems which ensure that our
clients always get the finest services we offer.
The Bank has prioritised its engagement in technology and the internet as one of
its key goals and has already made significant progress in web-enabling its core
businesses. In each of its businesses, the Bank has succeeded in leveraging its market
position, expertise and technology to create a competitive advantage and build market
share.
HDFC Bank offers a wide range of commercial and transactional banking services
and treasury products to wholesale and retail customers. The bank has three key business
segments:
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Wholesale Banking Services
The Bank's target market ranges from large, blue-chip manufacturing companies
in the Indian corporate to small & mid-sized corporate and agri-based businesses. For
these customers, the Bank provides a wide range of commercial and transactionalbanking services, including working capital finance, trade services, transactional services,
cash management, etc. The bank is also a leading provider of structured solutions, which
combine cash management services with vendor and distributor finance for facilitating
superior supply chain management for its corporate customers. Based on its superior
product delivery / service levels and strong customer orientation, the Bank has made
significant inroads into the banking consortia of a number of leading Indian corporate
including multinationals, companies from the domestic business houses and prime public
sector companies. It is recognised as a leading provider of cash management and
transactional banking solutions to corporate customers, mutual funds, stock exchange
members and banks.
Retail Banking Services
The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a one-stop window
for all his/her banking requirements. The products are backed by world-class service and
delivered to customers through the growing branch network, as well as through
alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile
Banking.
The HDFC Bank Preferred program for high net worth individuals, the HDFC
Bank Plus and the Investment Advisory Services programs have been designed keeping
in mind needs of customers who seek distinct financial solutions, information and advice
on various investment avenues. The Bank also has a wide array of retail loan products
including Auto Loans, Loans against marketable securities, Personal Loans and Loans for
Two-wheelers. It is also a leading provider of Depository Participant (DP) services for
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retail customers, providing customers the facility to hold their investments in electronic
form.
HDFC Bank was the first bank in India to launch an International Debit Card inassociation with VISA (VISA Electron) and issues the Mastercard Maestro debit card as
well. The Bank launched its credit card business in late 2001. By March 2009, the bank
had a total card base (debit and credit cards) of over 13 million. The Bank is also one of
the leading players in the merchant acquiring business with over 70,000 Point-of-sale
(POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank
is well positioned as a leader in various net based B2C opportunities including a wide
range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.
Treasury
Within this business, the bank has three main product areas - Foreign Exchange
and Derivatives, Local Currency Money Market & Debt Securities, and Equities. With
the liberalisation of the financial markets in India, corporates need more sophisticated
risk management information, advice and product structures. These and fine pricing on
various treasury products are provided through the bank's Treasury team. To comply with
statutory reserve requirements, the bank is required to hold 25% of its deposits in
government securities. The Treasury business is responsible for managing the returns and
market risk on this investment portfolio.
Credit Rating
The Bank has its deposit programs rated by two rating agencies - Credit Analysis
& Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed
Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which
represents instruments considered to be "of the best quality, carrying negligible
investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme
"PR 1+" which represents "superior capacity for repayment of short term promissory
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obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned
the "AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating
as "stable". This rating indicates "highest credit quality" where "protection factors are
very high"
The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE
and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II
Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE AAA"
for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the
rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned
"CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues.
CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme
and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded
were the highest assigned by the rating agency for those instruments.
Corporate Governance Rating
The bank was one of the first four companies, which subjected itself to a Corporate
Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating
Information Services of India Limited (CRISIL). The rating provides an independent
assessment of an entity's current performance and an expectation on its "balanced value
creation and corporate governance practices" in future. The bank has been assigned a
'CRISIL GVC Level 1' rating which indicates that the bank's capability with respect to
wealth creation for all its stakeholders while adopting sound corporate governance
practices is the highest.
HDFC Bank began operations in 1995 with a simple mission: to be a "World-
class Indian Bank". We realised that only a single-minded focus on product quality and
service excellence would help us get there. Today, we are proud to say that we are well
on our way towards that goal.
It is extremely gratifying that our efforts towards providing customer convenience have
been appreciated both nationally and internationally.
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Credit Rating
The Bank has its deposit programs rated by two rating agencies - Credit Analysis
& Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed
Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, whichrepresents instruments considered to be "of the best quality, carrying negligible
investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme
"PR 1+" which represents "superior capacity for repayment of short term promissory
obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned
the "AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating
as "stable". This rating indicates "highest credit quality" where "protection factors are
very high"
The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by
CARE and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper
Tier II Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE
AAA" for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned
the rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also
assigned "CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond
issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt
programme and Upper Tier II Bond issue. In each of the cases referred to above, the
ratings awarded were the highest assigned by the rating agency for those instruments?
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Awards and Achievements Banking Services
HDFC Bank began operations in 1995 with a simple mission: to be a "World-
class Indian Bank". We realised that only a single-minded focus on product quality and
service excellence would help us get there. Today, we are proud to say that we are wellon our way towards that goal.
It is extremely gratifying that our efforts towards providing customer convenience have
been appreciated both nationally and internationally.
2009
Euromoney Awards 2009 'Best Bank in India'
Economic Times Brand Equity & Nielsen
Research annual survey 2009
Most Trusted Brand - Runner Up
Asia Money 2009 Awards 'Best Domestic Bank in India'
IBA Banking Technology 'Best IT Governance Award - Runner
up'
Global Finance Award 'Best Trade Finance Bank in India for
2009
IDRBT Banking Technology Excellence
Award 2008
'Best IT Governance and Value Delivery'
Asian Banker Excellence in Retail
Financial Services
'Asian Banker Best Retail Bank in India
Award 2009 '
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2008
Finance Asia Country Awards for
Achievement 2008
'Best Bank and Best Cash Management
Bank'CNN-IBN 'Indian of the Year (Business)'
Nasscom IT User Award 2008 'Best IT Adoption in the Banking Sector'
Business India 'Best Bank 2008'
Forbes Asia Fab 50 companies in Asia Pacific
Asian Banker Excellence in Retail
Financial Services
Best Retail Bank 2008
Asiamoney Best local Cash Management Bank
Award voted by Corporate
Microsoft & Indian Express Group Security Strategist Award 2008World Trade Center Award of honour For outstanding contribution to
international trade services.
Business Today-Monitor Group survey One of India's "Most Innovative
Companies"
Financial Express-Ernst & Young Award Best Bank Award in the Private Sector
category
Global HR Excellence Awards - Asia
Pacific HRM Congress:
'Employer Brand of the Year 2007 -2008'
Award - First Runner up, & many moreAsian Banker 'Best Bank' Award
We are aware that all these awards are mere milestones in the continuing, never-ending
journey of providing excellent service to our customers. We are confident, however, that
with your feedback and support, we will be able to maintain and improve our services
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Board of Directors
The Composition of the Board of Directors of the Bank is governed by the
Companies Act, 1956, the Banking Regulation Act, 1949 and the listing requirements ofthe Indian Stock Exchanges where securities issued by the Bank are listed. The Board has
strength of 12 Directors as on March 31, 2008. All Directors other than Mr. Aditya Puri,
Mr. Harish Engineer and Mr. Paresh Sukthankar are non-executive directors. The Bank
has five independent directors and six non-independent directors. The Board consists of
eminent persons with considerable professional expertise and experience in banking,
finance, agriculture, small scale industries and other related fields.
None of the Directors on the Board is a member of more than 10 Committees and
Chairman of more than 5 Committees across all the companies in which he/she is a
Director. All the Directors have made necessary disclosures regarding Committee
positions occupied by them in other companies.
- Mr. Jagdish Capoor, Mr. Keki Mistry, Mrs. Renu Karnad, Mr. Aditya Puri, Mr.
Harish Engineer and Mr. Paresh Sukthankar are non-independent Directors on the Board.
- Mr. Arvind Pande, Mr. Ashim Samanta, Mr. Gautam Divan, Mr. C. M. Vasudev
and Dr. Pandit Palande are independent directors on the Board.
- Mr. Keki Mistry and Mrs. Renu Karnad represent HDFC Limited on the Board
of the Bank.
- The Bank has not entered into any materially significant transactions during the
year, which could have a potential conflict of interest between the Bank and its
promoters, directors, management and/or their relatives, etc. other than the transactions
entered into in the normal course of business. The Senior Management have made
disclosures to the Board confirming that there are no material, financial and/or
commercial transactions between them and the Bank which could have potential conflict
of interest with the Bank at large.
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Mission and Business Strategy
Our mission is to be "a World Class Indian Bank", benchmarking ourselves against
international standards and best practices in terms of product offerings, technology,service levels, risk management and audit & compliance. The objective is to build sound
customer franchises across distinct businesses so as to be a preferred provider of banking
services for target retail and wholesale customer segments, and to achieve a healthy
growth in profitability, consistent with the Bank's risk appetite. We are committed to do
this while ensuring the highest levels of ethical standards, professional integrity,
corporate governance and regulatory compliance.
Our business strategy emphasizes the following :
1. Increase our market share in Indias expanding banking and financial services
industry by following a disciplined growth strategy focusing on quality and not on
quantity and delivering high quality customer service.
2. Leverage our technology platform and open scaleable systems to deliver more
products to more customers and to control operating costs
3. Maintain our current high standards for asset quality through disciplined credit
risk management.
4. Develop innovative products and services that attract our targeted customers and
address inefficiencies in the Indian financial sector.
5. Continue to develop products and services that reduce our cost of funds.
6. Focus on high earnings growth with low volatility.
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RESEARCH DESIGN
NEED FOR THE STUDY
In the changing complex business scenario, one has to update
the information and review their present status against competitors. It
is assumed that the investors show more dynamism while investing
money. This study would certainly help both the researcher as well as
the investor to assess the present status of company performance. It
gives more information to researcher about which investment is better
to pool their money. Thus the company can use data, provided by the
researcher in planning and controlling financial efforts in future. The
study is very much needed to prepare comparative charts of various
investment distributions.
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OBJECTIVES OF STUDY
1) The main objective of the study is to find out which mutual fund
scheme is performing well in debt equity fund and hybrid fund
category.
2) To study, why the public concentration has taken paradigm shift
on to stock market, particularly in mutual fund sector.
3) To study the reasons of security seeking people to prefer mutual
funds.
4) To study influencing factor behind the employees are choosing
Equity linked Tax saving scheme rather than paying Income Tax.
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SCOPE OF THE STUDY
The scope of the study is limited. The main objective of the study
is to analyze the performance of mutual funds schemes with special
reference to HDFC Mutual Funds.
The project is aimed to know the portfolio of Debt fund, Equity
fund, and hybrid funds of mutual fund schemes. It is limited to these
three schemes with special reference to HDFC Mutual Funds. This
project will be helpful to the company is measuring the performance of
mutual funds. This study the company can make the demonstration
easy to the investor; to compare various mutual funds and select the
better to invest their money and company may assess risk and return
of money. Only few factors are considered keeping in mind that time
and other constraints. The study would help the researcher and
academician to understand the practical aspects of mutual fund
management.
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RESEARCH METHODOLOGY
The researcher has to decide both the primary and secondary
data which is suitable for Research study.
Primary Data: - The data which are collected for first time by
researcher through observation and interaction with concerned
executives.
Secondary data: - The research study has been based on secondary
data. To gain an overview of the current trends of the Indian Mutual
fund industry and also to identify which scheme is performing better
secondary Data has been an important source and collected from the
Internet, various asset management companys (AMC) fact sheets, etc.
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LIMITATIONS
1. This analysis is limited to certain mutual fund schemes, which are
selected from the AMFI.
2. The data is collected from HDFC Mutual Funds and the data so
collected is analyzed and charts are prepared.
3. The secondary data is collected from different mutual fund
companies broachers, internet and magazines.
4. The data collected is not static. It is fluctuating. So the figures
arrived are not totally dependable for future investments. All
peripheral factors have to be taken into account while investing
in a particular scheme.
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MUTUAL FUND
It is a fund, managed by an investment company with the financial objective of
generating high Rate of Returns. These asset management or investment management
companies collects money from the investors and invests those money in different
Stocks, Bonds and other financial securities in a diversified manner. Before investing
they carry out thorough research and detailed analysis on the market conditions and
market trends of stock and bond prices. These things help the fund managers to speculate
properly in the right direction. The investors, who invest their money in the Mutual fund
of any Investment Management Company, receive an Equity Position in that particularmutual fund. When after certain period of time, whether long term or short term, the
investors sell the Shares of the Mutual Fund, they receive the return according to the
market conditions.
HISTORY:
The definition of a mutual fund is a form of collective investment that pools
money from many investors and invests their money in stocks, bonds, short-term money
market instruments, and/or other securities. In a mutual fund, the fund manager trades the
funds underlying securities, realizing capital gains or losses, and collects the dividend or
interest income. The investment proceeds are then passed along to the individual
investors. The value of a share of the mutual fund, known as the net asset value per share
(NAV), is calculated daily based on the total value of the fund divided by the number of
shares currently issued and outstanding. Legally known as an open-end company under
the Investment Company Act of 1940 (the primary regulatory statute governing
investment companies), a mutual fund is one of three basic types of investment
companies available in the United States. Outside of the United States (with the exception
of Canada, which follows the U.S. model), mutual fund is a generic term for various
types of collective investment vehicle. In the United Kingdom and western Europe
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(including offshore jurisdictions), other forms of collective investment vehicle are
prevalent, including unit trusts, open-ended investment companies (OEICs), SICAVs and
unitized insurance funds.
In Australia the term mutual fund is generally not used; the name managedfund is used instead. However, managed fund is somewhat generic as the definition of
a managed fund in Australia is any vehicle in which investors money is managed by a
third party (NB: usually an investment professional or organization). Most managed
funds are open-ended (i.e., there is no established maximum number of shares that can be
issued); however, this need not be the case. Additionally the Australian government
introduced a compulsory superannuation/pension scheme which, although strictly
speaking a managed fund, is rarely identified by this term and is instead called a
superannuation fund because of its special tax concessions and restrictions on when
money invested in it can be accessed.
The Unit Trust of India with Rs.44, 541 crores of assets under management was
way ahead of other mutual funds. The modern mutual fund was first introduced in
Belgium in 1822. This form of investment soon spread to Great Britain and France.
Mutual funds became popular in the United States in the 1920s and continue to be
popular since the 1930s, especially open-end mutual funds. Mutual funds experienced a
period of tremendous growth after World War II, especially in the 1980s and 1990s.
Mutual funds really captured the publics attention in the 1980s and 90s when mutual
fund investment hit record highs and investors saw incredible returns. However, the idea
of pooling assets for investment purposes has been around for a long time. Here we look
at the evolution of this investment vehicle, from its beginnings in the Belgium in the
eighteenth century to its present status as a growing, international industry with fund
holdings accounting for trillions of dollars in the United States alone.
The Boston Personal Property Trust, formed in 1893, was the first closed-
end fund in the U.S. The creation of the Alexander Fund in Philadelphia, Pennsylvania, in
1907 was an important step in the evolution toward what we know as the modern mutual
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fund. The Alexander Fund featured semi-annual issues and allowed investors to make
withdrawals on demand. A momentous year in the history of the mutual fund, 1928 also
saw the launch of the Wellington Fund, which was the first mutual fund to include stocks
and bonds, as opposed to direct merchant bank style of investments in business and trade.By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-end
funds. With the stock market crash of 1929, the dynamic began to change as highly
leveraged closed-end funds were wiped out and small open-end funds managed to
survive.
GROWTH IN ASSETS UNDER MANAGEMENT
Fund Basics:
A Mutual Fund is a trust that pools the savings of a number of investors who share
a common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. The income earned
through these investments and the capital appreciation realized by the scheme 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 portfolio at a relatively low cost. The
small savings of all the investors are put together to increase the buying power and hire a
professional manager to invest and monitor the money. Anybody with an invisible
surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual
Fund scheme has a defined investment objective and strategy.
STRUCTURE OF A MUTUAL FUND:
A mutual fund is set up in the form of a trust, which has Sponsor, Trustees, Asset
Management Company (AMC) and a Custodian. The trust is established by a sponsor or
more than one sponsor who is like a promoter of a company. The trustees of the mutual
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fund hold its property for the benefit of the unit-holders. The AMC, approved by SEBI,
manages the funds by making investments in various types of securities. The custodian,
who is registered with SEBI, holds the securities of various schemes of the fund in its
custody. The trustees are vested with the general power of superintendence and directionover AMC. They monitor the performance and compliance of SEBI Regulations by the
mutual fund.
A typical mutual fund structure in India can be graphically represented as follows
SPONSOR:
Sponsor is the person who acting alone or in combination with another body
corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net
worth of the investment Managed and meet the eligibility criteria prescribed under the
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.
The Sponsor is not responsible or liable for any loss or shortfall resulting from the
operation of the Schemes beyond the initial contribution made by it towards setting up of
the Mutual Fund. The Sponsor (or) any of its directors or the principal officer employed
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the SEBI and is required to fulfill specified eligibility criteria. Additionally, a custodian
in which the sponsor or its associates holds 50% or more of the voting rights of the share
capital of the custodian or where 50% or more of the directors of the custodian represent
the interest of the sponsor or its associates cannot act as custodian for a mutual fundconstituted by the same sponsor or any of its associate or subsidiary company.
TRANSFER AGENTS:
Transfer agents are responsible for issuing and redeeming units of the mutual fund
and provide other related services such as preparation of transfer documents and updating
investor records. A fund may choose to carry out this activity in-house and charge the
scheme for the service at a competitive market rate. Where an outside Transfer Agent is
used, the fund investor will find the agent to be an important interface to deal with, since
all of the investor services that a fund provides (besides the investment management) are
going to be dependent on the transfer agent.
DISTRIBUTORS:
Mutual funds operate as collective investment vehicles, on the principle of
accumulating funds from a large number of investors and then investing on a big scale.
For a fund to sell units across a wide retail base of individual investors, an established
network of distribution agents is essential.
(AMCs usually appoint Distributors or Brokers, who sell units on behalf of the
fund. Some funds even require that all transactions be routed through such brokers. A
sponsor or an associate (or in some cases, an employee) may act as a distributor for the
AMC with which he or she is associated, only if adequate disclosure of such involvement
and the brokerage/commission paid is made to unit-holders.
A broker usually acts on behalf of several mutual funds simultaneously and may
have several sub-brokers under him for the purpose of distribution of units.
In India, besides brokers, independent individuals are appointed as agents for
the purpose of selling the fund schemes to investors. These agents are not brokers in a
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including agencies connected or involved in the field of capital Markets &
financial Services.
To promote high standards of commercial honor & encourage & promote among
members & others the observance of securities laws including regulations &directives issued by Securities & Exchange Board of India (SEBI) & function in
the best of interest of the investing public.
To help in setting up professional standards for providing efficient services &
establishing standard practices for Mutual Fund & Asset Management activities.
To bring about better co-ordination in the field of Mutual Funds & Asset
Management Industry.
To promote & develop sound, progressive & dynamic principles, practices &
conventions in the activities of Mutual Fund & Asset Management.
To render assistance & provide common services & utilities to the persons
engaged in the field of Mutual Funds & Asset Management.
How to Invest In Mutual Funds:
Step one Identify your investment needs:
Your financial goals will vary, based on your age, lifestyle, financial independence,
family commitments, level of income and expenses among many other factors. Therefore,
the first step is to assess your needs. Begin by asking yourself these questions.
1. What are my investment objectives and needs?
Probable Answer: I need regular income or need to buy a home or finance a
wedding or educate my children or a combination of all these needs.
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2. How much risk am I willing to take?
Probable Answer: I can only take a minimum amount of risk or I am willing to
accept the fact that my investment value may fluctuate or that there may be a short-
term loss in order to achieve a long-term potential gain.
3. What are my cash flow requirements?
Probable Answer: I need a regular cash flow or need a lump sum amount to meet a
specific need after a certain period or dont require a current cash flow but I want to build
my assets for the future.
By going through such an exercise, you will know what you want out of
your investment and can set the foundation for a sound mutual fund investment strategy
Step Two Choose the right mutual fund:
Once you have a clear strategy in mind, you now have to choose which mutual
fund and scheme you want to invest in. The offer document of the scheme tells you its
objectives and provides supplementary details like the track record of other schemes
managed by the same fund manager. Some factors to evaluate before choosing a
particular mutual fund are:
The track record of performance over the last few years in relation to the
appropriate yardstick and similar funds in the same category.
How well the mutual fund is organized to provide efficient, prompt and
personalized service.
Degree of transparency as a reflected in frequency and quality of their
communications.
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Step Three Select the ideal mix of schemes:
Investing in just one mutual fund scheme may not meet all your investment needs.
You may consider investing in a combination of schemes to achieve your specific goals.
The following charts could prove useful in selecting a combination of schemes
that satisfy your needs.
Aggressive Plan:
This plan may suit-
Investors in their prime earning years and willing to take more risk.
Investors seeking growth over a long-term.
Moderate Plan:
This plan may suit-
Investors seeking income and moderate growth.
Investors looking for growth and stability with moderate risk.
Conservative Plan:
This plan may suit-
Retired and other investors who need to preserve capital and earn regular
income.
Step Four Invest regularly:
For most of us, the approach that works best is to invest a fixed amount at specific
intervals, say every month. By investing a fixed sum each month, you buy fewer units
when the price is higher and more units when the price is low, thus bringing down your
average cost per unit. This is called rupee cost averaging and is a disciplined investment
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strategy followed by investors all over the world. With many open-ended schemes
offering systematic investment plane, this regular investing habit is made easy for you.
Step Five Keep your taxes in mind:If you are in a high tax bracket and have utilized fully the exemptions under
Section 80L of the Income Tax Act, investing in growth funds that do not pay dividends
might be more tax efficient and improve your post-tax return.
If you are in a low tax bracket and have not utilized fully the exemption available
under Section 80L, selecting funds paying regular income could be more tax efficient.
Further, there are other benefits available for investment in mutual funds under the
provisions of the prevailing tax laws. You may therefore consult your tax adviser or
Chartered Accountant for specific advice.
Step Six The final step:
All you need to do now is to get in touch with a mutual fund or your agent/broker
and start investing. Reap the rewards in the years to come. Mutual funds are suitable for
every kind of investor-whether starting a career or retiring, conservative or risk taking,
growth oriented or income seeking.
ROLE OF MUTUAL FUND
Mutual Funds & Financial Market:
In the process of development Indian mutual funds have emerged as strong
financial intermediaries & are playing a very important role in bringing stability to the
financial system & efficiency to resource allocation. Mutual Funds have opened new
vistas to investors & imparted a much-needed liquidity to the system. In the process they
have challenged the hitherto role of commercial banks in the financial market & national
economy.
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Mutual Fund & Capital Market:
The active involvement of Mutual Funds in promoting economic development can
be seen not only in terms of their participation in the savings market but also in their
dominant presence in the money & capital market. A developed financial market iscritical to overall economic development, & Mutual Funds play an active role in
promoting a healthy capital market. The asset holding pattern of mutual funds in the USA
indicates the dominant role of Mutual Funds in the capital market & money market.
Moreover, they have also rendered critical support to securities mortgage loans &
municipal bond market in the USA. In the USA, Mutual Funds provide very active
support to the secondary market in terms of purchase of securities.
Investors preferences pattern in India has undergone a tremendous change during
recent times, along with the changes in the share of financial assets in the total annual
savings. Indian investors have moved towards more liquid & growth oriented trade able
instruments likes shares/debentures & units of Mutual Funds. The shift is asset holding
pattern of investors has been significantly influenced by the equity & unit culture
while the holders of company shares & debentures are concentrated in the urban areas,
small/medium investors in the semi-urban & rural areas are tending towards Mutual
Funds. Mutual Funds in India have certainly created awareness among investors about
equity oriented investments & its benefits.
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CONCEPT OF MUTUAL FUND:
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 marketinstruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized are 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. The flow
chart below describes broadly the working of a mutual fund:
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Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as disclosed in
offer document.
Investments in securities are spread across a wide cross-section of industries andsectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. Mutual fund
issues units to the investors in accordance with quantum of money invested by them.
Investors of mutual funds are known as unit holders.
The profits or losses are shared by the investors in proportion to their investments.
The mutual funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.
A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types of
securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and compliance
of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be associated with
the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds
are required to be registered with SEBI before they launch any scheme.
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BENEFITS OF MUTUAL FUNDS:
Professional Management:Qualified investment professionals who to maximize returns and minimize risk
monitor investors money. When you buy in to a mutual fund, you are handing your
money to an investment professional that has experience in making investment decisions.
It is the fund managers job (a) find the best securities for the fund, given the funds
stated investment objectives; and (b) keep track of investments and changes in market
conditions and adjust the mix of portfolio, as and when required.
Portfolio Diversification:
It is a nuclear weapon in your arsenal for your fight against risk. It simply means
that you must spread your investment across different securities (stocks, bonds, money
market instruments, real estate etc.) and different sectors (auto, textile, information
technology etc.). This kind of diversification may add to the stability of your returns. For
example during one period of time equities might underperform but bonds and money
market instruments might do well enough to offset the effect of a slump in the equity
markets. Similarly the information technology sector might be faring poorly but the auto
and textile sectors might do well and may protect your principal investment as well as
help you meet your return objectives.
Diversification of Risk:
When an investor invests directly, all the risk of the potential loss is his own,
whether he places a deposit with a company or a bank, or buys a share or debenture on
his own or in any other form. While investing in a pool of funds shared with other
investors, the potential losses are also shared with other investors. This risk reduction is
one of the most important benefits of a collective investment vehicle like the mutual
fund.
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Convenient Administration:
Investing in a Mutual Fund reduces paperwork and helps to avoid many problems
such as bad deliveries, delayed payments and unnecessary follow up with brokers andcompanies. Mutual Funds save time and make investing easy and convenient.
Return Potential:
Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
Affordability and Low Costs:
A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending
upon the investment objective of the scheme. An investor can buy in to portfolio of
equities, which would otherwise be extremely expensive. Each unit holder thus gets an
exposure to such portfolios with an investment as modest Rs.500. this amount today
would get you less than quarter of an Infosys share! Thus it would be affordable for an
investor to build a portfolio of investment through a mutual fund rather than investing
directly in the stock market.
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial and
other fees translate into lower costs for investors.
Liquidity:
In open-ended schemes, Investors can get their money back promptly at net asset
value related prices from the Mutual Fund itself. With close-ended schemes, they can sell
their units on a stock exchange at the prevailing market price or avail of the facility of
direct repurchase at NAV related prices which some close-ended and interval schemes
offer periodically.
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Transparency:
Investors get regular information on the value of their investment in addition to
disclosure on the specific investments made by the scheme, the proportion invested in
each class of assets and the fund managers investment strategy and outlook. This level oftransparency were the investor himself sees the underlying assets bought with his money
is unmatched by any other financial instrument. Thus the investor is in the know of the
quality of portfolio and can invest further or redeem depending on the kind of portfolio
that has been constructed by the investment manager.
Flexibility:
Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, Investors can systematically invest or withdraw funds
according to their needs and convenience.
Choice of Schemes:
Mutual funds offer a tremendous variety of schemes. This variety is beneficial in
two ways, first it offers different types of schemes to with different needs and risk
appetites: secondly, it offers an opportunity to an investor to invest sums across a variety
of schemes, both debt and equity. For example an investor can invest his money in a
growth fund (equity scheme) and income fund (debt scheme) depending on his risk
appetite and thus create a balanced portfolio easily or just buy a balanced scheme.
Tax Benefits:
In general, investors pay tax on a year-to year basis. So if they were to an income
and then re-invest the income, what they would re-invest is the amount that is available
after paying tax. Mutual fund schemes, on the other hand, do not pay a tax on their
income. So the same earning in a mutual fund scheme could facilitate a higher re-
investment.
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the foundation of your investment program or as a supplement, Mutual Fund schemes can
help you meet your financial goals.
By Structure Schemes can be classified into 3 types
OPEN-ENDED SCHEMES:
These do not have a fixed maturity. Investors deal directly with the Mutual Fund
for their investments and redemptions. The key feature is liquidity. They can
conveniently buy and sell their units at Net Asset Value (NAV) related prices.
CLOSE-ENDED SCHEMES:
Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are
called close-ended schemes. Investors can invest directly in the scheme at the time of the
initial issue and thereafter they can buy or sell the units of the scheme on the stock
exchanges where they are listed. The market price at the stock exchange could vary from
the schemes NAV on account of demand and supply situation, unit holders expectations
and other market factors. One of the characteristics of the close-ended schemes is that
they are generally traded at a discount to NAV; but closer to maturity, the discount
narrows. Some close-ended schemes give them an additional option of selling their units
directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI
Regulations ensure that at least one of the two exit routes is provided to the investor.
INTERVAL SCHEMES:
These combine the features of open-ended and close- ended schemes. They may
be traded on the stock exchange or may be open for sale or redemption during
predetermined intervals at NAV related prices.
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BY INVESTMENT OBJECTIVE:
Growth/Equity Schemes:
Aim to provide capital appreciation over the medium to long term. These schemesnormally invest a majority of their funds in equities and are willing to bear short-term
decline in value for possible future appreciation. These schemes are not for investors
seeking regular income or needing their money back in the short-term.
Income Schemes:
Aim 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.
Balanced Schemes:
Aim to provide both growth and income by periodically distributing a part of the
income and capital gains they earn. They invest in both shares and fixed income
securities in the proportion indicated in their offer documents. In a rising stock market,
the NAV of these schemes may not normally keep pace, or fall equally when the market
falls.
Money Market Schemes:
Aim to provide easy liquidity, preservation of capital and moderate income. These
schemes generally invest in safer, short-term instruments, such as treasury bills,
certificates of deposit, commercial paper and inter- bank call money. Returns on these
schemes may fluctuate, depending upon the interest rates prevailing in the market.
Tax Saving Schemes:
These schemes offer tax rebates to the investors under tax laws as prescribed from
time to time. This is made possible because the Government offers tax incentives for
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investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS)
and Pension Schemes. Recent amendments to the Income Tax Act provide further
opportunities to investors to save capital gains by investing in Mutual Funds. The details
of such tax savings are provided in the relevant offer documents.
Special Schemes:
This category includes index schemes that attempt to replicate the performance of
a particular index, such as the BSE Sensex or the NSE 50, or industry specific schemes
(which invest in specific industries) or Sectoral schemes (which invest exclusively in
segments such as A Group shares or initial public offerings). Index fund schemes are
ideal for investors who are satisfied with a return approximately equal to that of an index.
Sectoral fund schemes are ideal for investors who have already decided to invest in a
particular sector or segment. Keeping in mind that any one scheme may not meet all the
investors requirements for all time
RISKS OF INVESTING IN MUTUAL FUNDS:
Risk:
Every type of investment, including mutual funds, involves risk. Risks refer to the
possibility that you will lose money (both principal and any earnings) or fail to make
money on an investment.
Following is a glossary of some risks to consider when investing in mutual funds.
Call Risk: The possibility that falling interest rates will cause a bond issuer to
redeemor callits high-yielding bond before the bonds maturity date.
Country Risk: The possibility that political events (a war, national elections),
financial problems (rising inflation, government default), or natural disasters (an
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earthquake, a poor harvest) will weaken a countrys economy and cause investments in
that country to decline.
Credit Risk: The possibility that a bond issuer will fail to repay interest and
principal in a timely manner. Also called default risk.Currency Risk: The possibility that returns could be reduced for Americans
investing in foreign securities because of a rise in the value of the U.S. dollar against
foreign currencies. Also called as exchange-rate risk.
Income Risk: The possibility that a fixed-income funds dividends will declines a
result of falling overall interest rates.
Industry Risk: The possibility that a group of stocks in a single industry will
decline in price due to developments in that industry.
Inflation Risk: The possibility that increases in the cost of living will reduce or
eliminate a funds real inflation-adjusted returns.
Interest Rate Risk: The possibility that a bond fund will decline in value because
of an increase in interest rates.
NET ASSET VALUE
Mutual funds most relevant disclosure for investors is NAV.Net asset value is the
mirror, depicting the worth of investment made per unit. NAV is the most sought after
criterion for making decision. The NAV of scheme is an indicator of capital appreciation
of the funds under the scheme as on the date of the NAV.
Definition of NAV:
Net Asset Value, or NAV, is the sum total of the market value of all the shares
held in the portfolio including cash, less the liabilities, divided by the total number of
units outstanding. Thus, NAV of a mutual fund unit is nothing but the book value.
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NAV vs. Price of an equity share:
In case of companies, the price of its share is as quoted on the
stock exchange, which apart from the fundamentals is also dependent on the perceptionof the companys future performance and the demand-supply scenario. And hence the
market price is generally different from its book value.
There is no concept as market value for the MF unit. Therefore,
when we buy MF units at NAV, we are buying at book value. And since we are buying at
book value, we are paying the right price of the assets whether it is Rs 10 or Rs.100.There
is no such thing as a higher or lower price.
NAV and its impact on the returns:
We feel that a MF with lower NAV will give better returns. This
again is due to the wrong perception about NAV. The NAV is calculated by dividing the
aggregate value of the net assets of the scheme by the number of outstanding units under
the scheme. The NAV represent the value of the asset held by the fund, valued
appropriately, by the liabilities and expenses incurred for the management of the scheme
including expenses to cover the duties, taxes and other expenses to cover the deemed
realization of the investment.
NAV formula given by SEBI for calculation is =U
OM )( +
M=Market value of securities/investment trade
O=other asset.
L=Total liabilities
U=Number of units outstanding
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The other formula for calculation of NAV on daily basis is:-
gOutstandinUnitssFund'ofNumber
sLiabilitie-AssetsofValueMarketTotalNAV =
There is hardly any difference in NAV computation of an open-ended or close-
ended scheme.NAV can be calculated on total basis as well as per unit basis.
Valuation system for NAV:
To say the appropriate valuation system for assets is critical one. The listed
securities are valued by some funds as per the closing prices at the stock exchange. Care
is taken to see that in the case of thinly traded shares or newly listed the valuation is fair.
The fixed income securities are valued at cost or on the basis of current yields and
maturity value of comparable instruments. The accrued interest is added in case of these
securities. All the other assets capable of being valued as above are value at book value.
The NAV incorporates both the realized as well as unrealized capital appreciation.
The realized capital joins the income stream. As unrealized capital appreciation is
dependent upon the market prices, in case of listed securities the NAV could also mob up
or down depending upon the market process for underlying securities.Thus, other things being the same, schemes having a regular distribution income
by dividends would have a lower NAV than schemes which accumulate the income and
do not make annual periodic payments. The longer a scheme has run, the more time it
would have to plough back profit an build up reserves and is likely to have a higher NAV
than a recent scheme. Performance of a scheme is reflected is its NAV and not in its
market quote at a given time.
It is also necessary to appreciate that NAV changes when any investment ordisinvestment takes place. Similarly, when dividends and bonus are declared, the scheme
has to resort to premature booking of profits and realize capital appreciation.
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In close ended schemes although investor is free to transact in Stock Exchange his
nits, but what he expects is value near to NAV of the unit. Buying and selling forces
matter a lot. An investor when sells his unit feels satisfies if he realizes value nearer to
NAV. But if realization to seller is below the buyer of unit is at an advantage especially ifhe wishes to retain the units up till redemption of the scheme.
As mentioned fund portfolio is diversified, NAV of a fund is less vulnerable as
compared to change in price of share on account of any development in the share market.
Further, except the growth funds, other fund NAV does no increase as much as
share prices may increase. The percentage of the premium or discount over the NAV
shows how fancied mutual funds are in the market; investors in the mutual funds may be
lost out because the units of various schemes may trade either below par or because the
market price is very low.
Pricing of units and NAV:
SEBI regulations permit mutual funds to provide for the price at which the units
may be subscribed or sold to the independent participants, once initial public offer is
over, in the scheme and the price at which such units may at any time be repurchased by
the mutual fund. Depending upon NAV, the prices may be termed as offer price or
purchase price and bid price, or sale price respectively.
The load is adjusted to NAV to calculate the offer price and bid price. To
calculate these prices there can be many alternatives.
Offer price = NAV per unit + Load Charges
Bid price = NAV per unit Realization
Calculation of sales load cumulative discount:
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With respect to any subsequent purchase of units made by any investor, the sales
load applicable to such subsequent purchase may be based on the aggregate amount of
units held by such investor, including the amount of the subsequent purchase. Thus, for
determining the sales load payable, the following will be aggregated:-
(a) The amount of the investors subsequent purchase &
(b) The aggregate NAV of all units held by the investor.
Is NAV Not Ascertainable or Not Available Value:
Many reasons can be subscribed to such a state of affair but certainly one reason
has been non-reliability or non-validity of NAV as the indicator or worth of mutual
fund scheme. Thus the depicted worth has always been doubled. The reason is ask of uni
forming in valuing assets. The problem is that there are so many accounting practices in
vague, and which are all legally acceptable, thus the NAV of the same mutual fund may
be higher or lower depending upon the amounting pattern utilized.
The major variation is in NAV on account of the factors like value of assets,
whether these are quoted or unquoted, whether these are convertible debenture or money
market instruments. Moreover, should the issue cost of scheme or for that matter front
end fee is to be amortized over the period of fund or to be written off at the start. Further,
what happens when mutual funds do not adopt a valuation policy consistently? All these
queries make NAV a doubtful signed for small investors. Not only valuation method but
even accounting for income & expenses also influence the NAV.
What m