frauds in indian banking sector

8/19/2019 Frauds in Indian Banking Sector

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INDEX

SRNO. TOPICS PAGE

NO

1. INTRODUCTION OF MUTUAL FUND 01

2. WORKING OF MUTUAL FUND 25

3. MUTUAL FUND IN INDIA 33

4. RELIANCE MUTUAL FUND vs. UTI MUTUAL FUND 37

5. MUTUAL FUND vs. OTHER INVESTMENT 0

. FUTURE !ROS!ECT OF MUTUAL FUNDS IN INDIA 7

MF "ARGON #

CONCLUSION $

%I%LOGRA!H& 70

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Chapter: 1

INTRODUCTION OF MUTUAL FUND

There are a lot of investment avenues available today in the financial market for an investor with

an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where

there is low risk but low return. He may invest in Stock of companies where the risk is high and

the returns are also proportionately high. The recent trends in the Stock arket have shown that

an average retail investor always lost with periodic bearish tends. !eople began opting for

portfolio managers with e"pertise in stock markets who would invest on their behalf. Thus we

had wealth management services provided by many institutions. However they proved too costly

for a small investor. These investors have found a good shelter with the mutual funds.

CONCE!T OF MUTUAL FUND'

# mutual fund is a common pool of money into which investors place their contributions

that are to be invested in accordance with a stated ob$ective. The ownership of the fund is thus

$oint or %mutual&' the fund belongs to all investors. # single investor(s ownership of the fund is

in the same proportion as the amount of the contribution made by him or her bears to the total

amount of the fund.

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utual )unds are trusts, which accept savings from investors and invest the same in

diversified financial instruments in terms of ob$ectives set out in the trusts deed with the view to

reduce the risk and ma"imi*e the income and capital appreciation for distribution for the

members. # utual )und is a corporation and the fund manager(s interest is to professionally

manage the funds provided by the investors and provide a return on them after deducting

reasonable management fees.

The ob$ective sought to be achieved by utual )und is to provide an opportunity for

lower income groups to ac+uire without much difficulty financial assets. They cater mainly to the

needs of the individual investor whose means are small and to manage investors portfolio in a

manner that provides a regular income, growth, safety, li+uidity and diversification opportunities.

DEFINITION'

“Mutual funds are collective savings and investment vehicles where savings of small (or

sometimes big) investors are pooled together to invest for their mutual benefit and returns

distributed proportionately”.

“A mutual fund is an investment that pools your money with the money of an unlimited

number of other investors. In return, you and the other investors each own shares of the fund.

he fund!s assets are invested according to an investment ob"ective into the fund!s portfolio of

investments. Aggressive growth funds see# long$term capital growth by investing primarily in

stoc#s of fast$growing smaller companies or mar#et segments. Aggressive growth funds are also

called capital appreciation !nds".

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M()(*+ F(,-s

E(/)

%*, FD

!s)*+ S*v/,s

V,)( C*6/)*+

HIGHER RISK

HIGHIER RETURNS

LOWER RISK

HIGIER RETURNS

LOWER RISK

LOWER RETURNS

HIGHIER RISK

MODERATE RETURNS

W S+8) M()(*+ F(,-9

The risk return tradeoff indicates that if investor is willing to take higher risk then

correspondingly he can e"pect higher returns and vise versa if he pertains to lower risk

instruments, which would be satisfied by lower returns. )or e"ample, if an investors opt for

bank )D, which provide moderate return with minimal risk. But as he moves ahead to invest in

capital protected funds and the profitbonds that give out more return which is slightly higher as

compared to the bank deposits but the risk involved also increases in the same proportion.

Thus investors choose mutual funds as their primary means of investing, as utual funds

provide professional management, diversification, convenience and li+uidity. That doesn(t mean

mutual fund investments risk free.

This is because the money that is pooled in are not invested only in debts funds which are

less riskier but are also invested in the stock markets which involves a higher risk but can e"pect

higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives

market which is considered very volatile.

RETURN RISK MATRIX

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HISTOR& OF MUTUAL FUNDS IN INDIA'

The mutual fund industry in -ndia started in /01 with the formation of 2nit Trust of

-ndia, at the initiative of the 3overnment of -ndia and 4eserve Bank. The history of mutual funds

in -ndia can be broadly divided into four distinct phases

FIRST !HASE : 1$4;#7'

2nit Trust of -ndia 52T-6 was established on /01 by an #ct of !arliament. -t was set up

by the 4eserve Bank of -ndia and functioned under the 4egulatory and administrative control of

the 4eserve Bank of -ndia. -n /78 2T- was delinked from the 4B- and the -ndustrial

Development Bank of -ndia 5-DB-6 took over the regulatory and administrative control in place

of 4B-. The first scheme launched by 2T- was 2nit Scheme /09. #t the end of /88 2T- had

4s.0,7:: crores of assets under management.

SECOND !HASE : 1$#7;1$$3


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2T- were to be registered and governed. The erstwhile Aothari !ioneer 5now merged with

)ranklin Templeton6 was the first private sector mutual fund registered in


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T *6 /,-/8*)s ) >) ? *ss)s (,- @*,*@,) v ) *s.

GROWTH IN ASSETS UNDER MANAGEMENT

(Source: www.amfindia.com )

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ADVANTAGES OF MUTUAL FUNDS'

-f mutual funds are emerging as the favorite investment vehicle, it is because of the many

advantages they have over other forms and the avenues of investing, particularly for the investor

who has limited resources available in terms of capital and the ability to carry out detailed

research and market monitoring. The following are the ma$or advantages offered by mutual

funds to all investors

1. !)?+/ D/vs/?/8*)/,'

ach investor in the fund is a part owner of all the fund(s assets, thus enabling him to

hold a diversified investment portfolio even with a small amount of investment that would

otherwise re+uire big capital.

2. !?ss/,*+ M*,*@,)'

ven if an investor has a big amount of capital available to him, he benefits from the

professional management skills brought in by the fund in the management of the investor(s

portfolio. The investment management skills, along with the needed research into available

investment options, ensure a much better return than what an investor can manage on his own.

)ew investors have the skill and resources of their own to succeed in today(s fast moving, globaland sophisticated markets.

3. R-(8)/,D/vs/?/8*)/, O? R/s'

@hen an investor invests directly, all the risk of potential loss is his own, whether he

places a deposit with a company or a bank, or he buys a share or debenture on his own or in any

other from. @hile investing in the pool of funds with investors, the potential losses are also

shared with other investors. The risk reduction is one of the most important benefits of a

collective investment vehicle like the mutual fund.

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4. R-(8)/, O? T*,s*8)/, Cs)s'

@hat is true of risk as also true of the transaction costs. The investor bears all the costs of

investing such as brokerage or custody of securities. @hen going through a fund, he has the

benefit of economies of scale' the funds pay lesser costs because of larger volumes, a benefit

passed on to its investors.

5. L/(/-/)'

>ften, investors hold shares or bonds they cannot directly, easily and +uickly sell. @hen

they invest in the units of a fund, they can generally cash their investments any time, by selling

their units to the fund if openended, or selling them in the market if the fund is closeend.

;i+uidity of investment is clearly a big benefit.

. C,v,/,8 A,- F+B//+/)'

utual fund management companies offer many investor services that a direct market

investor cannot get. -nvestors can easily transfer their holding from one scheme to the other' get

updated market information and so on.

7. T*B %,?/)s'

#ny income distributed after arch 1, ?::? will be sub$ect to ta" in the assessment of

all 2nit holders. However, as a measure of concession to 2nit holders of openended e+uity

oriented funds, income distributions for the year ending arch 1, ?::1, will be ta"ed at a

concessional rate of :.E.

-n case of -ndividuals and Hindu 2ndivided )amilies a deduction upto 4s. /,::: from the

Total -ncome will be admissible in respect of income from investments specified in Section 8:;,

including income from 2nits of the utual )und. 2nits of the schemes are not sub$ect to @ealth

Ta" and 3iftTa".

#. C/8 ? S8@s'

utual )unds offer a family of schemes to suit your varying needs over a lifetime.

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$. W++ R(+*)-'

#ll utual )unds are registered with SB- and they function within the provisions of strict

regulations designed to protect the interests of investors. The operations of utual )unds are

regularly monitored by SB-.

10. T*,s6*,8'

Fou get regular information on the value of your investment in addition to disclosure on the

specific investments made by your scheme, the proportion invested in each class of assets

and the fund managerGs investment strategy and outlook.

DISADVANTAGES OF INVESTING THROUGH MUTUAL

FUNDS'

1. N C,)+ Ov Cs)s'

#n investor in a mutual fund has no control of the overall costs of investing. The investor

pays investment management fees as long as he remains with the fund, albeit in return for the

professional management and research. )ees are payable even if the value of his investments is

declining. # mutual fund investor also pays fund distribution costs, which he would not incur in

direct investing. However, this shortcoming only means that there is a cost to obtain the mutual

fund services.

2. N T*/+;M*- !)?+/'

-nvestors who invest on their own can build their own portfolios of shares and bonds and

other securities. -nvesting through fund means he delegates this decision to the fund managers.

The veryhighnetworth individuals or large corporate investors may find this to be a constraint

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in achieving their ob$ectives. However, most mutual fund managers help investors overcome this

constraint by offering families of funds a large number of different schemes within their own

management company. #n investor can choose from different investment plans and constructs a

portfolio to his choice.

3. M*,*/, A !)?+/ O? F(,-s'

#vailability of a large number of funds can actually mean too much choice for the

investor. He may again need advice on how to select a fund to achieve his ob$ectives, +uite

similar to the situation when he has individual shares or bonds to select.

4. T W/s-@ O? !?ss/,*+ M*,*@,)'

ThatGs right, this is not an advantage. The average mutual fund manager is no better at

picking stocks than the average nonprofessional, but charges fees.

5. N C,)+'

2nlike picking your own individual stocks, a mutual fund puts you in the passenger seat

of somebody elseGs car

. D/+()/,'

utual funds generally have such small holdings of so many different stocks that

insanely great performance by a fundGs top holdings still doesnGt make much of a difference in a

mutual fundGs total performance.

7. %(/- Cs)s'

any mutual funds speciali*e in burying their costs and in hiring salesmen who do not

make those costs clear to their clients.

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T&!ES OF MUTUAL FUNDS SCHEMES IN INDIA

@ide variety of utual )und Schemes e"ists to cater to the needs such as financial

position, risk tolerance and return e"pectations etc. thus mutual funds has ariety of flavors,

Being a collection of many stocks, an investors can go for picking a mutual fund might be easy.There are over hundreds of mutual funds scheme to choose from. -t is easier to think of mutual

funds in categories, mentioned below.

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A=. %& STRUCTURE

1. O6, ; E,-- S8@s'

#n openend fund is one that is available for subscription all through the year. These do

not have a fi"ed maturity. -nvestors can conveniently buy and sell units at =et #sset alue

5I=#I6 related prices. The key feature of openend schemes is li+uidity.

2. C+s ; E,-- S8@s'

# closedend fund has a stipulated maturity period which generally ranging from 1 to

years. The fund is open for subscription only during a specified period. -nvestors 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 e"changes where they are listed. -n order to provide an e"it route to the

investors, some closeended funds give an option of selling back the units to the utual )und

through periodic repurchase at =# related prices. SB- 4egulations stipulate that at least one of

the two e"it routes is provided to the investor.

3. I,)v*+ S8@s'

-nterval Schemes are that scheme, which combines the features of openended and close

ended schemes. The units may be traded on the stock e"change or may be open for sale or

redemption during predetermined intervals at =# related prices.

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%=. %& NATURE

1. E(/) F(,-'

These funds invest a ma"imum part of their corpus into e+uities holdings. The structure

of the fund may vary different for different schemes and the fund manager(s outlook on differentstocks. The +uity )unds are subclassified depending upon their investment ob$ective, as

follows

• Diversified +uity )unds

• idCap )unds

• Sector Specific )unds

• Ta" Savings )unds 5;SS6

+uity investments are meant for a longer time hori*on, thus +uity funds rank high on

the riskreturn matri".

2. D) F(,-s'

The ob$ective of these )unds is to invest in debt papers. 3overnment authorities, private

companies, banks and financial institutions are some of the ma$or issuers of debt papers. By

investing in debt instruments, these funds ensure low risk and provide stable income to theinvestors. Debt funds are further classified as

• G/+) F(,-s -nvest their corpus in securities issued by 3overnment, popularly known as

3overnment of -ndia debt papers. These )unds carry *ero Default risk but are associated

with -nterest 4ate risk. These schemes are safer as they invest in papers backed by

3overnment.

• I,8@ F(,-s -nvest a ma$or portion into various debt instruments such as bonds,

corporate debentures and 3overnment securities.

• MI!s -nvests ma"imum of their total corpus in debt instruments while they take

minimum e"posure in e+uities. -t gets benefit of both e+uity and debt market. These

scheme ranks slightly high on the riskreturn matri" when compared with other debt

schemes.

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• S) T@ !+*,s


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C=. %& INVESTMENT O%"ECTIVE'

G>) S8@s'

3rowth Schemes are also known as e+uity schemes. The aim of these schemes is to

provide capital appreciation over medium to long term. These schemes normally invest a ma$or part of their fund in e+uities and are willing to bear shortterm decline in value for possible

future appreciation.

I,8@ S8@s

-ncome 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 fi"ed income

securities such as bonds and corporate debentures. Capital appreciation in such schemes may be

limited.

%*+*,8- S8@s'

Balanced Schemes aim to provide both growth and income by periodically distributing a

part of the income and capital gains they earn. These schemes invest in both shares and fi"ed

income securities, in the proportion indicated in their offer documents 5normally ::6.

M, M*) S8@s

oney arket Schemes aim to provide easy li+uidity, preservation of capital and

moderate income. These schemes generally invest in safer, shortterm instruments, such as

treasury bills, certificates of deposit, commercial paper and interbank call money.

L*- F(,-s'

# ;oad )und is one that charges a commission for entry or e"it. That is, each time you

buy or sell units in the fund, a commission will be payable. Typically entry and e"it loads range

from E to ?E. -t could be worth paying the load, if the fund has a good performance history.

N;L*- F(,-s'

# =o;oad )und is one that does not charge a commission for entry or e"it. That is, no

commission is payable on purchase or sale of units in the fund. The advantage of a no load fund

is that the entire corpus is put to work.

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OTHER SCHEMES

T*B S*v/, S8@s'

Ta"saving schemes offer ta" rebates to the investors under ta" laws prescribed from time

to time. 2nder Sec.88 of the -ncome Ta" #ct, contributions made to any +uity ;inked SavingsScheme 5;SS6 are eligible for rebate.

I,-B S8@s'

-nde" schemes attempt to replicate the performance of a particular inde" such as the BS

Sense" or the =S :. The portfolio of these schemes will consist of only those stocks that

constitute the inde". The percentage of each stock to the total holding will be identical to the

stocks inde" weightage. #nd hence, the returns from such schemes would be more or less

e+uivalent to those of the -nde".

S8) S68/?/8 S8@s'

These are the fundsJschemes which invest in the securities of only those sectors or industries as

specified in the offer documents. e.g. !harmaceuticals, Software, )ast oving Consumer 3oods

5)C36, !etroleum stocks, etc. The returns in these funds are dependent on the performance of

the respective sectorsJindustries. @hile these funds may give higher returns, they are more risky

compared to diversified funds. -nvestors need to keep a watch on the performance of those

sectorsJindustries and must e"it at an appropriate time.

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NET ASSET VALUE


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MUTUAL FUND FEES AND EX!ENSES

utual fund fees and e"penses are charges that may be incurred by investors who hold

mutual funds. 4unning a mutual fund involves costs, including shareholder transaction costs,

investment advisory fees, and marketing and distribution e"penses. )unds pass along these coststo investors in a number of ways.

1. TRANSACTION FEES

/= !(8*s F'

-t is a type of fee that some funds charge their shareholders when they buy shares.

2nlike a frontend sales load, a purchase fee is paid to the fund 5not to a broker 6 and is

typically imposed to defray some of the fundGs costs associated with the purchase.

//= R-@6)/, F'

-t is another type of fee that some funds charge their shareholders when they sell

or redeem shares. 2nlike a deferred sales load, a redemption fee is paid to the fund 5not

to a broker 6 and is typically used to defray fund costs associated with a shareholderGs

redemption.

///= EB8*, F'

"change fee that some funds impose on shareholders if they e"change 5transfer6

to another fund within the same fund group or Ifamily of funds.I

2. !ERIODIC FEES

/= M*,*@,) F'

anagement fees are fees that are paid out of fund assets to the fundGs investment

adviser for investment portfolio management, any other management fees payable to the

fundGs investment adviser or its affiliates, and administrative fees payable to the

investment adviser that are not included in the I>ther "pensesI category. They are also

called maintenance fees.

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//= A88(,) F'

#ccount fees are fees that some funds separately impose on investors in

connection with the maintenance of their accounts. )or e"ample, some funds impose anaccount maintenance fee on accounts whose value is less than a certain dollar amount.

3. OTHER O!ERATING EX!ENSES

T*,s*8)/, Cs)s'

These costs are incurred in the trading of the fundGs assets. )unds with a high

turnover ratio, or investing in illi+uid or e"otic markets usually face higher transaction

costs. 2nlike the Total "pense 4atio these costs are usually not reported.

LOADS

D?/,/)/, ? * +*-

;oad funds e"hibit a ISales ;oadI with a percentage charge levied on purchase or sale of

shares. # load is a type of Commission 5remuneration6. Depending on the type of load a mutual

fund e"hibits, charges may be incurred at time of purchase, time of sale, or a mi" of both. The

different types of loads are outlined below.

F,);,- +*-'

#lso known as %ales &harge, this is a fee paid when shares are purchased. #lso known as

a Ifrontend load,I this fee typically goes to the brokers that sell the fundGs shares. )rontend

loads reduce the amount of your investment. )or e"ample, letGs say you have 4s.:,::: and want

to invest it in a mutual fund with a E frontend load. The 4s.:: sales load you must pay comes

off the top, and the remaining 4s./:: will be invested in the fund. #ccording to =#SD rules, a

frontend load cannot be higher than 8.E of your investment.

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%*8;,- +*-'

#lso known as 'eferred %ales &harge, this is a fee paid when shares are sold. #lso

known as a Ibackend load,I this fee typically goes to the brokers that sell the fundGs shares. The

amount of this type of load will depend on how long the investor holds his or her shares and

typically decreases to *ero if the investor holds his or her shares long enough.

Lv+ +*- L> +*-'

-tGs similar to a backend load in that no sales charges are paid when buying the fund.

-nstead a backend load may be charged if the shares purchased are sold within a given time

frame. The distinction between level loads and low loads as opposed to backend loads, is that

this time frame where charges are levied is shorter.

N;+*- F(,-'

#s the name implies, this means that the fund does not charge any type of sales load. But,

as outlined above, not every type of shareholder fee is a Isales load.I # noload fund may charge

fees that are not sales loads, such as purchase fees, redemption fees, e"change fees, and account

fees.

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SELECTION !ARAMETERS FOR MUTUAL FUND

&( 8)/v'

The first point to note before investing in a fund is to find out whether your ob$ective

matches with the scheme. -t is necessary, as any conflict would directly affect your prospective

returns. Similarly, you should pick schemes that meet your specific needs. "amples pension

plans, children(s plans, sectorspecific schemes, etc.

&( /s 8*6*8/) *,- 8*6*/+/)'

This dictates the choice of schemes. Those with no risk tolerance should go for debt

schemes, as they are relatively safer. #ggressive investors can go for e+uity investments.

-nvestors that are even more aggressive can try schemes that invest in specific industry or sectors.

F(,- M*,*s *,- s8@ )*8 8-'

Since you are giving your hard earned money to someone to manage it, it is imperative

that he manages it well. -t is also essential that the fund house you choose has e"cellent track

record. -t also should be professional and maintain high transparency in operations. ;ook at the

performance of the scheme against relevant market benchmarks and its competitors. ;ook at the

performance of a longer period, as it will give you how the scheme fared in different market

conditions.

Cs) ?*8)'

Though the #C fee is regulated, you should look at the e"pense ratio of the fund before

investing. This is because the money is deducted from your investments. # higher entry load or

e"it load also will eat into your returns. # higher e"pense ratio can be $ustified only by

superlative returns. -t is very crucial in a debt fund, as it will devour a few percentages from your

modest returns.

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#lso, orningstar rates mutual funds. ach year end, many financial publications list the

yearGs best performing mutual funds. =aturally, very eager investors will rush out to purchase

shares of last yearGs top performers. ThatGs a big mistake. 4emember, changing market conditions

make it rare that last yearGs top performer repeats that ranking for the current year. utual fund

investors would be well advised to consider the fund prospectus, the fund manager, and the

current market conditions. =ever rely on last yearGs top performers.

T6s ? R)(,s , M()(*+ F(,-'

There are three ways, where the total returns provided by mutual funds can be en$oyed by

investors

• -ncome is earned from dividends on stocks and interest on bonds. # fund pays out nearly

all income it receives over the year to fund owners in the form of a distribution.

• -f the fund sells securities that have increased in price, the fund has a capital gain. ost

funds also pass on these gains to investors in a distribution.

-f fund holdings increase in price but are not sold by the fund manager, the fundGs shares increase

in price. Fou can then sell your mutual fund shares for a profit. )unds will also usually give you

a choice either to receive a check for distributions or to reinvest the earnings and get more

shares.

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RISK FACTORS OF MUTUAL FUNDS

1. T R/s;R)(, T*-;O??'

The most important relationship to understand is the riskreturn tradeoff. Higher the risk

greater the returns J loss and lower the risk lesser the returnsJloss.

Hence it is upto you, the investor to decide how much risk you are willing to take. -n

order to do this you must first be aware of the different types of risks involved with your

investment decision.

2. M*) R/s'

Sometimes prices and yields of all securities rise and fall. Broad outside influencesaffecting the market in general lead to this. This is true, may it be big corporations or smaller

midsi*ed companies. This is known as arket 4isk. # Systematic -nvestment !lan 5%S-!&6 that

works on the concept of 4upee Cost #veraging 5%4C#&6 might help mitigate this risk.

3. C-/) R/s'

The debt servicing ability 5may it be interest payments or repayment of principal6 of a

company through its cashflows determines the Credit 4isk faced by you. This credit risk is

measured by independent rating agencies like C4-S-; who rate companies and their paper. #

L###( rating is considered the safest whereas a LD( rating is considered poor credit +uality. #

welldiversified portfolio might help mitigate this risk.

4. I,?+*)/, R/s'

Things you hear people talk about

I4s. :: today is worth more than 4s. :: tomorrow.I

I4emember the time when a bus ride costed : paiseMI

Iehangai Aa


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when inflation grows faster than the return on your investment. # welldiversified portfolio with

some investment in e+uities might help mitigate this risk.

5. I,)s) R*) R/s'

-n a free market economy interest rates are difficult if not impossible to predict. Changes

in interest rates affect the prices of bonds as well as e+uities. -f interest rates rise the prices of

bonds fall and vice versa. +uity might be negatively affected as well in a rising interest rate

environment. # welldiversified portfolio might help mitigate this risk.

. !+/)/8*+ Gv,@,) !+/8 R/s'

Changes in government policy and political decision can change the investment

environment. They can create a favorable environment for investment or vice versa.

7. L/(/-/) R/s'

;i+uidity risk arises when it becomes difficult to sell the securities that one has

purchased. ;i+uidity 4isk can be partly mitigated by diversification, staggering of maturities as

well as internal risk controls that lean towards purchase of li+uid securities.

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Chapter: (

WORKING OF MUTUAL FUNDS

The mutual fund collects money directly or through brokers from investors. The money is

invested in various instruments depending on the ob$ective of the scheme. The income generated

by selling securities or capital appreciation of these securities is passed on to the investors in

proportion to their investment in the scheme. The investments are divided into units and the

value of the units will be reflected in =et #sset alue or =# of the unit. =# is the market

value of the assets of the scheme minus its liabilities. The per unit =# is the net asset value of

the scheme divided by the number of units outstanding on the valuation date. utual fund

companies provide daily net asset value of their schemes to their investors. =# is important, asit will determine the price at which you buy or redeem the units of a scheme. Depending on the

load structure of the scheme, you have to pay entry or e"it load.

26


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STRUCTURE OF A MUTUAL FUND'

-ndia has a legal framework within which utual )und have to be constituted. -n -ndia

open and closeend funds operate under the same regulatory structure i.e. as unit Trusts. #

utual )und in -ndia is allowed to issue openend and closeend schemes under a common legalstructure. The structure that is re+uired to be followed by any utual )und in -ndia is laid down

under SB- 5utual )und6 4egulations, //0.

T F(,- S6,s'

Sponsor is defined under SB- regulations as any person who, acting alone or in

combination of another corporate body establishes a utual )und. The sponsor of the fund is

akin to the promoter of a company as he gets the fund registered with SB-. The sponsor forms a

trust and appoints a Board of Trustees. The sponsor also appoints the #sset anagementCompany as fund managers. The sponsor either directly or acting through the trustees will also

appoint a custodian to hold funds assets. #ll these are made in accordance with the regulation

and guidelines of SB-.

27


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#s per the SB- regulations, for the person to +ualify as a sponsor, he must contribute at

least 9:E of the net worth of the #sset anagement Company and possesses a sound financial

track record over years prior to registration.

M()(*+ F(,-s *s T(s)s'

# utual )und in -ndia is constituted in the form of !ublic trust #ct, 88?. The )und

sponsor acts as a settlor of the Trust, contributing to its initial capital and appoints a trustee to

hold the assets of the trust for the benefit of the unitholders, who are the beneficiaries of the

trust. The fund then invites investors to contribute their money in common pool, by scribing to

%units& issued by various schemes established by the Trusts as evidence of their beneficial

interest in the fund.

-t should be understood that the fund should be $ust a %pass through& vehicle. 2nder the

-ndian Trusts #ct, the trust of the fund has no independent legal capacity itself, rather it is the

Trustee or the Trustees who have the legal capacity and therefore all acts in relation to the trusts

are taken on its behalf by the Trustees. -n legal parlance the investors or the unitholders are the

beneficial owners of the investment held by the Trusts, even as these investments are held in the

name of the Trustees on a daytoday basis. Being public trusts, utual )und can invite any

number of investors as beneficial owners in their investment schemes.

T(s)s'

# Trust is created through a document called the Trust Deed that is e"ecuted by the fund

sponsor in favour of the trustees. The Trust the utual )und N may be managed by a board of

trustees a body of individuals, or a trust company a corporate body. ost of the funds in -ndia

are managed by Boards of Trustees. @hile the boards of trustees are governed by the -ndian

Trusts #ct, where the trusts are a corporate body, it would also re+uire to comply with the

Companies #ct, /0. The Board or the Trust company as an independent body, acts as a

protector of the of the unitholders interests. The Trustees do not directly manage the portfolio of

securities. )or this specialist function, the appoint an #sset anagement Company. They ensure

that the )und is managed by ht #C as per the defined ob$ectives and in accordance with the

trusts deeds and SB- regulations.

28


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T Ass) M*,*@,) C@6*,/s'

The role of an #sset anagement Company 5#C6 is to act as the investment manager

of the Trust under the board supervision and the guidance of the Trustees. The #C is re+uired

to be approved and registered with SB- as an #C. The #C of a utual )und must have a

net worth of at least 4s. : Crores at all times. Directors of the #C, both independent and non

independent, should have ade+uate professional e"pertise in financial services and should be

individuals of high morale standing, a condition also applicable to other key personnel of the

#C. The #C cannot act as a Trustee of any other utual )und. Besides its role as a fund

manager, it may undertake specified activities such as advisory services and financial consulting,

provided these activities are run independent of one another and the #C(s resources 5such as

personnel, systems etc.6 are properly segregated by the activity. The #C must always act in the

interest of the unitholders and reports to the trustees with respect to its activities.

C(s)-/*, *,- D6s/)/s'

utual )und is in the business of buying and selling of securities in large volumes.

Handling these securities in terms of physical delivery and eventual safekeeping is a speciali*ed

activity. The custodian is appointed by the Board of Trustees for safekeeping of securities or

participating in any clearance system through approved depository companies on behalf of the

utual )und and it must fulfill its responsibilities in accordance with its agreement with the

utual )und. The custodian should be an entity independent of the sponsors and is re+uired to be

registered with SB-. @ith the introduction of the concept of demateriali*ation of shares the

demateriali*ed shares are kept with the Depository participant while the custodian holds the

physical securities. Thus, deliveries of a fund(s securities are given or received by a custodian or

a depository participant, at the instructions of the #C, although under the overall direction and

responsibilities of the Trustees.

%*,s'

# )und(s activities involve dealing in money on a continuous basis primarily with respect

to buying and selling units, paying for investment made, receiving the proceeds from sale of the

investments and discharging its obligations towards operating e"penses. Thus the )und(s banker

29


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plays an important role to determine +uality of service that the fund gives in timely delivery of

remittances etc.

T*,s? A,)s'

Transfer agents are responsible for issuing and redeeming units of the utual )und and

provide other related services such as preparation of transfer documents and updating investor

records. # fund may choose to carry out its activity inhouse and charge the scheme for the

service at a competitive market rate. @here 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 are going to be dependent on the transfer agent.

REGULATOR& STRUCTURE OF MUTUAL FUNDS IN INDIA'

The structure of mutual funds in -ndia is guided by the SB-. 4egulations, //0.These

regulations make it mandatory for mutual fund to have three structures of sponsor trustee and

asset anagement Company. The sponsor of the mutual fund and appoints the trustees. The

trustees are responsible to the investors in mutual fund and appoint the #C for managing the

investment portfolio. The #C is the business face of the mutual fund, as it manages all the

affairs of the mutual fund. The #C and the mutual fund have to be registered with SB-.

30


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SE%I REGULATIONS

• #s far as mutual funds are concerned, SB- formulates policies and regulates the mutual

funds to protect the interest of the investors.

• SB- notified regulations for the mutual funds in //1. Thereafter, mutual funds sponsored

by private sector entities were allowed to enter the capital market.

• The regulations were fully revised in //0 and have been amended thereafter from time to

time.

• SB- has also issued guidelines to the mutual funds from time to time to protect the interests

of investors.

• #ll mutual funds whether promoted by public sector or private sector entities including those

promoted by foreign entities are governed by the same set of 4egulations. The risks

associated with the schemes launched by the mutual funds sponsored by these entities are of

similar type. There is no distinction in regulatory re+uirements for these mutual funds and all

are sub$ect to monitoring and inspections by SB-.

• SB- 4egulations re+uire 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.

• #lso, :E of the directors of #C must be independent. #ll mutual funds are re+uired to be

registered with SB- before they launch any scheme.

• )urther SB- 4egualtions, interalia, stipulate that )s cannot gurarnatee returns in any

scheme and that each scheme is sub$ect to ?: ? condition O-.e minimum ?: investors per

scheme and one investor can hold more than ?E stake in the corpus in that one schemeP.

#lso SB- has permitted )s to launch schemes overseas sub$ect various restrictions and

also to launch schemes linked to 4eal state, >ptions and )utures, Commodities, etc.

31


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ASSOCIATION OF MUTUAL FUNDS IN INDIA


33/73

• #)- undertakes all -ndia awareness programme for investors in order to promote proper

understanding of the concept and working of mutual funds.

• #t last but not the least association of mutual fund of -ndia also disseminate informations

on utual )und -ndustry and undertakes studies and research either directly or in

association with other bodies.

AMFI !(+/8*)/,s'

#)- publish mainly two types of bulletin. >ne is on the monthly basis and the other is

+uarterly. These publications are of great support for the investors to get intimation of the

knowhow of their parked money.

33


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Chapter: )

MUTUAL FUNDS IN INDIA

-n /01, the day the concept of utual )und took birth in -ndia. 2nit Trust of -ndia

invited investors or rather to those who believed in savings, to park their money in 2T- utual

)und.

)or 1: years it goaled without a single second player. Though the /88 year saw some

new mutual fund companies, but 2T- remained in a monopoly position.

The performance of mutual funds in -ndia in the initial phase was not even closer to

satisfactory level. !eople rarely understood, and of course investing was out of +uestion. But yes,

some ?9 million shareholders were accustomed with guaranteed high returns by the beginning of

liberali*ation of the industry in //?. This good record of 2T- became marketing tool for new

entrants. The e"pectations of investors touched the sky in profitability factor. However, people

were miles away from the preparedness of risks factor after the liberali*ation.

The net asset value 5=#6 of mutual funds in -ndia declined when stock prices started

falling in the year //?. Those days, the market regulations did not allow portfolio shifts into

alternative investments. There was rather no choice apart from holding the cash or to further

continue investing in shares. >ne more thing to be noted, since only closedend funds were

floated in the market, the investors disinvested by selling at a loss in the secondary market.

The performance of mutual funds in -ndia suffered +ualitatively. The //? stock market

scandal, the losses by disinvestments and of course the lack of transparent rules in the

whereabouts rocked confidence among the investors. !artly owing to a relatively weak stock

market performance, mutual funds have not yet recovered, with funds trading at an average

discount of :?: percent of their net asset value.

The securities and "change Board of -ndia 5SB-6 came out with comprehensiveregulation in //1 which defined the structure of utual )und and #sset anagement

Companies for the first time.

The supervisory authority adopted a set of measures to create a transparent and

competitive environment in mutual funds. Some of them were like rela"ing investment

34


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restrictions into the market, introduction of openended funds, and paving the gateway for

mutual funds to launch pension schemes.

The measure was taken to make mutual funds the key instrument for longterm saving.

The more the variety offered, the +uantitative will be investors.

Several private sectors utual )unds were launched in //1 and //9. The share of the

private players has risen rapidly since then. Currently there are 19 utual )und organi*ations in

-ndia managing ,:?,::: crores.

#t last to mention, as long as mutual fund companies are performing with lower risks and

higher profitability within a short span of time, more and more people will be inclined to invest

until and unless they are fully educated with the dos and don(ts of mutual funds.

utual fund industry has seen a lot of changes in past few years with multinational

companies coming into the country, bringing in their professional e"pertise in managing funds

worldwide. -n the past few months there has been a consolidation phase going on in the mutual

fund industry in -ndia. =ow investors have a wide range of Schemes to choose from depending

on their individual profiles.

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MUTUAL FUND COM!ANIES IN INDIA'

The concept of mutual funds in -ndia dates back to the year /01. The era between /01

and /87 marked the e"istance of only one mutual fund company in -ndia with 4s. 07bn assets

under management 5#26, by the end of its monopoly era, the 2nit Trust of -ndia 52T-6. By theend of the 8:s decade, few other mutual fund companies in -ndia took their position in mutual

fund market.

The new entries of mutual fund companies in -ndia were SB- utual )und, Canbank

utual )und, !un$ab =ational Bank utual )und, -ndian Bank utual )und, Bank of -ndia

utual )und.

The succeeding decade showed a new hori*on in -ndian mutual fund industry. By the end

of //1, the total #2 of the industry was 4s. 97:.:9 bn. The private sector funds started

penetrating the fund families. -n the same year the first utual )und 4egulations came into

e"istance with reregistering all mutual funds e"cept 2T-. The regulations were further given a

revised shape in //0.

Aothari !ioneer was the first private sector mutual fund company in -ndia which has now

merged with )ranklin Templeton. utual )und

• Birla Sun ;ife utual )und

• Bank of Baroda utual )und

• HD)C utual )und

• HSBC utual )und

• -=3 ysya utual )und

• !rudential -C-C- utual )und

• State Bank of -ndia utual )und

• Tata utual )und

• 2nit Trust of -ndia utual )und

• 4eliance utual )und

• Standard Chartered utual )und

• )ranklin Templeton -ndia utual )und

• organ Stanley utual )und -ndia

• scorts utual )und

• #lliance Capital utual )und

• Benchmark utual )und

• Canbank utual )und

• Chola utual )und

• ;-C utual )und

36

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• 3-C utual )und

37


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)or the first time in the history of -ndian mutual fund industry, 2nit Trust of -ndia utual

)und has slipped from the first slot. arlier, in ay ?::0, the !rudential -C-C- utual )und was

ranked at the number one slot in terms of total assets.

-n the very ne"t month, the 2T-) had regained its top position as the largest fund house

in -ndia.

=ow, according to the current pegging order and the data released by #ssociation of

utual )unds in -ndia 5#)-6, the 4eliance utual )und, with a n the other hand, 2T-), with an #2 of 4s 17,1 crore, has gone to secomd

position. The !rudential -C-C- ) has slipped to the third position with an #2 of 4s 19,790

crore.

-t happened for the first time in last one year that a private sector mutual fund house has reached

to the top slot in terms of asset under management 5#26. -n the last one year to


39/73

Chapter: *

RELIANCE MUTUAL FUND Vs UTI MUTUAL FUND

RELIANCE MUTUAL FUND

4eliance utual )und 54)6 was established as trust under -ndian Trusts #ct, 88?. The

sponsor of 4) is 4eliance Capital ;imited and 4eliance Capital Trustee Co. ;imited is the

Trustee. -t was registered on


40/73

The Sponsor, the Trustee and the -nvestment anager are incorporated under the

Companies #ct /0.

V/s/, S)*)@,)

%To be a globally respected wealth creator with an emphasis on customer care and a

culture of good corporate governance.&

M/ss/, S)*)@,)

To create and nurture a worldclass, high performance environment aimed at delighting

our customers.

T M*/, O8)/vs O? T T(s)'

• To carry on the activity of a utual )und as may be permitted at law and formulate and

devise various collective Schemes of savings and investments for people in -ndia and

abroad and also ensure li+uidity of investments for the 2nit holders'

• To deploy )unds thus raised so as to help the 2nit holders earn reasonable returns on

their savings and

• To take such steps as may be necessary from time to time to realise the effects without

any limitation.


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SCHEMES

A=. EUIT&GROWTH SCHEMES'

The aim of growth funds is to provide capital appreciation over the medium to long

term. Such schemes normally invest a ma$or part of their corpus in e+uities. Such funds have

comparatively high risks. 3rowth schemes are good for investors having a longterm outlook

seeking appreciation over a period of time.

1. R+/*,8 I,?*s)(8)( F(,-


42/73

the secondary ob$ective is to generate consistent returns by investing in debt and money

market securities.

=atural resources may include, for e"ample, energy sources, precious and other

metals, forest products, food and agriculture, and other basic commodities.

4. R+/*,8 E(/) L/,- S*v/, F(,-


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7. R+/*,8 T*B S*v ) F(,-


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12.R+/*,8 L, T@ E(/) F(,-


45/73

1. R+/*,8 M,)+ I,8@ !+*, '

5#n >pen nded )und, onthly -ncome is not assured R is sub$ect to the availability

of distributable surplus6 The !rimary investment ob$ective of the Scheme is to generate

regular income in order to make regular dividend payments to unit holders and the secondary

ob$ective is growth of capital.

2. R+/*,8 G/+) S8(/)/s F(,- ; S) T@ G/+) !+*, L, T@ G/+)

!+*, '5>penended 3overnment Securities Scheme6 The primary ob$ective of the Scheme is

to generate optimal credit riskfree returns by investing in a portfolio of securities issued and

guaranteed by the central 3overnment and State 3overnment.

3. R+/*,8 I,8@ F(,- '

5#n >penended -ncome Scheme6 The primary ob$ective of the scheme is to generate

optimal returns consistent with moderate levels of risk. This income may be complemented

by capital appreciation of the portfolio. #ccordingly, investments shall predominantly be

made in Debt R oney market -nstruments.

4. R+/*,8 M-/(@ T@ F(,- '

5#n >pen nd -ncome Scheme with no assured returns6 The primary investment

ob$ective of the Scheme is to generate regular income in order to make regular dividend

payments to unit holders and the secondary ob$ective is growth of capital

5. R+/*,8 S) T@ F(,- '

5#n >pen nd -ncome Scheme6 The primary investment ob$ective of the scheme is to

generate stable returns for investors with a short investment hori*on by investing in )i"ed

-ncome Securities of short term maturity.

. R+/*,8 L/(/- F(,- '

5>penended ;i+uid Scheme6 The primary investment ob$ective of the Scheme is to

generate optimal returns consistent with moderate levels of risk and high li+uidity.


46/73

#ccordingly, investments shall predominantly be made in Debt and oney arket

-nstruments.

7. R+/*,8 F+*)/, R*) F(,- '

5#n >pen nd ;i+uid Scheme6 The primary ob$ective of the scheme is to generate

regular income through investment in a portfolio comprising substantially of )loating 4ate

Debt Securities 5including floating rate securitised debt and oney arket -nstruments and

)i"ed 4ate Debt -nstruments swapped for floating rate returns6. The scheme shall also invest

in fi"ed rate debt Securities 5including fi"ed rate securitised debt, oney arket -nstruments

and )loating 4ate Debt -nstruments swapped for fi"ed returns.

#. R+/*,8 NRI I,8@ F(,- '5#n >penended -ncome scheme6 The primary investment ob$ective of the Scheme is

to generate optimal returns consistent with moderate levels of risks. This income may be

complimented by capital appreciation of the portfolio. #ccordingly, investments shall

predominantly be made in debt -nstruments.

$. R+/*,8 L/(/-/) F(,- '

5#n >pen ended ;i+uid Scheme6 The investment ob$ective of the Scheme is to

generate optimal returns consistent with moderate levels of risk and high li+uidity.

#ccordingly, investments shall predominantly be made in Debt and oney arket

-nstruments.

10.R+/*,8 I,)v*+ F(,- '

5# Debt >riented -nterval Scheme6 The primary investment ob$ective of the scheme

is to seek to generate regular returns and growth of capital by investing in a diversified

portfolio

11.R+/*,8 L/(/- !+(s F(,-'

5#n >penended -ncome Scheme6 The investment ob$ective of the Scheme is to

generate optimal returns consistent with moderate levels of risk and li+uidity by investing in

debt securities and money market securities.


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12.R+/*,8 F/B- H/, F(,-:I'

5# closed ended Scheme6 The primary investment ob$ective of the scheme is to seek

to generate regular returns and growth of capital by investing in a diversified portfolio.

13.R+/*,8 F/B- H/, F(,- :II'

5# closed ended Scheme.6 The primary investment ob$ective of the scheme is to seek


14.R+/*,8 F/B- H/, F(,- :III'

5# Closeended -ncome Scheme.6 The primary investment ob$ective of the scheme is

to seek to generate regular returns and growth of capital by investing in a diversified

portfolio.

15.R+/*,8 F/B- T, F(,- '

5# Closeended Scheme6 The primary investment ob$ective of the !lan is to seek to

generate regular returns and growth of capital by investing in a diversified portfolio.

1.R+/*,8 F/B- H/, F(,- ;!+*, C '

5# closed ended Scheme.6 The primary investment ob$ective of the scheme is to seek


17.R+/*,8 F/B- H/, F(,- ; IV'



portfolio.


48/73

1#.R+/*,8 F/B- H/, F(,- ; V'



portfolio of

Central and State 3overnment securities and

>ther fi"ed incomeJ debt securities normally maturing in line with the time profile of the

scheme with the ob$ective of limiting interest rate volatility

1$.R+/*,8 F/B- H/, F(,- : VI '

5# Closeended -ncome Scheme6 The primary investment ob$ective of the scheme is


portfolio of



series with the ob$ective of limiting interest rate volatility

20.R+/*,8 F/B- H/, F(,- : VII '


to seek to generate regular returns and growth of capital by investing in a diversified portfolio of



series with the ob$ective of limiting interest rate volatility.

C=. SECTOR S!ECIFIC SCHEMES'

These are the fundsJschemes which invest in the securities of specified sectors or

industries e.g. !harmaceuticals, Software, )C3, !etroleum stocks, etc. The returns in these

funds are dependent on the performance of the respective sectorsJindustries. @hile these funds

may give higher returns, they are more risky compared to diversified funds.


49/73

1. R+/*,8 %*,/, F(,-

4eliance utual )und has an >pennded Banking Sector Scheme which has the

primary investment ob$ective to generate continuous returns by actively investing in e+uity J

e+uity related or fi"ed income securities of banks.

2. R+/*,8 D/vs/?/- !> S8) F(,-

4eliance Diversified !ower Sector Scheme is an >penended !ower Sector Scheme.

The primary investment ob$ective of the Scheme is to seek to generate consistent returns by

actively investing in e+uity J e+uity related or fi"ed income securities of !ower and other

associated companies.

3. R+/*,8 !*@* F(,-

4eliance !harma )und is an >penended !harma Sector Scheme. The primary

investment ob$ective of the Scheme is to generate consistent returns by investing in e+uity J

e+uity related or fi"ed income securities of !harma and other associated companies.

4. R+/*,8 M-/* E,))*/,@,) F(,-

4eliance edia R ntertainment )und is an >penended edia R ntertainment

sector scheme.

The the primary investment ob$ective of the Scheme is to generate consistent returns

by investing in e+uity J e+uity related or fi"ed income securities of media R entertainment

and other associated companies.

D=. RELIANCE GOLD EXCHANGE TRADED FUND'

5#n openended 3old "change Traded )und6 The investment ob$ective is to seek to provide

returns that closely correspond to returns provided by price of gold through investment in

physical 3old 5and 3old related securities as permitted by 4egulators from time to time6.

However, the performance of the scheme may differ from that of the domestic prices of 3old due

to e"penses and or other related factors.


50/73

UNIT TRUST OF INDIA MUTUAL FUND

GU,/) T(s) ? I,-/* was created by the 2T- #ct passed by the !arliament in /01. )or

more than two decades it remained the sole vehicle for investment in the capital market by the

-ndian citi*ens. -n mid /8:s public sector banks were allowed to open mutual funds. The real

vibrancy and competition in the ) industry came with the setting up of the 4egulator SB- and

its laying down the ) 4egulations in //1.2T- maintained its preeminent place till ?::,

when a massive decline in the market indices and negative investor sentiments after Aetan

!arekh scam created doubts about the capacity of 2T- to meet its obligations to the investors.

This was further compounded by two factors' namely, its flagship and largest scheme 2S 09 was

sold and repurchased not at intrinsic =# but at artificial price and its #ssured 4eturn Schemes

had promised returns as high as 8E over a period going up to two decades.

-n order to distance 3overnment from running a mutual fund the ownership was

transferred to four institutions' namely SB-, ;-C, B>B and !=B, each owning ?E. 2T- lost its

market dominance rapidly and by end of ?::,when the new shareholders actually paid the

consideration money to 3overnment its market share had come down to close to :E.

# new board was constituted and a new management inducted. Systematic study of its

problems role and functions was carried out with the help of a reputed international consultant.

>nce again 2T- has emerged as a serious player in the industry. Some of the funds have won

famous awards, including the Best -nfra )und globally from ;ipper. 2T- has been able to

benchmark its employee compensation to the best in the market.

Besides running domestic ) Schemes 2T- #C is also a registered portfolio manager

under the SB- 5!ortfolio anagers6 4egulations.

This company runs two successful funds with large international investors being active

participants. 2T- has also launched a !rivate +uity -nfrastructure )und along with HSH =ord

Bank of 3ermany and Shinsei Bank of


51/73

V/s/,'

To be the most !referred utual )und.

M/ss/,'

The most trusted brand, admired by all stakeholders.

The largest and most efficient money manager with global presence

The best in class customer service provider

The most preferred employer

The most innovative and best wealth creator

# socially responsible organisation known for best corporate governance

Ass)s U,- M*,*@,)' 2T- #sset anagement Co. ;tdS6,s'

• State Bank of -ndia

• Bank of Baroda

• !un$ab =ational Bank

• ;ife -nsurance Corporation of -ndia

T(s)' 2T- Trustee Co. ;imited.

R+/*/+/)

2T-) has consistently reset and upgraded transparency standards. #ll the branches,

2)Cs and registrar offices are connected on a robust -T network to ensure costeffective +uick

and efficient service. #ll these have evolved 2T-) to position as a dynamic, responsive,

restructured, efficient and transparent entity, fully compliant with SB- regulations.


52/73

SCHEMES

A=. EUIT& FUND

1. UTI E, F(,- b$ective is %capital appreciation& through investments in stocks of the

companies engaged in the transportation and logistics sector. #t least /:E of the funds will

be invested in e+uity and e+uity related instruments. #tleast 8:E of the funds will be

invested in e+uity and e+uity related instruments of the companies principally engaged in

providing transportation services, companies principally engaged in the design, manufacture,

distribution, or sale of transportation e+uipment and companies in the logistics sector. 2pto

:E of the funds will be invested in cashJmoney market instruments.

3. UTI %*,/, S8) F(,-


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5. UTI E(/) T*B S*v/,s !+*, ne of the growth sectors funds aiming to invest in e+uity shares of companies

belonging to information technology sector to provide returns to investors through capital

growth as well as through regular income distribution

$. UTI M*s) E(/) !+*, U,/) S8@


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10. UTI M*s) !+(s U,/) S8@


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1. UTI MNC F(,-


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21. UTI S!READ F(,-


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To endeavour to provide returns that, before e"penses, closely track the performance and

yield of 3old. However the performance of the scheme may differ from that of the

underlying asset due to racking error. There can be no assurance or guarantee that the

investment ob$ective of 2T-3old T) will be achieved.

3. UTI S(,-


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3. UTI R)/@,) %,?/) !,s/, F(,- penended debt oriented -ncome scheme with an ob$ective of investing not morethan 1:E of the funds in e+uity related instruments and the balance in debt and money

market instruments with low to medium risk profile. The scheme is catering to the

-nvestment needs of Charitable, 4eligious and ducational Trusts as well as 4egistered

societies with the goal of providing regular income.

E=.INCOME FUND


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2. UTI F+*)/, R*) F(,- ST!


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#. UTI M,)+ I,8@ S8@


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RELIANCE MUTUAL

FUND

UTI MUTUAL FUND

@hen StartedM stablished in //,Currently, number one company in-ndia.

stablished in /09.)irst mutual fund company in-ndia

How they came into business

4egistered with SB- as trust under -ndian Trusts #ct, 88?

By the 2T- #ct passed by the!arliament in /01.

inimum investment. 4s. :: 4s.:::

-nvestment. E(/)Bank 8ESoftware 8/E!etroleum !roducts 98E!harmaceuticals 0:E

/,vs) /, 12;20 s8)s >/8

/,8+(-'

#uto , #uto #ncillaries, )inance,-ndustrial Capital 3oods, TelecomServices, !ower, Construction!ro$ect, Hotels, 4etailing, edia Rntertainment, Transportation etc

E(/)

)inancial Service 0??Energy ?8EConsumer goods :89E

/,vs) /, 7;15 s8)s >/8

/,8+(-'

-T, Telecom, #utomobile,Cement !roducts, Derivatives,Te"tile, etals etc

ain )unds. 2T- Dividend yield )und,2T- >pportunity )und,

4eliance Diversified )und,4eliance +uity >pportunity)und,4eliance 4egular Saving )unds

Type of fund offered +uity )und, Debt )und, SectorSpecific )und and 3old "changeTraded )und.

+uity )und, -nde" )und,#sset )und, Balanced )und,Debt )und 5-ncome, ;i+uid6

=umbers of schemesoffered

:0 schemes :7 schemes.

Distribution • >nline and internet based

distribution.

• 4eliance outlets and branches.

• Tieup with !ost offices

branches.

• 2T- outlets and branches.

-s any other ventureM • ;ife -nsurance

• 3eneral -nsurance

• Broking R Distribution• Consumer )inance

• !rivate +uity

• #ssets 4econstruction.

• 2T- Bank

• !an card

• Bank 4ecruitment

• 2;-!


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Chapter: +MUTUAL FUNDS VS. OTHER INVESTMENTS

F@ /,vs)s v/>6/,) @()(*+ ?(,-s *v sv*+ *-v*,)*s s(8 *s'

!rofessional management and research to select +uality securities.

Spreading risk over a larger +uantity of stock whereas the investor has limited to buy only

a hand full of stocks. The investor is not putting all his eggs in one basket.

#bility to add funds at set amounts and smaller +uantities such as U:: per month

#bility to take advantage of the stock market which has generally outperformed other

investment in the long run.

)und manager are able to buy securities in large +uantities thus reducing brokerage fees.

H>v ) * s@ -/s*-v*,)*s >/) @()(*+ ?(,-s s(8 *s'

The investor must rely on the integrity of the professional fund manager.

)und management fees may be unreasonable for the services rendered.

The fund manager may not pass transaction savings to the investor.

The fund manager is not liable for poor $udgment when the investorGs fund loses value.

There may be too many transactions in the fund resulting in higher feeJcost to the

investor This is sometimes call IChurn and arnI.

!rospectus and #nnual report are hard to understand.

-nvestor may feel a lost of control of his investment dollars.

T @* s)/8)/,s , >, *,- > *, /,vs) s++s-@s /s @()(*+ ?(,-

s*s.

http://www.davidcole.net/mutual_funds/investments.htmlhttp://www.davidcole.net/mutual_funds/investments.html


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C@6*, F/B- D6s/)s vs(s M()(*+ F(,-s

)i"ed deposits are unsecured borrowings by the company accepting the deposit. Credit

rating of the fi"ed deposit program is an indication of the inherent default risk in the investment.

The moneys of investors in a mutual fund scheme are invested by the #C in specific

investments under that scheme. These investments are held and managed in$trust for the benefit

of scheme(s investors. >n the other hand, there is no such direct correlation between a

company(s fi"ed deposit mobilisation, and the avenues where these resources are deployed.

# corollary of such linkage between mobilisation and investment is that the gains and

losses from the mutual fund scheme entirely flow through to the investors. Therefore, there can

be no certainty of yield, unless a named guarantor assures a return or, to a lesser e"tent, if the

investment is in a serial gilt scheme. >n the other hand, the return under a fi"ed deposit is

certain, sub$ect only to the default risk of the borrower.

%) ?/B- -6s/)s *,- @()(*+ ?(,-s ?? +/(/-/) () s(8) ) s@ -/??,8s'

The provider of li+uidity in the case of fi"ed deposits is the borrowing company. -n

mutual funds, the li+uidity provider is the scheme itself 5for openend schemes6 or the market 5in

the case of closedend schemes6.

The basic value at which fi"ed deposits are encashed is not sub$ect to a market risk.

However, the value at which units of a scheme are redeemed depends on the market. -f securities

have gained in value during the period, then the investor can even earn a return that is higher

than what he anticipated when he invested. But he could also end up with a loss.

arly encashment of fi"ed deposits is always sub$ect to a penalty charged by the

company that accepted the fi"ed deposit. utual fund schemes also have the option of charging

a penalty on %early& redemption of units 5through by way of an Le"it load(,6 -f the =# has

appreciated ade+uately, then even after the e"it load, the investor could earn a capital gain on his

investment.


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%*, F/B- D6s/)s vss M()(*+ F(,-'

Bank fi"ed deposits are similar to company fi"ed deposits. The ma$or difference is that

banks are generally more stringently regulated than companies. They even operate under stricter

re+uirements regarding Statutory ;i+uidity 4atio 5S;46 and Cash 4eserve 4atio 5C446.

@hile the above are causes for comfort, bank deposits too are sub$ect to default risk.

However, given the political and economic impact of bank defaults, the government as well as

4eserve Bank of -ndia 54B-6 try to ensure that banks do not fail.

)urther, bank deposits upto 4s ::,::: are protected by the Deposit -nsurance and Credit

3uarantee Corporation 5D-C3C6, so long as the bank has paid the re+uired insurance premium

of paise per annum for every 4s :: of deposits. The monetary ceiling of 4s ::,::: is for all

the deposits in all the branches of a ban#, held by the depositor in the same capacity and right.

%ANKS MUTUAL FUNDS

R)(,s ;ow Better

A-@/,/s)*)/v B6. High ;ow

R/s ;ow oderate

I,vs)@,) 6)/,s ;ess ore

N)> High penetration ;ow but improving

L/(/-/) #t a cost Better

(*+/) ? *ss)s =ot transparent Transparent


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I,)s) 8*+8(+*)/,

Vuarterly

i.e. 1rd, 0th, /th R ?th.

very onth

G(**,) 3uarantor is needed. 3uarantor is not needed.

A88(,) =eeded. =ot =eeded.


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%,-s *,- D,)(s vs(s M()(*+ F(,-s

#s in the case of fi"ed deposits, credit rating of the bond J debenture is an indication of

the inherent default risk in the investment. However, unlike )D, bonds and debentures are

transferable securities.

@hile an investor may have an early encashment option from the issuer 5for instance

through a %put& option6, generally li+uidity is through a listing in the market.

I@6+/8*)/,s ? )/s *'

• -f the security does not get traded in the market, then the li+uidity remains on paper. -n this

respect, an openend scheme offering continuous sale J repurchase option is superior.

• The value that the investor would realise in an early e"it is sub$ect to market risk. The

investor could have a capital gain or a capital loss. This aspect is similar to a ) scheme.

-t is possible for a professional investor to earn attractive returns by directly investing in

the debt market, and actively managing the positions. 3iven the market realities in -ndia, it is

difficult for most investors to actively manage their debt portfolio. )urther, at times, it is difficult

to e"ecute trades in the debt market even when the transaction si*e is as high as 4s crore. -n

this respect, investment in a debt scheme would be beneficial.

Debt securities could be backed by a hypothecation or mortgage of identified fi"ed and J

or current assets 5secured bonds J debentures6. -n such a case, if there is a default, the identified

assets become available for meeting redemption re+uirements. #n unsecured bond J debenture is

for all practical purposes like a fi"ed deposit, as far as access to assets is concerned.

The investments of a mutual fund scheme are held by a custodian for the benefit of

investors in the scheme. Thus, the securities that relate to a scheme are ringfenced for the

benefit of its investors.


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E(/) vs(s M()(*+ F(,-s

-nvestment in both e+uity and mutual funds are sub$ect to market risk.

#n investor holding an e+uity security that is not traded in the market place has a

problem in realising value from it. But investment in an openend mutual fund eliminates this

direct risk of not being able to sell the investment in the market. #n indirect risk remains,

because the scheme has to realise its investments to pay investors. The #C is however in a

better position to handle the situation

#nother benefit of e+uity mutual fund schemes is that they give investors the benefit of

portfolio diversification through a small investment. )or instance, an investor can take an

e"posure to the inde" by investing a mere 4s ,::: in an inde" fund.

A-v*,)*s O? M()(*+ F(,-s Ov S)8s9

• # mutual fund offers a great deal of diversification starting with the very first dollar

invested, because a mutual fund may own tens or hundreds of different securities. This

diversification helps reduce the risk of loss because even if any one holding tanks, the

overall value doesnGt drop by much. -f youGre buying individual stocks, you canGt get much

diversity unless you have U:A or so.

• Small sums of money get you much further in mutual funds than in stocks. )irst, you can

set up an automatic investment plan with many fund companies that lets you put in as little

as U: per month. Second, the commissions for stock purchases will be higher than the cost

of buying noload fund 5>f course, the fundGs various e"penses like commissions are

already taken out of the =#6. Smaller si*ed purchases of stocks will have relatively high

commissions on a percentage basis, although with the U: trade becoming common, this is

a bit less of a concern than it once was.

• Fou can e"it a fund without getting caught on the bidJask spread.

• )unds provide a cheap and easy method for reinvesting dividends.

• ;ast but most certainly not least, when you buy a fund youGre in essence hiring a

professional to manage your money for you. That professional is 5presumably6 monitoring

the economy and the markets to ad$ust the fundGs holdings appropriately.


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A-v*,)*s O? S)8 Ov M()(*+ F(,-s9

• The opposite of the diversification issue -f you own $ust one stock and it doubles, you

are up ::E. -f a mutual fund owns : stocks and one doubles, it is up ?E. >n the other

hand, if you own $ust one stock and it drops in half, you are down :E but the mutual fund

is down E. Cuts both ways.

• -f you hold your stocks several years, you arenGt nicked a E or so management fee every

year 5although some brokerage firms charge if there arenGt enough trades6.

• Fou can take your profits when you want to and wonGt inadvertently buy a ta" liability.

5This refers to the common practice among funds of distributing capital gains around

=ovember or December of each year. See the article elsewhere in this )#V for more

details.6

• Fou can do a covered write option strategy. 5See the article on options on stocks for more

details.6

• Fou can structure your portfolio differently from any e"isting mutual fund portfolio.

5#lthough with the current universe of funds -Gm not certain what could possibly be missing

out thereW6

• Fou can buy smaller cap stocks which arenGt suitable for mutual funds to invest in.

• Fou have a potential profit opportunity by shorting stocks. 5Fou cannot, in general, short

mutual funds.6

• The argument is offered that the funds have a IherdI mentality and they all end up

owning the same stocks. Fou may be able to pick stocks better.


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L/? I,s(*,8 vs(s M()(*+ F(,-

;ife insurance is a hedge against risk N and not really an investment option. So, it would

be wrong to compare life insurance against any other financial product.

>ccasionally on account of market inefficiencies or mispricing of products in -ndia, life

insurance products have offered a return that is higher than a comparable %safe& fi"ed return

security N thus, you are effectively paid for getting insuredW Such opportunities are not

sustainable in the long run.


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FUTURE !ROS!ECT OF MUTUAL FUNDS IN INDIA

)inancial e"perts believe that the future of utual )unds in -ndia will be very bright. -t

has been estimated that by archend of ?::, the mutual fund industry of -ndia will reach 4s

9:,/:,::: crore, taking into account the total assets of the -ndian commercial banks. -n thecoming : years the annual composite growth rate is e"pected to go up by 1.9E.

• ::E growth in the last 0 years.

• =umber of foreign #CGs are in the +ueue to enter the -ndian markets like )idelity

-nvestments, 2S based, with over 2SUtrillion assets under management worldwide.

• >ur saving rate is over ?1E, highest in the world. >nly channeli*ing these savings in

mutual funds sector is re+uired.• @e have appro"imately ?/ mutual funds which is much less than 2S having more than

8::. There is a big scope for e"pansion.

• GBG and GCG class cities are growing rapidly. Today most of the mutual funds are

concentrating on the G#G class cities. Soon they will find scope in the growing cities.

• utual fund can penetrate rurals like the -ndian insurance industry with simple and

limited products.

• SB- allowing the )Gs to launch commodity mutual funds.

• mphasis on better corporate governance.

• Trying to curb the late trading practices.

• -ntroduction of )inancial !lanners who can provide need based advice.

;ooking at the past developments and combining it with the current trends it can be

concluded that the future of utual )unds in -ndia has lot of positive things to offer to its

investors.


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MF "ARGON

N) Ass) V*+( ffer !rice. -t

may include a sales load.

R6(8*s !/8

-s the price at which a closeended scheme repurchases its units and it may include a

backend load. This is also called Bid !rice.

R-@6)/, !/8

-t is the price at which openended schemes repurchase their units and closeended

schemes redeem their units on maturity. Such prices are =# related.

S*+s L*-

-t is a charge collected by a scheme when it sells the units. #lso called as L)rontend(

load. Schemes that do not charge a load are called L=o ;oad( schemes.

R6(8*s J%*8;,- L*-

-t is a charge collected by a scheme when it buys back the units from the unit holders.

http://finance.indiamart.com/markets/mutual_funds/latest_mf_navs.htmlhttp://finance.indiamart.com/india_business_information/mutual_funds_terms.htmlhttp://finance.indiamart.com/india_business_information/mutual_funds_terms.htmlhttp://finance.indiamart.com/markets/mutual_funds/latest_mf_navs.htmlhttp://finance.indiamart.com/india_business_information/mutual_funds_terms.htmlhttp://finance.indiamart.com/india_business_information/mutual_funds_terms.html


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CONCLUSION

utual )unds now represent perhaps most appropriate investment opportunity for most

investors. #s financial markets become more sophisticated and comple", investors need a

financial intermediary who provides the re+uired knowledge and professional e"pertise on

successful investing. #s the investor always try to ma"imi*e the returns and minimi*e the risk.

utual fund satisfies these re+uirements by providing attractive returns with affordable risks.

The fund industry has already overtaken the banking industry, more funds being under mutual

fund management than deposited with banks. @ith the emergence of tough competition in this

sector mutual funds are launching a variety of schemes which caters to the re+uirement of the

particular class of investors. 4isk takers for getting capital appreciation should invest in growth,

e+uity schemes. -nvestors who are in need of regular income should invest in income plans.

The stock market has been rising for over three years now. This in turn has not only

protected the money invested in funds but has also to helped grow these investments.

This has also instilled greater confidence among fund investors who are investing more

into the market through the ) route than ever before.

4eliance -ndia mutual funds provide ma$or benefits to a common man who wants to

make his life better than previous.

-ndiaGs largest mutual fund, 2T-, still controls nearly 8: per cent of the market. #lso, the

mutual fund industry as a whole gets less than ? per cent of household savings against the 90 per

cent that go into bank deposits. Some fund managers say this only indicates the sectorGs potential.

I-f mutual funds succeed in chipping away at bank deposits, even a triple digit growth is possible

over the ne"t few years.


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%I%LIOGRA!H&

REFERENCE %OOK'

)-=#=C-#; #4AT #=D S4-CS3ordon and =atara$an

WE%SITE'

www.utimf.com

www.reliancemutual.com

www.amfiindia.com

SEARCH ENGINE'

www.google.com

www.altavista.com

www.yahoo.com

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