TO STUDY THE INVESTMENT PROCEDURE

IN MUTUAL FUNDS

DATA PROVIDED HERE IS NOT ABSOLUTE…ITS ONLY FOR REFERENCE

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INTRODUCTION

MUTUAL FUND

A mutual fund collects the savings from small investors, invest them in Government and

other corporate securities and earn income through interest and dividends, besides capital

gains. It works on the principle of ‘small drops of water make a big ocean’. For instance, if

one has Rs. 1000 to invest, it may not fetch very much on its own. But, when it is pooled with

Rs. 1000 each from a lot of other people, then, one could create a ‘big fund’ large enough to

invest in a wide varieties of shares and debentures on a commanding scale and thus, to enjoy

the economies of large scale operations. Hence, a mutual fund is nothing but a form of

collective investment. It is formed by the coming together of a number of investors who

transfer their surplus funds to a professionally qualified organization to manage it. To get the

surplus funds from investors, the fund adopts a simple technique. Each fund is divided into a

small fraction called “units” of equal value. Each investor is allocated units in proportion to

the size of his investment. Thus, every investor, whether big or small, will have stake in the

fund and can enjoy the wide portfolio of the investment held by the fund. Hence, mutual

funds enable millions of small and large investors to participate in and derive the benefit of

the capital market growth. It has emerged as a popular vehicle of creation of wealth due to

high return, lower cost and diversified risk.

Mutual fund is a mechanism for pooling the resource 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 and sectors and

thus the risk is reduced. Diversification reduces the risk because all stocks may not move in

the same direction in the same proportion at the same time. Mutual fund issues units to the

investors in accordance with quantum of money invested by them investors of mutual funds

are known as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The

mutual fund normally comes 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

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with Securities and Exchange Board of India (SEBI) which regulates securities markets

before it can collect funds from the public. 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 appreciations realized by the scheme

are shared by its unit holders in proportion to the number of units owned by them that are on

pro rata basis. 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. Anybody with an inventible 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.

A mutual fund is the ideal investment vehicle for today’s complex and modern financial

scenario. Markets for equity shares, bonds and other fixed income instruments, real estate,

derivatives and other assets have become mature and information driven. Price changes in

these assets are driven by global events occurring in faraway places. A typical individual is

unlikely to have the knowledge, skills, inclination and time to keep track of events,

understand their implications and act speedily.

An individual also finds it difficult to keep track of ownership of his assets, investments,

brokerage dues and bank transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally qualified and

experienced staff that manages each of these functions on a full time basis. The large pool of

money collected in the fund allows it to hire such staff at a very low cost to each investor. In

effect, the mutual fund vehicle exploits economies of scale in all three areas - research,

investments and transaction processing. While the concept of individuals coming together to

invest money collectively is not new, the mutual fund in its present form is a 20th century

phenomenon. In fact, mutual funds gained popularity only after the Second World War.

Globally, there are thousands of firms offering tens of thousands of mutual funds with

different investment objectives. Today, mutual funds collectively manage almost as much as

or more money as compared to banks.

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NEED FOR THE STUDY

The main purpose of doing this project was to know about mutual fund and its functioning.

This helps to know in details about mutual fund industry right from its inception stage,

growth and future prospects. It also helps in understanding different schemes of mutual funds

because my study depends upon importance of mutual fund in financial planning in India and

their schemes like equity, income, balance as well as the returns associated with those

schemes.

And to also know about the benefits available from mutual funds and what are the types of

schemes are available and how the fund manager allocates the funds of the investors in

different sectors. And to also know how it is benefited to capital market growth and role of

mutual funds in financial planning. How the fund manager diversified risk.

The project study was done to ascertain the asset allocation entry load, exit load associated

with the mutual funds. Ultimately this would help in understanding the benefits of mutual

funds to investors. It also ensures good returns quick liquidity and creates a good rapport with

the investors.

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OBJECTIVES OF THE STUDY

To have a brief idea about the benefits available from mutual fund investment.

To give an idea of the types of schemes available.

Observe the fund management process of mutual funds.

Explore the recent developments in the mutual funds in India.

To study the investment procedure in mutual funds.

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METHODOLOGY OF THE STUDY

Data has been obtained from two sources viz;

Primary Data

Secondary Data

Primary Data: It is the first hand information collected directly from the respondents.

Primary data is collected through survey among existing clients along with the other

investors.

Secondary Data: It is the indirect or secondary hand information collected from

factsheets, website of company and books. Company’s periodical reports newspapers,

economic times, business line. The financial express, magazines, business today, business

world, capital markets.

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LIMITATIONS

The study is confined to selected AMCs.

Lack of information for analysis is a limitation.

Availability of time is a constraint in the proposed survey, since the project should be

completed in 4 weeks.

Reliability on usage of secondary data.

Complexity and confidentiality of the company is also a limitation for the study.

The company could not discharge certain information about the business.

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Evolution of Indian Mutual Fund Industry

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at

the initiative of the Government of India and Reserve Bank. The history of mutual funds in

India can be broadly divided into four distinct phases:

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by

the Reserve Bank of India and functioned under the Regulatory and administrative control of

the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial

Development Bank of India (IDBI) took over the regulatory and administrative control in

place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988

UTI had Rs.6,700 cores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks

and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India

(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987

followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),

Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund

(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund

in December 1990. At the end of 1993, the mutual fund industry had assets under

management of Rs.47, 004 cores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund

industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year

in which the first Mutual Fund Regulations came into being, under which all mutual funds,

except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged

with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

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The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and

revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI

(Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds

setting up funds in India and also the industry has witnessed several mergers and acquisitions.

As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805

crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way

ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was

bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of

India with assets under management of Rs.29,835 crores as at the end of January 2003,

representing broadly, the assets of US 64 scheme, assured return and certain other schemes.

The Specified Undertaking of Unit Trust of India, functioning under an administrator and

under the rules framed by Government of India and does not come under the purview of the

Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is

registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation

of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under

management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual

Fund Regulations, and with recent mergers taking place among different private sector funds,

the mutual fund industry has entered its current phase of consolidation and growth. As at the

end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores

under 421 schemes.

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FUND HOUSE EXPERTISE

Investment Expertise:

The best investment strategies put together by the best minds, our Fund Managers. With a

sharp eye to monitor, gauge and understand the changes in the market, our fund managers

and analysts gear up to meet new challenging environments. Their ability to capture the

growth potential of Indian securities and manage complex portfolios as well as the drive to

deliver optimum results is their forte. With superior securities selection, incisive research,

intensive coverage including internal forecasts, active monitoring and regular tracking, our

dedicated team ensures minimization of risks while protecting our investor's interest.

Investment Philosophy:

Growth through innovation.

Our expert team of experienced and market savvy researchers prepare comprehensive

analytical and informative reports on diverse sectors and identify stocks that promise high

performance in the future.

What is innovation? Innovation is the process of turning ideas into concrete plans for

progressive growth. We always seek to provide our investors with opportunities for

progressive growth through our innovative products, superior stock selection and active

portfolio management. Accordingly, we also enhance and optimize asset allocation and stock

selection based on internal and external research. Derivatives are used to hedge and rebalance

portfolios to keep the risk factors at reasonable levels,

The three main phrases, which act as a guiding force for the investment performance, are as

follows:

Long-term capital appreciation for the investor: Our fund manager's view is not

guided by any momentum play but by the objective of generating sustainable

performance for the investor.

Superior stock selection : Our team is encouraged to be ahead of the rest of the

industry in terms of identifying new ideas & opportunities.

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Active fund management : While the performance of all the funds is benchmarked

against a specific index, we do not encourage our investment team to replicate the

index composition with the fund portfolio.

Optimal Risk Management:

Risk Management is an inherent part of any business. As one of the core focus areas, each of

our strategies is subject to close scrutiny on a continuous basis. Regulatory agencies around

the world are placing increasing pressure on institutions to measure and manage risk better.

At SBI Funds Management, we follow enterprise wide approach to risk management with a

dedicated, experienced and professional risk management team covering significant functions

of the organization. Risk Management focuses on:

Identifying actual and potential areas of risk

Assessing the adequacy of internal controls

Proposing risk mitigating measures and

Safeguarding investor interest through ongoing analysis and monitoring

Investment Objective:

Setting benchmarks time and again for our investors.

Our objective is to endeavor to outperform our benchmarks through well researched

investments in Indian equities. This is achieved by implementing an active management style

based on fundamental analysis, leading to the construction of a portfolio. It could be blended,

large cap, mid cap, or specific sector oriented - which aims at capturing the growth potential

of Indian equities.

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Indian Mutual Funds – Growth Strategy

The basic approach to mutual fund is planning and policy making in India, is slowly

emerging as a clearly discernible strategy. Though a mutual fund is primarily an economic

activity, both the economic and non-economic environment influences an organization and

policy of mutual funds. Among the critical elements of the non-economic environment, the

role of government is very crucial. Against this backdrop, mutual funds have a ten-point

emerging strategy for growth in India.

Horizontalisation: The investment base has to be horizontalised, schemes should be so well

dispersed that there is constant inflow of new investors and diffused investors with varied

income backgrounds to effect market integration.

Structural integration: The time has come to attempt a structural integration of the small

savings, deposits and the capital unit cult, so that the economy is monetized, production

increased and employment expanded. Mutual funds are most suited for such structural

integration in the emerging scenario.

Cost Rationalization: Financial product managers work towards cost rationalization to

reduce inflation and to cope with low productivity. Capital market resource mobilization is

becoming increasingly costly. Cost rationalization can be achieved through efficient

management of mutual funds in financial, marketing and investment areas.

Corpus Optimization: The goal of higher productivity and lower costs is achieved in mutual

funds through optimization of resource mobilization and utilization as well as process

optimization.

Conservation: Conservation implies sustainability of a system so that the future generation is

assured of integration equity i.e. benefit to a greater or at least to the same extent than the

present generation. The milking of the economy through the mutual fund route for resource

intensification should not entail a high future cost i.e. the loss of future credibility of the

mutual fund system. The regulatory mechanisms tend to ensure this.

Capacity Utilization: It is an aspect of corpus build-up, planning and control. Capacity

utilization in mutual funds depends on better resource management, security management and

opportunity management. It also depends on another crucial factor i.e., preventive vigilance

rather than breakdown survey of the garnered resources.

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Technology Upgradation: Modernization in fund management techniques, investment in

R&D and inducting on-line, real time transaction processing, custodial banking and security

trading are becoming increasingly critical for success of mutual funds.

Professionalization of management : The growing competition in the market needs to be

matched by a total change in the management paradigm. Mutual funds need sensitive

professional managers for their nodal activities like corpus planning, marketing, security

trading, custodial banking, portfolio management and technological up gradation.

Internationalization: The Indian resource market is under pressure from competing forces

of opportunities arising out of constantly increasing demands. The global resource market is

both huge and open. Some unique selling propositions backed by a policy of liberalization

and diversification will enable Indian mutual funds to be truly globalized beyond their

present activities.

Quality Orientation: As mutual funds must stay and operate on a continuing basis to

become market leaders in financial management, they need quality orientation to meet both

domestic and international standards. This needs continuous R&D, supervision backed by

well-laid down programmers, policies and procedures.

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Future Focus

The mutual fund industry has evolved in many aspects in the last decade or so, be it product

innovation, distribution reach, investor education or leveraging technology. At present, only

small portions of public savings reach the capital markets through the MF route. In the future,

the percentage of savings reaching capital markets through MF route will rise gradually.

Innovations like arbitrage funds, exchange-traded funds are going to benefit investors in a

very tangible way. However, again within the exchange traded funds category, products like

real estate exchange-traded funds will take some time to be introduced in the Indian market.

The industry is one of the most regulated and has so far seen a very small number of issues.

This fact alone should illustrate the likely future development of the mutual funds industry.

Although the competitive scenario is getting together by the day, it actually helps in the

expansion of the market. Competition will also lead to innovation in product development

and a race for better returns. Going by India’s demography, the purchasing power and the

savings rate and the kind of money people earn will increase in the future. Obviously, they

need investment opportunities and mutual funds will be one of the best opportunities for the

future, because of the kind of returns they yield, which no other class can give vis-à-vis the

risks. Investors can map these risks and returns on the basis of investments in the mutual fund

industry. With this background, the industry’s future seems bright for the coming years. It has

great potential to grow and is already on that path.

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Mutual Fund in financial planning

"Riches do not respond to wishes. They respond only to definite plans, backed by definite

desires, through constant persistence." - Napoleon Hill

The importance of Financial Planning couldn't have been summed up better than this. To

simply put, financial planning is a tool through which you can chalk out definite plans in

order to achieve your financial goals thus ensuring you peace of mind at various stages of

your life cycle.

All of us have financial goals – be it buying a house, buying a car, getting children married,

their education and then our retirement. But, unless we do not assess where we stand in terms

of our income, expenses, assets, liabilities, age and risk appetite, all the financial goals would

just remain "dreams" and would never turn into a reality.

Today there are several investment avenues; but for you to optimally undertake financial

planning (to achieve financial freedom), what is required is combination of various financial

products in the respective asset classes – be it equity, debt or gold. However, your asset

allocation also needs to be optimally structured for work for you (in the financial plan); or

else it would not help you attaining financial freedom

Strategic Asset AllocationBarring "most conservative portfolios" which do not hold equities at all, every portfolio

should be optimally structure and diversified to hold all asset classes:

Cash - for security and liquidity, so that one can take advantage of opportunities as they

arise.

Bonds - to help preserve capital and provide a steady income.

S tocks - for growing wealth and to help you beat inflation and counter the impact of taxes.

Real estate - because of their low correlation with stocks and bonds.

Gold - for its ability to be a hedge against the inflation bug and other economic and political

uncertainties .Once your asset allocation is optimally structured, the next important action

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point should be having the right investment avenues / products under each asset class, in

order to achieve the financial goals (within the time frame) with comfort.

Lower entry level – With the minimum investment amount in mutual funds being as low as `

5,000, the encouragement to start small and at the same time take exposure to the fund's

portfolio of 20-30 stocks (due to diversification) is also present. Now this is unlike stocks

because there with   5,000 you can barely buy few quality stocks – and this especially true

when valuations are expensive.

Innovative plans/services for investors – Today for regular investing in mutual

funds (which is much needed to achieve financial goals), AMC (Asset Management

Companies) offer innovative plans such as SIP (Systematic Investment Plan) / STP

(Systematic Transfer Plan). Also for facilitating withdrawals too (taking care of your cash

flow requirements), SWPs (Systematic Withdrawal Plans) are in place, thus enabling you to

manage your portfolio from a financial planning perspective too.

Liquidity – Unlike direct stock investing where you may encounter a situation where a stock

turns illiquid (due to various reasons); in mutual funds you would not face such a situation if

the scheme selected by you follows strong investments systems and process. This because the

stock selection process helps in eliminating such illiquid stocks. Moreover as an investment

avenue, mutual funds per se, especially the open-ended mutual funds offer you the much

required liquidity as you can simply buy / sell units at the day's NAV (Net Asset Value) by

approaching the fund house directly, or by approaching your mutual fund distributor or even

by transacting online.

Hence having assessed the inherent advantages of mutual funds, you can strategies your

portfolio with the help of equity funds, debt funds, hybrid funds and gold funds whereby the

under-mentioned financial objectives can be categorized to

Growth

Income

Inflation protection

Peace of mind and preservation of capital

Tax saving

Among the various investment avenues available today, mutual funds (amongst other

investment avenues) are a wealth creating avenue, aiding you achieve your financial goals.

Moreover they power your portfolio with diversification benefit. And mind you

diversification immensely helps during the turbulence of the capital markets as the jerks (of

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turbulence) are felt far lesser. The other benefits which you enjoy while investing in mutual

funds are:

Professional management – Your money is managed by a professional fund manager, hence

ascertaining the prospect of the companies is not your headache and portfolio churning (if

required) too is taken care by him.

Economies of scale –Even though if a mutual fund does engage in high portfolio churning in

the race to deliver luring returns, the voluminous trade carried out by it helps to enjoy the

economies of large scale and have lower impact on their profitability. But on the other hand if

you were to do this by yourself, you may get negatively impacted on the profitability front

due to small volume of trades carried out.

But your financial planner should ideally balance the importance of each of these, while

structuring a portfolio. Remember there are no one rules for all in Financial Planning.

While drawing a financial plan you need to cooperate with your financial planner and try to

ask yourself the following questions and attempt answering them too in a very honest

manner.

Towards what objective/goal am I investing my money?

Knowing the objective of investing enables you to select the right options. For example,

if you have a long term objective of wealth creation, then going with an equity oriented

fund (following a growth style of investing) would be prudent. However if your

objective is to maintain short-term fund requirements, you may invest liquid funds or

ultra-short term funds.

What is the time horizon? 

Time horizon refers to, when you want to enjoy the fruits of your investments.

Ascertaining this is critical because both, the risk and the reward of investments can vary

according to the time horizon.

Generally, a longer horizon allows for more aggression in investment. Lesser the

time, the more one needs to avoid risk.

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What is my risk appetite? 

There is a risk-reward continuum running from cash to bonds to stocks. Returns are

commensurate with the risk someone is willing to tolerate. High risks may also eat into

your capital. And if there is no income to make up for that lost capital, replacing it would

be difficult; which means a more conservative approach needs to be followed. Other

considerations could be the present financial situation, estate planning and level of

taxation. 

Another important factor is age. As a general rule, the younger one is, the more

aggressive someone can afford to be with their investment portfolio.

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SBI MUTUAL FUNDKEY INFORMATION

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Mutual Fund SBI Mutual Fund

Setup Date Jun-29-1987

Incorporation Date Feb-07-1992

Sponsor State Bank of India

Trustee SBI Mutual Fund Trustee Company Private Limited

Chairman N.A

CEO / MD Mr. Deepak Kumar Chatterjee

CIO Mr.Navneet Munot

Compliance Officer Ms.Vinaya Datar

Investor Service Officer

Mr. C A Santosh

Assets Managed Rs. 47874.46 crores (Jun-30-2011)

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Other Details:

Auditors M/s Deloitte Haskins & Sells Jt Auditor SBI Funds Mgmt P Ltd, M/s Khandelwal Jain & Co CAs Jt Auditor SBI Funds Mgmt P Ltd.

Custodians Bank of Nova Scotia / Citi Bank / HDFC Bank / Stock Holding Corporation of India

Registrars

Computer Age Management Services Pvt. Ltd,

Computronics Financial Services (I) Ltd, Datamatics Financial Software Services Ltd

Address 191 Maker Tower E, Cuffe Parade, Mumbai - 400005.

Telephone Nos. 022 - 22180221-27

Fax Nos. 022 – 22189663

E-mail partnerforlife@sbimf.com

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SBI Mutual Fund PortfolioThere are no two opinions on the fact that mutual funds are increasingly gaining widespread

acceptability among masses. Investors who have traditionally embraced fixed deposits, post-

office schemes and even stocks have bought the idea of investing through a professional

money manager. Now for some bad news .There is too many mutual funds in the country and

investors aren't able to decide which fund to own and which to abandon. A steady stream of

mutual fund IPOs compounds the issue even further. This is how we can define an ideal

mutual fund portfolio for the investor with a moderate risk appetite and an investment time

frame of at least 5 years.

 A Large-Cap Diversified Equity Fund

 A Mid-Cap Diversified Equity Fund

  A Balanced Fund

  A Monthly Income Plan

  A Floating Rate Fund

  Mutual Fund Portfolio Management Strategies

  No Strategy

  Over

  Duplication Of Fund Securities

A Large-Cap Diversified Equity Fund :

One of the first funds that investors must probably considering owning is a large-cap

diversified equity fund with a steady track record of at least 5 years. Large cap stocks would

usually include stocks from the BSE Sensex/S&P Nifty. A well-diversified fund must have

not more than 40% of assets in the top 10 stocks (this is a global standard). A steady track

record must involve outperformance vis-à-vis the benchmark index and peers especially

during a downturn in equity markets. There are few funds that fit the bill, but the ones that

qualify are the ones worth owning.

A Mid-Cap Diversified Equity Fund:

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Mid-cap funds (except few) did not exist until even 3 years ago. So it’s a fairly nascent fund

category. You can give the "steady 5-Yr track record" criterion a miss for mid-cap funds.

Though, you need to be careful of 'mid-cap funds' as right now its 'fashionable' to be invested

in mid-cap stocks. There are a lot of 'opportunity' funds with equity portfolios that swing in

line with the market mood. So if the accent is on large cap stocks the 'opportunity' fund will

be invested in large caps. If the mood in the markets turns and mid-cap stocks are pitch

forked into the limelight, the fund's strategy will reflect the change in the market mood.

Choose funds that define themselves as 'mid-cap' either by name or by investment objective.

Also look at the benchmark index; a fund that benchmarks itself against the CNX 500 or BSE

500 can be considered a mid-cap fund. Though, a fund that tracks the Sensex or Nifty may

not necessarily be a mid-cap fund even if it has a lot of mid-cap stocks in its current

portfolio. In other words, a fund's investment objective and investments must both

correspond to its benchmark index.

A Balanced Fund :

Balanced funds work mostly well during a downturn in equity markets, when the fund

manager has a window to shift assets on to the debt side. The flexibility helps the fund

manager curtail losses in a falling market. While selecting a balanced fund, choose the

conventional type - 60:40 (equity: debt) with a steady track record. You have to make sure

that the fund manager sticks to the 60:40 mandates even during bullish times, when most

balanced fund managers succumb to the temptation of over-allocation to equities for higher

growth.

A Monthly Income Plan:

A monthly income plan (MIP) works on the same premise as a balanced fund. The fund

manager has the flexibility to invest a portion of assets (between 5-25% of assets in most

cases) in equities. An MIP works well when debt markets are witnessing a subdued phase,

like now for instance. When debt markets are in turmoil, the fund manager has the flexibility

to shift assets in equities (provided equity markets are robust) to generate that extra growth.

Again, since MIPs are a relatively recent phenomenon, investors can consider the short-term

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performance (at least 1-Yr) before selecting a good MIP. If you are looking for a regular

income stream, choose the quarterly option as opposed to a monthly option, to allow the fund

manager to declare a dividend in volatile equity markets.

A Floating Rate Fund:

Floating rate debt funds invest in floating rate paper. Floating rate instruments have their

coupon rates adjusted at periodical intervals, which reduces price fluctuations arising out of

interest rate volatility. Investors can park funds in a floating rate fund (short-term plan) until

more attractive investment opportunities emerge. Given the situation in debt markets at

present, we believe it makes more sense to own a floating rate fund for some time going

forward, rather than a regular long-term debt fund. Floating rate funds have a relatively short

history and investors can look at the 1-Yr performance before selecting a floating rate fund. 

Mutual Fund Portfolio Management Strategies:

Following are the strategies that can be adopted to avoid the pit fall in Mutual fund Portfolio

management.

No Strategy:

This is perhaps the most common mistake in mutual fund investing. It never ends to be

surprised by the large number of individuals who select specific mutual funds without giving

any idea to an asset allocation strategy. Many investors may actually define and identify their

investment objectives, but then miss out the next critical step in establishing a successful

mutual fund portfolio-creating a detailed asset allocation strategy. Exclusive of a well-

defined, appropriate asset allocation strategy that accurately reflects individual investment

objectives and preferences (time horizon, return objectives, risk tolerance, etc), the selection

of mutual funds is haphazard (messy) instead of a logical, clear-cut process.

With very few exceptions, the result of haphazard fund selection is inappropriate asset

allocation, which in turn causes ineffective diversification with the final result being poor or

mediocre portfolio performance. Ineffective diversification has both allocation and

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risk/reward characteristics which do not precisely represent the chosen investment objectives

in a given portfolio. In particular, these characteristics may include over-weighting of fund

categories, under-weighting of fund categories and/or inappropriate funds in the portfolio.

Over-weighting and under-weighting of fund categories are significant percentage

imbalances in allocation correspondingly, they account for additional and insufficient of a

portfolio's assets. Inappropriate funds do not robust the chosen investment objectives and

they are the "wrong" funds for a portfolio.

On the contrary, effective diversification is a straight result of an appropriate detailed asset

allocation strategy that fits individual investment objectives and preferences. Effective

diversification distributes investment assets among different fund categories to achieve both

a variety of distinct risk/reward objectives and a reduction in overall risk. Appropriate in

depth asset allocation not only eliminates unattractive characteristics of over-weighting,

under-weighting and inappropriate funds, it perfectly matches fund categories and their

percentage of portfolio assets to specified objectives -- in essence, it is the "blueprint" for

suitable fund selection.

Establishing a successful mutual fund portfolio is a three-step process. The first step is

identifying investment objectives and preferences, including portfolio amount, return

objectives, time horizon and risk tolerance, second step are formulating a detailed asset

allocation strategy by fund type category to reflect chosen objectives and the last step is

suitable fund selection to match each category.

The second step is the trickiest due to the abundance of asset allocation theories and

strategies. Most asset allocation strategies fall into two groups, the first group is the one

primarily treats risk as a stock/bond allocation, with risk tolerance changing the percentage of

stock and bond funds and the other one is primarily a fund category allocation, with risk

tolerance affecting the type of fund categories and their allocation percentages within a basic

stock/bond allocation.

Apart from of which asset allocation method an investor prefers, the important note is clear

that is to avoid the pitfalls of haphazard fund selection, develop a detailed asset allocation

strategy which accurately represents your investment objectives and preferences.

25

Weighting in High-Risk, Non-Diversified Funds- This error is a precise example of portfolio

imbalance. A huge percentage of total portfolio assets are concentrated in funds with very

high risk/reward characteristics, even if the fund types may actually reflect chosen

investment objectives. The result is extreme unpredictability in the price movement of these

funds which, in many instances, can cause disappointing portfolio performance because the

very large percentage of risk does not justify the potential reward. In other terms, the risk is

highly disproportionate to overall profit potential. Over-weighting can arise with any type of

risk tolerance, although this specific type of over-weighting is more likely to be a problem in

portfolios with aggressive risk tolerances.

A high-risk, non-diversified stock fund category includes domestic and foreign small-cap

growth, emerging markets and sector funds. In bond categories, emerging market and assured

high-yield funds are also high risk. These fund types can be appropriate in many portfolios,

provided an investor sticks to the principles of effective diversification. That is the distinct

risk or reward objectives within a variety of fund types and a reduction in overall portfolio

risk.

Are there an acceptable percentage of high-risk, non-diversified funds to own in a portfolio?

Most strategy recommend between 5-30% of total portfolio assets, depending upon the

choices of aggressive, moderate or conservative risk tolerances and growth, balance or

income-oriented return objectives. The solution is to treat high risk, non-diversified mutual

funds as a suitable portfolio supplement without dramatically increasing overall risk.

 

Duplication Of Fund Securities:

This type of fault is a case of inefficient diversification and occurs when an investor has two

(or more) funds with identical objectives. For example, owning two small-cap growth funds,

two large-cap growth funds and one intermediate corporate bond fund in a five-fund portfolio

is inefficient diversification due to the replication of fund objectives in the small and large-

cap growth categories. In this type of arrangement they lack the array of distinct risk or

reward characteristics of ideal diversification. To avoid replication, it is most excellent to

represent a fund category with just one fund.

26

The essential familiar factor in avoiding these three common mistakes is appropriate detailed

asset allocation. It provides effective diversification and eliminates the troubles associated

with haphazard fund selection. It is the explanation in establishing a successful mutual fund

portfolio.

SBI Mutual Fund-Scheme Name

27

Scheme Name Rating Downloa

d

Category Latest

NAV

1 year

Return

(%)

AUM (Rs.

cr.)

Jun 11

SBI Arbitrage Oppor. Fund

(G)

Not

RatedDebt - Speciality 13.89 8.5 41.98

SBI Blue Chip Fund (G)Equity

Diversified14.31 -1.4 824.52

SBI Capital Protection - Sr -I Not

Rated

Debt - Speciality 11.11 3.1 218.10

SBI Capital Protection Fund-

Sr-II

Not

RatedDebt - Speciality 10.16 -- 107.23

SBI Dynamic Bond Fund (G) Not

Rated

Debt - Long Term 12.13 8.5 16.07

SBI Gold Exchange Traded

Fund

Not

RatedGold

2,260.6

323.3 218.31

SBI Infrastructure - Sr I (G)Equity

Diversified9.09 -12.4 946.55

SBI Magnum Balanced Fund

(G)

Balanced 49.98 -0.5 459.97

SBI Magnum Cash-Liq Float

-G

Money Market 17.36 7.9 346.60

SBI Magnum Childrens

Benefit

Not

RatedDebt - Speciality 23.13 7.8 23.26

SBI Magnum Comma Fund

(G)

Equity

Diversified23.69 -1.3 553.25

SBI Magnum Contra Fund

(G)

Equity

Diversified55.13 -4.1 3,139.54

28

SBI Magnum Emerging Busi

(G)

Equity

Diversified44.42 16.5 354.56

SBI Magnum Equity Fund

(G)

Equity

Diversified43.85 4.3 440.76

SBI Magnum FMCG FundNot

RatedEquity - FMCG 33.15 22.3 42.71

SBI Magnum Gilt - LTP (G) Debt - Long Term 20.08 4.9 51.64

SBI Magnum Gilt - STP (G) Debt - Short

Term19.91 5.9 65.72

SBI Magnum Gilt LTP - PF

(G)Debt - Long Term 12.87 5.0 90.98

SBI Magnum Gilt LTP-PF

1Yr (G)

Not

RatedDebt - Long Term 12.55 4.5 2.62

SBI Magnum Gilt LTP-PF

2Yr (G)

Not

RatedDebt - Long Term 12.39 4.3 9.08

SBI Magnum Gilt LTP-PF

3Yr (G)

Not

RatedDebt - Long Term 12.18 4.2 4.77

SBI Magnum Global Fund

(G)

Equity

Diversified59.28 7.8 978.86

SBI Magnum Income Fund

(G)Debt - Long Term 24.07 5.9 46.71

SBI Magnum Income Plus -

IP (G)

Not

RatedDebt - Speciality 16.41 2.9 69.03

SBI Magnum Income Plus-

SP (G)

Not

RatedDebt - Long Term 11.51 5.3 1.81

SBI Magnum Income-FRP -

STP (G)

Not

Rated

Debt - Floating

Rate15.59 8.1 250.80

SBI Magnum Income-FRP-

LT IP -G

Not

Rated

Debt -

Institutional11.95 -- 0.15

SBI Magnum Income-FRP-

LTRP (G)

Not

Rated

Debt - Floating

Rate15.17 7.7 6.05

SBI Magnum Index Fund (G)Not

RatedEquity Index 47.66 3.6 33.83

29

SBI Magnum Insta Cash (G) Money Market 22.31 7.6 3,207.45

SBI Magnum IT FundNot

Rated

Equity -

Technology22.17 4.5 46.70

SBI Magnum Midcap Fund

(G)

Equity

Diversified23.10 0.7 255.44

SBI Magnum MIP (G)Monthly Income

Plan20.41 4.4 380.19

SBI Magnum MIP - Floater

(G)

Not

Rated

Monthly Income

Plan13.60 7.5 10.93

SBI Magnum Multicap Fund

(G)

Equity

Diversified17.40 -4.2 489.25

SBI Magnum Multiplier Plus

(G)

Not

Rated

Equity

Diversified81.44 -1.0 1,159.05

SBI Magnum NRI Fund -

FAP (G)

Not

Rated

Equity

Diversified29.22 3.8 8.71

SBI Magnum Pharma Fund

(G)

Not

RatedEquity - Pharma 48.06 14.2 40.15

SBI Magnum Tax Gain (G)Equity Tax

Saving59.68 -1.0 5,224.14

SBI One India Fund (G)Equity

Diversified10.69 -4.1 582.14

SBI Premier Liquid - IP (G)Not

Rated

Debt -

Institutional15.97 7.6 1,748.62

SBI Premier Liquid - SIP (G)Not

Rated

Debt -

Institutional15.81 7.7 6,849.94

SBI PSU Fund (G)Equity

Diversified9.74 -2.7 599.78

SBI SHDF - Short Term -IP

(G)

Not

Rated

Debt -

Institutional11.55 7.0 30.02

SBI SHDF - Short Term -RP

(G)

Debt - Short

Term13.10 6.7 33.38

SBI SHDF - USTBF - IP (G)Not

Rated

Debt -

Institutional13.13 7.9 7,427.75

30

SBI SHDF - USTBF - RP

(G)

Debt - Short

Term12.94 7.8 337.74

SBI Tax Advantage Sr-1 (G)Equity Tax

Saving11.97 -2.8 624.65

AWARDS RECEIVED BY SBI MUTUAL FUND

31

At SBI Funds Management, we devote considerable resources to gain, maintain and sustain

our profitable insights into market movements. The trust reposed on us by millions of

investors is a genuine tribute to our expertise in Fund Management and dedication to our

singular focus. And this has resulted in various awards and accolades for us from the fund

industry, motivating us to do better. Some of the awards won by us are listed below.

2011

Readers Digest Awards 2011 for Trusted Brand in Fund Management Category.

ICRA Mutual   Fund Awards 2011 for Magnum Income Fund - Floating Rate Plan - Long

Term Plan.

2010

ICRA Mutual   Fund Awards 2010 for Magnum Global Fund .

2009

ICRA Mutual Funds Awards 2009 for Magnum Tax Gain Scheme 1993.

The Lipper India Fund Awards 2009 for Various Schemes.

2008

Outlook Money NDTV Profit Awards 2008.

The Lipper India Fund Awards 2008 for Magnum Balanced Fund – Dividend.

ICRA Mutual   Fund Awards 2008 for Various Schemes .

32

2007

Outlook Money NDTV Profit Awards 2007.

CNBC Awaaz Consumer Awards 2007.

The Lipper India Fund Awards 2007 for Various Schemes.

ICRA   Mutual Funds Awards 2007 for Various Schemes .

CNBC TV18 - CRISIL Mutual Fund of the Year Award 2007 for Various Schemes

Developments of SBI Mutual Fund

33

Indian Bank to sell SBI Mutual Fund Products

New Delhi: Indian state-run lender Indian Bank has entered into an agreement with the fund

house SBI Mutual fund to sell the latter's mutual fund products in the market, it said.

Established in 1987, SBI Mutual Fund is a joint venture between the country's largest lender

State Bank of India, and France-based fund management company Societe Generale Asset

Management.

Indian Bank's 1,850 branches will sell SBI Mutual Fund's products, wherein the bank will

also have access to products of other fund houses UTI Mutual Fund and Reliance Mutual

Fund, as per the agreement.

The partnership is aimed towards improving the non-interest income of the bank, Indian

Bank's Chairman and Managing Director T M Bhasin said.

Indian Bank's shares Wednesday ended at Rs 214.45 on the Bombay Stock Exchange, up 3%

from the previous close.

Definition of Mutual Fund34

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1993 defines a

mutual fund as “a fund established in the form of a trust by a sponsor, to raise monies by the

trustees through the sale of units to the public, under one or more schemes, for investing in

securities in accordance with these regulations”.

These mutual funds are referred to as Unit Trusts in the U.K. and as open end investment

company as “an organization formed for the investment of funds obtained from individuals

and the institutional investors who in exchange for the funds receive shares which can be

redeemed at any time at their underlying asset values”.

According to Weston J. Fred and Brigham, Eugene, F., Unit Trusts are “Corporations which

accept dollars from savers and then use these dollars to buy stocks, long term bonds, short

term debt instruments issued by business or government units; these corporations pool funds

and thus reduce risk by diversification”.

Thus, mutual funds are corporations which pool funds by selling their own shares and reduce

risk by diversification.

Origin of the fund

35

The origin of the concept of mutual funds dates back to the very dawn of commercial history.

It is said that Egyptians and Phoenicians sold their shares in vessels and caravans with a view

to spreading the risk attached with these risky ventures. However, the real credit of

introducing the modern concept of mutual fund goes to the Foreign and Colonial Government

Trust of London established in 1868. Thereafter, a large number of close-ended mutual funds

were formed in the U.S.A. in 1930’s followed by many countries in Europe, the Far East and

Latin America. In most of the countries, both open and close-ended types were popular.

In India, it gained momentum only in 1980, though it began in the year 1964 with the Unit

Trust of India launching its first fund, the Unit scheme 1964.

Importance of Mutual Funds

36

The Mutual Fund industry has grown at a phenomenal rate in the recent past. One can witness

a revolution in the mutual fund industry in view of its importance to the investors in general

and the country’s economy at large.

The following are some of the important advantages of mutual funds:

Channelizing Savings for Investment : Mutual Funds act as a vehicle in

galvanising the savings of the people by offering various schemes suitable to

the various classes of customers for the development of the economy as a

whole. A number of schemes are being offered by MFs so as to meet the

varied requirements of the masses, and thus savings are directed towards

capital investments directly. In the absence of MFs, these savings would have

remained idle. Thus, the whole economy benefits due to the cost efficient and

optimum use and allocation of scarce financial and real resources in the

economy for its speedy development. Again, MFs prefer less risky

investments.

Offering Wide Portfolio Investment: Small and medium investors used to

burn their fingers in stock exchange operations with a relatively modest

outlay. If they invest in a select few shares, some may even sink without a

trace never to rise again. Now, these investors can enjoy the wide portfolio of

the investment held by the mutual fund. The fund diversifies its risks by

investing on large varieties of shares and bonds which cannot be done by

small and medium investors. This is in accordance with the maxim ‘Not to lay

all eggs in one basket’. These funds have large amounts at their disposal, and

so, they carry a clout in respect of stock exchange transactions. They are in a

position to have a balanced portfolio which is free from risks. Thus, MF’s

provide instantaneous portfolio diversification.

Providing Better Yields: The pooling of funds from a large number of

customers enables the fund to have large funds at its disposal. Due to these

large funds, mutual funds are able to buy cheaper and sell dearer than the

small and medium investors. Thus, they are able to command better market

rates and lower rates of brokerage. So, they provide better yields to their

37

customers. They also enjoy the economies of large scale and can reduce the

cost of capital market participation. The transaction costs of large investments

are definitely lower than that of small investments. In fact, all the profits of a

mutual fund are passed on to the investors by way of dividends and capital

appreciation. The expenses pertaining to a particular scheme alone are charged

to the respective scheme. Most of the mutual funds so far floated have given a

dividend at the rate ranging between 12% p.a. and 17% p.a. It is fairly a good

yield. It is an ideal vehicle for those who look for long term capital

appreciation.

Rendering Expertise Investment Service at Low Cost: The management of

the Fund is generally assigned to professionals who are well trained and have

adequate experience in the field of investment. The investment decisions of

these professionals are always backed by informed judgement and experience.

Thus, investors are assured of quality services in their best interest. Due to the

complex nature of the securities market, a single investor cannot do all these

works by himself or he cannot go to a professional manager who manages

individual portfolios. In such a case, he may charge hefty management fee.

The intermediation fee is the lowest being 1 per cent in the case of a mutual

fund.

Providing Research Service : A mutual fund is able to command vast

resources and hence it is possible for it to have an in-depth study and carry out

research on corporate securities. Each Fund maintains a large research team

which constantly analyses the companies and the industries and recommends

the fund to buy or sell a particular share. Thus, investments are made purely

on the basis of a thorough research. Since research involves a lot of time,

efforts and expenditure, an individual investor cannot take up this work. By

investing in a mutual fund, the investor gets the benefit of the research done

by the Fund.

Offering Tax Benefits: Certain funds offer tax benefits to its customers.

Thus, apart from dividends, interest and capital appreciation, investors also

stand to get the benefit of tax concession.

38

For instance, under section 80L of the Income Tax Act, a sum of Rs. 10,000

received as dividend (Rs. 13000 to UTI) from a MF is deductible from the

gross total income. Under section 88A 20% of the amount invested is allowed

to be deducted from the tax payable. Under the Wealth Tax Act, investments

in MF are exempted up to Rs. 5 lakhs.

The mutual funds themselves are totally exempt from tax on all income on

their investments. But, all other companies have to pay taxes and they can

declare dividends only from the profits after tax. But, mutual funds do not

deduct tax at source from dividends. This is really a boon to investors.

Introducing Flexible Investment Schedule: Some mutual funds have

permitted the investors to exchange their units from one scheme to another and

this flexibility is a great boon to investors. Income units can be exchanged for

growth units depending upon the performance of the funds. One cannot derive

such flexibility in any other investments.

Providing Greater Affordability and Liquidity: Even a very small investor

can afford to invest in Mutual Funds. They provide an attractive and cost

effective alternative to direct purchase of shares.

In the absence of MFs, small investors cannot think of participating in a number

of investments with such a meagre sum. Again, there is greater liquidity. Units

can be sold to the Fund at any time at the Net Asset Value and thus quick access

to liquid cash is assured. Besides, branches of the sponsoring bank are always

ready to provide loan facility against the unit certificates.

Simplified Record Keeping: An investor with just an investment in 500 shares

or so in 3 or 4 companies has to keep proper records of dividend payments,

bonus issues, price movements, purchase or sale instruction, brokerage and

other related items. It is tedious and it consumes a lot of time. One may even

forgot to record the rights issue and may have to forfeit the same. Thus, record

keeping is the biggest problem for small and medium investors. Now, a mutual

fund offers a single investment source facility, i.e., a single buy order of 100

units from a mutual fund is equivalent to investment in more than 100

39

companies. The investor has to keep a record of only one deal with the Mutual

Fund. Even if he does not keep a record, the MF sends statements very often to

the investor. Thus, by investing in MFs, the record keeping work is also passed

on to the Fund.

Supporting Capital Market: Mutual funds play a vital role in supporting the

development of capital markets. The mutual funds make the capital market

active by means of providing a sustainable domestic source of demand for

capital market instruments. In other words, the savings of the people are

directed towards investments in capital markets through these mutual funds.

Thus, funds serve as a conduit for dis-intermediating bank deposits into stocks,

shares and bonds. Mutual funds also provide a valuable liquidity to the capital

market, and thus, the market is made very active and stable. When foreign

investors and speculators exit and re-enter the markets en masse, mutual funds

keep the market stable and liquid. In the absence of mutual funds, the prices of

shares would be subject to wide price fluctuation due to the exit and re-entry of

speculators into the capital market en masse. Thus, it is rendering an excellent

support to the capital market and helping in the process of institutionalisation of

the market.

Promoting Industrial Development: The economic development of any nation

depends upon its industrial advancement and agricultural development. All

industrial units have to raise their funds by restoring to the capital market by the

issue of shares and debentures. The mutual funds not only create a demand for

these capital market instruments but also supply a large source of funds to the

market, and thus, the industries are assured of their capital requirements. In fact

the entry of mutual funds has enhanced the demand for India’s stocks and

bonds. Thus, mutual funds provide financial resources to the industries at

market rates.

Acting as Substitute for Initial Public Offerings (IPOs): In most cases

investors are not able to get allotment in IPOs of companies because they are

often oversubscribed many times. Moreover, they have to apply for a minimum

of 500 shares which is very difficult particularly for small investors. But, in

40

mutual funds, allotment is more or less guaranteed. Mutual funds are also

guaranteed a certain percentage of IPOs by companies. Thus, by participating in

MFs, investors are able to get the satisfaction of participating in hundreds of

varieties of companies.

Reducing the Marketing Cost of New Issues: The mutual funds help to reduce

the marketing cost of the new issues. The promoters used to allot a major share

of the Initial Public offering to the mutual funds and thus they are saved from

the marketing cost of such issues.

Keeping the Money Market Active : An individual investor cannot have any

access to money market instruments since the minimum amount of investment is

out of his reach. On the other hand, mutual funds keep the money market active

by investing money on the money market instruments. In fact, the availability of

more money market instruments itself is a good sign for a developed money

market which is essential for the successful functioning of the central bank in a

country.

Thus, mutual funds provide stability to share prices, safety to investors and resources to

prospective entrepreneurs.

41

DIFFERENT TYPES OF MUTUAL FUND SCHEMES.

Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme

depending on its maturity period.

Open – ended Fund/Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a

continuous basis. These schemes do not have a fixed maturity period investors can

conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared

on a daily basis. The key feature of open-ended schemes is liquidity.

Close – ended Fund/Scheme

A close-ended fund or schemes has a stipulated maturity period e.g. 5 – 7 years. The fund is

open for subscription only during a specified period at the time of launch of the scheme.

Investors can invest in the scheme at the time of the initial public issue and thereafter they

can buy or sell the units of the scheme on the stock exchanges where the units are listed. In

order to provide an exit route to the investors, some close-ended funds give an option of

selling back the units to the mutual fund through periodic repurchase at NAV related prices.

SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor

i.e. either repurchase facility or through listing on stock exchanges. These mutual funds

schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme

considering its investment objective. Such schemes may be open-ended or close-ended

schemes as described earlier. Such schemes may be classified mainly as follows:

42

Growth/Equity Oriented Scheme

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

Such schemes normally invest a major part of their corpus in equities. Such funds have

comparatively high risks. These schemes provide different options to the investors like

dividend option, capital appreciation, etc. and the investors may choose an option depending

on their preference. The investors must indicate the option in the application form. The

mutual funds also allow the investors to change the options at a later date. Growth schemes

are good for investors having a long term outlook seeking appreciation over a period of time.

Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes

generally invest in fixed income securities such as bonds, corporate debentures, Government

securities and money market instruments. Such funds are less risky compared to equity

schemes. These funds are not affected because of fluctuations in equity markets. However,

opportunities of capital appreciation are also limited in such funds. The NAV’s on such funds

are affected because of change in interest rates in the country. If the interest rates fall, NAVs

of such funds are likely to increase in the short run and vice versa. However, long term

investors may not bother about these fluctuations.

Balanced Fund

The aim of balanced funds is to provide both growth and regular income as such schemes

invent both in equities and fixed income securities in the proportion indicated in their offer

documents. These are appropriate for investors looking for moderate growth they generally

invest 40 – 60% in equity and debt instruments. These funds are also affected because of

fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to

be less volatile compared to pure equity funds.

Money Market or Liquid Fund: These funds are also income funds and their aim is to

provide easy liquidity, preservation of capital and moderate income. These schemes invest

exclusively in safer short term instruments such as treasury bills, certificates of deposit,

commercial paper and interbank call money, government securities, etc. returns on these

schemes fluctuate much less compared to other funds. These funds are appropriate for

corporate and individual investors as a means to park their surplus funds for short periods.

43

Gilt Fund

These funds invest exclusively in government securities. Government securities have no

default risk. NAVs of these schemes also fluctuate due to change in interest rates and other

economic factors as in the case with income or debt oriented schemes.

Index Fund

Index funds replicate the portfolio of a particular index such as the BSE sensitive index, S&P

NSE 50 index (Nifty), etc these schemes invest in the securities in the same weight age

comprising of an index. NAVs of such schemes would rise or all in accordance with the rise

or fall in index, though not exactly by the same percentage due to some factors known as

“tracking error” in technical terms. Necessary disclosures in this regard are made in the offer

document of the mutual fund scheme.

44

Structure of Mutual Fund

The SEBI (Mutual Fund) Regulations 1996 a mutual fund as a fund established in the form of

a trust by a sponsor to raise monies by the trustees through the sale of units to the public

under one or more schemes for investing in securities with the regulations.

The structure consists of:

Sponsor: Sponsor is a person who acting alone or in a combination with another body

corporate establishes a mutual fund and registers it with SEBI. 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 forms a Trust and appoints a Board of

Trustees. The Sponsor appoints the custodian and the Asset Management Company

either directly or indirectly through the Trust, in accordance with SEBI regulations.

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.

Trust: Mutual Fund is constituted as a trust in accordance with the provisions of the

Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian

Registration Act, 1908.

Trustee: Trustee is usually a company (corporate body) or a Board of Trustees (body

of individuals). The main responsibility of the trustee is to safeguard the interest of

the unit holders and inter alia ensure that the AMC functions in the interest of

investors and in accordance with the SEBI (Mutual Funds) Regulations, 1996, the

provisions of the Trust Deed and the Offer Documents of the respective schemes. At

least 2/3rd directors of the Trustee are independent directors who are not associated

with the Sponsor in any manner.

45

Rights of Trustees

1. Approve each of the schemes floated by the AMC.

2. The right to request any necessary information from the AMC.

3. May take corrective action if they believe that the conduct of the fund’s business is

not in accordance with SEBI regulations.

4. Have the right to dismiss the AMC.

5. Ensure that, any shortfall in the net worth of the AMC is made up.

Asset management company (AMC): The AMC acts as an investment manager of

the trust under the supervision and direction of the trustees. The AMC is required to

be approved by the Securities and Exchange Board of India (SEBI) to act as an asset

management company of the mutual fund. At least 50% of the directors of the AMC

are independent directors who are not associated with the sponsor in any manner. The

AMC must have a net worth of at least 10 crores at all times.

Registrar and Transfer Agent: The AMC is of authorized by the Trust Deed

appoints the registrar and transfer Agent to the mutual funds. The registrar processes

the application form; redemption requests and dispatches account statements to the

unit holders. The Registrar and Transfer agent also handles communications with

investors and updates investor records.

Custodian: The custodian has the responsibility of physically hand lint and safe

keeping of securities. The custodian is independent of the sponsors and is registered

with SEBI.

Depositories: Indian capital markets are moving away from physical certificates for

securities to ‘dematerialized’ form. This is done by depository. The depository will

hold the dematerialized security holdings of the mutual fund.

46

Role of Mutual Funds in Financial Planning

A Financial Plan involves various steps: gathering and processing information, establishing

goals and setting objectives, drawing up, implementing and finally, monitoring the plan.

While the initial steps leading up to it are important, the success of any financial plan

depends on how well you implement it. You could say implementation is probably the most

difficult stage: lack of access to the right securities or investments across desired asset

classes, difficulty in rebalancing a portfolio due to the illiquid nature of some investments

and lack of time to continuously track a portfolio are some of the key challenges that

individuals face while implementing a financial plan. However, it is relatively easy to

overcome most of these challenges with the innovative products and facilities that mutual

funds have started offering in recent times. Here are some reasons why you could consider

investing in mutual funds to help you implement a financial plan successfully.

Wide range of products across asset classes

Whether you are planning for retirement or children's education, you are most likely to need

an allocation across different asset classes in order to earn returns at a risk level that you are

comfortable with. These could include domestic equities, emerging market equities, global

equities, bonds, cash, commodities, real estate, gold, etc. It is possible to invest in some of

these directly, but for individuals, it is difficult to access some investments, such as bonds,

for instance. More importantly, investing calls for time and specialized skills. For example,

individual investors may have direct access to equities, but to choose stocks, you need time

and talent in order to track companies, their performance and growth plans, etc. Investing in

mutual funds makes investing simple as they offer you a variety of products - from the basic

diversified equity funds to the more sophisticated real estate funds and exchange traded gold

funds - that can help you implement your financial plan.

Flexibility

Financial planning does not end once you construct your desired portfolio. Monitoring

investments at regular intervals and rebalancing is equally important. If there is a cost

involved in liquidating your investments, it may affect overall performance of your portfolio.

For this reason, it makes sense to invest in relatively liquid options that can help you to

47

redeem your investments, if required. Also, while rebalancing, you may need to make

incremental investments in some asset classes. Most mutual funds offer both these facilities

thereby making the process of portfolio rebalancing a lot easier.

Diversification

Diversification is an important requirement of any investment strategy. Mutual funds ensure

diversification within and across asset classes, across securities, across geographies and also

across fund managers - if diversification in investment styles is what you are looking for. For

example, the fund manager of an equity fund could focus only on large caps or may invest

across all market caps. Or, there could be a fund manager who focuses on value investing or

growth investing or a blend of both. As different investment styles often work at different

points in a market cycle, investing in multiple funds managed by different fund managers

provide "style diversification" to the investment strategy.

Mutual funds facilitate regular investment

If you earn a regular income like a salary, you may prefer to invest a certain amount at

regular intervals. The Systematic Investment Plan (SIP) facility offered by mutual funds is

one of the best ways to make such regular investments for your long-term goals. Since SIP

investments can be as little as Rs. 500 per month, you can also diversify across different types

of funds. For example, if you are planning for a retirement corpus of Rs. 10,000,000 after a

20-year period and if you expect equities to deliver 15% cumulative returns, you could

consider investing Rs. 8000 every month in diversified equity funds over the next 20 years.

(This example is for illustration purposes only. You may actually need to reduce your

exposure to equities as you approach retirement. Also, the actual return that you earn on

equity investments could be more or could be less than 15%).

48

Ways of Investing In Mutual Funds

There are two ways of investing in mutual fund.

1. Lump sum  Investment

2. Systematic Investment Plan ( SIP)

  Lump Sum Investment

  Systematic Investment Plan (SIP)

  Expanation

  Process of Systematic Transfer Plan

  Benefits of Systematic Transfer Plan

  SIP OR LUMPSUM Investment In The Current Market Conditions

Lump Sum Investment : Also known as Online Payment. When you put in a substantially large sum

of money in a mutual fund and subsequently gain a number of units of that fund based on the Net

Asset Value of the fund at the time of buying is what we know as a lump sum investment.

Systematic Investment Plan (SIP): Also known as Periodic Investment. It’s a scheduled investment

done periodically in a mutual fund. That means that, every month, you commit to invest say, Rs

1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund.

Explanations: The SIP is the best direction to invest with regular cash flows. But what if someone

has an enormous corpus and plans to invest in equities and at the same time is worried about the

widespread uncertainty in the market? Still, the systematic investment route remains the most

excellent vehicle to move forward. The gains could be improved by opting for a systematic transfer

plan (STP) all along with the SIP. STP allows one to make cyclic transfers from one fund into

another.

In an SIP, an investor characteristically parks the money in a bank savings account and a certain

amount is transferred at a regular interval from the savings account to the fund house for buying into

49

a specified equity fund.

In the case of an STP, the lump sum is invested in a liquid or a balanced short-term plan and is

transferred at regular interval to a specified equity fund. For an illustration, one has Rs 60,000 to

invest in equities; he can put the entire amount in a liquid plan and go for a monthly SIP of Rs 5,000

in an equity plan through a systematic transfer. However, the drawback of this investment process is

its inability to invest in different fund houses. So, if you have an equity fund to invest through the

SIP approach, you would have to choose the liquid fund of the identical fund house. But with slight

difference in returns among different liquid funds and it’s approximately risk free status, STP is still

a better stake.

Despite the fact that an investor earns only around 3.5% pa interest on the amount parked in the

savings account, a liquid fund gives a higher return of 5-7% pa on the corpus with the same level of

liquidity. Since these funds invest in safe and liquid debt instruments, the level of risk remains very

low.

“An STP helps you accomplish your financial goals by investing a fixed sum in your preferred fund

for a pre-determined number of installments. We would recommend the STP option to those sitting

on cash hand not defective to take the risk of lump-sum investment in the equity market.”This helps

take the edge off any risk arising from volatility or improve the fund’s returns in a boom. Thus, an

investor can match his risk enthusiasm with that of the equity scheme.

To this point, 48 investors have opted for the facility. Lowest edge to transfer from liquid fund to

equity schemes is Rs 10,000 while the highest edge is Rs 5 lakh. An STP is best suited when markets

have worn out or are volatile and uncertain. Through it, an investor takes advantage of the reasonably

consistent returns of debt while banking on the potential of equities to create wealth for him in the

long term.

“STP is definitely going to achieve ground as aspirations, possibilities and opportunities increase

among the youth. I am sure that questions pertaining to efficient management of their wealth would

be answered by STP and many such other facilities.” Industry experts see a relationship between

systematic transfer plan and systematic investment plan but both the options fluctuate from each

other by way of nature of cash flow.

“STP is as good as an SIP and a better option for investors with large amounts to invest. An SIP is

50

targeted at investors with small regular cash flows. STPs are for investors with large unplanned cash

flows.” Nevertheless, fund managers feel, STP is yet to be promoted in India to its full coverage.

Investors need to be sufficiently informed about it.

Systematic Transfer Plan (STP) is a package of transaction options, which aims toward offering you

a rate free, disciplined and efficient investment solution in all types of existing schemes in the

market. Transfer either a fixed sum or just the appreciation accrued. By transferring only the

appreciation in a scheme, you can guard your capital

The continued ambiguity in the financial markets has led to a situation where investors are frightened

about their investments and its performance. It is during these hard times that the various strategies

available to the investor can be used to accomplish their objectives.

One significant strategy is the use of the systematic transfer plan to structure their mutual fund

investments. This can be used very effectively by the investor to make sure that they are getting the

best out of the money invested.

The Systematic Transfer Plan (STP) has some features alike to a Systematic Investment Plan (SIP)

that is quite recognized to the investors. The final objective is a regular investment into equities that

takes place on a monthly basis. However, there are times when the investor already has a lump sum

and something more has to be done in order to ensure that the money earns good returns.

This will involve the practice of ensuring that this lump sum is invested properly at the initial

juncture and then there is an amount that is transferred to equities in a regular approach. This will

help the investor accomplish a buildup in their portfolio of equities with a small amount of risk.

Process of Systematic Transfer Plan

The process of the entire STP is very important because it enables the investor to make the best use

of the money that is already present with them. The investor would want to invest the available

amount into equities, but they could be faced with a typical problem.

On one occasion investment into equities might turn out to be very costly, because this will

concentrate the investment risk at one particular point of time. The main plan in such a situation

would be to ensure that the initial lump sum amount is invested into debt and from this debt there is a

transfer of a regular sum of money each month into equities.

51

This will guarantee that the aim of achieving a regular investment into equities is done and at the

same time there is also the protection of the investment in the interim time period.

There have been a bunch of upheavals as far as the debt mutual funds are concerned because of the

increase in the yields that have been witnessed in the Market. In such a situation, the investor has to

make certain that the debt investment does not have any risk. The debt investment will be into funds

that do not carry much of a risk of a decline in value. This will signify selecting liquid or money

Market Mutual funds that will usually not see wearing away in the value of the investment.

The transfer then is done to an equity-oriented scheme each month by giving the required

instructions to the mutual fund. This ensures that the entire process is completed automatically each

month because the commands will not have to be given each month and at the same time the process

is completed effortlessly without much of a problem.

Benefits of Systematic Transfer Plan

There are a small number of benefits of this entire process for the investor that has to be taken into

consideration. First of all, there is the averaging out of the cost in the equity investment just like a

SIP, because the investment is made regularly each month. This ensures that there is an efficient

manner of buying into the units of the equity scheme.

The additional benefit is that the investment till the time of the transfer earns a higher rate of return

than the normal amount that would be earned had the money been left in a savings bank account. The

return for liquid funds is higher than the savings bank interest and this will promote the investor in

terms of a higher return.

There is also the easiness of the process and the fact that the entire requirement of the investor is

being completed effortlessly without much of administrative work. All this is helpful for the investor

as they are comfortable with the process.

Wealth creation out of capital market can be very tough and uncontrollable task. The people who

earn through capital markets have to give large amount of time to understand its every aspect. But

with mutual funds, investing in capital market has become all the further simpler and less risky. If

followed methodically it also lead to wealth creation. Systematic investment plan, S.I.P is been

52

termed as a pathway to wealth creation due to its feature of disciplined and long term nature. Capital

markets are made up of a lot of different investors who participate in it. There are bulky institutions,

such as fund houses, as well as companies, brokers and individual investors. Over the long-term, the

financial market can do better but in the short- term, prices rise and fall on many accounts but the

basis of fluctuation are quiet similar like fundamental reasons like company news, market sentiment,

expectations, rumor or competitor activity.

There are statistical measures and techniques, such as price-earnings ratios, which help determine the

true value of a stock or bond, but many times in the financial market rational measures are often

unnoticed and sentiment can take over.

Deciding when to invest in this environment can be a traumatic task. If the market is doing better you

may fear that you’re buying when prices are too high. By contrast, when the market is falling, there

is a lack of enthusiasm to invest due to fears that it may fall further. So what should an investor need

to do in order to keep away from having to make these timing decisions?

Many a times by the time a common investor realize that its time to invest, the market is already at

its hit the highest point. The Systematic Investment Plan is not a kind of mutual fund. It is a

technique of investing in a mutual fund. Systematic investment plan is generally known as SIP. SIP

is a good way to invest as it leads to regimented and regular investment.

When you purchase the units of a fund, you may do so when the NAV is really high. For occasion,

let's say you bought the units of a fund when the market is at its hit the highest point, leading to an

elevated NAV. If the market drops after that, the value of your investments falls and you may have to

remain for a long while to make a return on your investment. But, if you invest through a SIP, you do

not entrust the mistake of buying units when the market is at its peak. In view of the fact that you are

buying small amounts continuously, your investment will average out over a period of time.

Investing on a regular basis removes the nervous tension of “timing the market” because you are

employing the concept of “Rupee Cost Averaging”. If you are an investor in mutual funds it means

that you buy additional units when the purchase price is low and smaller quantity units when the

purchase price is high. The trap to all this is to remember that it’s not the cost you pay for each unit

that matters. It’s the average price per unit over time that determines you’re by and large return. This

will be lesser than the cost accrued to lump sum investment.

More over a systematic investment carry definite other benefits for the investors like diversifying the

53

risk. If you are investing regularly then the oscillation in the market won’t give heart ache to the

investor as the investment is not done lump sum. The investor spreads out his risk through the

pathway of SIP.

The quantity to be invested to get started is very less and therefore it is in everybody’s reach. Some

persist the SIP must be done every month. Others give you the alternative of investing once in three

months or once in six months. Similarly investor can keep away from timing the market by

withdrawing constant amounts periodically (Systematic Withdrawal Plan), or systematically

transferring investment between diverse schemes (Systematic Transfer Plan).

Would you like to have access to the SIP calculators which are designed to help investors in

analyzing different scenarios for automatic investment plan, which include: Your sip need, your sip

amount, sip return

You can put different information/amount for generating different results and know how secured

your financial future would be if you invested 1000 every month opening this month, for the next

20years and you are expecting a return of 20%(I have taken the minimum consideration, some funds

give 35% to 50% return for such medium/long term investments) and the total amount that you will

be receiving at the end 20 years will be: 2476194.Your overall investment for 20 years was 240000.

SIP OR LUMPSUM Investment In The Current Market Conditions

In a positive market scenario, a lump sum investment would earn remarkably as the investor would

have purchased a huge number of units and so with the increase in NAV, it will fetch higher profits.

As SIPs would be a scattered investment, so the returns would be considerably lower.

Looking at the present market condition, it doesn’t seem a promising prospect to opt for a lump sum

investment. In a volatile market, an SIP definitely wins hands down, as an investor would have a

chance to purchase more number of units of a fund when the value is less.

If a person goes for SIP he is benefited from a phenomenon known as "rupee cost averaging", no

matter how markets are performing:

If the market goes up, the units you already own will increase in value.

If the market goes down, your next payment will buy more units. Thereby, a lump sum

54

investment will get fixed units of the fund while an SIP will get various units of the fund on a

monthly basis according to the current Net Asset Value. A lump sum investment would see

returns in extremes, which is either a high or a low. On the other side, with an SIP, investor

will achieve a steady return. Even when the market is dismal, an investor earns by the units

bought. This can be seen in the table given below; a lump sum investor will get 3000 units for

Rs60000 whereas by opting for SIP, investor will receive 3110 units for the same amount

invested.

LUMP SUM

INVESTOR

REGULAR SAVER

Month Unit

Price

(Rs.)

Amount

invested

(Rs.)

Units

bought

Amount

invested

(Rs.)

Units bought*

1 20 60,000 3,000 10,000 500

2 18 10,000 556

3 14 10,000 714

4 22 10,000 455

5 26 10,000 385

6 20 10,000 500

Total invested 0 60,000 60,000

Average price

paid

0 20 19

Total units bought 0 3,000 3,110

Value of

investment after

six months

0 60,000 62,200

55

Recent Developments in Mutual Fund

Gold Exchange Traded Funds

The modern international method of investing in gold is via gold mutual funds. India has now up

in this area.

In his Union Budget for 2005-06, Finance Minister P. Chidambaram had proposed that SEBI

should permit mutual funds to introduce Gold Exchange Traded Funds (Gold ETFs) with gold as

the underlying asset. According to the Budget proposals, the scheme would enable households to

buy and sell gold in units for as little as Rs. 100 and such units could be traded in the same manner

as units of mutual funds.

In Gold Exchange Traded Fund (Gold ETF), the underlying asset is exclusively gold bullion, and

not a basket of stocks as is the case of equity ETFs. Gold ETFs are shares or units of gold that are

owned by investors and are fully backed by gold bullion bars held by a custodian. Like other ETFs,

they are traded on a stock exchange.

Gold ETFs allow investors to buy gold in small increments. In the global market, one unit

represents one-tenth of an ounce fine gold (1 oz-28.35 grams). If an investor in the fund holds 100

units, the fund must have physical gold worth 10 ozs. The value of the unit will move in

accordance with the price of gold. Just like mutual funds, the value per unit will be the total value

of the gold held, divided by the number of units, minus the expenses of the fund. Gold ETFs, like

any share, can be traded and bought by the investors through their stockbrokers. They can be used

for speculating in the short-term for betting on the price of gold, or it can be used for long-term

investing. Just like the ETFs, Gold ETFs can be open-ended funds or closed ended funds.

Gold Exchange Traded Funds(ETFs) In India

The first proposal of a gold exchange traded fund was initiated by an Indian company called

56

Benchmark Asset Management; a proposal was launched with the SEBI (Securities Exchange

Board of India) in 2002. This proposal was not approved at that time.

The Australia Stock Exchange was the first to launch a gold exchange traded fund in 2003 by Gold

Bullion Securities under the symbol ‘GOLD’. This fund was fully backed, insured and deposited

by gold bullion.

Benefits Of Trading In Gold ETFs

In ETF’s investors have the opportunity of buying as less as 1 unit on the exchange. Investors

don’t have to pay entry or exit load and expenses on brokerage are less. Here gold ETF’s score

over mutual funds as in case of later investor has to bear defined load structure, entry and exit

loads and other expenses.

If you take a look at gold prices in the past few months, they have been moving in just one

direction that is upwards. From Rs 10, 650 for 10 grams last January 2008, the price has moved to

more than Rs15,000 today. Gold price is at a seven month high and is up by 10 per cent since

January this year. The World Gold Council reports that global demand was up by 4 per cent in

2008. Gold and stock markets have negative correlation, which can be witnessed in the current

scenario where volatility in stock markets has led to sky rocketing gold prices. In 2009 itself Gold

ETFs have outperformed gold mutual funds. ETFs have given 29 per cent returns in 2008 and over

8 per cent till now in 2009. In this current financial turmoil investing in shining yellow metal turns

out to be the safest bet.

Why should an investor invest in Gold ETF?

There is nothing to worry on adulteration

Gold provides diversification to the portfolio

Gold is considered as a Global Asset Class

Gold is used as a Hedge against Inflation

Gold is considered to be less volatile compared to equities

Held in Electronic Form

Store of value

Extremely Liquid

57

 

Advantages Of Investing In Gold ETFs

Potentially cheaper to have price exposure to gold price as compared to other available

avenues

Quick and convenient dealing through demat account

No storage and security issue for investors

Transparent pricing

Taxation of Mutual Fund

Can be traded on stock exchange like buying / selling a stock

Ideal for retail investor as minimum lot size to trade is one unit on secondary market

NAV of a unit will track price of approximately ½ or 1 gram of gold.

58

SWOT Analysis of Mutual Funds

STRENGTHS

Large number of potential customers as base.

Government support by way of tax concessions for MF investors.

Sophisticated capital market.

Volatility of bank interest rate.

Vital source of capital formation.

Better scope for accessing market information.

Offer liquidity to the investors at any time.

Offer variety of products such as equity, debt and balanced schemes to the investors to

suit their risk appetite and time horizons.

The size of the market is very large.

WEAKNESSES

59

Poor participation of retail investors.

There is a very high degree of discomfort along with uncertainty.

Lack of focus.

Leadership vacuum.

Under performance.

Inability to scale up.

Unclear value proposition.

Overemphasis on funds under management.

Strategic vacuum.

Poor service conditions.

Distribution network is confined only to metro cities.

Increasing NPAs in the portfolio.

OPPORTUNITIES

Huge untapped market in semi-urban and rural areas.

60

High level of savings habit among the people.

Liberalized business environment.

Increasing number investors have begun turning toward money market instruments of

mutual funds.

Using on-line mode of trading system.

Linkage of ATMs for cash withdrawal is ongoing.

Consolidation in the industry is in progress.

Investment opportunities abound in the international market.

Failures of non-bank financial company operations.

THREATS

Increasing competition among the players.

61

High level of volatility in the stock market.

NAVs are highly sensitive to internal and market factors.

Possibility of more stringent regulations by SEBI, RBI, AMFI etc., in future.

Future Scenario of the Mutual Fund Industry

In the four decades of its existence in India, the mutual fund industry has gone through

several structural changes. The mutual fund industry in India has been roll as the assets under

management continues to see a strong spurt in growth. Apart from this, the industry has also

seen a spurt in the number of schemes catering to varied needs of investors. A booming

62

economy and a conductive regulatory environment and other factors have added to the

growth of an industry. Given the huge opportunity in the market, which is higher if one

considers the untapped and growing income levels in the country, the industry’s future looks

bright.

A mutual fund is an alternative investment avenue for investors, especially in a scenario

where the interest rates are falling. The only thing is that an investor should bear in mind that

investment in mutual funds is not risk-free, unlike a bank deposit. It carries a certain amount

of risk and one has to accordingly weigh the risks and returns, and the investment objectives.

Though there are around 30 players operating in the industry, the competition is limited.

There is nothing like competition between the public and private sector, as all players operate

in the same environment. Mutual Funds players formulate their strategies to have a share of

the growing market. They develop their products for both the mass and niche markets,

considering clients’ financial goals, risk-taking ability and time duration. They meticulously

segment and target their customers and position their products according to their needs. There

is a remarkable change in the promotional activities taken up by mutual fund players.

AMCs now opt for the services of large distributors to sell their products by leveraging their

value chain, which comprises of a broker, sub-brokers and agents. The AMCs also use banks

and Non-Banking Financial AMCs as distribution channels to leverage their reach and huge

client base. Mutual fund players also make use the Internet to distribute products because of

the cost advantages and increased communications.

Even as the number of funds operating in India is high, the penetration of the industry is

significantly low. So there is a huge market available in the country for channelizing the

savings of the people into mutual funds. Currently, mutual funds are concentrating on the

urban market and it is incumbent on them to take proper steps to study the rural population

and its investing capability before penetrating the rural market.

63

ANALYSIS STUDY

64

This analysis study is based on the comparative study and the performance of five equity

funds, five income funds, five balanced funds, five MIP funds with that of market (Sensex),

CCIL tri index, government security yield, GDP(growth rate) and inflation.

The data are taken from the year 2006 to 2011. The NAV of equity funds are taken from Jan

2006 and it’s taken on quarterly basis. Which means Jan ’06, Apr’06, Jul ’06, Oct ’06….and

so followed till June 2011. These values are then arranged and further quarterly return, half

yearly return and yearly return is calculated, and finally average return is calculated, and then

ranking is done on the basis of Sensex average quarterly return, quarterly return and yearly

return.

ASSUMPTIONS:

This analysis is based the data taken from the year 2006 to June 2011.

The analysis is based on a quarterly basis and not on a daily basis and finally average

quarterly, half- yearly and yearly returns are calculated.

The sensex values, the sensex (P/E) ratios are obtained from BSE india.com website.

The bond index value is obtained from the CCIL bond index website

The bond index values are taken from CCIL bond tri index

The inflation datas are obtained from economic India survey website

All the datas are taken for the first day of the month, and if by chance the first day of

the month is Sunday or holiday then the day closest to holiday the value is taken for

the working day.

The following data are the rankings:

65

RANKING ON THE BASIS OF AVERAGE RETURN

EUITY FUNDS

QUARTERLY RETURN

HALF-YEARLY RETURN

YEARLY RETURN RANKS

MAGNUM CONTRA 7.29% 15.10% 42.98% 1

DSBR TOP 100 6.08% 12.75% -46.66% 5

RELIANCE GROWTH -0.18% 14.06% 39.94% 4

HDFC EQUITY 6.28% 12.85% 35.97% 2

BIRLA FRONTLINE 6.27% 13.35% 37.84% 3

BSE SENSEX 4.44% 9.70% 28.18%  

66

Graph: Ranking on the basis of Average return.

ANALYSIS:

SBI Magnum Contra ranks number one among the five equity funds. The average quarterly

return, average half yearly return and average yearly return when compared with that of

sensex average return is the highest when compared with that of other four equity funds. This

means if market is giving return of 4.44% then Magnum Contra will yield 7.29% with

2.85%(7.29%-4.44%) return on quarterly basis…. So the overall comparison is highest in

case of SBI Contra.

67

INCOME FUNDSQUARTERLY RETURN

HALF -YEARLY RETURN

YEARLY RETURN RANKS

BIRLA INCOME PLUS 2.23% 4.51% 10.08% 2

ICICI INCOME 2.36% 4.82% 10.45% 1

MAGNUM INCOME 1.04% 2.07% 3.96% 4

LIC BOND 1.89% 3.82% 7.96% 3

BARODA INCOME 1.01% 2.03% 3.82% 5

CCIL TRI INDEX 1.55% 3.18% 6.36% RANKING ON THE BASIS OF AVERAGE RETURN

68

Graph: Ranking on the basis of average return of Income funds.

Analysis:

ICICI income fund ranks number one when compared with other income funds. The returns

are compared with that of CCIL bond Index. For this CCIL TRI INDEX values are taken and

its average quarterly, half yearly and yearly returns are calculated. The returns of the income

funds when compared with that of bond index data then ICICI Income ranks number one and

Baroda Income ranks the least. Although ICICI income fund and Birla Income plus fund

gives a very negligible difference result but still ICICI ranks number one among the Income

funds.

69

RANKING ON THE BASIS OF AVERAGE RETURN

BALANCED

QUARTERLY

RETURN

HALF-

YEARLY

RETURN

YEARLY

RETURN RANKS

MAGNUM

BALANCED 4.32% 9.15% 25.60% 5

HDFC

PRUDENCE 5.66% 11.56% 26.07% 1

HDFC

BALANCE 4.58% 9.30% 22.80% 4

DSPBR 4.99% 10.31% 27.90% 2

RELIANCE 4.81% 10.07% 25.33% 3

BSE SENSEX 4.44% 9.70% 28.18%  

CCIL INDEX 1.55% 3.18% 6.36%  

70

Graph: Ranking on the basis of average return of balanced funds.

Analysis:

Now this is the case of balanced funds, where the fund is balance between debt and equity.

The distribution of debt is 65% and that of equity is 35%. Hence the fund is known as

balance fund. Hence to compare the performance of the fund we need to compare the average

returns of the fund with both CCIL bond index as well as BSE Sensex return.

HDFC prudence ranks number one among the performance of the balanced funds.

Although there are two funds from HDFC fund house which are HDFC prudence and

HDFC balance but both of their performance differs…although the values does not

vary so much but this values when compared in the long run and compared to other

balance funds and Sensex and CCIL Bond tri index then I find HDFC prudence ranks

number one and HDFC balance ranks number four which sounds a great

diversification in the performance of balanced fund in HDFC mutual fund house.

Now HDFC prudence yearly return is less than that of DSPBR but still I rank HDFC

prudence higher then DSPBR as I find DSPBR quarterly and half yearly average

return yield is less as compared to that of HDFC prudence and hence to look at the

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overall performance of the fund then HDFC prudence is ranked as number one among

the performance of various balanced funds.

72

MIP

QUARTERLY

RETURN

HALF-

YEARLY

RETURN

YEARLY

RETURN RANKS

RELIANCE 3.07% 6.23% 13.57% 1

SBI MIP 1.31% 2.61% 5.35% 5

HDFC MIP STP 1.72% 3.49% 7.44% 4

TATA MIP

PLUS 1.80% 3.65% 7.71% 3

ICICI MIP 2.12% 4.03% 9.16% 2

BSE SENSEX 4.44% 9.70% 28.18%  

CCIL TRI

INDEX 1.55% 3.18% 6.36%  

Table: Ranking on the basis of average return of MIP funds

73

Graph: Ranking on the basis of average return of MIP funds.

Analysis:

MIP funds stands for monthly income plan funds. In case of MIP funds it’s also a mixture of

both debt as well as equity. But the proportion of debt is much more as compared to that of

equity. Here debt is around 85% and equity is around 15%.Hence it can be easily said that

MIP funds are risk free funds when compared to equity funds. Here also to compare the

performance of various MIP funds we need to compare the returns of the following funds to

that of BSE Sensex as well as CCIL tri index.

RELIANCE MIP ranks number one among the performance of the MIP funds.

Although no fund has crossed the market return value but mostly all the index values

are crossed over.

As percentage of equity is very less in case of MIP funds hence the returns generated

by the MIP funds is very less when compared to the market Sensex return.

The returns generated by RELIANCE MIP is more as compared to other MIP funds

with those of market BSE Sensex and that of CCIL bond tri index.

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SBI MIP ranks the least when compared with other MIP funds and market Sensex and

CCIL bond tri index.

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Interpretations of BSE sensex and that of CCIL bond tri index

This comparison is taken from the year 2006 onwards till June 2011. This is done on a

quarterly basis. However there is a huge difference in the values of BSE sensex and that of

CCIL tri index.

The sensex value gives us the market equity values and the CCIL bond tri index gives

the debt values.

There is a huge difference between the market BSE sensex values with that of CCIL

bond tri index values.

Mostly all the values of BSE sensex are about 10-15% higher than those of CCIL

bond tri index values.

The market sensex reaches its highest value on 1st Jan ’08 which is “20286.99” and

the most interesting thing is that the least market sensex value is on 1 st Jan ’09 that is

just after one year with value “9647.31”.

This means the alpha between this ranges is “10639.68” which is a huge value, and

hence justifies the high volatile nature of the market

For the year 2009 the market return shows an increasing trend and rest all the years it

shows a fluctuating trend.

The CCIL tri index values are also showing a fluctuating trend.

The CCIL tri index is also highest for the day 1st Jan ’09 and is least for the date 1st

July ’06.

The CCIL tri index value is showing an increasing trend for the year 2010.

On 1st Jan ’09 we have both the highest CCIL tri index as well as the BSE sensex.

Hence this is a nice day for any investor who wants to withdraw money which he has

purchased to invest in any funds.

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Findings

SBI Magnum Contra ranks number one among the five equity funds. The average

quarterly return, average half yearly return and average yearly return when compared

with that of sensex average return is the highest when compared with that of four

other equity funds. So the overall comparison is highest in case of SBI Magnum

Contra.

ICICI income fund ranks number one when compared with other income funds. The

returns are compared with that of CCIL Bond Index. For this CCIL TRI INDEX

values are taken and its average quarterly, half yearly and yearly returns are

calculated. The returns of the income fund when compared with that of bond index

data then ICICI income ranks number one.

HDFC prudence ranks number one among the performance of the balanced funds.

Although there are two funds from HDFC fund house which are HDFC prudence and

HDFC balance but both of their performance differs…although the values does not

vary so much but this values when compared in the long run and compared to other

balance funds and Sensex and CCIL Bond tri index then I find HDFC prudence ranks

number one and HDFC balance ranks number four which sounds a great

diversification in the performance of balanced fund in HDFC mutual fund house.

Now HDFC prudence yearly return is less than that of DSPBR but still I rank HDFC

prudence higher then DSPBR as I find DSPBR quarterly and half yearly average

return yield is less as compared to that of HDFC prudence and hence to look at the

overall performance of the fund then HDFC prudence is ranked as number one among

the performance of various balanced funds.

RELIANCE MIP ranks number one among the performance of the MIP funds.

Although no fund has crossed the market return value but mostly all the index values

are crossed over. As percentage of equity is very less in case of MIP funds hence the

returns generated by the MIP funds is very less when compared to the market Sensex

return. The returns generated by RELIANCE MIP is more as compared to other MIP

funds with those of market BSE Sensex and that of CCIL bond tri index. SBI MIP

ranks the least when compared with other MIP funds and market Sensex and CCIL

bond tri index.

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Summary

The journey of mutual funds began, in 1822. Four decades later, in 1868, the mutual fund

caravan reached England with the setting up of the Foreign and Colonial Government Trust.

In the United States, the first mutual fund was launched in Boston in 1924. The take off of

mutual funds was however not spectacular. Two factors contributed to their slow growth.

One, a number of close-ended mutual funds bombed in the market. And two, the great crash

of 1929. These factors killed public interest in the funds. It was only in 1940 that a formal

attempt at regulating the functioning of mutual fund was made. But the publics’ enthusiasm

was soon snuffed out as the market collapsed in 1969-70. The number of mutual funds grew

during 1940-1990. Since the beginning of 1991, more than half a trillion dollars have been

invested in units and share of mutual funds. According to Wall Street estimates, by 2000 AD

the US funds alone would have crossed the 4,000 billion dollar barrier. The sharp growth in

the assets reflects the underlying strong demand, implying that mutual funds are a superior

vehicle for meeting genuine investment needs. The mutual fund industry serves about 50

million investors. Japan tops in the member of mutual funds with around 5400 million

investors. The UK has around 1400 mutual funds, while France has 1000 odd. Though the

concept of mutual fund was first introduced in India as early as 1964 with the setting up of

the Unit Trust of India, it became popular in a big way only from 1987 onwards. As financial

intermediaries, mutual funds mobilize savings from the masses and channelize them to

productive investment avenues through the capital market. They are particularly very useful

to small investors who do not have access to stock market. With the liberalization of

economy gaining momentum and the opening up of the financial sector, the monopoly of

public sector mutual funds has come to an end. Many private sector mutual funds have

appeared in the scene. Kothari Industries promoted the Kothari Pioneer Mutual fund in

November 1993 followed by the foreign mutual funds led by Morgan Stanley entry of private

sector mutual funds has imparted competitive efficiency to the industry, helped investors to

choose from funds with different maturity periods and offered different risk-return trade-offs

Indian investors are attracted to put their money in mutual funds for two reasons. First, they

offer a better return than fixed deposits. Second, the funds are being run by professionals with

requisite infrastructure to monitor company workings, their outlook of stock markets etc. The

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sophisticated information cells, coupled with professionalism and prompt customer services

have become a part and parcel of the growth of mutual funds. Another feature of mutual

funds is that most of them are already into leasing and hire purchase business. Mutual funds

are also organized by reputed industrial houses like the Birla’s and Tata’s. Some of the

mutual funds provide assured returns.

All these factors are responsible for the great popularity of mutual funds. There are also a

good number of mutual funds operating various schemes tailored to meet the needs of their

target customers. Basically, they can be grouped under open-ended mutual funds and close-

ended mutual funds. In addition to this, different mutual funds are designed to meet the

objectives of different types of savers such as bond funds, income funds, money market

funds; growth oriented mutual funds, balanced funds, industry funds and tax relief funds,

index funds and off-shore funds etc. However open-ended funds are still more popular in

India due to the distinctive feature of regular sale and purchase of securities.

At present, the mutual funds industry over the years has grown and there are 36 mutual funds

registered with Securities & Exchange Board of India. Despite the falling markets, mutual

funds have been able to generate good returns for their investors. Mutual funds have

undergone considerable quantitative as well as qualitative changes. At present, the SEBI has

permitted Indian mutual funds to invest in Global Depository Receipts/American Depository

Receipts of Indian companies. Further, the 1999-2000 budgets have showered liberal

concessions on the mutual fund industry. The government’s decision to exempt them from

income tax and the dividend being paid mutual funds in the hands of the investors is

welcomed by the investing public. Despite all the advantages linked with mutual funds,

people still prefer to invest their money independently. This is largely due to lack of

investors’ confidence. Further, mutual funds have increased significantly in number during

the short period and each fund has come out with multiple schemes, which has increased

competition. As a result, they lose their stabilizing factor in the market. Investors have the

right to know and asset management companies have an obligation to inform where and how

their money has been deployed. But investors are deprived of obtaining this information. So

far mutual funds have not been able to introduce any scheme that is suitable to the needs of

agricultural farmers, small entrepreneurs and merchants to tap rural savings. Further, mutual

funds are not yet a developed product structural to tap target customers. There is a lack of

product conceptualization and innovation. The weak distribution and marketing channels are

another problem which the mutual fund industry faces today. Again, the merchant banking

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industry is not sufficiently matured, which hampers the development of the mutual fund

industry. The interesting thing is that mutual funds are the most misunderstood financial

products in India. Mutual fund industries are not making efforts towards investor awareness

programmes, which are the need of the day.

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Suggestions According to the analysis study among the equity funds SBI Magnum Contra equity

funds performance is the best. SBI Magnum Contra ranks number one among the five

equity funds. The average quarterly return, average half yearly return and average

yearly return when compared with that of sensex average return is the highest when

compared with that of four other equity funds.

In case of income funds ICICI income fund performs the best. ICICI income fund

ranks number one when compared with other income funds. The returns are compared

with that of CCIL bond Index. For this CCIL TRI INDEX values are taken and its

average quarterly, half yearly and yearly returns are calculated. The returns of the

income funds when compared with that of bond index data then ICICI Income ranks

number one.

In case of balanced funds HDFC prudence performs the best. HDFC prudence ranks

number one among the performance of the balanced funds. Although there are two

funds from HDFC fund house which are HDFC prudence and HDFC balance but both

of their performance differs…although the values does not vary so much but this

values when compared in the long run and compared to other balance funds and

Sensex and CCIL Bond tri index then I find HDFC prudence ranks number one

In case of MIP funds RELIANCE MIP performs the best. RELIANCE MIP ranks

number one among the performance of the MIP funds. Although no fund has crossed

the market return value but mostly all the index values are crossed over. As

percentage of equity is very less in case of MIP funds hence the returns generated by

the MIP funds is very less when compared to the market Sensex return.

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