Major Mutual Funds in India - Final

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MAJOR MUTUAL FUNDS IN INDIA

FORAM RAJENDRA SHETH

DPGD/OC10/1081

SPECIALIZATION - FINANCE

WELINGKAR INSTITUTE OF MANAGEMENT

DEVELOPMENT AND RESEARCH

YEAR OF SUBMISSION: - AUGUST, 2012.

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ACKNOWLEDGEMENT

With Immense pleasure I would like to present this report on MAJOR MUTUALFUNDS IN INDIA

I would like to thankWelingkar Institute of Management for providing me the

opportunity to present this project.

Acknowledgements are due to my parents, family members, friends and all those

people who have helped me directly or indirectly in the successful completion of

the project.

Foram Rajendra Sheth

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CONTENTS

CHAPTER NO CONTEXT PAGE

NO

1 EXECUTIVE SUMMARY 4INTRODUCTION OF MUTUAL FUND 5

NEED OF THE STUDY 6

OBJECTIVE OF THE STUDY 7

SCOPE OF THE STUDY 8

RESEARCH METHODOLOGY 8

LIMITATIONS OF THE STUDY 9

2

CONCEPT OF MUTUAL FUND 9

TYPES OF INVESTMENT COMPANIES 10

TYPES OF MUTUAL FUND SCHEMES 12

DIFFERENT TYPES OF FUNDS 13

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY 15

ORGANISATION OF A MUTUAL FUND 17

3IMPORTANT CHARACTERISTICS OF A MUTUAL FUND 18

OBJECTIVES OF MUTUAL FUND 19

ADVANTAGES OF MUTUAL FUNDS 19

DISADVANTAGES OF MUTUAL FUNDS 20

4

INVESTORS PROFILE 22

MUTUAL FUNDS EXPECTATIONS AND BENEFITS 23

ORGANISATION OF A MUTUAL FUND 24

ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS 25

FORMULATION & REGULATIONS 28

SCHEMES 28

INVESTMENT NORMS 29

DISTRIBUTION 29

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MUTUAL FUND SCHEME TYPES 30

DIFFERENT MODES OF RECEIVING THE INCOME EARNED FROMMUTUAL FUND INVESTMENTS

32

MUTUAL FUND INVESTING STRATEGIES 34

ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS 35

RISKS ASSOCIATED WITH MUTUAL FUNDS 39

PERFORMANCE MEASURES OF MUTUAL FUNDS 42

6COMPANY PROFILE(KOTAK MAHINDRA) 46

DATA ANALYSIS& INTERPRETATIONS 51

SUGGESTIONS 61

CONCLUSIONS 61

FUTURE OF MUTUAL FUNDS IN INDIA 63

7 ANNEXURE 64

8 BIBLIOGRAPHY 68

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EXECUTIVE SUMMARY :

A mutual fund is a scheme in which several people invest their money for a common financial

cause. The collected money invests in the capital market and the money, which they earned, is

divided based on the number of units, which they hold.

The mutual fund industry started in India in a small way with the UTI Act creating what was

effectively a small savings division within the RBI. Over a period of 25 years this grew fairly

successfully and gave investors a good return, and therefore in 1989, as the next logical step,

public sector banks and financial institutions were allowed to float mutual funds and their

success emboldened the government to allow the private sector to foray into this area.

The advantages of mutual fund are professional management, diversification, economies of

scale, simplicity, and liquidity.

The disadvantages of mutual fund are high costs, over-diversification, possible tax consequences,

and the inability of management to guarantee a superior return.

The biggest problems with mutual funds are their costs and fees it include Purchase fee,

Redemption fee, Exchange fee, Management fee, Account fee & Transaction Costs. There are

some loads which add to the cost of mutual fund. Load is a type of commission depending on the

type of funds.

Mutual funds are easy to buy and sell. You can either buy them directly from the fund company

or through a third party. Before investing in any funds one should consider some factor like

objective, risk, Fund Managers and scheme track record, Cost factor etc.

There are many, many types of mutual funds. You can classify funds based Structure (open-

ended & close-ended), Nature (equity, debt, balanced), Investment objective (growth,

income, money market) etc.

A code of conduct and registration structure for mutual fund intermediaries, which were

subsequently mandated by SEBI. In addition, this year AMFI was involved in a number of

developments and enhancements to the regulatory framework.

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The most important trend in the mutual fund industry is the aggressive expansion of the foreign

owned mutual fund companies and the decline of the companies floated by nationalized banks

and smaller private sector players.

Reliance Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual

Fund and Birla Sun Life Mutual Fund are the top five mutual fund company in India.

INTRODUCTION OF MUTUAL FUND:

A Mutual Fund is a trust that pools the savings of a number of investors who share a common

financial goal. The money thus collected is then invested in capital market instruments such as

shares, debentures and other securities. The income earned through these investments and the

capital appreciations realized are shared by its unit holders in proportion to the number of units

owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it

offers an opportunity to invest in a diversified, professionally managed basket of securities at a

relatively low cost. The flow chart below describes broadly the working of a Mutual Fund.

A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India

(SEBI) that pools up the money from individual/corporate investors and invests the same on

behalf of the investors/unit holders, in Equity shares, Government securities, Bonds, Call Money

Markets etc, and distributes the profits. In the other words, a Mutual Fund allows investors to

indirectly take a position in a basket of assets. Mutual Fund is a mechanism for pooling the

resources by issuing units to the investors and investing funds in securities in accordance with

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objectives as disclosed in offer document. Investments in securities are spread among a wide

cross-section of industries and sectors thus the risk is reduced.

Diversification reduces the risk because all stocks too may not move in the same direction in the

same proportion at same time. Investors of mutual funds are known as unit holders. The

investors in proportion to their investments share the profits or losses. The mutual funds

normally come out with a number of schemes with different investment objectives which are

launched from time to time. A Mutual Fund is required to be registered with Securities Exchange

Board of India (SEBI) which regulates securities markets before it can collect funds from the

public

DEFINITION:

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

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

distributed proportionately.

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

of other investors. In return, you and the other investors each own shares of the fund. The fund's

assets are invested according to an investment objective into the fund's portfolio of investments.

Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-

growing smaller companies or market segments. Aggressive growth funds are also called capital

NEED OF THE STUDY:

The projects idea is to project Mutual Fund as a better avenue for investment on a long-term or

short-term basis. Mutual Fund is a productive package for a lay-investor with limited finances,

this project creates an awareness that the Mutual Fund is a worthy investment practice. Mutual

Fund is a globally proven instrument.

Mutual Funds are Unit Trust as it is called in some parts of the world has a long and successful

history, of late Mutual Funds have become a hot favorite of millions of people all over the world.

The driving force of Mutual Funds is the safety of the principal guaranteed, plus the added

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advantage of capital appreciation together with the income earned in the form of interest or

dividend. The various schemes of Mutual Funds provide the investor with a wide range of

investment options according to his risk bearing capacities and interest besides; they also give

handy return to the investor.

Mutual Funds offers an investor to invest even a small amount of money, each Mutual Fund has

a defined investment objective and strategy. Mutual Funds schemes are managed by respective

asset managed companies sponsored by financial institutions, banks, private companies

or international firms. A Mutual Fund is the ideal investment vehicle for todays complex and

modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of different Asset

Management Companies to highlight the diversity of investment that Mutual Fund offer. Thus,

through the study one would understand how a common man could fruitfully convert a pittance

into great penny by wisely investing into the right scheme according to his risk taking abilities.

OBJECTIVE OF THE STUDY :

To give a brief idea about the benefits available from Mutual Fund investment

To give an idea of the types of schemes available.

To discuss about the market trends of Mutual Fund investment.

To study some of the mutual fund schemes and analyse them

Observe the fund management process of mutual funds

Explore the recent developments in the mutual funds in India

To give an idea about the regulations of mutual funds

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SCOPE OF THE STUDY :

In my project the scope is limited to some prominent mutual funds in the mutual fund industry.

I analyzed the funds depending on their schemes like equity, income, balance. But there is so

many other schemes in mutual fund industry like specialized (banking, infrastructure, pharmacy)

funds, index funds etc.

The study here has been limited to analyse open-ended equity Growth schemes of different Asset

Management Companies namely Kotak Mahindra Mutual Fund,Reliance Mutual Fund, HDFC

Mutual Fund, Franklin Templeton Mutual Fund, HSBC Mutual Funds each scheme is analysed

according to its performance against the other.

RESEARCH METHODOLOGY

The Methodology involves randomly selecting Open-Ended equity schemes of different fund

houses of the country. The data collected for this project is basically from one source, that is:-

1. Secondary sources: Collection of data from Internet and Books.

HYPOTHESIS :

The Hypothesis of the study involves Comparison between:

1. Kotak Opportunities fund.

2. Reliance Equity Opportunities fund.

3. Franklin India Flexi fund.

4. HDFC Core & satellite fund.

5. HSBC India Opportunities fund

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LIMITATIONS OF THE STUDY :

The time constraint was one of the major problems.

The study is limited to the different schemes available under the mutual funds selected.

The study is limited to selected mutual fund schemes.

The data provided by the prospects may not be 100% correct as they too have their limitations.

The study is limited only to the analysis of different schemes and its suitability to different

investors according to their risk-taking ability.

The study is based on secondary data available from monthly fact sheets, websites and other

books, as primary data was not accessible.

The study is limited by the detailed study of various schemes of Five Asset Management

Company

CONCEPT OF MUTUAL FUND:

A mutual fund is a common pool of money into which investors place their contributions that are

to be invested in accordance with a stated objective. The ownership of the fund is thus joint or

mutual; the fund belongs to all investors. A single investors ownership of the fund is in the

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

of the fund.

Mutual Funds are trusts, which accept savings from investors and invest the same in diversified

financial instruments in terms of objectives set out in the trusts deed with the view to reduce the

risk and maximize the income and capital appreciation for distribution for the members.

A Mutual Fund is a corporation and the fund managers interest is to professionally manage the

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

management fees.

The objective sought to be achieved by Mutual Fund is to provide an opportunity for lower

income groups to acquire without much difficulty financial assets. They cater mainly to the

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

manner that provides a regular income, growth, safety, liquidity and diversification

opportunities.

TYPES OF INVESTMENT COMPANIES :

Legally known as an "open-end company," a mutual fund is one of three basic types of

investment companies. While this brochure discusses only mutual funds, you should be aware

that other pooled investment vehicles exist and may offer features that you desire. The two other

basic types of investment companies are:

Closed-end funds which, unlike mutual funds, sell a fixed number of shares at one time (in an

initial public offering) that later trade on a secondary market; and

Unit Investment Trusts (UITs) which make a one-time public offering of only a specific, fixed

number of redeemable securities called "units" and which will terminate and dissolve on a date

specified at the creation of the UIT.

"Exchange-traded funds" (ETFs) are a type of investment company that aims to achieve the same

return as a particular market index. They can be either open-end companies or UITs. But ETFs

are not considered to be, and are not permitted to call themselves, mutual funds.

Some of the traditional, distinguishing characteristics of mutual funds include the

following:

Investors purchase mutual fund shares from the fund itself (or through a broker for the fund)instead of from other investors on a secondary market, such as the New York Stock Exchange or

Nasdaq Stock Market.

The price that investors pay for mutual fund shares is the fund's per share net asset value (NAV)

plus any shareholder fees that the fund imposes at the time of purchase (such as sales loads).

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Mutual fund shares are "redeemable," meaning investors can sell their shares back to the fund (or

to a broker acting for the fund).

Mutual funds generally create and sell new shares to accommodate new investors. In other

words, they sell their shares on a continuous basis, although some funds stop selling when, for

example, they become too large.

The investment portfolios of mutual funds typically are managed by separate entities known as

"investment advisers" that are registered with the SEC.

Hedge Funds and "Funds of Hedge Funds"

"Hedge fund" is a general, non-legal term used to describe private, unregistered investment pools

that traditionally have been limited to sophisticated, wealthy investors. Hedge funds are not

mutual funds and, as such, are not subject to the numerous regulations that apply to mutual funds

for the protection of investors including regulations requiring a certain degree of liquidity,

regulations requiring that mutual fund shares be redeemable at any time, regulations protecting

against conflicts of interest, regulations to assure fairness in the pricing of fund shares, disclosure

regulations, regulations limiting the use of leverage, and more.

"Funds of hedge funds," a relatively new type of investment product, are investment companies

that invest in hedge funds. Some, but not all, register with the SEC and file semi-annual reports.

They often have lower minimum investment thresholds than traditional, unregistered hedge

funds and can sell their shares to a larger number of investors. Like hedge funds, funds of hedge

funds are not mutual funds. Unlike open-end mutual funds, funds of hedge funds offer verylimited rights of redemption. And, unlike ETFs, their shares are not typically listed on an

exchange.

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KEY POINTS TO REMEMBER :

Mutual funds are not guaranteed or insured by the FDIC or any other government agency

even if you buy through a bank and the fund carries the bank's name. You can lose money

investing in mutual funds.

Past performance is not a reliable indicator of future performance. So don't be dazzled by last

year's high returns. But past performance can help you assess a fund's volatility over time.

All mutual funds have costs that lower your investment returns. Shop around, and use a mutual

fund cost calculator at www.sec.gov/investor/tools.shtml to compare many of the costs of

owning different funds before you buy.

TYPES OF MUTUAL FUND SCHEMES ;

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk

tolerance and return expectations etc. The table below gives an overview into the existing types

of schemes in the Industry.

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DIFFERENT TYPES OF FUNDS :

When it comes to investing in mutual funds, investors have literally thousands of choices. Before

you invest in any given fund, decide whether the investment strategy and risks of the fund are a

good fit for you. The first step to successful investing is figuring out your financial goals and risk

tolerance either on your own or with the help of a financial professional. Once you know what

you're saving for, when you'll need the money, and how much risk you can tolerate, you can

more easily narrow your choices.

Most mutual funds fall into one of three main categories money market funds, bond funds

(also called "fixed income" funds), and stock funds (also called "equity" funds). Each type has

different features and different risks and rewards. Generally, the higher the potential return, the

higher the risk of loss.

Open Ended Funds :

The holders of the shares in the Fund can resell them to the issuing Mutual Fund Company at the

time. They receive in turn the net assets value (NAV) of the shares at the time of re-sale. Such

Mutual Fund Companies place their funds in the secondary securities market. They do not

participate in new issue market as do pension funds or life insurance companies. Thus they

influence market price of corporate securities. Open-end investment companies can sell an

unlimited number of Shares and thus keep going larger. The open-end Mutual Fund Company

Buys or sells their shares. These companies sell new shares NAV plus a Loading or management

fees and redeem shares at NAV. In other words, the target amount and the period both are

indefinite in such funds

Close Ended Funds :

A closedend Fund is open for sale to investors for a specific period, after which further sales are

closed. Any further transaction for buying the units or repurchasing them, Happen in the

secondary markets, where closed end Funds are listed. Therefore new investors buy from the

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existing investors, and existing investors can liquidate their units by selling them to other willing

buyers. In a closed end Funds, thus the pool of Funds can technically be kept constant. The asset

management company (AMC) however, can buy out the units from the investors, in the

secondary markets, thus reducing the amount of funds held by outside investors. The price at

which units can be sold or redeemed Depends on the market prices, which are fundamentally

linked to the NAV. Investors in closed end Funds receive either certificates or Depository

receipts, for their holdings in a closed end mutual Fund

Money Market Funds

Money market funds have relatively low risks, compared to other mutual funds (and most other

investments). By law, they can invest in only certain high-quality, short-term investments issued

by the U.S. government, U.S. corporations, and state and local governments. Money market

funds try to keep their net asset value (NAV) which represents the value of one share in a

fund at a stable $1.00 per share. But the NAV may fall below $1.00 if the fund's investments

perform poorly. Investor losses have been rare, but they are possible.

Money market funds pay dividends that generally reflect short-term interest rates, and

historically the returns for money market funds have been lower than for either bond or stock

funds. That's why "inflation risk" the risk that inflation will outpace and erode investment

returns over time can be a potential concern for investors in money market funds.

Bond Funds

Bond funds generally have higher risks than money market funds, largely because they typically

pursue strategies aimed at producing higher yields. Unlike money market funds, the SEC's rules

do not restrict bond funds to high-quality or short-term investments. Because there are many

different types of bonds, bond funds can vary dramatically in their risks and rewards. Some of

the risks associated with bond funds include:

Stock Funds

Although a stock fund's value can rise and fall quickly (and dramatically) over the short term,

historically stocks have performed better over the long term than other types of investments

including corporate bonds, government bonds, and treasury securities.

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Overall "market risk" poses the greatest potential danger for investors in stocks funds. Stock

prices can fluctuate for a broad range of reasons such as the overall strength of the economy

or demand for particular products or services.

Not all stock funds are the same. For example:

Growth funds focus on stocks that may not pay a regular dividend but have the potential for large

capital gains.

Income funds invest in stocks that pay regular dividends.

Index funds aim to achieve the same return as a particular market index, such as the S&P 500

Composite Stock Price Index, by investing in all or perhaps a representative sample of the

companies included in an index.

Sector funds may specialize in a particular industry segment, such as technology or consumer

products stocks.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY :

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

initiative of the Government of India and Reserve Bank the. 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 crores of assets under management.

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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 Canbank Mutual Fund (Dec 87), Punjab

National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun

90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while

GIC had set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third 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.

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 Undertakingof 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.

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ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organizational set up of a

Mutual Fund:(For detailed definitions in the above chart refer to annexure 1)Mutual Funds

diversify their risk by holding a portfolio of instead of only one asset. This is because by holding

all your money in just one asset, the entire fortunes of your six portfolios depends on this one

asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual

Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same

risk as investing in the markets, the only difference being that due top professional management

of funds the controllable risks are substantially reduced. A very important risk involved in

Mutual Fund investments is the market risk. However, the company specific risks are largely

eliminated due to professional fund management

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IMPORTANT CHARACTERISTICS OF A MUTUAL FUND :

A Mutual Fund actually belongs to the investors who have pooled their Funds. The ownership

of the mutual fund is in the hands of the Investors.

A Mutual Fund is managed by investment professional and other Service providers, who earns

a fee for their services, from the funds.

The pool of Funds is invested in a portfolio of marketable investments.

The value of the portfolio is updated every day.

The investors share in the fund is denominated by units. The value of the units changes with

change in the portfolio value, every day. The value of one unit of investment is called net asset

value (NAV).

The investment portfolio of the mutual fund is created according to the stated Investment

objectives of the Fund.

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OBJECTIVES OF MUTUAL FUND :

To Provide an opportunity for lower income groups to acquire without Much difficulty,

property in the form of shares.

To Cater mainly of the need of individual investors, whose means are small?

To Manage investors portfolio that provides regular income, growth, Safety, liquidity, tax

advantage, professional management and diversification.

ADVANTAGES OF MUTUAL FUNDS :

Diversification:

An investor undertakes risk if he invests all his funds in a single scrip. Mutual funds invest in a

number of companies across various industries and sectors. This diversification reduces the risk

of the investment.

Professional Management:

An investor lacks the knowledge of the capital market operations and does not have large

resources to reap the benefits of investment. Hence, he requires the help of an expert. Mutual

funds are managed by professional managers who have the requisite skills and experiences to

analyse the performance and prospectus of companies.

Regulatory oversight:

Mutual funds are subject to many government regulations that protect investors from fraud.

Liquidity:

It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the

cash.

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Convenience:

You can usually buy mutual fund shares by mail, phone, or over the Internet. It reduces

paperwork, saves time and makes investment easy

Low cost:

Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index

Funds are less than that, because index funds are not actively managed. Instead, they

automatically buy stock in companies that are listed on a specific index

Transparency

Mutual funds transparently declare their portfolio every month. Thus, an investor knows where

his/her money is being deployed and in case they are not happy with the portfolio they can

withdraw at a short notice.

Flexibility:

Mutual funds offer a family of schemes, and investors have the option of transferring their

holdings from one scheme to other.

Tax benefits

Mutual fund investors now enjoy income tax benefits. Dividends received from mutual funds

debt schemes are tax exempt to the overall limit of Rs 9000 allowed under section SOL of the

Income Tax Act.

DISADVANTAGES OF MUTUAL FUNDS:

Hidden costs:

The mutual fund industry tactfully buries costs under layers of jargon. These costs come despite

of negative returns. Examples of such costs include sales charges, annual fees, and other

expenses; and depending on the timing of their investment, investors may also have to pay taxes

on any capital gains distribution they receive even if the fund went on to perform poorly

after they bought shares.

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Lack of control:

Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor

can they directly influence which securities the fund manager buys and sells or the timing of

those trades.

Dilution:

Because funds have small holdings in so many different companies, high returns from a few

investments often don't make much difference on the overall return. Dilution is also the result of

a successful fund getting too big. When money pours into funds that have had strong success, the

manager often has trouble finding a good investment for all the new money

Price Uncertainty:

With an individual stock, one can obtain real-time (or close to real-time) pricing information

with relative ease by checking financial websites or through a broker, as can one observe stock

price changes by the hour or minute. By contrast, with a mutual fund, the price at which one

purchases or redeems shares will typically depend on the fund's NAV, which the fund might not

calculate until many hours after the order has been placed. In general, mutual funds must

calculate their NAV at least once every business day, typically after the major U.S. exchanges

close.

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INVESTORS PROFILE :

An investor normally prioritizes his investment needs before undertaking an investment. So

different goals will be allocated to different proportions of the total disposable amount.

Investments for specific goals normally find their way into the debt market as risk reduction is of

prime importance, this is the area for the risk-averse investors and here, Mutual Funds are

generally the best option. One can avail of the benefits of better returns with added benefits of

anytime liquidity by investing in open-ended debt funds at lower risk, this risk of default by any

company that one has chosen to invest in, can be minimized by investing in Mutual Funds as the

fund managers analyze the companies financials more minutely than an individual can do as they

have the expertise to do so. Moving up the risk spectrum, there are people who would like to take

some risk and invest in equity funds/capital market. However, since their appetite for risk is also

limited, they would rather have some exposure to debt as well. For these investors, balanced

funds provide an easy route of investment, armed with expertise of investment techniques; they

can invest in equity as well as good quality debt thereby reducing risks and providing the

investor with better returns than he could otherwise manage. Since they can reshuffle their

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portfolio as per market conditions, they are likely to generate moderate returns even in

pessimistic market conditions. Next comes the risk takers, risk takers by their nature, would not

be averse to investing in high-risk avenues. Capital markets find their fancy more often than not,

because they have historically generated better returns than any other avenue, provided, the

money was judiciously invested. Though the risk associated is generally on the higher side of the

spectrum, the return-potential compensates for the risk attached

MUTUAL FUNDS EXPECTATIONS AND BENEFITS:

Everyone expects the New year to usher an era of joy and prosperity and certainly looks forward

to a windfall in terms of good things to come. Investor is no exception to this. But before one

rushes to celebrate with new investments, it would be appropriate to take a look at how Y2K

treated Mutual Funds (MFs) - the investment vehicle of the small investor.

A happy-go-lucky-man turned investor would have nothing to write home about, had he invested

in the Year 2000 and stayed invested throughout the year. Positive returns seemed like a state of

utopia in Y2K. What a transformation in an Industry that had witnessed almost triple digit

returns in 1999 when BSE Sensex had generated returns of about 65 percent.

What was common to MFs in Y2K was the presence of technology, media & telecom sector

scrips in portfolios of most funds, especially equity growth funds. Birla Advantage Fund with

and exposure of 67%, Alliance to the tune of 71% are just to name a few.

When the bull phase came to an end and when most of the funds stood stripped with the

downslide of most of the TMT stocks, most fund managers moved to quality portfolio levels and

reduced their IT exposure to reasonable levels. Most equity diversified funds, today, maintain IT

exposure at 20% to 37% while simultaneously picking up both old and new economy stocks. But

fund managers still are willing to bet on TMT stocks despite the tumultuous experience they

have had in Y2K. While accepting the possibility of a downward revision of their growth rate,

they foresee no indications of a significant slowdown from at least India based companies. They

concur that the fundamentals of IT sector are strong with future growth, however, being at a

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modest pace. They are now of the view that a mixture of old and new economy scrip would form

an ideal portfolio.

While the crash in IT share prices has resulted in a re-balancing of portfolios, action on the old

economy front would further narrow the gap between the so called click and mortar and brick

and mortar companies-bring with it a greater diversification in MF portfolios.

MF Industry in India, like any other Industry, has had its nascent stage and is still trying to

grapple with several inconsistencies. The Industry is now approaching a stage where a cross

section of investing community has begun to comprehend that MFs provide and ideal investment

vehicle to meet their varied investment objectives in the long run with adequate emphasis on

portfolio diversification. All in all, MFs have had their share of lessons in Y2K and are waiting

for newer horizons in Y2K+1 with abated breath.

ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organizational set up of a

Mutual Fund:(For detailed definitions in the above chart refer to annexure 1)Mutual Funds

diversify their risk by holding a portfolio of instead of only one asset. This is because by holding

all your money in just one asset, the entire fortunes of your six portfolios depends on this one

asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual

Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same

risk as investing in the markets, the only difference being that due top professional management

of funds the controllable risks are substantially reduced. A very important risk involved in

Mutual Fund investments is the market risk. However, the company specific risks are largely

eliminated due to professional fund management

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ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS :-

In India Mutual Fund usually formed as trusts, three parties are generally involved viz.

Settler of the trust or the sponsoring organization.

The trust formed under the Indian trust act, 1982 or the trust company registered under the

Indian companies act, 1956

Fund mangers or the merchant-banking unit

Custodians

MUTUAL FUNDS TRUST :-

Mutual fund trust is created by the sponsors under the

Indian trust act, 1982

Which is the main body in the creation of Mutual Fund Trust? The main functions of Mutual

Fund trust are as follows:

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Planning and formulating Mutual Funds schemes.

Seeking SEBIs approval and authorization to these schemes.

Marketing the schemes for public subscription.

Seeking RBI approval in case NRIs subscription to Mutual Fund is invited

Attending to trusteeship function. This function as per guidelines can be assigned to separately

established trust companies too. Trustees are required to submit a consolidated report six

monthly to SEBI to ensure that the guidelines are fully being complied with trusted are

also required to submit an annual report to the investors in the fund.

FUND MANAGERS (OR) THE ASSET MANAGEMENT COMPANY (AMC) :

AMC has to discharge mainly three functions as under:

I. Taking investment decisions and making investments of the funds through market

dealer/brokers in the secondary market securities or directly in the primary capital market or

money market instruments

II. Realize fund position by taking account of all receivables and realizations, moving corporate

actions involving declaration of dividends, etc to compensate investors for their investments in

units; and

III. Maintaining proper accounting and information for pricing the units and arriving at net asset

value (NAV), the information about the listed schemes and the transactions of units in the

secondary market. AMC has to feed back the trustees about its fund management operations and

has to maintain a perfect information system.

CUSTODIANS OF MUTUAL FUNDS:-

Mutual funds run by the subsidiaries of the nationalized banks had their respective sponsor banks

as custodians like canara bank, SBI, PNB, etc. Foreign banks with higher degree of automation

in handling the securities have assumed the role of custodians for mutual funds. With the

establishment of stock Holding Corporation of India the work of custodian for mutual funds is

now being handled by it for various mutual funds. Besides, industrial investment trust company

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acts as sub-custodian for stock Holding Corporation of India for domestic schemes of UTI, BOI

MF, LIC MF, etc

Fee structure:-

Custodian charges range between 0.15% to 0.20% on the net value of the customers holding for

custodian services space is one important factor which has fixed cost element.

RESPONSIBILITY OF CUSTODIANS:

Receipt and delivery of securities

Holding of securities.

Collecting income

Holding and processing cost

Corporate actions etc

FUNCTIONS OF CUSTODIANS:

Safe custody

Trade settlement

Corporate action

Transfer agents

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RATE OF RETURN ON MUTUAL FUNDS:-

An investor in mutual fund earns return from two sources:

Income from dividend paid by the mutual fund.

Capital gains arising out of selling the units at a price higher than the acquisition price

FORMULATION & REGULATIONS:

1. Mutual funds are to be established in the form of trusts under the

Indian trusts act and are to be operated by separate asset management companies (AMC s)

2. AMCs shall have a minimum Net worth of Rs. 5 crores;

3. AMCs and Trustees of Mutual Funds are to be two separate legal entities and that an AMC or

its affiliate cannot act as a manager in any other fund

4. Mutual funds dealing exclusively with money market instruments are to be regulated by

the Reserve Bank Of India

5. Mutual fund dealing primarily in the capital market and also partly money market instruments

are to be regulated by the Securities Exchange Board Of India (SEBI)

6. All schemes floated by Mutual funds are to be registered with SEBI

SCHEMES:

1. Mutual funds are allowed to start and operate both closed-end and open-end schemes;

2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs 20crore;

3. Each open-end scheme must have a Minimum corpus of Rs 50 crore

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4. In the case of a Closed End scheme if the Minimum amount of Rs 20 crore or 60% of the

target amount, which ever is higher is not raised then the entire subscription has to be refunded to

the investors;

5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50 crore or 60 percent

of the targeted amount, which ever is higher, is no raised then the entire subscription has to be

refunded to the investors.

INVESTMENT NORMS:

1. No mutual fund, under all its schemes can own more than five percent of any companys paid

up capital carrying voting rights;

2. No mutual fund, under all its schemes taken together can invest more than 10percent of its

funds in shares or debentures or other instruments of any single company;

3. No mutual fund, under all its schemes taken together can invest more than 15percent of its

fund in the shares and debentures of any specific industry, except those schemes which are

specifically floated for investment in one or more specified industries in respect to which a

declaration has been made in the offer letter.

4. No individual scheme of mutual funds can invest more than five percent of its corpus in

any one companys share;

5. Mutual funds can invest only in transferable securities either in the money or in the capital

market. Privately placed debentures, securitized debt, and other unquoted debt, and other

unquoted debt instruments holding cannot exceed 10percent in the case of growth funds and 40

percent in the case of income funds.

DISTRIBUTION:

Mutual funds are required to distribute at least 90 percent of their profits annually in any given

year. Besides these, there are guidelines governing the operations of mutual funds in dealing with

shares and also seeking to ensure greater investor protection through detailed disclosure and

reporting by the mutual funds. SEBI has also been granted with powers to over see the

constitution as well as the operations of mutual funds, including a common advertising code.

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Besides, SEBI can impose penalties on Mutual funds after due investigation for their failure to

comply with the guidelines

MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes

These schemes mainly invest in equity. They seek to achieve long-term capital appreciation by

responding to the dynamically changing Indian economy by moving across sectors such as

Lifestyle, Pharma, Cyclical, Technology, etc.

Sector Schemes

These schemes focus on particular sector as IT, Banking, etc. They seek to generate long-term

capital appreciation by investing in equity and related securities of companies in that particular

sector.

Index Schemes

These schemes aim to provide returns that closely correspond to the return of a particular stock

market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest in all the stocks

comprising the index in approximately the same weight age as they are given in that index.

Exchange Traded Funds (ETFs)

ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE Sensex. They

are similar to an index fund with one crucial difference. ETFs are listed and traded on a stock

exchange. In contrast, an index fund is bought and sold by the fund and its distributors.

Equity Tax Saving Schemes

These work on similar lines as diversified equity funds and seek to achieve long-term capital

appreciation by investing in the entire universe of stocks. The only difference between these

funds and equity-diversified funds is that they demand a lock-in of 3years to gain tax benefits.

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Dynamic Funds

These schemes alter their exposure to different asset classes based on the market scenario. Such

funds typically try to book profits when the markets are overvalued and remain fully invested in

equities when the markets are undervalued. This is suitable for investors who find it difficult to

decide when to quit from equity.

Balanced Schemes

These schemes seek to achieve long-term capital appreciation with stability of investment and

current income from a balanced portfolio of high quality equity and fixed-income securities.

Medium-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the average

maturity of the underlying portfolio is in the range of five to seven years.

Short-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the average

maturity of the underlying portfolio is in the range of one to two years.

Money Market Debt Schemes

These schemes invest in debt securities of a short-term nature, which generally means securities

of less than one-year maturity. The typical short-term interest-bearing instruments these funds

invest in Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money

Market.

Medium-Term Gilt Schemes

These schemes invest in government securities. The average maturity of the securities in the

scheme is over three years.

Short-Term Gilt Schemes

These schemes invest in government securities. The securities invested in are of short to medium

term maturities.

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Floating Rate Funds

They invest in debt securities with floating interest rates, which are generally linked to some

benchmark rate like MIBOR. Floating rate funds have a high relevance when interest rates are on

the rise helping investors to ride the interest rate rise.

Monthly Income Plans (MIPS)

These are basically debt schemes, which make marginal investments in the range of 10-25% in

equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly

higher return that pure long-term debt schemes at marginally higher risk.

DIFFERENT MODES OF RECEIVING THE INCOME EARNED FROM MUTUAL

FUND INVESTMENTS

Mutual Funds offer following methods of receiving income:

Growth Plan

In this plan, dividend is neither declared nor paid out to the investor but is built into the value of

the NAV. In other words, the NAV increases over time due to such incomes and the investor

realizes only the capital appreciation on redemption of his investment.

Income Plan

In this plan, dividends are paid-out to the investor. In other words, the NAV only reflects the

capital appreciation or depreciation in market price of the underlying portfolio.

Dividend Re-investment Plan

In this case, dividend is declared but not paid out to the investor, instead, it is reinvested back

into the scheme at the then prevailing NAV. In other words, the investor is given additional units

and not cash as dividend.

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Dividend Payout Option:

Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the

mutual fund scheme falls to the extent of the dividend payout.

Retirement Pension Option:

Some schemes are linked with retirement pension. Individuals participate in these options for

themselves, and corporates participate for their employees.

Insurance Option:

Certain Mutual Funds offer schemes that provide insurance cover to investors as an added

benefit.

Systematic Investment Plan (SIP):

Here the investor is given the option of preparing a pre-determined number of post-dated

cheques in favour of the fund. The investor is allotted units on a predetermined date specified in

the offer document at the applicable NAV.

Systematic Withdrawal Plan (SWP):

As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the

investor the facility to withdraw a pre-determined amount / units from his fund at a pre-

determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

How Funds Can Earn Money for You :

You can earn money from your investment in three ways:

Dividend Payments A fund may earn income in the form of dividends and interest on thesecurities in its portfolio. The fund then pays its shareholders nearly all of the income (minus

disclosed expenses) it has earned in the form of dividends.

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Capital Gains Distributions The price of the securities a fund owns may increase. When a

fund sells a security that has increased in price, the fund has a capital gain. At the end of the

year, most funds distribute these capital gains (minus any capital losses) to investors.

Increased NAV If the market value of a fund's portfolio increases after deduction of expenses

and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV

reflects the higher value of your investment.

With respect to dividend payments and capital gains distributions, funds usually will give you a

choice: the fund can send you a check or other form of payment, or you can have your dividends

or distributions reinvested in the fund to buy more shares (often without paying an additional

sales load).

Factors to Consider

Thinking about your long-term investment strategies and tolerance for risk can help you decide

what type of fund is best suited for you. But you should also consider the effect that fees and

taxes will have on your returns over time.

Degrees of Risk

All funds carry some level of risk. You may lose some or all of the money you invest your

principal because the securities held by a fund go up and down in value. Dividend or interest

payments may also fluctuate as market conditions change.

Before you invest, be sure to read a fund's prospectus and shareholder reports to learn about its

investment strategy and the potential risks. Funds with higher rates of return may take risks that

are beyond your comfort level and are inconsistent with your financial goals.

MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs)

These are best suited for young people who have started their careers and need to build their

wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals in the Mutual

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fund scheme the investor has chosen, an investor opting for SIP in xyz Mutual Fund scheme will

need to invest a certain sum on money every month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)

These plans are best suited for people nearing retirement. In these plans, an investor invests in a

mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals to take

care of his expenses

3. Systematic Transfer Plans (STPs)

They allow the investor to transfer on a periodic basis a specified amount from one scheme to

another within the same fund family meaning two schemes belonging to the same mutual fund.

A transfer will be treated as redemption of units from the scheme from which the transfer is

made. Such redemption or investment will be at the applicable NAV. This service allows the

investor to manage his investments actively to achieve his objectives. Many funds do not even

charge any transaction fees for his service an added advantage for the active investor.

ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS:

There are several reasons that can be attributed to the growing popularity and suitability of

Mutual Funds as an investment vehicle especially for retail investors:

ASSET ALLOCATION

Mutual Funds offer the investors a valuable tool Asset Allocation. This is explained by an

example.

An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100 crores and

invested the money in various investment options, will have Rs.1 lakh spread over a number of

investment options as demonstrated below:

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Investment Type Percentage of

Allocation (%

of total

portfolio)

Total portfolio of

the Mutual

Fundscheme (Rs.

Incrores)

Investors

portfolioallocation

(Rs.)

EQUITY: 57% 57 57,000

State Bank of India 15% 15 15,000

Infosys Technologies 12% 12 12,000

ABB 10% 10 10,000

Reliance Industries 9% 9 9,000

MICO 7% 7 7,000

Tata Power 4% 4 4,000

DEBT: 43% 43 43,000

Govt. Securities 20% 20 20,000

Company Debentures 10% 10 10,000

Institution Bonds 9% 9 9,000

Money Market 4% 4 4,000

Total 100% 100 1,00,000

Thus Asset Allocation is allocating your investments in to different investment options

depending on your risk profile and return expectations.

DIVERSIFICATION

Diversification is spreading your investment amount over a larger number of investments in

order to reduce risk. For instance, if you have Rs.10, 000 to invest in Information Technology

(IT) stocks, this amount will only buy you a handful of stocks of perhaps one or two companies.

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A fall in the market price of any of these company stocks will significantly erode your

investment amount instead it makes sense to invest in an IT sector mutual fund scheme so that

your Rs.10,000 is spread across a larger number of stocks thereby reducing your risk.

PROFESSIONALS AT WORK

Few investors have the time or expertise to manage their personal investments everyday, to

efficiently reinvest interest or dividend income, or to investigate the thousands of securities

available in the financial markets. Fund managers are professionals and experienced in tracking

the finance markets, having access to extensive research and market information, which enables

them to decide which securities to buy and sell for the fund. For an individual investor like you,

this professionalism is built in when you invest in the Mutual Fund.

REDUCTION OF TRANSACTION COSTS

While investing directly in securities, all the costs of investing such as brokerage, custodial

services etc. Borne by you are at the highest rates due to small transaction sizes. However, when

going through a fund, you have the benefit of economies of scale; the fund pays lesser costs

because of larger volumes, a benefit passed on to its investors like you.

EASY ACCESS TO YOUR MONEY

This is one of the most important benefits of a Mutual Fund. Often you hold shares or bonds that

you cannot directly, easily and quickly sell. In such situations, it could take several days or even

longer before you are able to liquidate his Mutual Fund investment by selling the units to the

fund itself and receive his money within 3working days.

TRANSPARENCY

The investor gets regular information on the value of his investment in addition to disclosure on

the specific investments made by the fund, the proportion invested in each class of assets and the

fund managers investment strategy and outlook.

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SAVING TAXES

Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of the Income

Tax Act. Under this section, an investor can invest up to Rs.10, 000 per financial year in a

tax saving scheme. The rate of rebate under this section depends on the investors total income.

INVESTING IN STOCK MARKET INDEX

Index schemes of mutual funds give you the opportunity of investing in scrips that make up a

particular index in the same proportion of weightage that these scrips have in the index. Thus, the

return on your investment mirrors the movement of the index.

INVESTING IN GOVERNMENT SECURITIES

Gilt and Money Market Schemes of Mutual Funds also give you the opportunity to invest in

Government Securities and Money Markets (including the inter banking call money market)

WELL-REGULATED INDUSTRY

All Mutual Funds are registered with SEBI and they function within the provisions of strict

regulations designed to protect the interests of investors. The operations of Mutual Funds are

regularly monitored by SEBI.

CONVENIENCE AND FLEXIBILITY

Mutual Funds offer their investors a number of facilities such as inter-fund transfers, online

checking of holding status etc, which direct investments dont offer.

RISKS ASSOCIATED WITH MUTUAL FUNDS:-

Investing in Mutual Funds, as with any security, does not come without risk. One of the most

basic economic principles is that risk and reward are directly correlated. In other words, the

greater the potential risk the greater the potential return. The types of risk commonly associated

with Mutual Funds are:

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1) Market Risk

Market risk relates to the market value of a security in the future. Market prices fluctuate and are

susceptible to economic and financial trends, supply and demand, and many other factors that

cannot be precisely predicted or controlled.

2) Political Risk

Changes in the tax laws, trade regulations, administered prices, etc are some of the many

political factors that create market risk. Although collectively, as citizens, we have indirect

control through the power of our vote individually, as investors, we have virtually no control.

Changes in government policy and political decision can change the investment environment.

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

3) Inflation Risk

Interest rate risk relates to future changes in interest rates. For instance, if an investor invests in a

long-term debt Mutual Fund scheme and interest rates increase, the NAV of the scheme will fall

because the scheme will be end up holding debt offering lower interest rates.

Things you hear people talk about:

"Rs. 100 today is worth more than Rs. 100 tomorrow."

"Remember the time when a bus ride costed 50 paise?"

"Mehangai Ka Jamana Hai."

The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times

people make conservative investment decisions to protect their capital but end up with a sum of

money that can buy less than what the principal could at the time of the investment. This happens

when inflation grows faster than the return on your investment. A well-diversified portfolio with

some investment in equities might help mitigate this risk.

4) Business Risk

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Business risk is the uncertainty concerning the future existence, stability, and profitability of the

issuer of the security. Business risk is inherent in all business ventures. The future financial

stability of a company cannot be predicted or guaranteed, nor can the price of its securities.

Adverse changes in business circumstances will reduce the market price of the companys equity

resulting in proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the

equity of such a company.

5) Economic Risk

Economic risk involves uncertainty in the economy, which, in turn, can have an adverse effect on

a companys business. For instance, if monsoons fail in a year, equity stocks of agriculture-based

companies will fall and NAVs of Mutual Funds, which have invested in such stocks, will fall

proportionately.

6) The Risk-Return Trade-off:

The most important relationship to understand is the risk-return trade-off. Higher the risk greater

the returns/loss and lower the risk lesser the returns/loss.

Hence it is upto you, the investor to decide how much risk you are willing to take. In order to do

this you must first be aware of the different types of risks involved with your investment

decision.

7) Credit Risk:

The debt servicing ability (may it be interest payments or repayment of principal) of a company

through its cashflows determines the Credit Risk faced by you. This credit risk is measured by

independent rating agencies like CRISIL who rate companies and their paper. A AAA rating is

considered the safest whereas a D rating is considered poor credit quality. A well-diversified

portfolio might help mitigate this risk. The possibility that company or other issuers whose bonds

are owned by the fund may fail to pay their debts (including the debt owed to holders of their

bonds). Credit risk is less of a factor for bond funds that invest in insured bonds or U.S. Treasury

bonds. By contrast, those that invest in the bonds of companies with poor credit ratings generally

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will be subject to higher risk.

8) Interest Rate Risk:

In a free market economy interest rates are difficult if not impossible to predict. Changes in

interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds

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

environment. A well-diversified portfolio might help mitigate this risk.

9) Liquidity Risk:

Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.

Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as

internal risk controls that lean towards purchase of liquid securities.

10) Prepayment Risk:

the chance that a bond will be paid off early. For example, if interest rates fall, a bond issuer

may decide to pay off (or "retire") its debt and issue new bonds that pay a lower rate. When this

happens, the fund may not be able to reinvest the proceeds in an investment with as high a return

or yield.

PERFORMANCE MEASURES OF MUTUAL FUNDS:

Mutual Fund industry today, with about 30 players and more than six hundred schemes, is one of

the most preferred investment avenues in India. However, with a plethora of schemes to choose

from, the retail investor faces problems in selecting funds. Factors such as investment strategy

and management style are qualitative, but the funds record is an important indicator too.

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Though past performance alone cannot be indicative of future performance, it is, frankly, the

only quantitative way to judge how good a fund is at present. Therefore, there is a need to

correctly assess the past performance of different Mutual Funds. Worldwide, good Mutual Fund

companies over are known by their AMCs and this fame is directly linked to their superior stock

selection skills.

For Mutual Funds to grow, AMCs must be held accountable for their selection of stocks. In

other words, there must be some performance indicator that will reveal the quality of stock

selection of various AMCs.

Return alone should not be considered as the basis of measurement of the performance of a

Mutual Fund scheme, it should also include the risk taken by the fund manager because different

funds will have different levels of risk attached to them. Risk associated with a fund, in a

general, can be defined as Variability or fluctuations in the returns generated by it. The higher

the fluctuations in the returns of a fund during a given period, higher will be the risk associated

with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces.

First, general market fluctuations, which affect all the securities, present in the market, called

Market risk or Systematic risk and second, fluctuations due to specific securities present in the

portfolio of the fund, called Unsystematic risk. The Total Risk of a given fund is sum

of these two and is measured in terms of standard deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in

the NAV of the fund vis--vis market. The more responsive the NAV of a Mutual Fund is to the

changes in the market; higher will be its beta. Beta is calculated by relating the returns on a

Mutual Fund with the returns in the market. While Unsystematic risk can be diversified through

investments in a number of instruments, systematic risk cannot. By using the risk return

relationship, we try to assess the competitive strength of the Mutual Funds one another in a better

way. In order to determine the risk-adjusted returns of investment portfolios, several eminentauthors have worked since 1960s to develop composite performance indices to evaluate a

portfolio by comparing alternative portfolios within a particular risk class.

The most important and widely used measures of performance are:

The TreynorMeasure

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The Sharpe Measure

Jenson Model

Fama Model

1) The Treynor Measure:-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's

Index.This Index is a ratio of return generated by the fund over and above risk free rate of return

(generally taken to be the return on securities backed by the government, as thereis no credit risk

associated), during a given period and systematic risk associated with it(beta). Symbolically, it

can be represented as :

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where, Ri represents return on fund,

Rf is risk free rate of return,

And Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive Treynor's

Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index

is an indication of unfavorable performance.

2) The Sharpe Measure:-

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of

returns generated by the fund over and above risk free rate of return and the total risk associated

with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about.

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So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be

written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,Si is standard deviation of the fund,

Ri represents return on fund, and

Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of afund, a

low and negative Sharpe Ratio is an indication of unfavorable performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a

numerical risk measure. The total risk is appropriate when we are evaluating the risk return

relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant

measure of risk when we are evaluating less than fully diversified portfolios or individual stocks.

For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total

risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-

diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified

fund that ranks higher on Treynor measure, compared with another fund that is highly

diversified, will rank lower on Sharpe Measure.

3) Jenson Model:-

Jenson's model proposes another risk adjusted performance measure. This measure was

developed by Michael Jenson and is sometimes referred to as the differential Return Method.

This measure involves evaluation of the returns that the fund has generated vs .the returns

actually expected out of the fund1 given the level of its systematic risk. The surplus between the

two returns is called Alpha, which measures the performance of a fund compared with the actual

returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as

:Ri = Rf + Bi (Rm - Rf)

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Where,Ri represents return on fund, and Rm is average market return during the given period, Rf

is risk free rate of return, and Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return from the actual return

of the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation

of this model is that it considers only systematic risk not the entire risk associated with the fund

and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is

primitive.

4) Fama Model:-

The Eugene Fama model is an extension of Jenson model. This model compares the

performance, measured in terms of returns, of a fund with the required return commensurate with

the total risk associated with it. The difference between these two istaken as a measure of the

performance of the fund and is called Net Selectivity. The Net Selectivity represents the stock

selection skill of the fund manager, as it is the excess returns over and above the return required

to compensate for the total risk taken by the fund manager. Higher value of which indicates that

fund manager has earned returns well above the return commensurate with the level of risk taken

by him. Required return can be calculated as:

Ri = Rf + Si/Sm*(Rm - Rf)

Where,Ri represents return on fund,

Sm is standard deviation of market returns,

Rm is average market return during the given period, and Rf is risk free rate of return.

The Net Selectivity is then calculated by subtracting this required return from the actual return of

the fund. Among the above performance measures, two models namely, Treynor measure and

Jenson model use Systematic risk is based on the premise that the Unsystematic risk is

diversifiable. These models are suitable for large investors like institutional investors with high

risk taking capacities as they do not face paucity of funds and can invest in a number of options

to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors.

However, Sharpe measure and Fama model that consider the entire risk associated with fund are

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suitable for small investors, as the ordinary investor lacks the necessary skill and resources to

diversify. Moreover, the selection of the fund on the basis of superior stock selection ability of

the fund manager will also help in safeguarding the money invested to a great extent. The

investment in funds that have generated big returns at higher levels of risks leaves the

money all the more prone to risks of all kinds that may exceed the individual investors' risk

appetite.

COMPANY PROFILE(KOTAK MAHINDRA)

Kotak Mahindra Mutual Fund (KMMF) is managed by Kotak Mahindra AssetManagement

Company Ltd., a wholly owned subsidiary of Kotak MahindraBank Ltd. Kotak Mahindra Mutual

Fund launched its Schemes in December 1998 and today manages assets over and above Rs.

7353.82 cr. contributed by more than 1,99,818investors in various schemes. KMMF has to its

credit the launching of innovative schemes and plans like Kotak Gilt and Free Life Insurance

with Kotak Bond Deposit Plan. Kotak Mahindra is one of India's leading financial institutions,

offering complete financial solutions that encompass every sphere of life. From commercial

banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group

caters to the financial needs of individuals and corporates. The group has a net worth of around

Rs.1,700 crore and employs over 4,000 employees in its various businesses. With a presence in

74 cities in India and offices in New York, London, Dubai and Mauritius, it services a customer

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base of over 5,00,000 Kotak Mahindra has international partnerships with Goldman Sachs (one

of the world'sl argest investment banks and brokerage firms), Ford Credit (one of the world's

largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset

management conglomerate).

Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned

subsidiary of KMBL, is the asset manager for Kotak Mahindra Mutual Fund (KMMF).KMAMC

started operations in December 1998 and has over 1,99,818 investors in various schemes.

KMMF offers schemes catering to investors with varying risk - return profiles and was the first

fund house in the country to launch a dedicated gilt scheme investing only in government

securities.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited.

This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &Company.

Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the

company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady and

confident journey to growth and success. Kotak Mahindra Finance Limited starts the activity of

Bill Discounting Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market.

The Auto Finance division is started the Investment Banking Division is started. Enters the

Funds Syndication sector 1995 Brokerage and Distribution businesses incorporated into a

separate company -Kotak Securities. Investment Banking division incorporated into a separate

company -Kotak Mahindra Capital Company.1996 The Auto Finance Business is hived off into a

separate company - Kotak Mahindra Primus Limited. Kotak Mahindra takes a significant stake in

Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. The launch of Matrix

Information Services Limited marks the Groups entry into information distribution.1998 Enters

the mutual fund market with the launch of Kotak Mahindra Asset Management Company.

Kotak Mahindra ties up with Old Mutual plc. For the Life Insurance business. Kotak Securities

launches kotakstreet.com - its on-line broking site. Formal commencement of private equity

activity through setting up of Kotak Mahindra Venture Capital Fund.2001 Matrix sold to Friday

Corporation Launches Insurance Services 2003 Kotak Mahindra Finance Ltd. converts to

bank Kotak Mahindra is one of India's leading financial institutions, offering complete financial

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solutions cities in India and offices in New York, London, Dubai and Mauritius, it services a

customer base of over 5,00,000.has international partnerships with Goldman Sachs (one of the

world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest

dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset

management conglomerate that encompass every sphere of life. From commercial banking, to

stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the

financial needs of individuals and corporates.

The group has a net worth of around Rs.1,700 crore and employs over 4,000 employees in its

various businesses. With a presence in 74 cities in India and offices in New York, London,

Dubai and Mauritius, it services a customer base of over 5,00,000.Kotak Mahindra has

international partnerships with Goldman Sachs (one of the world's largest investment banks and

brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and

Old Mutual (a large insurance, banking and asset management conglomerate).Kotak Mahindra

Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KMBL, is the

asset manager for Kotak Mahindra Mutual Fund (KMMF).KMAMC started operations in

December 1998 and has over 1,99,818 investors in various schemes. KMMF offers schemes

catering to investors with varying risk - return profiles and was the first fund house in the

country to launch a dedicated gilt scheme investing only in government securities.

Kotak Investment Banking* (KIB), India's premier Investment Bank is a strategic joint

venture between Kotak Mahindra Bank Limited (KMBL) and the Goldman Sachs

Group,LLP.KMBL has come into existence in March 2003 through the conversion

ofKotak Mahindra Bank Ltd. into a Commercial Bank. Kotak Mahindra is one of India's

leading financial institutions, offering complete financial solutions that encompass every sphere

of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to

investment banking, the group caters to the needs of individuals and corporates. The group has a

net worth of over Rs.1,550 crore and employs over 3,000 employees in its various businesses.

With a presence in 60 cities in India and offices in New York, London, Dubai and Mauritius, it

services a customer base of over 5,00,000.Kotak Mahindra has international partnerships with

Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit

(one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance,

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banking and asset management conglomerate).Kotak Investment Banking (KIB) and Kotak

Institutional Equities represent the securities business of the Kotak Mahindra Group **(KI),

both, joint ventures with Goldman Sachs involved in brokerage, distribution and research

We are a full service Investment Bank bringing to our clients the global reach and

expertise of Goldman Sachs and the local knowledge and skills of Kotak Mahindra. As a full

service Investment Bank, Kotak Investment Banking core business areas include Equity

Issuances, Mergers & Acquisitions, Advisory Services and Fixed Income Securities and

Principal Business. Our strength lies in understanding our clients' businesses backed by a strong

research team and an extensive distribution network, which spans a wide variety of investors

across the country. We are also the first Indian Investment Bank to be registered with the

Securities & Futures Authority in the UK (through our wholly owned subsidiary) and the

National Association of Securities and Dealers in the USA. We are also the first Indian

Investment Bank to be appointed by the Government of India as a Co-lead Manager in their

international divestment of Gas Authority of India Ltd through a GDR offering. We are today

well positioned in an increasing globalised environment to provide full service to its clients

based either in India or overseas.

OBJECTIVES:

1. To project Mutual Fund as the productive avenue for investing activities.

2. To show the wide range of investment options available in Mutual Funds by explaining its

various schemes.

3. To compare the schemes based on Sharpes ratio, Treynors ratio, Co-efficient, Returns and

show which scheme is best for the investor based on his risk profile.

4. To help an investor make a right choice of investment, while considering the inherent risk

factors. To understand the recent trends in Mutual Funds world. The comparison between these

schemes is made based on the following factors

A) Sharpes Ratio

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B) Treynors Ratio

C) (Beta) co-efficient.

D) Returns

A) The Sharpes Measure :-

In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which isa ratio of

returns generated by the fund over and above risk free rate of return and thetotal risk associated

with it.According to Sharpe, it is the total risk of the fund that the investors are concernedabout.

So, the model evaluates funds on the basis of reward per unit of total risk.Symbolically, it can be

written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,Si is Standard Deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of afund, a

low and negative Sharpe Ratio is an indication of unfavorable performance.

B) The Treynor Measure :-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's

Index. This Index is a ratio of return generated by the fund over and above risk free rate of return

(generally taken to be the return on securities backed by the government, as thereis no credit risk

associated), during a given period and systematic risk associated with it(beta). Symbolically, it

can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,Ri represents return on fund, Rf is risk free rate of return, and Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive Treynor's

Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index

is an indication of unfavorable performance.

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C) (Beta) Co-efficient:-

Systematic risk is measured in terms of Beta, which represents fluctuations in the NAVof the

fund vis--vis market. The more responsive the NAV of a Mutual Fund is to the changes in the

market; higher will be its beta. Beta is calculated by relating the returns on a Mutual Fund with

the returns in the market. While unsystematic risk can be diversified through investments

in a number of instruments,

Documents

Major Mutual Funds in India - Final