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CHAPTER-I
INTRODUCTION
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INTRODUCTION
A mutual fund is just the connecting bridge or a financial intermediary that allows a group
of investors to pool their money together with a predetermined investment objective. The mutual
fund will have a fund manager who is responsible for investing the gathered money into specific
securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions
of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.
Mutual funds are considered as one of the best available investments as
compare to others they are very cost efficient and also easy to invest in, thus by pooling money
together in a mutual fund, investors can purchase stocks or bonds with much lower trading coststhan if they tried to do it on their own. But the biggest advantage to mutual funds is
diversification, by minimizing risk & maximizing returns
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NEED OF THE STUDY
1. Mutual funds are dynamic financial intuitions which play crucial role in an economy by
mobilizing savings and investing them in the capital market.
2. The activities of mutual funds have both short and long term impact on the savings in the
capital market and the national economy.
3. Mutual funds, trust, assist the process of financial deepening & intermediation.
4. To banking at the same time they also compete with banks and other financial intuitions.
5. India is one of the few countries to day maintain a study growth rate is domestic savings.
OBJECTIVES
1. To show the wide range of investment options available in MFs by explaining various
schemes offered by different AMCs.
2. To help an investor to make a right choice of investment, while considering the inherent risk
factors.
3. To understand the recent trends in the MF world.
4. To understand the risk and return of the various schemes.
5. To find out the various problems faced by Indian mutual funds and possible solutions.
SCOPE THE STUDY
1. The study is limited to the analysis made for a Growth scheme offered by four AMCs.
2. Each scheme is calculated their risk and return using different performance measurement
theories.
3. Because of the reason for such performance is immediately analyzed in the issue.
4. Graphs are used to reflect the portfolio risk and return.
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RESEARCH METHODOLOGY & TOOLS
This study is basically depends on
1. Primary Data
2. Secondary Data
Primary data: The primary data collected from the different companies through enquiry.
Secondary data:
The secondary data collected from the different sites, broachers, news papers, company offer
documents, different books and through suggestions from the project guide and from the faculty
members of our college.
TOOLS USED IN THIS PROJECT
The following parameters were considered for analysis:
Beta
Alpha
Correlation coefficient
Treynors Ratio
Sharpes Ratio
ADVANTAGES OF THE MUTUAL FUNDS
1. The investors risk is reduced to the minimum.2. The funds managers maximize the income of the funds.
3. To achieve a similar degree of diversification, an individual investor as to spend
considerable and money.
4. In a mutual fund, it is possible to reinvest the dividend and capital gains.
5. Selection of shares debentures etc and timing is made available to investors. .
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LIMITATIONS OF THE STUDY:
1. The study is conducted in short period, due to which the study may not be detailed in all
aspects.
2. The study is limited only to the analysis of different schemes and its suitability to different
investors according to their risk-taking ability. 3. The study is based on secondary data available
from monthly fact sheets, web sites; offer documents, magazines and newspapers etc., as primary
data was not accessible.
4. The study is limited by the detailed study of various schemes.
5. The NAVS are not uniform.
6. The data collected for this study is not proper because some mutual funds are not disclosing
the correct information.
7. The study is not exempt from limitations of Sharpe Treynor and Jenson measure.
8. Unique risk is completely ignored in all themeasure.
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CHAPTER-II
INDUSTRY PROFILE
&
COMPANY PROFILE
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INDUSTRY PROFILE
A bank is a financial institution that accepts deposits and channels those deposits into lending
activities. Banks primarily provide financial services to customers while enriching investors.
Government restrictions on financial activities by banks vary over time and location. Banks are
important players in financial markets and offer services such as investment funds and loans. In
some countries such as Germany, banks have historically owned major stakes in industrial
corporations while in other countries such as the United States banks are prohibited from owning
non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity
known as the keiretsu. In France, bancassurance is prevalent, as most banks offer insurance
services (and now real estate services) to their clients.
The level ofgovernment regulation of the banking industry varies widely, with countries such as
Iceland, having relatively light regulation of the banking sector, and countries such as China
having a wide variety of regulations but no systematic process that can be followed typical of a
communist system.
The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy,
which has been operating continuously since 1472.
History
Origin of the word
The name bankderives from the Italian word banco "desk/bench", used during the Renaissance
by Jewish Florentine bankers, who used to make their transactions above a desk covered by a
green tablecloth. However, there are traces of banking activity even in ancient times, which
indicates that the word 'bank' might not necessarily come from the word 'banco'.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called macellaon a long bench
called a bancu, from which the words banco and bankare derived. As a moneychanger, the
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merchant at the bancu did not so much invest money as merely convert the foreign currency into
the only legal tender in Romethat of the Imperial Mint.
The earliest evidence of money-changing activity is depicted on a silver drachm coin from
ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented
in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a
pun on the name of the city.
In fact, even today in Modern Greekthe word Trapeza () means both a table and a bank.
Traditional banking activities
Banks act as payment agents by conducting checking or current accounts for customers, payingcheques drawn by customers on the bank, and collecting cheques deposited to customers' current
accounts. Banks also enable customer payments via other payment methods such as telegraphic
transfer, EFTPOS, and ATM.
Banks borrow money by accepting funds deposited on current accounts, by accepting term
deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by
making advances to customers on current accounts, by making installment loans, and by
investing in marketable debt securities and other forms of money lending.
Banks provide almost all payment services, and a bank account is considered indispensable by
most businesses, individuals and governments. Non-banks that provide payment services such as
remittance companies are not normally considered an adequate substitute for having a bank
account.
Banks borrow most funds from households and non-financial businesses, and lend most funds to
households and non-financial businesses, but non-bank lenders provide a significant and in many
cases adequate substitute for bank loans, and money market funds, cash management trusts and
other non-bank financial institutions in many cases provide an adequate substitute to banks for
lending savings to.
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Entry regulation
Currently in most jurisdictions commercial banks are regulated by government entities and
require a special bank licence to operate.
Usually the definition of the business of banking for the purposes of regulation is extended to
include acceptance of deposits, even if they are not repayable to the customer's orderalthough
money lending, by itself, is generally not included in the definition.
Unlike most other regulated industries, the regulator is typically also a participant in the market,
i.e. a government-owned (central) bank. Central banks also typically have a monopoly on the
business of issuing banknotes. However, in some countries this is not the case. In the UK, for
example, the Financial Services Authority licences banks, and some commercial banks (such as
the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of
England, the UK government's central bank.
Definition
The definition of a bank varies from country to country.
Under English common law, a banker is defined as a person who carries on the business ofbanking, which is specified as:
conducting current accounts for his customers
paying cheques drawn on him, and
collecting cheques for his customers.
In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law
in relation to negotiable instruments, including cheques, and this Act contains a statutorydefinition of the term banker: bankerincludes a body of persons, whether incorporated or not,
who carry on the business of banking' (Section 2, Interpretation). Although this definition seems
circular, it is actually functional, because it ensures that the legal basis for bank transactions such
as cheques do not depend on how the bank is organised or regulated.
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The business of banking is in many English common law countries not defined by statute but by
common law, the definition above. In other English common law jurisdictions there are statutory
definitions of the business of banking or banking business. When looking at these definitions it is
important to keep in mind that they are defining the business of banking for the purposes of the
legislation, and not necessarily in general. In particular, most of the definitions are from
legislation that has the purposes of entry regulating and supervising banks rather than regulating
the actual business of banking. However, in many cases the statutory definition closely mirrors
the common law one. Examples of statutory definitions:
"banking business" means the business of receiving money on current or deposit account,
paying and collecting cheques drawn by or paid in by customers, the making of advances
to customers, and includes such other business as the Authority may prescribe for thepurposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).
"banking business" means the business of either or both of the following:
1. receiving from the general public money on current, deposit, savings or other similar
account repayable on demand or within less than [3 months] ... or with a period of call or
notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers
[6]
Since the advent ofEFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct
debit and internet banking, the cheque has lost its primacy in most banking systems as a payment
instrument. This has led legal theorists to suggest that the cheque based definition should be
broadened to include financial institutions that conduct current accounts for customers and
enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.
Accounting for bank accounts
Bank statements are accounting records produced by banks under the various accounting
standards of the world. Under GAAP and IFRS there are two kinds of accounts: debit and credit.
Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses.
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This means you credit a credit accountto increase its balance, and you debit a debit accountto
decrease its balance.
This also means you debit your savings account every time you deposit money into it (and the
account is normally in deficit), while you credit your credit card account every time you spend
money from it (and the account is normally in credit).
However, if you read your bank statement, it will say the oppositethat you credit your account
when you deposit money, and you debit it when you withdraw funds. If you have cash in your
account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or
deficit) balance.
The reason for this is that the bank, and not you, has produced the bank statement. Your savings
might beyourassets, but the bank's liability, so they are credit accounts (which should have a
positive balance). Conversely, your loans areyourliabilities but the bank's assets, so they are
debit accounts (which should also have a positive balance).
Where bank transactions, balances, credits and debits are discussed below, they are done so from
the viewpoint of the account holderwhich is traditionally what most people are used to seeing.
Economic functions
1. issue of money, in the form ofbanknotes and current accounts subject to cheque or
payment at the customer's order. These claims on banks can act as money because they
are negotiable and/or repayable on demand, and hence valued at par. They are effectively
transferable by mere delivery, in the case ofbanknotes, or by drawing a cheque that the
payee may bank or cash.
2. netting and settlement of paymentsbanks act as both collection and paying agents for
customers, participating in interbank clearing and settlement systems to collect, present,
be presented with, and pay payment instruments. This enables banks to economise on
reserves held for settlement of payments, since inward and outward payments offset each
other. It also enables the offsetting of payment flows between geographical areas,
reducing the cost of settlement between them.
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3. credit intermediationbanks borrow and lend back-to-back on their own account as
middle men.
4. credit quality improvementbanks lend money to ordinary commercial and personal
borrowers (ordinary credit quality), but are high quality borrowers. The improvement
comes from diversification of the bank's assets and capital which provides a buffer to
absorb losses without defaulting on its obligations. However, banknotes and deposits are
generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise
the funding it needs to continue to operate, this puts the note holders and depositors in an
economically subordinated position.
5. maturity transformationbanks borrow more on demand debt and short term debt, but
provide more long term loans. In other words, they borrow short and lend long. With a
stronger credit quality than most other borrowers, banks can do this by aggregating issues
(e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and
redemptions of banknotes), maintaining reserves of cash, investing in marketable
securities that can be readily converted to cash if needed, and raising replacement funding
as needed from various sources (e.g. wholesale cash markets and securities markets).
Law of banking
Banking law is based on a contractual analysis of the relationship between the bank(defined
above) and the customerdefined as any entity for which the bank agrees to conduct an account.
The law implies rights and obligations into this relationship as follows:
1. The bank account balance is the financial position between the bank and the customer:
when the account is in credit, the bank owes the balance to the customer; when the
account is overdrawn, the customer owes the balance to the bank.
2. The bank agrees to pay the customer's cheques up to the amount standing to the credit of
the customer's account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account without a mandate from the customer,
e.g. a cheque drawn by the customer.
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4. The bank agrees to promptly collect the cheques deposited to the customer's account as
the customer's agent, and to credit the proceeds to the customer's account.
5. The bank has a right to combine the customer's accounts, since each account is just an
aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer's account, to the extent that the
customer is indebted to the bank.
7. The bank must not disclose details of transactions through the customer's account
unless the customer consents, there is a public duty to disclose, the bank's interests
require it, or the law demands it.
8. The bank must not close a customer's account without reasonable notice, since cheques
are outstanding in the ordinary course of business for several days.
These implied contractual terms may be modified by express agreement between the customer
and the bank. The statutes and regulations in force within a particular jurisdiction may also
modify the above terms and/or create new rights, obligations or limitations relevant to the bank-
customer relationship.
Some types of financial institution, such as building societies and credit unions, may be partly or
wholly exempt from bank licence requirements, and therefore regulated under separate rules.
The requirements for the issue of a bank licence vary between jurisdictions but typically include:
1. Minimum capital
2. Minimum capital ratio
3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior
officers
4. Approval of the bank's business plan as being sufficiently prudent and plausible.
Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals and small
businesses; business banking, providing services to mid-market business; corporate banking,
directed at large business entities; private banking, providing wealth management services to
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high net worth individuals and families; and investment banking, relating to activities on the
financial markets. Most banks are profit-making, private enterprises. However, some are owned
by government, or are non-profit organizations.
Central banks are normally government-owned and charged with quasi-regulatory
responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They
generally provide liquidity to the banking system and act as the lender of last resort in event of a
crisis.
Types of retail banks
Commercial bank: the term used for a normal bank to distinguish it from an investment
bank. After the Great Depression, the U.S. Congress required that banks only engage in
banking activities, whereas investment banks were limited to capital market activities.
Since the two no longer have to be under separate ownership, some use the term
"commercial bank" to refer to a bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses.
Community Banks: locally operated financial institutions that empower employees to
make local decisions to serve their customers and the partners.
Community development banks: regulated banks that provide financial services andcredit to under-served markets or populations.
Postal savings banks: savings banks associated with national postal systems.
Private banks: banks that manage the assets of high net worth individuals.
Offshore banks: banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.
Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even
18th century. Their original objective was to provide easily accessible savings products to
all strata of the population. In some countries, savings banks were created on public
initiative; in others, socially committed individuals created foundations to put in place the
necessary infrastructure. Nowadays, European savings banks have kept their focus on
retail banking: payments, savings products, credits and insurances for individuals or
small and medium-sized enterprises. Apart from this retail focus, they also differ from
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commercial banks by their broadly decentralised distribution network, providing local
and regional outreachand by their socially responsible approach to business and
society.
Building societies and Landesbanks: institutions that conduct retail banking.
Ethical banks: banks that prioritize the transparency of all operations and make only what
they consider to be socially-responsible investments.
Islamic banks: Banks that transact according to Islamic principles.
Types of investment banks
Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for
their own accounts, make markets, and advise corporations on capital market activities
such as mergers and acquisitions.
Merchant banks were traditionally banks which engaged in trade finance. The modern
definition, however, refers to banks which provide capital to firms in the form of shares
rather than loans. Unlike venture capital firms, they tend not to invest in new companies.
Both combined
Universal banks, more commonly known as financial services companies, engage in
several of these activities. These big banks are very diversified groups that, among other
services, also distribute insurancehence the term bancassurance, a portmanteau word
combining "banque or bank" and "assurance", signifying that both banking and insurance
are provided by the same corporate entity.
Other types of banks
Islamic banks adhere to the concepts ofIslamic law. This form of banking revolves
around several well-established principles based on Islamic canons. All banking activities
must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit
(markup) and fees on the financing facilities that it extends to customers.
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COMPANY PROFILE
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Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a
steady and confident journey leading to growth and success. The milestones of the group growth
story are listed below year wise.
2010
Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored
enterprise, became operational as a national commodity exchange.
2009 Kotak Mahindra Bank Ltd. opened a representative office in Dubai
Entered Ahmedabad Commodity Exchange as anchor investor.
2008 Launched a Pension Fund under the New Pension System.
2006 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital
Company and Kotak Securities.
2005 Kotak Group realigned joint venture in Ford Credit; their stake in Kotak
Mahindra Prime was bought out (formerly known as Kotak Mahindra Primus
Ltd) and Kotak groups stake in Ford credit Kotak Mahindra was sold.
Launched a real estate fund.
2004
Launched India Growth Fund, a private equity fund.
2003 Kotak Mahindra Finance Ltd. converted into a commercial bank - the first Indian
company to do so.
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2001 Matrix sold to Friday Corporation.
Launched Insurance Services.
Kotak Securities Ltd. was incorporated
2000 Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance business.
Kotak Securities launched its on-line broking site.
Commencement of private equity activity through setting up of Kotak
Mahindra Venture Capital Fund.
1998
Entered the mutual fund market with the launch of Kotak Mahindra Asset
Management Company.
1996 The Auto Finance Business is hived off into a separate company - Kotak
Mahindra Prime Limited (formerly known as 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 Group's entry into information distribution.
1995 Brokerage and Distribution businesses incorporated into a separate company -
Securities. Investment banking division incorporated into a separate company -
Kotak Mahindra Capital Company
1992
Entered the Funds Syndication sector
1991 The Investment Banking Division was started. Took over FICOM, one of India's
largest financial retail marketing networks
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1990 The Auto Finance division was started
Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market
1986 Kotak Mahindra Finance Ltd started the activity of Bill Discounting
Our Businesses
Multiple businesses. One brand.
Kotak Mahindra is one of India's leading banking and financial services groups, offering a wide
range of financial services that encompass every sphere of life.
Kotak Mahindra Bank Ltd
Kotak Mahindra Bank Ltd is a one stop shop for all banking needs.
The bank offers personal finance solutions of every kind from savings accounts to credit
cards, distribution of mutual funds to life insurance products. Kotak Mahindra Bank
offers transaction banking, operates lending verticals, manages IPOs and provides
working capital loans. Kotak has one of the largest and most respected Wealth
Management teams in India, providing the widest range of solutions to high net worth
individuals, entrepreneurs, business families and employed professionals.
For more information, please visit the Kotak Mahindra Bank website
www.kotak.com/bank/personal-banking/
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Kotak Mahindra Old Mutual Life Insurance Ltd
Kotak Mahindra Old Mutual Life Insurance Ltd is a 74:26 joint
venture between Kotak Mahindra Bank Ltd., its affiliates and Old Mutual plc. A
Company that combines its international strengths and local advantages to offer its
customers a wide range of innovative life insurance products, helping them take
important financial decisions at every stage in life and stay financially independent. The
company covers over 3 million lives and is one of the fastest growing insurance
companies in India. www.kotaklifeinsurance.com
Kotak Securities Ltd
Kotak Securities is one of the largest broking houses in India with a
wide geographical reach. Kotak Securities operations include stock broking and
distribution of various financial products including private and secondary placement of
debt, equity and mutual funds.
Kotak Securities operate in five main areas of business:
o Stock Broking (retail and institutional)
o Depository Services
o Portfolio Management Services
o Distribution of Mutual Funds
o Distribution of Kotak Mahindra Old Mutual Life Insurance Ltd products
For more information, please visit the Kotak Securities website www.kotaksecurities.com
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Kotak Mahindra Capital Company (KMCC)
Kotak Investment Banking (KMCC) is a full-service investment bank
in India offering a wide suite of capital market and advisory solutions to leading domestic
and multinational corporations, banks, financial institutions and government companies.
Our services encompass Equity & Debt Capital Markets, M&A Advisory, Private Equity
Advisory, Restructuring and Recapitalization services, Structured Finance services and
Infrastructure Advisory & Fund Mobilization.
For more information, please visit the Kotak Investment Banking website
www.kmcc.co.in
Kotak Mahindra Prime Ltd (KMPL)
Kotak Mahindra Prime Ltd is among India's largest dedicated
passenger vehicle finance companies. KMPL offers loans for the entire range of
passenger cars, multi-utility vehicles and pre-owned cars. Also on offer are inventory
funding and infrastructure funding to car dealers with strategic arrangements via various
car manufacturers in India as their preferred financier.
For more information, please visit the KMPL website http://carloan.kotak.com
Kotak International Business
Kotak International Business specialises in providing a range of
services to overseas customers seeking to invest in India. For institutions and high net
worth individuals outside India, Kotak International Business offers asset management
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through a range of offshore funds with specific advisory and discretionary investment
management services.
For more information, please visit the Kotak Mahindra International Business website
www.investindia.kotak.com
Kotak Mahindra Asset Management Company Ltd (KMAMC)
Kotak Mahindra Asset Management Company offers a complete
bouquet of asset management products and services that are designed to suit the diverse
risk return profiles of each and every type of investor. KMAMC and Kotak Mahindra
Bank are the sponsors of Kotak Mahindra Pension Fund Ltd, which has been appointed
as one of six fund managers to manage pension funds under the New Pension Scheme
(NPS).
For more information, please visit the KMAMC website
www.kotakmutual.com/kmw/main.htm
Kotak Private Equity Group (KPEG)
Kotak Private Equity Group helps nurture emerging businesses and
mid-size enterprises to evolve into tomorrow's industry leaders. With a proven track
record of helping build companies, KPEG also offers expertise with a combination of
equity capital, strategic support and value added services. What differentiates KPEG is
not merely funding companies, but also having a close involvement in their growth as
board members, advisors, strategists and fund-raisers.
For more information, please visit the KPEG website www.privateequityfund.kotak.com
http://www.investindia.kotak.com/http://www.kotakmutual.com/kmw/main.htmhttp://www.privateequityfund.kotak.com/http://www.privateequityfund.kotak.com/http://www.kotakmutual.com/kmw/main.htmhttp://www.investindia.kotak.com/8/2/2019 Mutual Funds in Kotak 2011-1
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Kotak Realty Fund
Kotak Realty Fund deals with equity investments covering sectors such
as hotels, IT parks, residential townships, shopping centres, industrial real estate, health
care, retail, education and property management. The investment focus here is on
development projects and enterprise level investments, both in real estate intensive
businesses.
For more information, please visit the Kotak Realty Fund website
www.realtyfund.kotak.com
Senior Management
Mr. Uday S. Kotak
Executive Vice Chairman and Managing Director
Mr. Uday Kotak, is the Executive Vice-Chairman and Managing Director of the Bank, and its
principal founder and promoter. Mr. Kotak is an alumnus of Jamnalal Bajaj Institute of
Management Studies.
In 1985, when he was still in his early twenties, Mr Kotak thought of setting up a bank when
private Indian banks were not even seen in the game. First Kotak Capital Management Finance
Ltd (which later became Kotak Mahindra Finance Ltd), and then with Kotak Mahindra Finance
Ltd, Kotak became the first non-banking finance company in India's corporate history to be
converted into a bank. Over the years, Kotak Mahindra Group grew into several areas like stock
broking and investment banking to car finance, life insurance and mutual funds.
Among the many awards to Mr Kotak's credit are the CNBC TV18 Innovator of the Year Award
in 2006 and the Ernst & Young Entrepreneur of the Year Award in 2003. He was featured as one
of the Global Leaders for Tomorrow at the World Economic Forum's annual meet at Davos in
1996. He was also featured among the Top Financial Leaders for the 21st Century by Euromoney
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magazine. He was named as CNBC TV18 India Business Leader of the Year 2008 and as the
most valued CEO by businessworld in 2010.
Mr. C Jayaram
Joint Managing Director
Mr. C. Jayaram, is a Joint Managing Director of the Bank and is currently in charge of the
Wealth Management Business of the Kotak Group. An alumnus of IIM Kolkata, he has been
with the Kotak Group since 1990 and member of the Kotak board in October 1999. He also
oversees the international subsidiaries and the alternate asset management business of the group.
He is the Director of the Financial Planning Standards Board, India. He has varied experience of
over 25 years in many areas of finance and business, has built numerous businesses for the
Group and was CEO of Kotak Securities Ltd. An avid player and follower of tennis, he also has a
keen interest in psephology.
Mr. Dipak Gupta
Joint Managing Director
An electronics engineer and an alumnus of IIM Ahmedabad, Mr. Gupta has been with the Kotak
Group since 1992 and joined the board in October 1999.
He heads commercial banking, retail asset businesses and looks after group HR function. Early
on, he headed the finance function and was instrumental in the joint venture between Kotak
Mahindra and Ford Credit International. He was the first CEO of the resulting entity, Kotak
Mahindra Primus Ltd.
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Awards
Recent achievements
At Kotak Mahindra Group we take a client-centric view and constantly innovate to provide you
with the best of services and infrastructure. We have regularly received accolades that standtestimony to our success in this endeavour. Some of our recent achievements are:
Banking
ICAI AwardExcellence in Financial Reporting under Category 1 - Banking Sector for the year ending
31st March, 2010
Asiamoney
Best Local Cash Management Bank 2010
IDG India
Kotak won the CIO 100 'The Agile 100' award 2010
IDRBT
Banking Technology Excellence Awards Best Bank Award in IT Framework and
Governance Among Other Banks' - 2009
Banking Technology Award for IT Governance and Value Delivery, 2008
IR Global Rankings
Best Corporate Governance Practices - Ranked among the top 5 companies in AsiaPacific, 2009
FinanceAsia
Best Private Bank in India, for Wealth Management business, 2009
Kotak Royal Signature Credit Card
Was chosen "Product of the Year" in a survey conducted by Nielsen in 2009
IBA Banking Technology Awards
Best Customer Relationship Achievement - Winner 2008 & 2009
Best overall winner, 2007
Best IT Team of the Year, 4 years in a row from 2006 to 2009
Best IT Security Policies & Practices, 2007
Euromoney
Best Private Banking Services (overall), 2009
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Emerson Uptime Champion Awards
Technology Senate Emerson Uptime Championship Award in the BFSI category, 2008
Corporate Responsibility
Community investment and development
Kotak Mahindra views Corporate Social Responsibility as an investment in society and in its
own future. Kotak uses the power of its human and financial capital to help in transforming
communities into vibrant, desirable places for people to live. The group leverages its core
competencies in three areas:
Sustainability
An integral part of all Kotak Mahindra Group activities is to be consistently responsible
to shareholders, clients, employees, society and the environment.
Economic Development
By helping people achieve their financial goals, Kotak strengthens the fabric of
communities and helps them overcome unemployment and poverty to help them shape
their future.
Doing My Bit
A growing number of employees are committed to civic leadership and responsibility
with the support and encouragement of the Kotak Group. A number of employees have
been involved in strengthening communities through voluntary work, payroll giving and
management inputs.
For any CSR related queries, please contact:
Group CSR
Kotak Mahindra Bank Ltd
Tel. Board +91 22 6720 6720
Email: [email protected]
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CHAPTER-III
REVIEW OF LITERATURE
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CONCEPT OF MUTUAL FUNDS
Like most developed and developing countries the mutual fund culture has been catching
on in India. There are various reasons for this. Mutual funds make it easy and less costly for
investors to satisfy their need for capital growth, income and/or income preservation. And in
addition to this a mutual fund brings the benefits of diversification and money management to
the individual investor, providing an opportunity for financial success that was once available
only to a select few.
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:
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Mutual Fund Operation Flow Chart
Organization of a Mutual
BENEFITS OF MUTUAL FUNDS
Investing in mutual has various benefits which makes it an ideal investment avenue. Following
are some of the primary benefits.
Professional investment management
One of the primary benefits of mutual funds is that an investor has access to professional
management. A good investment manager is certainly worth the fees you will pay. Good mutual
fund managers with an excellent research team can do a better job of monitoring the companies
they have chosen to invest in than you can, unless you have time to spend on researching the
companies you select for your portfolio. That is because Mutual funds hire full-time, high-level
investment professionals. Funds can afford to do so as they manage large pools of money. The
managers have real-time access to crucial market information and are able to execute trades on
the largest and most cost-effective scale. When you buy a mutual fund, the primary asset you are
buying is the manager, who will be controlling which assets are chosen to meet the funds' stated
investment objectives.
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Diversification
A crucial element in investing is asset allocation. It plays a very big part in the success of any
portfolio. However, small investors do not have enough money to properly allocate their assets.
By pooling your funds with others, you can quickly benefit from greater diversification. Mutual
funds invest in a broad range of securities. This limits investment risk by reducing the effect of a
possible decline in the value of any one security. Mutual fund unit-holders can benefit from
diversification techniques usually available only to investors wealthy enough to buy significant
positions in a wide variety of securities.
Low Cost
A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000, and
sometimes less. And with a no-load fund, you pay little or no sales charges to own them.
Convenience and Flexibility
Investing in mutual funds has its own convenience. While you own just one security rather than
many, you still enjoy the benefits of a diversified portfolio and a wide range of services. Fund
managers decide what securities to trade, collect the interest payments and see that your
dividends on portfolio securities are received and your rights exercised. It also uses the services
of a high quality custodian and registrar. Another big advantage is that you can move your funds
easily from one fund to another within a mutual fund family. This allows you to easily rebalance
your portfolio to respond to significant fund management or economic changes.
Liquidity
In open-ended schemes, you can get your money back promptly at net asset value related prices
from the mutual fund itself.
Transparency
Regulations for mutual funds have made the industry very transparent. You can track the
investments that have been made on you behalf and the specific investments made by the mutual
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fund scheme to see where your money is going. In addition to this, you get regular information
on the value of your investment.
VarietyThere is no shortage of variety when investing in mutual funds. You can find a mutual fund that
matches just about any investing strategy you select. There are funds that focus on blue-chip
stocks, technology stocks, bonds or a mix of stocks and bonds. The greatest challenge can be
sorting through the variety and picking the best for you.
TYPES OF MUTUAL FUNDS
Getting a handle on what's under the hood helps you become a better investor and put together amore successful portfolio. To do this one must know the different types of funds that cater to
investor needs, whatever the age, financial position, risk tolerance and return expectations. The
mutual fund schemes can be classified according to both their investment objective (like income,
growth, tax saving) as well as the number of units (if these are unlimited then the fund is an
open-ended one while if there are limited units then the fund is close-ended).
This section provides descriptions of the characteristics -- such as investment objective and
potential for volatility of your investment -- of various categories of funds. The type of securities
purchased by each fund organizes these descriptions: equities, fixed-income, money market
instruments, or some combination of these.
Open-Ended Schemes
Open-ended schemes do not have a fixed maturity period. Investors can buy or sell units at
NAV-related prices from and to the mutual fund on any business day. These schemes have
unlimited capitalization, open-ended schemes do not have a fixed maturity, there is no cap on the
amount you can buy from the fund and the unit capital can keep growing. These funds are not
generally listed on any exchange.
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Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any
time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily
basis. The advantages of open-ended funds over close-ended are as follows:
Any time exit option. The issuing company directly takes the responsibility of providing an entry
and an exit. This provides ready liquidity to the investors and avoids reliance on transfer deeds,
signature verifications and bad deliveries. Any time entry option, an open-ended fund allows one
to enter the fund at any time and even to invest at regular intervals.
Close-Ended Schemes
Close-ended schemes have fixed maturity periods. Investors can buy into these funds during the
period when these funds are open in the initial issue. After that such schemes can not issue new
units except in case of bonus or rights issue. However, after the initial issue, you can buy or sell
units of the scheme on the stock exchanges where they are listed. The market price of the units
could vary from the NAV of the scheme due to demand and supply factors, investors
expectations and other market factors
Classification According To Investment Objectives
Mutual funds can be further classified based on their specific investment objective such as
growth of capital, safety of principal, current income or tax-exempt income.
In general mutual funds fall into three general categories:
1] Equity Funds are those that invest in shares or equity of companies.
2] Fixed-Income Funds invest in government or corporate securities that offer fixed rates of
return are
3] While funds that invest in a combination of both stocks and bonds are called Balanced Funds.
Growth Funds
Growth funds primarily look for growth of capital with secondary emphasis on dividend. Such
funds invest in shares with a potential for growth and capital appreciation. They invest in well-
established companies where the company itself and the industry in which it operates are thought
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to have good long-term growth potential, and hence growth funds provide low current income.
Growth funds generally incur higher risks than income funds in an effort to secure more
pronounced growth.
Some growth funds concentrate on one or more industry sectors and also invest in a broad range
of industries. Growth funds are suitable for investors who can afford to assume the risk of
potential loss in value of their investment in the hope of achieving substantial and rapid gains.
They are not suitable for investors who must conserve their principal or who must maximize
current income.
Growth and Income Funds
Growth and income funds seek long-term growth of capital as well as current income. The
investment strategies used to reach these goals vary among funds. Some invest in a dual portfolio
consisting of growth stocks and income stocks, or a combination of growth stocks, stocks paying
high dividends, preferred stocks, convertible securities or fixed-income securities such as
corporate bonds and money market instruments. Others may invest in growth stocks and earn
current income by selling covered call options on their portfolio stocks.
Growth and income funds have low to moderate stability of principal and moderate potential for
current income and growth. They are suitable for investors who can assume some risk to achieve
growth of capital but who also want to maintain a moderate level of current income.
Fixed-Income Funds
Fixed income funds primarily look to provide current income consistent with the preservation of
capital. These funds invest in corporate bonds or government-backed mortgage securities that
have a fixed rate of return. Within the fixed-income category, funds vary greatly in their stability
of principal and in their dividend yields. High-yield funds, which seek to maximize yield by
investing in lower-rated bonds of longer maturities, entail less stability of principal than fixed-
income funds that invest in higher-rated but lower-yielding securities.
Some fixed-income funds seek to minimize risk by investing exclusively in securities whose
timely payment of interest and principal is backed by the full faith and credit of the Indian
Government. Fixed-income funds are suitable for investors who want to maximize current
income and who can assume a degree of capital risk in order to do so.
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Balanced
The Balanced fund aims to provide both growth and income. These funds invest in both shares
and fixed income securities in the proportion indicated in their offer documents. Ideal for
investors who are looking for a combination of income and moderate growth.
Money Market Funds/Liquid Funds
For the cautious investor, these funds provide a very high stability of principal while seeking a
moderate to high current income. They invest in highly liquid, virtually risk-free, short-term debt
securities of agencies of the Indian Government, banks and corporations and Treasury Bills.
Because of their short-term investments, money market mutual funds are able to keep a virtually
constant unit price; only the yield fluctuates.
Therefore, they are an attractive alternative to bank accounts. With yields that are generally
competitive with - and usually higher than -- yields on bank savings account, they offer several
advantages. Money can be withdrawn any time without penalty. Although not insured, money
market funds invest only in highly liquid, short-term, top-rated money market instruments.
Money market funds are suitable for investors who want high stability of principal and current
income with immediate liquidity.
Specialty/Sector Funds
These funds invest in securities of a specific industry or sector of the economy such as health
care, technology, leisure, utilities or precious metals. The funds enable investors to diversify
holdings among many companies within an industry, a more conservative approach than
investing directly in one particular company.
Sector funds offer the opportunity for sharp capital gains in cases where the fund's industry is "in
favor" but also entail the risk of capital losses when the industry is out of favor. While sector
funds restrict holdings to a particular industry, other specialty funds such as index funds give
investors a broadly diversified portfolio and attempt to mirror the performance of various market
averages.
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Index funds generally buy shares in all the companies composing the BSE Sensex or NSE Nifty
or other broad stock market indices. They are not suitable for investors who must conserve their
principal or maximize current income.
RISK Vs. REWARD
Having understood the basics of mutual funds the next step is to build a successful
investment portfolio. Before you can begin to build a portfolio, one should understand some
other elements of mutual fund investing and how they can affect the potential value of your
investments over the years. The first thing that has to be kept in mind is that when you invest in
mutual funds, there is no guarantee that you will end up with more money when you withdraw
your investment than what you started out with. That is the potential of loss is always there. The
loss of value in your investment is what is considered risk in investing. Even so, the opportunity
for investment growth that is possible through investments in mutual funds far exceeds that
concern for most investors. Heres why At the cornerstone of investing is the basic principal that
the greater the risk you take, the greater the potential reward. Or stated in another way, you get
what you pay for and you get paid a higher return only when you're willing to accept more
volatility.
Risk then, refers to the volatility -- the up and down activity in the markets and individual issues
that occurs constantly over time. This volatility can be caused by a number of factors -- interestrate changes, inflation or general economic conditions. It is this variability, uncertainty and
potential for loss, that causes investors to worry. We all fear the possibility that a stock we invest
in will fall substantially. But it is this very volatility that is the exact reason that you can expect
to earn a higher long-term return from these investments than from a savings account.
Different types of mutual funds have different levels of volatility or potential price change, and
those with the greater chance of losing value are also the funds that can produce the greater
returns for you over time. So risk has two sides: it causes the value of your investments to
fluctuate, but it is precisely the reason you can expect to earn higher returns. You might find it
helpful to remember that all financial investments will fluctuate. There are very few perfectly
safe havens and those simply don't pay enough to beat inflation over the long run.
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TYPES OF RISKS
All investments involve some form of risk. Consider these common types of risk and evaluate
them against potential rewards when you select an investment.
Market Risk
At times the prices or yields of all the securities in a particular market rise or fall due to broad
outside influences. When this happens, the stock prices of both an outstanding, highly profitable
company and a fledgling corporation may be affected. This change in price is due to "market
risk". Also known as systematic risk.
Inflation Risk
Sometimes referred to as "loss of purchasing power." Whenever inflation rises forward faster
than the earnings on your investment, you run the risk that you'll actually be able to buy less, not
more. Inflation risk also occurs when prices rise faster than your returns.
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Credit Risk
In short, how stable is the company or entity to which you lend your money when you invest?
How certain are you that it will be able to pay the interest you are promised, or repay your
principal when the investment matures?
Interest Rate Risk
Changing interest rates affect both equities and bonds in many ways. Investors are reminded that
"predicting" which way rates will go is rarely successful. A diversified portfolio can help in
offsetting these changes.
Exchange riskA number of companies generate revenues in foreign currencies and may have investments or
expenses also denominated in foreign currencies. Changes in exchange rates may, therefore,
have a positive or negative impact on companies which in turn would have an effect on the
investment of the fund.
Investment Risks
The sectoral fund schemes, investments will be predominantly in equities of select companies inthe particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance
of such companies and may be more volatile than a more diversified portfolio of equities.
Call Risks
Call risk is associated with bonds have and embedded call option in them. This option gives the
issuer the right to call back the bonds prior to maturity. Then investor how ever is exposed to
some risks here. The price of the callable bond many not rise much above the price at which the
issuer may call the bond.
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Changes in the Government Policy
Changes in Government policy especially in regard to the tax benefits may impact the business
prospects of the companies leading to an impact on the investments made by the fund. Effect of
loss of key professionals and inability to adapt business to the rapid technological change.
An industries' key asset is often the personnel who run the business i.e. intellectual
properties of the key employees of the respective companies. Given the ever-changing
complexion of few industries and the high obsolescence levels, availability of qualified, trained
and motivated personnel is very critical for the success of industries in few sectors. It is,
therefore, necessary to attract key personnel and also to retain them to meet the changing
environment and challenges the sector offers. Failure or inability to attract/retain such qualified
key personnel may impact the prospects of the companies in the particular sec
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Investment cycle in Mutual Funds
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Types of mutual funds
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 Phase1964-87(UTI MONOPOLY)
An Act of Parliament established Unit Trust of India (UTI) on 1963. 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.
Second Phase1987-1993 (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).
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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 Phase1993-2003 (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 I am
dearmutual funds setting up funds in India and also the industry has witnessed several mergersand acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of
Rs. 1, 21,805 crores.
Fourth Phasesince 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.
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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
June 30, 2003, there were 31 funds, which manage assets of Rs.104762 crores under 376
schemes.
The graph indicates the growth of assets over the years.
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GROWTH IN ASSETS UNDER MANAGEMENT
India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an
Asset base that is much higher than its bank deposits. In India, mutual fund assets are not even
10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in
the first quarter of the current fiscal year.
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At least half the trustees should be independent persons. The AMC or its employees
cannot act as a trustee. No person who is appointed as a trustee of a mutual fund can be
appointed as a trustee of any other mutual fund unless he is an independent trustee and prior
permission is obtained from the mutual fund in which he is a trustee.
The trustees are required to submit half-yearly reports to SEBI on the activities of the
mutual fund. The trustees appoint a custodian and supervise their activities. The trustees can be
removed only with prior approval of SEBI.
As per SEBI guidelines, an asset management company is appointed by the trustees to
float the schemes for the mutual fund and manage the funds raised by selling units under a
scheme. The AMC must act as per SEBI guidelines, trust deeds and management agreement
between trustee & the AMC.
The Importance of Accounting Knowledge
Mutual funds in India are required to follow the accounting policies laid down in SEBI (Mutual
Fund) Regulations, 1996 and the amendments in 1998. This section of the workbook summarizes
the important Regulations, and periodical budgets.
Net Asset Value (NAV)A mutual fund is a common investment vehicle where the assets of the fund belong directly to
the investors. The fund does not account for investors' subscriptions as liabilities or deposits but
as Unit Capital. On the other hand, the investments made on behalf of the investors are reflected
on the assets side and are the main constituents of the balance sheet. There are, however,
liabilities of a strictly short-term nature that may be part of the balance sheet. The fund's Net
Assets are therefore defined as the assets minus the liabilities. As there are many investors in a
fund, it is common practice for mutual funds to compute the share of each investor on the basis
of the value of Net Assets Per Share/Unit, commonly known as the Net Asset Value (NAV).
The following are the regulatory requirements and accounting definitions lay down by SEBI.
NAV = Net Assets of the scheme / Number of Units Outstanding, i.e. Market value of
investments + Receivables + Other Accrued Income + Other Assets
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Accrued Expenses-Other Payables-Other Liabilities
No. Of Units Outstanding as at the NAV date
A fund's NAV is affected by four sets of factors:
-- Purchase and sale of investment securities
-- Valuation of all investment securities held
-- Other assets and liabilities, and
-- Units sold or redeemed
Pricing of Units:
Although NAV per share defines the value of the investor's holding in the fund, the fund
may not repurchase the investor's units at the same price as NAV. However, SEBI requires that
the fund must ensure that repurchase price is not lower than 93% of NAV (95% in the case of a
closed end fund). On the other side, a fund may sell new units at a price that is different from the
NAV, but the sale price cannot be higher than 107% of NAV. Also, the difference the repurchase
price and the sale price of the unit is not permitted to exceed 7% of the sale price.
Fees and Expenses:
An AMC may incur many expenses specifically for given schemes, and other common
expenses. In any case, all expenses should be clearly Unidentified and allocated to the individual
schemes. The AMC may charge the scheme with investment management and advisory fees that
are fully disclosed in the offer document subject to the following limits:
@ 1.25% of the first Rs. 100 crore of weekly average net assets outstanding in the accounting
year, and @ 1% of weekly average net assets in excess of Rs. 100 crore.
For no load schemes, the AMC may charge an additional management fee up to 1% of weekly
average net assets outstanding in the accounting year.
=
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Investment management and advisory fees are subject to the overall ceiling for expenses.
A. Initial expensesof launching schemes (not to exceed 6% of initial resources raised under the
scheme); and
B. Recurring expensesincluding:
i. Marketing and selling expenses including agents' commission
ii. Brokerage and transaction costs
iii. Registrar services for transfer of units sold or redeemed
v. Fees and expenses of trustees
v. Audit fees
vi. Custodian fees
vii. Costs related to investor communication
viii. Costs of fund transfers from location to location
ix. Costs of providing account statements and dividend / redemption
cheques and warrants
x. Insurance premium paid by the fund
xi. Winding up costs for terminating a fund or a scheme
xii. Other costs as approved by SEBI
The total expenses charged by the AMC to a scheme, excluding issue or redemption expenses
but including investment management and advisory fees are subject to the following limits:
On the first Rs. 100 Crores of average weekly net assets-2.5%
On the next Rs. 300 Crores of average weekly net assets -2.0%
On the balance of average weekly net assets-1.75%
For bond funds, the above percentages are required to be lower by 0.25%
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Initial Issue Expenses:
When a scheme is first launched, the AMC will incur significant expenses, whose benefit
will accrue over many years. All expenses cannot, therefore, be charged to a scheme in the first
year itself. SEBI permits "amortization" of initial expenses as follows:
For a closed-end scheme floated on a 'load' basis, the initial issue expenses shall be amortized
on a weekly basis over the period of scheme. For example, a 5-year (i.e. 260 week) closed-end
scheme with initial issue expenses of Rs. 5 lakhs must charge Rs.1923 (5 lakhs / 260 weeks)
every week to the fund. It cannot charge the entire amount of Rs. 5 lakhs at the time of issue.
For an open-end scheme floated on a 'load' basis, initial issue expenses may be amortized over a
period not exceeding five years. For example, if an open-end scheme has initial issue expenses of
Rs. 10 lakhs, it need not charge this entire amount to the fund in the year of issue. Instead, it may
charge Rs. 2 lakhs (10 lakhs / 5 years) per year to the fund, thereby spreading the charge of
initial issue expenses over a maximum of 5 years. Issue expenses incurred during the life of an
open-end scheme cannot be amortized.
Un amortized portion of initial issue expenses shall be included for NAV calculation,
considered as "other asset". The investment advisory fee cannot be claimed on this asset. Hence,
they have to be excluded while determining the chargeable investment management / advisory
fees. While calculating the maximum amount of chargeable expenses, the un amortized portion
of the initial issue expenses will not be included as part of the average weekly net assets figure.
Accounting Policies:Investments are required to be marked to market using market prices. Any unrealized
appreciation cannot be distributed, and provision must be made for the same.
Dividend received by the fund on a share should be recognized, not on the date of declaration,
but on the date the share is quoted on ex-dividend basis. For example, if a fund owns shares on
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which dividend is declared on April 5, and the shares are quoted on ex-dividend basis on April
20, the dividend income will be included by the fund for distribution/NAV computation only
April 20.
In determining gain or loss on sale of investments, the average cost method must be followed to
determine the cost of purchase. This will be applied by security.
Purchase / sale of investments should be recognized on the trade date and not settlement date
Bonus / rights shares should be recognized only when the original shares are traded on the stock
exchange on an ex-bonus /ex-rights basis
Income receivable on investments, which is accrued, but not received for 12 months beyond
due date, should be provided for, and no further accrual should be made for such investment
An investment shall be regarded as non-performing if it has provided no returns through
dividend/interest for more than 2years at the end of the accounting year
Investments owned by mutual funds are marked to market. Therefore, the value of investments
appreciates or depreciates based on market fluctuations, which is reflected in the balance sheet.
However, this change in value constitutes unrealized gain/loss. When any investments are
actually sold, the proportion of the unrealized gain / loss that pertains to such investments
becomes realized gain/loss. Therefore, at any given time, the NAV includes realized and
unrealized gain/loss on investments. While SEBI prohibits the distribution of unrealized
appreciation on investments, realized gain in available for distribution.
An open-end scheme sells and repurchases units on the basis of NAV. SEBI therefore
prescribes the use of an equalization account, to ensure that creation / redemption of units does
not change the percentage of income distributed. This involves the following steps:
- Computation of distributable reserves:
- Income + Realized Gain on Investments- Expenses-Unrealized Losses (unrealized gains are
excluded)
- If distributable reserves are positive, the following percentage is computed:
Distributable Reserve / Units Outstanding
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- The above percentage is multiplied with the number of new units sold, and the equalization
account is credited by this amount, if units are sold above par; if the units are sold below par, the
equalization account is debited by this amount. The same percentage is multiplies with the
number of units repurchased, and the equalization account is debited by this amount if the units
are repurchased above par; if the units are repurchased below par, the equalization account is
credited.
- The net balance in the equalization account is transferred to the profit and loss account. It is
only an adjustment to the distributable surplus and does not affect the net income for the period.
VALUATION
Mutual funds value their investments on a 'mark-to-market' basis with reference to the date on
which they are valued i.e., the valuation date.
Valuation of Traded Securities:
Where a security is traded on a stock exchange, it is valued at the last quoted closing price on
the stock exchange where it is "principally traded".
If a security is not traded on any stock exchange on a particular valuation day, the value at
which it was traded on the selected/other stock exchange on the
Earliest previous day may be used, provided such date is not more than 60 days prior to the
valuation date.
Valuation of traded securities, once the market price is obtained as above, is quite simple. The
fund will multiply its current holding in number of shares or bonds by the applicable market
price to get the "mark to market" value.
valuation of Non-traded Securities:
When a security is not traded on any stock exchange for 60 days prior to the valuation date, it
must be treated as non-traded' scrip.
Non-traded securities shall be valued 'in good faith' by the AMC on the basis of appropriate
valuation methods, which shall be periodically reviewed by the trustees and reported by the
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auditors as fair and reasonable. The following principles are to be applied for the valuation of
non-traded securities:
Equity instruments: are to be valued on the basis of capitalization of earnings solely or in
combination with its balance sheet Net Asset Value. For this purpose, capitalization rate will be
determined by reference to the price or earning rations of comparable traded securities with an
appropriate discount for lower liquidity to be used.
Debit instruments:are to be valued on a yield to maturity basis, the capitalization factor
being determined for comparable traded securities with an appropriate discount for lower
liquidity.
Call money, bills purchased: under rediscounting and short term deposits with banksare to be
valued at cost + accrual: other money market instruments at yield at which they are currently
traded; non-traded instruments (not traded for 7 days) will be valued at cost plus interest accrued
till the beginning of the valuation day plus the difference between redemption value and cost,
spread uniformly over the remaining maturity of the instruments
Government Securities:are to be valued at yield to maturity based on prevailing market
rate
Convertible debentures and bonds:non-convertible component is to be valued as a
debt instrument, and convertible as any equity instrument. If after Conversion, the resultant
equity instrument would be traded pari passu with an existing instrument, which is traded, the
value of the latter instrument can be adopted after an appropriate discount for the non-tradability
of the instrument.
RISK INVOLVED IN MUTUAL FUNDS INDUSTRY:
Mutual funds are not free from risk. It is so because basically the mutual funds also invest their
funds in stock markets on shares, which are volatile in nature and are not risk free, the following
risk are inherent in their dealing.
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INHERENT RISK FACTORS:
1) Market Risks:
In general there are certain risks associated with the every kind of investment on shares. They are
called market risks. These market risks can be reduced, but cannot be completely eliminatedeven by a good investment.
2) Scheme Risks
There are certain risks inherent in the scheme itself. It all depends upon the nature of the
scheme. For instance, in a pure growth scheme, risks are greater.
3) Investment Risks
Whether the mutual fund makes money in shares or loses depends upon the investment expertise
of the Asset Management Company. If the investment advice goes wrong, the fund has to suffer
a lot.
4) Business Risks
The corpus of a mutual fund might have been invested in a companys shares. If the business of
that company suffers any set back, it cannot declare any dividend. It may even go to the extent
of winding up its business.
5) Political RisksSuccessive Governments bring with them fancy new economic ideologies and policies. It is
often said that many economic decisions are politically motivated.
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PARAMETERS DESCRIPTION
The following parameters were considered for analysis:
Beta
Alpha
Correlation coefficient
Treynors Ratio
Sharpes Ratio
Jensens Ratio
Beta
Beta is a measure of volatility, or systematic risk, of a security or portfolio in comparison to the
market as a whole. Beta measures a stock's volatility, the degree to which a stock price fluctuates
in relation to the overall market. Investment analysts use the Greek letter beta,. It is calculated
using regression analysis. A beta of 1 indicates that the security's price will move with the
market. A beta greater than 1 indicates that the security's price will be more volatile than the
market, and a beta less than 1 means that it will be less volatile than the market.
While standard deviation determines the volatility of a fund according to the disparity of its
returns over a period of time, beta, another useful statistical measure, determines the volatility, or
risk, of a fund in comparison to that of its index.
Investors expecting the market to be bullish may choose funds exhibiting high betas, which
increase investors' chances of beating the market. If an investor expects the market to be bearish
in the near future, the funds that have betas l