AN ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS

SUBMITTED IN FULFILLMENT FOR DEGREE OF

SAHARA INDIA FINANCIAL CORPORATION LIMITED

CAPITAL MARKET SERVICES DIVISION (CMSD)

SAHARA INDIA PARIWAR

SUBMITTED BY: -

SANDEEP ARORAPGF0653

JAIPURIA INSTITUTE OF MANAGEMENT

NOIDA

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Acknowledgement to the company

The opportunity to get practical training in a reputed organization fulfills the felt gap between the theory and practical. In the case of a student of FINANCE this aspect assumes an additional dimension I hereby acknowledge SAHARA INDIA for providing the constant guidance for encouragement which helped me a lot to be successful in my efforts. This formal acknowledgement will hardly be sufficient to express my deep sense of gratitude to all of them. It was a memorable experience while doing my project at SAHARA ORGANISATION, Lucknow.

I am highly indebted and thankful to DEVENDRA SIR for his guidance and encouragement, without which the satisfactory completion of this project would not had been possible. He is a constant source of inspiration to me, showing all the patience and abundant encouragement throughout the project duration.

Acknowledgement couldn’t end without expressing my gratitude towards Mr. PANKAJ VARSHNEYA who was instrumental in timely completion of the project.

Words fall short in expressing my sincere regards towards the members of CMSD Ms Priyanka and Mr Santosh kumar for their expert advice and invaluable suggestions.I would also like to thank my brother PRAKARSH SRIVASTAVA who was working with me in the same department and was there to help me all the time.

Lastly thanks to teacher and colleagues who directly or indirectly helped me in procurement of my goal.

In all SAHARA INDIA provided a wonderful simulating environment for this very educative and instructive training.

(UTKARSH SRIVASTAVA)

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Acknowledgement to the Faculty Of PGDM , Jaipuria Institute of

Management

It is high privilege for me to express my deep sense of gratitude to all those faculty members who helped me in the completion of the project, especially my PGDM Director Mr. AMAN SRIVASTAVA who was always there at hour of need.My special thanks to Prof. PRASHANT GUPTA (FACULTY OF FINANCE) for helping me in the completion of project work and its report submission.Last but not the least my special thanks to the faculty of Jaipuria Institute of Management for their kind co–operation and providing me with all the necessary documents needed and guidance during the time period of project completion.

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(UTKARSH SRIVASTAVA)

DECLARATION

This is the report of the project work entitled “AN ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS” undertaken by me during the two month training at SAHARA INDIA, Lucknow.I hereby declare that project report is being submitted by me to the Department of Commerce for the partial fulfillment of the degree of Master of Finance & Control. A copy of this project has been submitted to the organization where the project was developed. This project is not submitted to any other organization or university or college and is the outcome of my work.

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(UTKARSH SRIVASTAVA)

INDEX

Sr No. Contents Pg. No.

1 Introduction 6

2 Company Profile 11

3 Capital Market Services Division 16

4 Initial Methods Of Investment 19

5 History Of Mutual Funds 26

6 Mutual Funds & its classifications 33

7 Advantages of Mutual Funds 40

8 Disadvantages Of Mutual Funds 42

9 Tax Aspect of Mutual Funds 47

10 Terms Related To Mutual Funds 51

11 Steps Involved In Investments Of Mutual Funds 54

12 Growth in Mutual Fund Industry 56

13 Comparision Of Mutual Fund With Other Deposits 62

14 Market Trends Mutual Funds 70

15 Research Objective & Research Design 78

16 Data Analysis 80

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17 Recommendations & Conclusion 97

18 Future Scenario 99

19 Global Scenario 100

20 Questionaire 101

21 FAQ’s 103

22 Glosary 105

23 Bibligraphy 110

Introduction

A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Respective Asset Management Company (AMC) manages each Mutual Fund with different type of schemes. An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. Fund manager in different types of suitable stock and securities, bonds and money market instruments then invests the invested money in a particular scheme of a Mutual Fund. Each Mutual Fund is managed by qualified professional men, who use this money to create a portfolio, which includes stock and shares, bonds, gilt, money-market instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money. A security that gives small investors access to a well-diversified portfolio of equities, bonds, and other securities. Each

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shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed. The fund's net asset value (NAV) is determined each day. Each mutual fund portfolio is invested to match the objective stated in the prospectus.

Respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms manages Mutual Funds schemes. The biggest Indian AMC is UTI while Alliance, Franklin Templeton etc are international AMC's.

Mutual Fund offers several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund.

A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the board rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approvals from a regulator, SEBI (securities Exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an Asset Management Company to invest the funds according to the investment objectives. It also hires another entity to be the custodian of the asset of the fund and perhaps a third one to handle registry work for the unit holder (subscriber) of the fund, in the Indian context, the sponsor promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC).

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A mutual fund is like a big pizza cut into slices. Each slice is called a share. The share price is called the Net Asset Value (NAV). Unlike a stock price that will fluctuate all day long, the mutual fund price changes only once a day, at the close of the stock marketEach Mutual Fund has a specific stated objective

The fund’s objective is laid out in the fund’s prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.

Some popular objectives of a mutual fund are-

FUND OBJECTIVE WHAT THE FUND WILL INVEST IN

Equity (growth) Only in stocks

Debt (income) Only in fixed-income securities

Money Market (including Gilt) In short-term money market instrument (including government securities)

Balanced Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in return and risk

FLOW CHART OF HOW MUTUAL FUND WORKS

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The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.

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The AMC hires a professional money manager, who buys and sells securities in line with the fund’s stated objective.

All AMCs regulated by SEBI, funds governed by board of directors.

ORGANISATION OF MUTUAL WORK

The securities and exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.

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In addition, every mutual fund has a board of directors that is supposed to represent the shareholder’s interest, rather than the AMC’s

A mutual fund is a company that combines, or pools, investors' money and, generally, purchases stocks or bonds. Ideally, a fund's size and resultant efficiency, combined with experienced management, provide advantages for investors that include diversification, expert stock and bond selection, low cost, and convenience.

In terms of legal structure, a mutual fund is a corporation that receives preferential tax treatment under the U.S. Internal Revenue Code. The assets of a mutual fund consist almost entirely of the securities it holds in its portfolio. The most common type of mutual fund, called an open-end fund, allows investors to buy and sell stock in it on an ongoing basis.

COMPANY PROFILE

The Mutual Fund Industry is one of the fastest growing sectors in India with an average CAGR of 20% over the past five years. In this scenario, Sahara Mutual Funds is all set to revolutionize the India AMC industry, with a mission to give every class of investors a profitable and prudent investment option with a perfect balance of returns, safety and liquidity.

Investment options are: Debt: Sahara Income Fund, Sahara Gilt Fund, Sahara Liquid

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Fund, And Sahara Short Term Plan.Equity: Sahara Growth Fund, Sahara Tax Gain Fund.

Sahara India Pariwar’s success story began in 1978. Starting on a modest scale with a capital of only Rs. 2000 (USD 43), the company has traversed a long way to become a frontrunner in Indian entrepreneurship. Today, Sahara India Pariwar is a major entity on the corporate scene having an asset base of over Rs. 50,000 crores (USD 10.87 billion) and diversified business interests that include: Public Deposit Mobilization, Infrastructure & Housing, Media & Entertainment, Aviation, Consumer Products, Information Technology, Sundarbans Project, Sahara Hospital, Araria Jute Project, Life Insurance, Mutual Funds, Housing Finance, Power Project, Computer Manufacturing, Hotel and Caring Scheme.

SAHARA’S CORE COMMITMENTS - OUR STRENGTH

Emotion

Emotion is in Performance of genuine duties towards the loved ones primarily in their benefit, from their point of view. EMOTION is THE KEY that generates the required energy and enthusiasm for desired quality performance.

Discipline

The enthusiastic obedience of laws and orders, which are given by the rightful authority.

Duty

The enthusiastic obedience of laws and orders, which are given by our CONSCIENCE.

No Discrimination

Never should we discriminate in any of our actions, reactions,

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attitudes, decisions, conclusions, in any of our expressions while caring for the six health’s of other human beings, namely physical, material, mental, emotional, social and

professional health.

Quality

Results from honoring Rules, Regulations, Commitments, Values, Fairness, Performance of Duties by honestly balancing one's own and others' reasonable point of view in the matters of Material & Emotional aspects.Quality is our essence and we, at Sahara India Pariwar, have always stressed on the Qualitative aspect. Consequently in this run for quality, quantity has always pursued us. We look forward to reaching the zenith and reaffirm our commitment to the process of sound nation-building.

“We chase Quality, Quantity chases us”

Give Respect

To definitely make others feel important and respected by giving sincere regard to others' feelings, reasonable wishes & thoughts with an open and receptive mind and warmth.

Self-respect

To develop a sense of respect for oneself in others' mind, i.e. to generate genuine & warm feelings for oneself among others on a continuous basis.

Truth

Means total transparency in action, reaction, attitude and all

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other expressions and the conviction to follow the right course.

Collective Materialism

Means to progress and prosper together for collective sharing and caring and not individually or for a select group.

Religion

There is a religion higher than religion itself - it is NATIONALITY. We may practice our religions in the confines of our homes, but outside, we should be Indians and only Indians. 'Bharatiyata' or Nationalism thus becomes our supreme religion.

Absolute Honesty

We firmly believe that our mind inside knows the truth and we should be absolutely honest to our mind inside and accordingly our actions, reactions, directions, decisions and all our expressions should be present in all human dealings.

PHILOSOPHYSAHARA INDIA PARIWAR'S PHILOSOPHY   - "Collective Materialism"

In any human relationship, it becomes imperative to take into consideration the materialistic aspect of life - we do so but by giving it second priority.The first priority is given to emotional aspect and with perfect blending of materialism with emotionalism, results in continuous collective growth for collective sharing and caring, that gives an impetus to our philosophy - "COLLECTIVE MATERIALISM".

FEELINGS THAT DWELS IN AN ORGANISATION

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Maan-Samman,Atmasamman Emotions are of two kinds - love and respect. Love is an inferior emotion which has been given by God to fulfill your reasonable, unreasonable needs. But in human society since we have the thinking power, respect for others and sense of self-respect are the most superior emotions.

"Saharasri"SubrataRoySahara

The Man and His Vision

He has talked about problems and proposed the solutions on 5 social issues namely Population, Education, Political (Election) system, Media & Religion, besides interacting on various aspects of life and professional life. According to him if these five issues are taken care of properly, our beloved country shall be the best in the worldSAHARA INDIA FINANCIAL CORPORATION LIMITED

Sahara India Financial Corporation Limited, (SIFCL) is the flagship company of Sahara India Group. Incorporated in 1987, SIFCL is the First Residuary Non-Banking Company (RNBC) in India that has been granted certificate of registration by RBI and is considered to be a leading public deposit mobilization company in the Private sector. The Sahara India Group, has over

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the years emerged as a multi-service and multi-product business conglomerate with diverse interests in fields such as Aviation, Life Insurance, Para banking, Housing, Infrastructure & Tourism, Consumer Products, Media & Entertainment

Sahara India Financial Corporation Limited is the largest deposit mobilization company in the private sector with the highest yearly deposit level in India. It is the first Residuary Non-Banking Company (RNBC) to be granted a certification of registration by the Reserve Bank of India. It has over 61 million esteemed depositors (1 out of every 17 Indians) served by 9.1 lakh staff through over 1500 branches

“ Capital Market Services Division ”

Capital Market Services Division (CMSD) is a Division of Sahara India Financial Corporation Ltd. (SIFCL) with an objective to provide various fee based services to the Investors in the Capital Market.

This Division operates through a cluster of Service Centers & collection centres. It deals in Depository Services with National Securities Depository Ltd (NSDL) & Central Depository Services (I) Ltd as a Depository Participant (DP) and has also ventured into other related activities like Mutual Fund distribution,

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Financing against Initial Public Offerings, Distribution of other Financial Products etc.

Our Strong And Strict Fundamentals

Stringent expense control.Cost of fund (including interest cost) within 8% p.a.

No speculative investment. Total investment in listed equity shares (less than 1% of the total assets.)

High class quality investment. Restricting the non-performing assets ratio within 0.75% only.

No unsecured loans. Hence no bad debts at all.

Capital adequacy ratio. 24.64% as on 30.09.2004(statutory requirement 12%)

Present Activities of CMSD

Depository Services.

Mutual Fund Distribution.

Distribution of RBI Bonds, Infrastructure Bonds, Capital Gain Tax Bonds.

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IPO Financing (Financing for Subscribing New Initial Public Offerings) etc.

Our Services

Extended Business Hours.Highly Competitive Rates.Round the Clock Helpdesk service through IVRS facility and availability on 24/7/365 basis.Convenience of anywhere accounts management through SPEED-e (NSDL) / easiest (CDSL).Personalized and Efficient Service by NCFM qualified staff

Our Offering

Multiple financial products at a very reasonable cost and in a very convenient manner. Depository servicesInternet Trading of securitiesDistribution of Mutual Fund Units

Distribution of Other Products CMSD is also a Distributor for other financial products

like RBI Relief Bonds (Tax Free)Infrastructure BondsCapital Gain Tax BondsInitial Public Offerings etc.

Future Plans:

Proposed Activities: Loan against Shares and Mutual Fund Units.Funding for Margin TradingDistribution of Insurance Products.Facilitating Internet Trading of SecuritiesRetailing of Debt Instruments.

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Geographical Expansion based on potentials of respective markets.

Initial Product Offering by Capital Market Service Division

SAHARA INCOME FUND

Depositing your money in a savings account bank or fixed deposit will only provide you safety, but the opportunity for your money to appreciate is limited. Sahara Income Fund provides safety, highest credit quality, plus an opportunity to earn steady and regular income.

SAHARA LIQUID FUND

Sahara Liquid Fund is a good parking place for your idle funds. It provides an opportunity to generate returns on your idle funds with minimal risk and high liquidity.

SAHARA GILT FUND

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When you invest in Gilt Fund, your investment carries no Credit risk. You can enjoy steady returns at a relatively low risk over a medium to long-term horizon.

SAHARA SHORT TERM FUND

Every Corporate and High Net worth investors who have treasury surpluses for a few days can benefit from Sahara Short Term Plans.

SAHARA GROWTH FUND

Make your Investments grow with the benefit of Equities.

SAHARA TAX GAIN FUND

Sahara Tax Gain Fund is an Equity Linked Saving Scheme (ELSS) that not only helps you save tax under section 88 of the Income Tax Act, 1961 but also has the potential of long-term growth through investments in equities.

INITIAL METHODS OF INVESTMENT

What is `deposit’

The term `deposit’ has been defined as receipt of any money borrowed by the company but not including any of the following :-

Government BorrowingsBorrowings from any financial institutions;Borrowings from any Banks;Borrowings from any companySecurity deposit;Advance from purchasing/selling agentmoney received in Trust ;Subscription against application for shares;

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Subscription against bonds, debentures, etc. secured by a mortgage with or without option to convert into shares;Money brought in by issue of any secured bonds/debentureMoney brought in by promoters;Money received from the shareholders of a private limited company or a deemed public company.

What are the limits for accepting deposits ?

A company can borrow deposits upto the extent given below :-

up to 25% of the paid-up capital and free reserves of the company from the public and

upto 10% of its paid-up capital and free reserves from its shareholders.

Therefore, maximum deposit a company can accept from public/shareholders is 35% of its paid up capital and free reserves as mentioned above.

If the company is a `Government Company’, then it can accept or renew deposits from public upto 35% of its paid up capital and free reserves.

"Free Reserves" mean the balance in the share premium account, capital and debenture redemption reserves and any other reserves shown in the balance-sheet of the company and created by appropriation out of the profits of the company, but does not include the balance in any reserve created for repayment of any future liability or for depreciation in assets or for bad debts;

revaluation of any assets of the company

Period of accepting deposits:-

A company can invite/accept deposits for a period not less than 6 months and not more than 36 months from the date of acceptance of such deposits or from the date of its renewal.Therefore, a company can accept/invite deposits for a period between 6-36 months.

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However, a company may accept deposits upto 10% of its paid up capital and free reserves which are repayable after three months, from the date of such deposits or renewal thereof to meet any of its short term requirements.

Rate of interest

Maximum rate of interest that a company can offer on fixed deposits is 15%.

FIXED DEPOSITS

Fixed deposits remain the most popular instrument for financial savings in India. They are the middle path investments with adequate returns and sufficient liquidity. There are basically three avenues for parking savings in the form of fixed deposits. The most common are bank deposits. For nationalized banks, the yield is generally low with a maximum interest of 10 to 10.5% per annum for a period of three years or more. As opposed to that, NBFCs and company deposits are more attractive.          

The idea is to select the right company to minimize the risk. Company deposits as a saving instrument have declined in popularity over the last three years. The major reasons being the slowdown in economy resulting in default by some companies. Also, some NBFCs simply vanished with the depositors' money. All that is likely to change for the better. Corporate performance is likely to improve and stricter control by RBI should improve NBFCs record. But one still needs to be selective. Let us help you in making the right decision.

Post office is a very safe and secure investment avenue. The money is used in the development of the society as a whole, while it provides steady returns. The biggest advantage of investing in post office schemes is the tax benefit that they provide. Thus a lot of savings go through this channel to dual advantage - tax benefits and steady returns

Deposit account

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A deposit account is an account at a banking institution that alows money to be held on behalf of the account holder. Some banks charge a fee for this service, while others may pay the client interest on the funds deposited.

The account holder retains rights to their deposit, although restrictons placed on access depend upon the terms and conditions of the account and the provider.A deposit is a type of asset.

Saving deposit

Savings deposits are accounts maintained by commercial banks, savings and loan associations, credit unions, and mutual savings banks that pay interest but can not be used directly as money (by, for example, writing a check). These accounts let customers set aside a portion of their liquid assets that could be used to make purchases. But to make those purchases, savings account balances must be transferred to "transaction deposits" (or "checkable deposits") or currency. However, this transference is easy enough that savings accounts are often termed near money. Savings accounts, as such constitute a sizeable portion of the M2 monetary aggregate.

With savings accounts you can make withdrawals, but you do not have the flexibility of using checks to do so. As with an MMDAs (money market deposit account), the number of withdrawals or transfers you can make on the account each month is limited

Time deposit

A time deposit (also known as a term deposit, particularly in Australia and New Zealand) is a money deposit at a bank that cannot be withdrawn for a certain "term" or period of time. When the term is over it can be withdrawn or it can be held for another term. Generally speaking, the longer the term the better the yield on the money. A certificate of deposit is a time-deposit product.

Note that the M2 money supply includes funds that can be used directly in payment, such as money market mutual funds and

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money market deposit accounts (MMDAs). MMDAs are considered by the United States Federal Reserve (the Fed) to be savings accounts and are thus exempt from reserve requirements. These large transaction accounts not being included in the M1 money supply suggests that the Fed does not pay much attention to ordinary transaction deposits, and in July 2000, it announced that it was no longer setting target ranges for growth rates of the monetary aggregates

Transaction deposit

Transaction accounts include all deposits against which the account holder is permitted make withdrawals by negotiable or transferable instruments, payment orders of withdrawal, or telephone or preauthorized transfers for the purpose of making payments to third persons or others. However, accounts subject to the rules that permit no more than six preauthorized, automatic, or other transfers per month (of which no more than three may be by check, draft, debit card, or similar order payable directly to third parties) are savings deposits, not transaction accounts

Current account

A current account is a deposit account in the UK and countries with a UK banking heritage offering various flexible payment methods to allow customers to distribute money directly to others. Most current accounts have a cheque book, offer the facility to arrange standing orders, direct debits and payment via a debit card. Current accounts may also allow borrowing via an overdraft facility.Current accounts providers include banks, building societies and credit unions.Since the internet revolution most retail banking institutions offer access to current accounts via online banking.

Demand deposit

A demand account (or demand deposit, demand deposit account) is a deposit account held at a bank or other financial institution,

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the funds deposited in which are payable on demand. The primary purpose of demand accounts is to facilitate cashless payments by means of check, bank draft, direct debit, electronic funds transfer, etc.A demand account is commonly known as:

a checking account a share draft account a current account a current account a cheque account

REASON WHY PEOPLE INVEST IN DEPOSITS

There has been an age old concept of people investing in fixed deposits and other methods of deposits .They follow this concept because again and again investing in different fields might fetch them loss at different stages of life and in order to have a secure future people prefer to invest in one deposit for a particular period of time and withdraw them whenever they need.In today’s era where people are more concerned about their secure future and due to their busy life they lack knowledge about other methods if investment.

REASONS OF INVESTMENTS

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BASIC INVESTMENT OBJECTIVE

The investment approach will be based on a set of well established but flexible principles that emphasize the concept of sustainable economic earnings and cash return on investment as the means of valuation of companies.

Five basic principles serve as the foundation for this investment approach. They are as follows:

Focus on the long term

There is substantive empirical evidence to suggest that equities provide the maximum risk adjusted returns over the long term.

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In an attempt to take full advantage of this phenomenon, investments would be made with a long term perspective.

Investments confer proportionate ownership

The approach to valuing a company is similar to making an investment in a business. Therefore, there is a need to have a comprehensive understanding of how the business operates. The key issues to focus on are growth opportunities, sustainable competitive advantage, industry structure and margins and quality of the management.

Maintain a margin of safety

The benchmark for determining relative attractiveness of stocks would be the intrinsic value of the business. The Investment Manager would endeavor to purchase stocks that represent a discount to this value, in an effort to preserve capital and generate superior growth. Maintain a balanced outlook on the market

The investment portfolio would be regularly monitored to understand the impact of changes in business and economic trend as well as investor sentiment. While short-term market volatility would affect valuations of the portfolio, this is not expected to influence the decision to own fundamentally strong companies.

HISTORY OF MUTUAL FUND

When three Boston securities executives pooled their money together in 1924 to create the first mutual fund, they had no idea how popular mutual funds would become.

The idea of pooling money together for investing purposes started in Europe in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University. On March 21st, 1924 the first official mutual fund was born. It was called the Massachusetts Investors Trust.

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After one year, the Massachusetts Investors Trust grew from $50,000 in assets in 1924 to $392,000 in assets (with around 200 shareholders). In contrast, there are over 10,000 mutual funds in the U.S. today totaling around $7 trillion (with approximately 83 million individual investors) according to the Investment Company Institute. The stock market crash of 1929 slowed the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the SEC and provide prospective investors with a prospectus. The SEC (U.S. Securities and Exchange Commission) helped create the Investment Company Act of 1940 which provides the guidelines that all funds must comply with today.

With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s there were around 270 funds with $48 billion in assets.

In 1976, John C. Bogle opened the first retail index fund called the First Index Investment Trust. It is now called the Vanguard 500 Index fund and in November of 2000 it became the largest mutual fund ever with $100 billion in assets. One of the largest contributors of mutual fund growth was Individual Retirement Account (IRA) provisions made in 1981, allowing individuals (including those already in corporate pension plans) to contribute $2,000 a year. Mutual funds are now popular in employer-sponsored defined contribution retirement plans (401k), IRAs and Roth IRAs.

Mutual funds are very popular today, known for ease-of-use, liquidity, and unique diversification capabilities

Mutual funds are not an American invention.

The first was started in the Netherlands in 1822, and the second in Scotland in the 1880's.

Originally called investment trusts, the first American one was the New York Stock Trust, established in 1889. Most that followed were begun in Boston in the early 1920's, including the

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State Street Fund, Massachusetts Investor's Trust (now called MFS), Fidelity, Scudder, Pioneer, and the Putnum Fund. The Wellington Fund, the first balanced fund that included both stocks and bonds, was founded in 1928, and today is part of the giant Vanguard Funds Group. In the 1960's there was a phenomenal rise in aggressive growth funds (with very high risk). Sometimes called "go-go" or "hot-shot" funds, they received the majority of the billions of dollars flowing into mutual funds at that time. In 1968 and 1969, over 100 of these new aggressive growth funds were established.

A severe bear market began in the autumn of 1969. People became disillusioned with stocks and mutual funds. "The market's toast will never get back to where it was!" was echoed by panicked investors.

Unemployment grew; inflation went crazy, and investors pulled billions back out of the funds. They should have hung in there! Many funds have risen 9,000% since then.

The 1970's saw a new kind of fund innovation: funds with no sales commission called "no load" funds. The largest and most successful no load family of funds is the Vanguard Funds, created by John Bogle in 1977.

At the end of the 1920's there were only 10 mutual funds. At the end of the 1960's there were 244. Today there are more than 6,500 unique funds and even thousands more that differ only by their share class (how they are sold, and how their expenses are charged).

Before we continue with all you need to know about mutual funds, here is something that merits your attention.

Since 1940, no mutual fund has gone bankrupt.

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You sure can't say that about banks and savings and loans!

GROWTH OF MUTUAL FUNDS SINCE IT’S INCEPTION

Just 76 years ago the mutual fund industry was born in the United States.  The first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924 and after one year had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924.  At the end of December 1999, the industry's explosive growth includes more than 8,000 mutual funds with over $6.8 trillion in assets.

First 27 Years Experienced Slow Growth

Growth for the industry during the first 27 years was slow. In 1951, the number of funds surpassed 100 and the number of shareholders exceeded 1 million. It wasn't until 1954 that the stock market finally rose above its 1929 peak and by the end of the fifties there were 155 mutual funds with $15.8 billion in assets. In 1967 funds hit their best year, one quarter earning at least 50% with an average return of 67%, but it was done by cheating using borrowed money, risky options, and pumping up returns with privately traded "letter stock."  By the end of the 60's there were 269 funds with a total of $48.3 billion. 

Index Funds are Born in 1970s

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In 1976, John C. Bogle opened the first retail index fund - First Index Investment Trust (now the largest index fund - Vanguard 500 Index) and the next year Peter Lynch took over at Fidelity Magellan, now the largest stock mutual fund. The two funds are battling for top spot and some think the Vanguard 500 Index will surpass Fidelity Magellen by the year 2000. By the end of the 70s there were 524 funds with $94.5 billion in assets.

Major Growth after IRA Introduced

In 1981, Congress created the Individual Retirement Account and by the end of the 80s there were 2,917 funds and $982 billion in assets. The next big change for the industry was in 1991 when Morningstar introduced its "star ratings." By 1994, 75% of all new investments were in funds with a rating of four or five stars. In 1992, Charles Schwab started One Source, the first "fund supermarket." As of December 1998, stock mutual funds account for $2.981 trillion or 53.9% of total mutual fund industry assets. Money market funds account for 24.5% ($1.353 trillion), bond funds comprise 15.0% ($830.5 billion), and hybrid funds hold 6.6% ($365.1 billion). Mutual funds held about 20% of all publicly traded U.S. stocks in 1998. The remaining 80% was held by households, private pension funds, state and local government retirement funds, insurance companies, private trusts, residents of foreign countries, and other investors. These numbers are gathered by the Investment Company Institute.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

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The mutual fund industry in India started in 1963 with the formation of the Unit Trust Of India, at the initiative of the government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases, which are as follows:

Phase I (Monopoly of UTI) 1964-87:

This period was marked by the operational of a single institution, UTI, which prepared ground for the future mutual fund industry.The first and still most popular, product launched by UTI was unit64. Due to the immense popularity of unit64, UTI launched was unit64. Another popular scheme, Unit Linked Insurance Plan (ULIP), was launched in 1971. By the end of June 1974 there were 6-lakh unit holder with UTI.

An act of parliament established Unit Trust of India (UTI) in 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 delinked 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 6700 crores of assets management.

Phase II (Public Sector Competition) 1987-199

This period was marked by the entry of non-UTI public Sector mutual funds in the market, bringing in competition. With the opening up of the economy many public sector financial institutions established mutual funds in India. However, the mutual funds industry remained the exclusive domain of public sector in this period.

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1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance corporation of India (GIC). SBI mutual fund was the first non-UTI mutual fund established in June 1987 followed by Can bank Mutual fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jan 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 4700 crores.

Phase III (Entry of Private Sector Fund) 1993-2003:

A new era in the mutual fund industry began with entry of private sector funds in 1993, posing a serious competition to the existing public sector funds. The first private sector mutual fund to launch a scheme was the Madras based Kothari pioneer Mutual fund. It launched the open-ended prima fund in November 1993.

With the entry of private 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 templton) was the 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 was witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total asset of Rs 1, 21,805 crores.

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Phase IV (Since February 2003):

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the specified undertaking of the Unit Trust of India with assets under management of Rs 29,835 crores as at the end of January 2003.

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. At the end of October 31,2003, there were 31 funds, which manage asset of Rs 126726 crores under 386 scheme.

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MUTUAL FUND AND ITS CLASSIFICATION:

Income Funds

These are also known as debt funds since they invest in debt instruments issued by the government, private companies’ banks and financial institutions. By investing in debt, these funds target low risk and stable income to the investors. While returns in these funds may be regular, their scale may fluctuate depending on the prevailing interest rates and the credit quality of the debt securities.

Liquid Funds

Also know as Money market funds as they invest in securities of short term nature, typically securities of less than one-year maturity like Treasury Bills issued by the government, Certificate of Deposits issued by banks and Commercial Paper issued by companies as well as in the inter- bank call money market. These funds are considered to be at the lowest rung in the hierarchy of risks.

Equity Funds

As the name suggests these funds invest in stock market securities. They are exposed to the equity price fluctuation risk at the market level, industry level and also the specific company level. These price movements are caused by external factors, political and social as well as economic factors. Thus the Net Asset values of these funds fluctuate with all price movements. Equity investments are for a longer time horizon and a well managed equity fund can get you higher returns but also carries higher risks.

Gilt Funds

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These funds invest in government paper called dated securities. As the investments are in government paper these funds have little risk of default and hence offer better protection of principal. However, one must recognize the potential changes in values of debt securities held by the funds that are caused by changes in the market price of these securities as a result of change in the market price of these debt securities.

Balanced Funds

These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both equities and fixed income securities in line with pre-defined investment objectives. The aim at providing a balanced mix of capital appreciation through investments in equities coupled with investments in stable instruments like bonds etc.

TYPES OF MUTUAL FUNDS

A Mutual Fund may float several schemes, which may be classified on the basis of its structure, its investment objectives and other objectives.

Types of Schemes

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MUTUAL FUND SCHEME BY STRUCTURE:

Open-Ended Funds:

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Open-Ended fund scheme is open for subscription all through year. An investor can buy or sell the units at "NAV" (Net Asset Value) related price at any time.

The investments of these schemes will predominantly be in the stock markets and endeavor will be to provide investors the opportunity to benefit from the higher returns which stock markets can provide. However they are also exposed to the volatility and attendant risks of stock markets and hence should be chosen only by such investors who have high risk taking capacities and are willing to think long term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index Funds. Diversified Equity Funds invest in various stocks across different sectors while sectoral funds which are specialized Equity Funds restrict their investments only to shares of a particular sector and hence, are riskier than Diversified Equity Funds. Index Funds invest passively only in the stocks of a particular index and the performance of such funds move with the movements of the index

Close-Ended Funds:

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A Close-Ended fund is open for subscription only during a specified period, generally at the time of initial public issue that generally ranges from 3 to 15 years.. The Close-Ended fund scheme is listed on the some stock exchanges where an investor can buy or sell the units of this type of scheme.

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

Interval Funds:

Interval Funds combines both the features of Open-Ended funds and Close-Ended funds.

MUTUAL FUND SCHEME BY INVESTMENT OBJECTIVES:

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Growth Funds :

The objective of Growth Fund scheme is to provide capital appreciation over the medium to long term. This type of scheme is an ideal scheme for the investors seeking capital appreciation for a long period.

Income Funds:

The Income Fund schemes objective is to provide regular and steady income to investors.

Balanced Funds:

The objective of Balanced Fund schemes is to provide both growth and regular income to investors.

Money Market Funds

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The objective of Money market funds is to provide easy liquidity, regular income and preservation of income.Money market funds also come in two varieties, taxable and tax-free. Taxable funds buy the best-yielding short-term corporate, agency, or government issues available, while tax-free funds are limited to buying primarily municipal debt. Taxable funds pay slightly higher income than tax-free funds, but you must pay tax on any distributions they make. In either case, the rate a fund pays is roughly the same as bank money market accounts or CDs.

Load Funds :

A load fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission is payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

No Load Funds:

A No Load Fund is one that does not charge a commission for the entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

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OTHER FUNDS:

Tax Saving Schemes:

The objective of Tax Saving schemes is to offer tax rebates to the investors under specific provisions of the Indian Income Tax Laws. Investment made under some schemes are allowed as deduction u/s 88 of the Income Tax Act.

Industry specific Schemes:

Industry specific schemes invest only in the industries specified in the offer document of the schemes.

Sectorial Schemes:

The schemes invest particularly in a specified industries or initial public offering.

Index schemes:

Such schemes link with the performance of BSE sensex or NSE.

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Advantages of Investment in Mutual Fund

Mutual Funds offer several benefits to an investor that unmatched by the other investment options. The major benefits are good post-tax returns and reasonable safety, the other benefits in investing in Mutual Funds are

Professional Management:

Mutual Funds employ the services of experienced and skilled professionals and dedicated investment research team. The whole team analyses the performance and balance sheet of companies and selects them to achieve the objectives of the scheme.

Potential Return:

Mutual Funds have the potential to provide a higher return to an investor than any other option over a reasonable period of time.

Diversification:

Mutual Funds invest in a number of companies across a wide cross section of industries and sectors.

Liquidity:

The investor can get the money promptly at the net asset value related prices from the Mutual Funds open-ended schemes. In close-ended schemes, the units can be sold on a stock exchange at the prevailing market price.

Low Cost:

Investment in Mutual Funds is a less expensive way in comparison to a direct investment in capital market.

Transparency:

Mutual Funds have to disclose their holdings, investment pattern and the necessary information before all investors under a regulation framework.

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Flexibility:

Investment in Mutual Funds offers a lot of flexibility with features of schemes such as regular investment plan, regular withdrawal plans and dividend reinvestment plans enabling systematic investment or withdrawal of funds.

Affordability:

Small investors with low investment fund are unable to high-grade or blue chip stocks. An investor through Mutual Funds can be benefited from a portfolio including of high priced stock.

Well regulated:

All Mutual Funds are registered with SEBI, and SEBI acts a watchdog, so the Mutual Funds are well regulated

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Disadvantages of Mutual Funds

Fluctuating Returns:

Mutual funds are like many other investments without a guaranteed return. There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund.

Diversification:

Although diversification is one of the keys to successful investing, many mutual fund investors tend to over diversify. The idea of diversification is to reduce the risks associated with holding a single security; over diversification (also known as diworsification) occurs when investors acquire many funds that are highly related and so don't get the risk reducing benefits of diversification.

Cash, Cash and More Cash:

Mutual funds pool money from thousands of investors, so everyday investors are putting money into the fund as well as withdrawing investments. To maintain liquidity and the capacity to accommodate withdrawals, funds typically have to keep a large portion of their portfolio as cash. Having ample cash is great for liquidity, but money sitting around as cash is not working for you and thus is not very advantageous.

Costs:

In mutual funds the fees are classified into two categories: shareholder fees and annual fund-operating fees.

The shareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage - usually ranging from 1-3%. These fees are assessed

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to mutual fund investors regardless of the performance of the fund. When the fund doesn't make money these fees only magnify losses.

Misleading Advertisements:

The misleading advertisements of different funds can guide investors down the wrong path. Some funds may be incorrectly labeled as growth funds, while others are classified as small-cap or income.

Evaluating Funds:

Another disadvantage of mutual funds is the difficulty they pose for investors interested in researching and evaluating the different funds. Unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc.

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STRUCTURE OF INDIAN MUTUAL FUND INDUSTRY

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Mutual Funds in India

Mutual funds have been a significant source of investment in both government and corporate securities. It has been for

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decades the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300bn. (US$ 10bn.). The state-owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks--- mainly state-owned too have established Mutual Funds (MFs). Foreign participation in mutual funds and asset management companies is permitted on a case by case basis.

UTI, the largest mutual fund in the country was set up by the government in 1964, to encourage small investors in the equity market. UTI has an extensive marketing network of over 35, 000 agents spread over the country. The UTI scrip’s have performed relatively well in the market, as compared to the Sensex trend. However, the same cannot be said of all mutual funds.

All MFs are allowed to apply for firm allotment in public issues. SEBI regulates the functioning of mutual funds, and it requires that all MFs should be established as trusts under the Indian Trusts Act. The actual fund management activity shall be conducted from a separate asset management company (AMC). The minimum net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can be penalized for defaults including non-registration and failure to observe rules set by their AMCs. MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes floated by MFs are required to be registered with SEBI.

In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity upto one year. Before investing in a Mutual Fund an investor must identify his needs and preferences. While selecting a Mutual Fund's schemes he should consider the effect of inflation rate, diversification of investment, the time period of investment and the risk factors. There are various type of risk factors as:

Market Risk

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Credit Risk Interest Rate Risk Inflation Risk Political Environment

CRISIL's composite performance ranking (CPR) measures the performance for each of the open-ended scheme of Mutual Fund. There are four parameters considered to measure the performance of a mutual fund such as Risk-adjusted returns of the scheme's NAV, Diversification of Portfolio, Liquidity and Asset Size.

By December 2004, Indian mutual fund industry reached Rs 1, 50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40, 90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.

Some facts for the growth of mutual funds in India:

100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

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Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products.

SEBI allowing the Mutual Fund's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based advice.

Tax aspect of Mutual fund

Dividend Made Tax-free

Dividend received from a domestic company and income distributed by UTI-I or any MF, to its unit holders has been made tax-free from 1.4.03 onwards. However, dividend declared, distributed or paid by such sources shall be charged a distribution tax of @12.8125% flat. This distribution tax is in addition to the normal income tax payable by them.

Capital Gain Tax:

Capital gains are generated through the sale of stocks, bonds and other investments, which have appreciated in value, from the fund’s portfolio. Net capital gains are taxed at the 15% cap.

LTCG on Equities Exempt

Long-term capital gains arising from transfer of shares purchased through a recognized stock exchange, on or after 1.3.03 but before 1.3.04 are exempt from income tax. This exemption is restricted to only those shares figuring in the BSE-500 index as on 1.3.03. If during the course of the year, any of these shares are replaced with another stock in the index, investors who had purchased the share prior to its replacement

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will continue to enjoy the benefit.The benefit is also extended to shares of companies making Initial Public Offers during the year.

Income received from Mutual Fund:

The Internal Revenue Service might depend upon the nature of your mutual fund investment. Generally, most income generated from a mutual fund account, with the exception of tax-exempt money market or municipal bond funds, is subject to federal taxes as ordinary income or capital gains

Wealth Tax:

Under sec 21(e), Wealth tax is not treated as an asset. Therefore this is exempted from tax liability.

Gift Tax:

Mutual Fund may be given as a gift and no tax is applicable by donor or donee.

TDS on Redemption:

No TDS is required to be deducted from capital gain at the time of redemption in case of mutual fund.

Tax benefits on investment in Mutual Fund:

100% Income Tax Exemption on all Mutual Fund dividends.

Capital Gains tax to be lower of –

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10% on the capital gains without factoring indexation benefits and 20% on the capital gains after factoring indexation benefits.

Open-end funds with equity exposure of more than 50% are exempt of dividend tax for a period of 3 years from 1999-2000.

Another Investment Avenue featuring in the list of “eligible” instruments is the Equity Linked Saving Scheme or tax saving funds. Simply put, these are mutual fund schemes wherein investment upto Rs 10,000 qualify for Section 88 benefits. Investors are given the unique opportunity to invest in an equity-linked product and still claim tax benefits on the same; which is quite a departure from conventional tax saving instruments. Tax saving funds has a mandatory 3-Yr lock in period, which distinguishes them from conventional equity-oriented funds, which have no constraints on liquidity.

Tax saving funds: Smart long-term performers!

Tax Saving Funds NAV (Rs)

1-Yr 3-Yr 5-Yr SD SR

HDFC LONG TERM ADV.

46.63 41.52%

68.36%

-6.17%

0.76%

BIRLA EQUITY PLAN

35.50 19.55%

55.01%

12.10%

7.23%

0.62%

MAGNUM TAXGAIN 32.45 47.12%

51.95%

0.13%

7.96%

0.64%

PRU ICICI TAX 41.91 30.89%

51.93%

15.76%

7.93%

0.59%

HDFC TAX SAVER 61.15 42.46%

51.40%

-5.72%

0.78%

(Source: Credence Analytics. NAV data as on Jan 7, 2005. Growth over 1-Yr is compounded annualized)

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(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument) (Standard deviation highlights the element of risk associated with the fund.)

TERMS RELATED TO MUTUAL FUND

Net Asset Value

"Net asset value," or "NAV," of an investment company is the company’s total assets minus its total liabilities. For example, if an investment company has securities and other assets worth $100 million and has liabilities of $10 million, the investment company’s NAV will be $90 million. Because an investment company’s assets and liabilities change daily, NAV will also change daily. NAV might be $90 million one day, $100 million the next, and $80 million the day after.

Mutual funds and Unit Investment Trusts (UITs) generally must calculate their NAV at least once every business day, typically after the major U.S. exchanges close .A closed-end fund, whose shares generally are not "redeemable"—that is, not required to be repurchased by the fund—is not subject to this requirement.

An investment company calculates the NAV of a single share (or the "per share NAV") by dividing its NAV by the number of shares that are outstanding. For example, if a mutual fund has an NAV of $100 million, and investors own 10,000,000 of the fund’s shares, the funds per share NAV will be $10. Because per share NAV is based on NAV, which changes daily, and on the number of shares held by investors, which also changes daily, per share NAV also will change daily. Most mutual funds publish their per share NAVs in the daily newspapers.

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The share price of mutual funds and traditional UITs is based on their NAV. That is, the price that investors pay to purchase mutual fund and most UIT shares is the approximate per share NAV, plus any fees that the fund imposes at purchase (such as sales loads or purchase fees). The price that investors receive on redemptions is the approximate per share NAV at redemption, minus any fees that the fund deducts at that time (such as deferred sales loads or redemption fees).

Example:

You invest $1,000 in a mutual fund with an NAV of $10.00. You will therefore own 100 shares of the fund. If the NAV drops to $9.00 (because the value of the fund's portfolio has dropped), you will still own 100 shares, but your investment is now worth $900. If the NAV goes up to $11.00, your investment is worth $1,100. (This example assumes no sales charge.)

Sale Price

Is the price you pay when you invest in a scheme.Also called Offer Price. It may include a sales load.

Repurchase Price

Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price

Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load

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Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes.

Repurchase or ‘Back-end’ Load

Is a charge collected by a scheme when it buys back the units from the unit holders.

ASSET MANAGEMENT COMPANY

In an endeavor to enlarge the range of services available to our customers, PNB has been distributing the products of Principal PNB Asset Management Company Pvt. Ltd. from its designated branches.In recent times Mutual funds have gained rapid popularity as a good investment vehicle. The variety of schemes and income options offered by Mutual Funds can suit the financial preferences of all classes of investors, be it Retail, Corporate or Institutional.

The following benefits, intrinsic to investments in Mutual Funds have inspired greater confidence amongst the investors:

TransparencyEfficient PerformanceLiquidityConvenienceTax benefits

Range of schemes:

Mutual Funds offer schemes keeping in view the risk profile and risk-return preferences of investors. For an aggressive investor

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with appetite for risk, Equity oriented schemes are available which have a higher potential for capital appreciation. For a conservative investor with expectations of stable returns and low risk, Income Schemes are available. To suit various type of requirements of the investors, following is the range of schemes offered by PRINCIPAL PNB AMC:Principal Growth Scheme: Open-ended equity fund with an investment portfolio of stocks diversified across different sectors of the economy.

Principal balanced Fund:

Open ended fund with an equity (diversified) component of 51% to 70% and Debt component (including Money Market) 30% to 49%.Principal Income Fund: Open-ended fund with up to 100% investment in Debt instruments (including Money Market instruments and securitized debt)

Principal Income Fund –

Short Term Debt: Open-ended short term maturity debt fund aimed at providing stable returns with lower to negligible risks. Fund invests in debt securities, predominantly 100% money market instruments and securitized debt.

Principal Cash management Fund:

Open-ended fund that invests 100% of its corpus in Money Market instruments and seeks to provide an excellent avenue to park very short term cash surpluses and earn returns linked to the call money market rates.

Principal Index Fund:

Open-ended fund that tracks S&P CNX Nifty (NSE) closely. The aim of the fund is to provide its investors returns commensurate with the Nifty.

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Principal Government Securities Fund:

Open-ended dedicated Gilt scheme investing in Government Securities.

Innovative options to facilitate greater control over investments:Mutual Funds have options such as Systematic Investment Plans, Systematic withdrawal plan, Trigger Option, Automatic Rebalancing, Dividend Re-investment, etc that enable you to get the most out of your investment in Mutual Funds.

Distribution Reach

The distribution services of Mutual Fund products are available at selected branches of all the zones except Bihar, Chhatisgarh and Jharkhand.

Risk Profile

Mutual Fund investments are subject to market risks. Please read the offer document of the scheme carefully for details on risk factors before investment. Punjab National Bank does not guarantee any assured returns for your investments through Mutual Fund.

How to invest in Mutual Fund

Step One -  Identify your Investment needs

Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step is to assess your needs. You can begin by defining your investment objectives and needs which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements.

Step Two - Choose the right Mutual Fund

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The important thing is to choose the right mutual fund scheme which suits your requirements. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are the track record of the performance of the fund over the last few years in relation to the appropriate yardstick and similar funds in the same category. Other factors could be the portfolio allocation, the dividend yield and the degree of transparency as reflected in the frequency and quality of their communications.

Step Three - Select the ideal mix of Schemes

Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals.

Step Four - Invest regularly

The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. You can also avail the systematic investment plan facility offered by many open end funds.

Step Five- Start early

It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.

Step Six - The final step

All you need to do now is to Click here for online application forms of various mutual fund schemes and start investing. You

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may reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking                                      

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THINGS KEPT IN MIND BEFORE INVESTING

Prospectus

By law, you should receive a prospectus from the fund company before you invest in it. Many investors ignore the prospectus, but this is a must read. The mutual fund's objectives are displayed in the prospectus. It tells you the goals of the fund and how it intends to achieve them. You will also find information about the fund's past performance and fees.

Mutual Fund FamiliesMutual Fund Glossary

Mutual Fund Fees

The fees are displayed in the prospectus as well as on many mutual fund research sites. Try to buy funds with low expense ratios and certainly avoid 12b-fees. I have yet to hear a valid argument on why you should ever buy a loaded fund. A loaded fund is a fund that carries front-end loads, back-end loads or deferred loads. These loads are basically sales charges. There are plenty of no-load funds to meet your objectives.

GROWTH IN MUTUAL FUNDS SECTOR

“Mutual funds are shuddering at the prospect of an economic recovery. But they have enough time to consolidate their client base.”

The Smart Investor Team

Normally a recovery means good news for all, consumers, manufacturers and service providers. But hold on. Mutual funds aren't very enthusiastic, though. Why? Because, the biggest investors in the domestic mutual fund industry today are large corporates and banks.

These investors have put in more than 50 per cent of total assets of the industry. And, a recovery means that corporates may pull

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out their money to invest in their core activities. Similarly, a revival in credit demand on the back of a recovery means that banks may need to pull out their investments from mutual funds to meet the demand.

That's perhaps why mutual funds are pulling such long faces at the prospect of a recovery. What if the economy recovers and corporates go on a spending spree? Capacity expansions, merger and acquisition activity and better credit demand would require corporates and banks to encash their existing investments to plough back in their core business.

Obviously, there is a strong possibility of large scale redemptions. While fund companies see this issue as a matter of concern, they are optimistic about guarding their current assets. Says Ved Prakash Chaturvedi, chief executive officer,

Tata TDW Mutual Fund, "Despite an economic recovery, the fund industry should be able to retain and in fact, grow its assets."

Is a economic recovery underway? The outlook on the economy is pretty much positive and economists are predicting a wide-ranging recovery led by an increase in domestic consumer demand.

According to the latest data released by the Central Statistical Organization (CSO), the Indian economy grew 4.3 per cent in 2002-03. With the manufacturing and services sectors growing at 6.0 per cent and 7.1 per cent respectively, the poor performance of the agriculture sector dragged down the overall growth. Growth in the agricultural sector declined 3.2 per cent last fiscal. The growth in manufacturing industry was led by buoyant exports and a boost to construction activity.

This year, again, the manufacturing sector is expected to grow at a faster clip. The overall manufacturing outsourcing story should mean more business for Indian manufacturing companies too.Construction is again going to be a key driver. So sectors like steel and cement have already seen a quantum jump in demand and many loss-making companies such as Ispat, Essar, and the Jindal group have turned profitable. Similarly, many other sectors such as consumer durables and textiles are seeing demand-led growth. Many of these corporate houses are thus

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focusing on the longer-term targets. Some sectors like steel are already talking of capacity expansion and green field projects. Others like cement have been seeing consolidation. However, as Sanjeev Bafna, senior vice-president

Corporate finance, Grasim Industries says "It will take 1-2 years for the Indian industry to start committing funds into expansions."But whenever it happens, will corporates queue up for redemptions? And secondly, will banks and financial institutions, which have invested their surplus funds in mutual funds on the back of poor credit off take in the last couple of years, divert their money into lending?

The latter, of course, is a definite possibility. Last year, lending behemoth IDBI was among the biggest investors in mutual funds. Others such as ICICI bank and HDFC also figured in the list of biggest investors.

While Reliance Industries was one of the largest investors in mutual funds, mutual fund sources say that some of the other big investors are from the banking industry. For instance, both IDBI and SIDBI are said to have a considerable exposure in rolling over surplus funds in mutual funds. Other big players in the sector include the Finolex Group, ICICI Bank, Bank of India, Central bank and LIC Housing Finance.

Clearly, a lot depends on the outlook for the economy. Any revival will result in an increase in credit off take and thus, funds will have to be redirected from the market to industry. But the probability of that happening in the near-term is bleak: there is a huge amount of liquidity in the banking sector, and further rate cuts will only add to it.

But corporate money pulling out may not be that big a threat. Here is why. Companies typically park their surplus cash in treasury instruments (liquid fund schemes). And, they deploy money considered surplus in a slightly longer horizon into medium term funds. Industry experts feel that the economic recovery will have no impact on the flows into liquid funds.

As a matter of fact, improved cash flow for corporates will only increase the popularity of liquid funds. Even more, they say that

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today financially healthy corporates will find it less prudent to pull out money from investments like mutual funds to fund expansions because borrowed funds are so cheap.

Also, capital expenditure is never lumped together but is spread over a period of time and prudence requires a judicious mix of debt and equity depending on the project size, horizon of returns, gestation period etc. Hence there will not be any sudden withdrawal of funds from the market. Such expenditure is planned in advance and as result, a company cannot take the risk of a sudden withdrawal of its investment.

Opportunity cost of money

To get a feel of this, look at the opportunity cost of money. Currently, companies have witnessed around a 500-600 basis points reduction in interest costs on long-term debt from about 16 per cent-plus in 1998-99 to about 10 per cent now, and even lesser for top rated corporates, which can raise money at around 5.5-6.0 per cent per annum. As a result, it is much more attractive to fund investments by taking on additional debt while continuing to earning a higher return from deploying internal cash into market instruments such as mutual funds.

Arbitrage between debt vs. funds

But the main reason that the companies prefer raising debt is two-fold. Firstly, debt is available at historically low costs and secondly, tax considerations favor debt. These include a tax benefit on the interest costs, a dividend distribution tax on dividend income and capital gains tax on long-term capital gains. As a result, while effective cost of debt is less than 4 per cent, the effective tax-adjusted return on mutual fund investment is around 5-6 per cent.

Grasim's Bafna says "the biggest factor that will determine an outflow of funds is the any change in the tax status of dividends and capital gains tax on long-term capital gains". Currently,

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dividends from mutual funds are tax-free in the hands of the investors except for a dividend distribution tax of 12.81 per cent. Long-term capital gains are taxed at 10.25 per cent with indexation benefits, and at 20.5 per cent without indexation benefits.

The banking sector, with the considerable amount of liquidity in the system, has also been a significant investor in mutual funds.

For instance, as on March 31, 2003, HDFC had investments of around Rs 1500 crore in liquid funds. According to MA Ravi Kumar, Regional

Head - Global Markets, Stanchart Grindlays "The corporate sector accounts for a reasonable chunk of the investments in mutual funds. While there may be some withdrawal of funds, an increase in economic activity will also increase the surplus funds. Therefore, over a period of time, the cash surpluses will find their way back into the market"

NEW FUND OFFER

In the last one-year we have seen surge in the number of Equity IPOs & Mutual Fund NFOs launched. This is because there is a significant jump in profits of small & medium sized companies & so many loss-making companies have been restructured and now making profits. These companies are looking for expansion & to support their future plans these companies are looking at IPO option. This has created good opportunity to invest in the new companies, which are growing at fast rate. New Mutual Fund schemes launched also got the more options to invest collected money in various old as well as new companies. This year so many Mutual Fund NFOs have collected money in excess of Rs1000Cr & some of them had even crossed Rs2000Cr mark. Some of the existing schemes with highest AUMs are looking small if we look at these collections by MF NFOs.Collection of Mutual Fund NFOs launched in 2005

Scheme NFO Collection (Rs Cr)

SBI Magnum Multi Cap Fund 2102

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Franklin India Flexi Cap Fund 1950

Reliance Equity Opportunities Fund 1761

Fidelity Equity Fund 1495

Prudential ICICI Infrastructure Fund 1418

HDFC Premier Multi - Cap Fund 1328

Standard Chartered Classic Equity Fund

1043

Floating a NFO at the right time when markets are in correction phase & investing the collected money on correction is proved as very successful strategy in the last one year. This is evident as newly launched Mutual Fund NFOs have outperformed various indices & able to generate good returns. The below table indicates good performance given by MF NFOs. Therefore It’s a good idea to invest in NFO’s which could create wealth for investors like you.

Current Scenario of Mutual Fund

India is at the first stage of a revolution that has already peaked in the U.S. the U.S. boasts if an asset base that are much higher than its 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 mutual fund asset went up by 115% whereas bank deposit rose up only 17%. This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets. This improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not completely. Their role closes down as intermediaries cannot be ignored. It is just mutual Funds are going to change the way banks do business in the future.

COMPARISONS OF MUTUAL FUND WITH OTHER DEPOSITS

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BANKS V/S MUTUAL FUNDS

Banks v/s Mutual FundsBANKS MUTUAL FUNDS

Returns Low BetterAdministrative exp.

High Low

Risk Low ModerateInvestment options

Less More

Network High Penetration Low put improving

Liquidity At a cost Better

Quality of assets

Not Transparent Transparent

Interest calculation

Min. bal. between 10th & 30th of every month

Everyday

Guarantee Max. Rs. 1Lakh on deposit None

SHARES V/S MUTUAL FUNDS

SHARES MUTUAL FUNDS

Know-how is needed Superficial know. Is sufficient

High cost involved Low Cost

Time needed one can sleep over

Professional Management.

Insurance Vs Mutual Funds

Both these instruments are designed to serve different purposes and are not comparable. A unit-linked plan from an insurance company is an insurance policy designed to pay a lump sum on

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maturity or on death if earlier. Premium paid under these plans is eligible for tax deduction under Section 88 of the Income Tax Act. On the other hand, mutual funds are investment avenues to participate in the growth of financial markets and do not provide any tax deduction (except ELSS and pension funds).

For a unit-linked insurance plan, providing life cover is the most important function; returns are just an added benefit, which gets magnified, given the tax rebates. Though unit-linked plans offer transparency in returns in terms of net asset value and flexibility in investment options in debt, equity or mixes of both, these advantages remain secondary, whereas for a mutual fund, the main objective is to provide returns.

Moreover, unit-linked plans are not as liquid as mutual funds. There is a lock-in of three years. Even if one redeems after three years, you would be at a loss because of higher initial administrative charges. For example, the upfront charges for the first two premium amounts are as high as 20-27 per cent. Then there is an annual management fee of 0.8-1.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is a deduction for risk cover. This goes towards contribution to the sum assured or the life insurance cover, which is based on mortality rates as calculated by actuaries. Though mutual funds too have entry and exit loads (maximum 2 per cent) and expenses (maximum 2.5 per cent), these costs are lower than unit-linked plans.

COMPARISON AMONG DIFFERENT INVESTMENT AVENUES

INVESTMENT AVENUES

FD Real Estate

Business

Asset

MF Shares

RBI Bonds

PPF NSC Post Office

RETURNS * 5.25% V V DEP V V 8% 9.50%

8% 8%

POST TAX YIELD

3.63% V V - V V 5.60% 6-6.5%

5.60% 5.60%

INFLATION 6% - - - - - - - - -RRR - V V - V V - 0.65 - -

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2.50% 0.40% % 0.40% 0.40%

Pos RRR - Pos Pos - Pos Pos - - - -LIQUIDITY

- LOW LOW - HIGH

HIGH LOW LOW LOW LOW

PUBLIC PROVIDENT FUND

Scheme: Public Provident Fund

Tenure:15 years and then optional extension in blocks of 5 years

Issue date: Perpetually Open

Closure date: At the end of the 15th year

Interest: 9.5%

Interest Payment: Yearly (Computed on monthly balance)

Effective interest rate: 9.9%

Minimum investment: Rs.100

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Maximum Investment: Rs.60000 per financial year

Tax benefits: Sec.88 and Sec.10

Loan Facility:

Available. Loans can be obtained upto 25% of the balance at the end of the 2nd preceding financial year in the 3rd year of opening at an interest rate 1% above the prevalent PPF rate. Thus the repayment rate is now 12%. After the repayment of the first loan is affected, a second loan can be taken. This loan facility ceases after the end of the 6th financial year as after that the withdrawal facility starts.

Withdrawal:

Available.From the 7th year and every year thereafter, the account holder is allowed to withdraw a maximum of 50% of the balance that is to his/her credit at the end of the 4th or the 1st previous financial year, whichever is lower.

Remarks:

1. Benefits are two fold, 20% of the amount paid each year in the account is available as a tax rebate and interest earned is tax free.2. The account can be opened even at any of the select few nationalized banks also.

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NATIONAL SAVING CERTIFICATE

Scheme: National Savings Certificate

Tenure: 6 years

Issue date: Perpetually Open

Closure date: End of tenure

Interest: 9.5%

Interest Payment: Half-Yearly

Effective interest rate: 9.7%  

Minimum investment: Rs.100

Maximum Investment: No Limit

Tax benefits: Sec. 88 and Sec.80L

Loan Facility:Not available. However can be pledged in a bank

Withdrawal: Not available

Remarks: None

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KISAN VIKAS PATRA

Scheme: Kisan Vikas Patra

Tenure: 6.5 years (en cashable after 2.5 years)

Issue date: Perpetually Open

Closure date: End of tenure

Interest: 9.5%

Interest Payment: Cumulative compounding

Effective interest rate: 9.5%

Minimum investment: Rs.100

Maximum Investment: No Limit

Tax benefits: Nil

Loan Facility:Not Available. However can be pledged in a bank.

Withdrawal: Not Available

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POST OFFICE SCHEME

Scheme: Monthly Income Scheme

Tenure: 6 years

Issue date: Perpetually Open

Closure date: Anytime after 3rd year

Interest: 11%

Interest Payment: Monthly

Effective interest rate: 11.57%

Minimum investment: Rs.6000

Maximum Investment:Rs.300000 - Individual nameRs.600000 - Joint Name

Tax benefits: Sec.80L

Loan Facility:After completion of 1st year, but 5% of the amount deposited is deducted.

Withdrawal:After 3rd year full deposit amount can be withdrawn without any penalties.

Remarks:At the end of the 6th year, the amount his repaid with 10% bonus.

 

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Current Mutual Fund Schemes:

One can select specific Investment Avenue from among the products offered by the following fund houses:

Alliance Capital Mutual FundBenchmark Mutual Fund

Birla Sun Life Mutual FundBOB Mutual Fund

Canbank Mutual FundChola Mutual Fund

Deutsche Mutual FundDSP Merrill Lynch Mutual Fund

Escorts Mutual FundFidelity Mutual Fund

GIC Mutual FundHDFC Mutual FundHSBC Mutual Fund

ING Vysya Mutual Fund J M Mutual Fund

Kotak Mahindra Mutual FundLIC Mutual Fund

Morgan Stanley Mutual FundPRINCIPAL Mutual Fund

Prudential ICICI Mutual FundReliance Mutual Fund Sahara Mutual Fund

SBI Mutual FundStandard Chartered Mutual Fund

Sundaram Mutual Fund Tata Mutual Fund

Taurus Mutual Fund Templeton Mutual Fund UTI Mutual Fund

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MARKET TRENDS

Alone UTI with just one scheme in 1964 now competes with as many as 400 odd products and 34 players in the market. Now with increasing competition and losing market share, UTI no longer remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now passed with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulator have become more mature and responsible.

The industry is also having a profound impact on financial market. UTI has once been a dominant player on the bourses as well as the debt market, but now, new generations of private funds, has gained substantial mass, and are flexing their muscles. Fund managers by their selection criteria for stocks have forced corporate governance on the industry. By rewarding honest and transparent management with higher valuations, a system of risk reward has been created where the corporate sector is more transparent than before.

Funds have shifted their focus to the recession free sector like pharmaceutical, FMCG and technology sector, funds performances are improving. Funds collection, which averaged at less than Rs 100 bn per annum over five-year period spanning 1993-1998 doubled to Rs 210 bn in 1998-1999. In the financial year ending march2000 was mobilization was above Rs 300 bn. Total collections for the financial year march 2000 was around Rs 450 bn.What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs 7819.43 crores during the first nine months of the year as against a net inflow of Rs 604.40 crores in case of public sector funds.

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Mutual funds are now also competing with commercial banks in race for retail investor’s savings and corporate float money. The power shift towards mutual funds has become obvious. The coming few years will show that the traditional saving avenues are losing out in the current scenario. Many investors are realizing that investments in saving account are good as locking up their deposits in a closet. The fund mobilization trends by mutual funds in the current year indicate that money is going to mutual funds in a big way.

RESEARCH OBJECTIVE

The present study has been undertaken with the object of examining, analyzing and inferring the performance of the mutual funds, which addresses the following issues:

To understand what type of mutual fund is most preferred by the existing customer because performance of these funds is the criteria for customer selection.

Which mutual fund is the best in its category?

To understand the best way to attract customer investing in mutual fund by understanding the factors responsible for making a mutual fund successful.

To find out the reasons behind not investing in mutual fund

and to find out the most important attributes so as to keep the existing customer & to attract new customers.

To understand which factors govern their choice of investment?

RESEARCH DESIGN

As the focus is on the probable reasons responsible for the low dealer sales therefore the research design used is Exploratory Research.

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METHODOLOGY

The data was collected through both primary & secondary sources. Primary data was collected from the market by circulating questionnaires to the respondents.

The secondary data was collected from the Internet site of:

www.amfiindia.com.,www.valueresearch.com,www.capitalmarket.com, BSEINDIA.COM.

My sample size is 100 in number and we are dealing with the Government Offices and recognized private Offices. Important secondary data were available to us from the confidential office records of the department and various magazines and newspaper published by the concerned authorities.

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ANALYSIS OF PERFORMANCE OF MUTUAL FUNDS

PERFORMANCE COMPARISON OF FOLOWING MUTUAL FUNDS HAS BEEN DONE:

Reliance Growth-G HDFC Growth Fund DBS Chola Growth Escorts Growth ICICI Prudential Growth LICMF Growth Principal Growth Sahara Growth Tata Growth Templeton India Growth.

INDIVIDUAL PERFORMANCE OF EACH FUND

1) RELIANCE GROWTH FUND (GROWTH)

Current Stats & profileLatest NAV   296.94 (19/06/07)

52-Week High   298.36 (05/06/07)

52-Week Low   183.75 (24/07/06)

Fund Category   Equity: Diversified

Type   Open End

Launch Date   October  1995

Risk Grade   Average

Return Grade   High

Net Assets (Cr)   3,775.92 (31/05/07) 

Benchmark   BSE 100

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Trailing Returns

As on 19 Jun 2007 Fund Category

Year to Date 11.32 6.18

1-Month 2.84 1.72

3-Month 18.15 16.59

1-Year 55.94 43.68

3-Year 63.43 46.91

5-Year 58.38 41.95

Return Since Launch 33.60 --

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

 

2) HDFC GROWTH FUND(GROWTH)

Current Stats & profile

Latest NAV   53.27 (19/06/07)

52-Week High   53.305 (01/06/07)

52-Week Low   33.65 (20/06/06)

Fund Category   Equity: Diversified

Type   Open End

Launch Date   August  2000

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Risk Grade   Below Average

Return Grade   Average

Net Assets (Cr)   447.79 (31/05/07) 

Benchmark   Sensex

Trailing Returns

As on 19 Jun 2007 Fund Category

Year to Date 10.03 6.18

1-Month 5.09 1.72

3-Month 22.59 16.59

1-Year 56.62 43.68

3-Year 49.50 46.91

5-Year 44.13 41.95

Return Since Launch 27.61 --

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

 

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3) DBS CHOLA GROWTH FUND

Current Stats & profile

Latest NAV   32.82 (19/06/07)

52-Week High   33.48 (07/02/07)

52-Week Low   22.3 (19/07/06)

Fund Category   Equity: Diversified

Type   Open End

Launch Date   September  2001

Risk Grade   Below Average

Return Grade   Below Average

Net Assets (Cr)   32.19 (31/05/07) 

Benchmark   S&P CNX Nifty

Trailing Returns

As on 19 Jun 2007 Fund Category

Year to Date 1.77 6.18

1-Month 1.11 1.72

3-Month 15.93 16.59

1-Year 41.89 43.68

3-Year 43.27 46.91

5-Year 40.54 41.95

Return Since Launch 38.45 --

Returns upto 1 year are absolute and over 1 year are annualised.

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RELATIVE PERFORMANCE (fund vs. category)

 

4) ESCORTS GROWTH FUND

Current Stats & profile

Latest NAV   58.4193 (19/06/07)

52-Week High   59.4682 (05/06/07)

52-Week Low   42.5427 (19/07/06)

Fund Category   Equity: Diversified

Type   Open End

Launch Date   March  2001

Risk Grade   High

Return Grade   Average

Net Assets (Cr)   4.26 (31/05/07) 

Benchmark   S&P CNX Nifty

Trailing ReturnsAs on 19 Jun 2007 Fund Category

Year to Date 7.44 6.18

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1-Month 0.93 1.72

3-Month 18.87 16.59

1-Year 33.93 43.68

3-Year 47.03 46.91

5-Year 38.34 41.95

Return Since Launch 32.62 --

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

 

5) ICICI PRUDENTIAL GROWTH FUND

Current Stats & profile

Latest NAV   97.71 (19/06/07)

52-Week High   99.85 (01/06/07)

52-Week Low   68.89 (20/06/06)

Fund Category   Equity: Diversified

Type   Open End

Launch Date   June  1998

Risk Grade   Average

Return Grade   Average

Net Assets (Cr)   470.64 (31/05/07) 

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Benchmark   S&P CNX Nifty

Trailing Returns

As on 19 Jun 2007 Fund Category

Year to Date 4.66 6.18

1-Month 0.17 1.72

3-Month 13.95 16.59

1-Year 39.57 43.68

3-Year 48.21 46.91

5-Year 38.55 41.95

Return Since Launch 28.80 --

Returns upto 1 year are absolute and over 1 year are annualised.

RELATIVE PERFORMANCE (fund vs. category)

6) LICMF GROWTH

Current Stats & profile

Latest NAV   10.7098 (19/06/07)

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52-Week High   11.3947 (07/02/07)

52-Week Low   8.254 (20/06/06)

Fund Category   Equity: Diversified

Type   Open End

Launch Date   August  1994

Risk Grade   Above Average

Return Grade   Low

Net Assets (Cr)   99.62 (31/05/07) 

Benchmark   Sensex

Trailing Returns

As on 19 Jun 2007 Fund Category

Year to Date -3.12 6.18

1-Month -0.15 1.72

3-Month 11.90 16.59

1-Year 27.86 43.68

3-Year 31.66 46.91

5-Year 36.19 41.95

Return Since Launch 0.53 --

Returns upto 1 year are absolute and over 1 year are annualised.

RECOMMENDATIONS & CONCLUSIONS

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Tapping the up coming market - Semi Urban Market as there is a lot of opportunity. Most of the Mutual Funds are operating in the metros and big cities as per their present branch office locations. If they have to increase their market size they have to open more distribution centers at the various urban and semi-urban markets.To create the awareness about the different products of Mutual Fund and not about the generic product. Various respondents were not aware of the mutual fund products and the type of mutual fund schemes and the risk associated with mutual fund products.

To provide some kind of curriculum at the school/college level to create awareness regarding Mutual Fund. The shift of preference may change the market leadership in terms of AUM in years to come. Therefore, the change of strategy and tactics is required to maintain their market position, those who are holding today and those who want to hold in future.

LACK OF PROPER GUIDANCE MAKE MUTUAL FUND FALL

From the days of the Unit Trust of India till now when private sector funds have assumed a dominant position, what do you see as the industry's greatest achievements? And what are the challenges? The achievements are manifold. The performance record of both equity and debt funds have been excellent. Plus, there is a robust risk-management system in place and the atmosphere is very vibrant. We have also seen improvements on the service side. The investor now has the liberty to switch schemes and redemptions are credited to bank accounts in less than 24 hours. There are many other facilities available like monthly fact-sheets, quarterly holding-statements, online trading, etc. We have done many things, but much more needs to be done.

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The greatest challenge, of course, is to get more retail participation in funds. We have made tremendous efforts in this direction. About 250 mutual fund outlets, including branches, franchisees and collection centers, were opened across the country in the last two years. Today, in metros and non-metros, there are more than 1,000 outlets to provide services to investors.

Mutual Funds are still not the most preferred investment vehicle in the country. How do you think this could change? In our country, people want to buy only sacred assets. Unless this mindset changes, it will be difficult to get investors interested in mutual funds. Government securities and post-office investments offer 8 per cent assured returns, while banks offer 6 per cent. So, competition is very high. Only sustained efforts by a trained and qualified distributor class can bring success.

Again this is wrong, when it is done regularly. We are discussing various ways to tackle the same and will take it up with Sebi. But there is no clear solution as of now. Why don't you say there should be no additional incentives for new funds?You must understand that this is also a business. So, we cannot micro-manage everything. There is a cap on expenses that funds can charge. Within the existing cap, there should be freedom and creativity for the managers to work. Despite the plethora of new funds launched in the past year, there has been hardly any real innovation... There is a drought in the area of real innovations. Though funds are packaged differently, all of them invest in the same companies. But it is not a problem as long as the investor is not misled. As long as fund companies say what they are going to do and do not camouflage anything, it should be fine. The fact is that, people have a mindset to buy at Rs 10. The industry has to cater to that sentiment. Most mutual funds are launching funds focused on the flavour of the day or season. Don't you think this is dangerous? People have a mindset to buy at Rs. 10. The industry has to cater to that sentimentThere is risk in the market. We can contain it, but can not eliminate it. Can we have a uniform load structure to attract more retail investors?There is always a discount for those who buy big. That is one of the basic laws of business. If you buy one shirt, you pay the full-price. If you buy two shirts, you get discount. If you buy three, you get one free. But I feel that an exit-load helps. It will discourage people from moving out easily.

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Amfi has also been an industry lobby. Do you see it developing as one that is on the side of investors? Amfi was established for protecting and promoting the industry and investors. We have never done anything that damaged the interest of investors. Bearing the sole interest of customers in mind, we have inscribed certification, ensured quicker payment facilities and set up a committee for the simplification of the offer-document. There is a congruity of interest between the industry and the investor. Have you invested in mutual funds personally? How has been your experience?There have made gains and losses. However, I do not have any remorse. It is common that the preacher seldom follows what he teaches. Mutual fund investments are about 25 to 30 per cent of the total investments. And they are mostly on the equity side. I have recently shifted my debt-investments to the RBI and post-office investments. Who is your favourite fund manager? It's like asking me who is your favourite grandchild. I like all of them equally

LIMITATIONS

As every aspect of life has its own limitations the same goes with researches. The few limitations attached to this research are: -

As time and tide waits for none so is the case with this research. A much more detailed analysis could be done had there been more time spent for data collection. Due to lack of Time data from the all the places could not be collected.Management of all the activities from one place limited the research with in it self as appropriate data, which was required, was not available.Giving Instruction through telecommunications has caused a communication gap due to which the cream of data has not been available.

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QUESTIONAIRE TO PRESENT INVESTORS IN MUTUAL FUNDS

Dear Sir/Madam, I am currently engaged in a study on “Investor Perception Of Mutual Funds”. In this connection I request you to read the following items carefully & answer them .The answers you give will be held confidential & used purely for academic purposes.

Indicate your response by tick marking when applicable.

1.) Name:-

2.) Sex:- Male Female

3.) Age:- Below 30 31 – 40 years

41 – 50 years Above 50 years.

Academic Qualification (Last Qualification):-

Which of the following is your source of income? Government employee

Private employee Self employed

Annual Income In Rs. Below 1 Lakh 1 - 3 Lakhs 3- 5 Lakhs Above 5 Lakhs

Have you ever invested in any of the Mutual Funds?Yes No

Rank in order of preference of savings avenue (Highest being given 1st rank & the lowest being given 9th rank)___ Currency ___ Real Estate

___ Units of UTI ___ Life Insurance& Mutual Bonds

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___ Bank Deposits ___ Shares

___ Postal Savings ___ Pension & Provident Fund

___ Gold

As a mutual fund investor what is your experience? Highly satisfied Satisfied Somewhat satisfied Unsatisfied Highly unsatisfied

Reasons For Preference Of Mutual Funds(Please Tick mark in the box provided.)

Professional Management Liquidity

Good Return Capital Appreciation

Tax Benefit Diversification

Safety Flexibility

What Are the Decision Affecting Factors:- Economic Scenario Company's

Image

Fund Performance Fund Managers Image

Tax Incentive Minimum Initial Investment

How did you come to know about Mutual Fund investments schemes?

News Paper T.V.

Financial Magazines Reference Groups

Brokers/Agents Mail

What effects your decision regarding of investment in Mutual Funds?

Economic Scenario Company’s Image

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Fund Performance Fund Management Image

Tax Incentives Minimum Initial Investment

Which Mutual Fund is the best?ICICI HDFC UTISBI KOTAK

TATASTANDARD CHARTERED

RELLIANCEFRANKLIN TEMPLETION

OTHERSThanks you very much for your kind co-operation & for taking time to complete this questionnaire.

ANNEXURE: 2

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FAQs ON MUTUAL FUNDS

?

Some banks and savings institutions are now offering uninsured products such as mutual funds and annuities. These products may provide you with higher returns, but these investments involve risk. America's Community Bankers, a national trade association representing nearly 2,000 savings institutions across the country, has provided the answers to some commonly asked questions:

Q. Are the mutual fund or annuity investments I buy from a bank or savings institution insured?

A. No. These investments are not like insured deposits. They are not guaranteed by the FDIC, they are not guaranteed by the bank or savings institution, and they are not guaranteed by the U.S. government. You are not protected against losses on the amount you invest.

Q. Are there risks in investing in mutual funds or annuities?

A. Yes. You may get more or less back than the original amount you invested. There may also be sales charges for these investments. The sales representative should thoroughly brief you to make sure you understand these risks and charges, and

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you should be asked to sign an acknowledgement form verifying that you have received the information and understand it.

Q. Who can sell me these products?

A. Only properly trained sales personnel can sell these products. Tellers may not sell or provide advice to you on these products. They can refer you to the sales desk for these services.

Q. How can I be sure I am investing in the right mutual fund or annuity?

A. A sales representative should ask you questions about how much risk you are willing to accept, your investment objectives and your financial resources and background. You have no obligation to provide this information, but it would be helpful to the sales representative in suggesting the most appropriate investment for you.

GLOSSARY

AdvisorThe organization employed by a mutual fund to give professional advice on the fund’s investment and to supervise the management of its assets.

Asset Allocation FundA fund that spreads its portfolio among a wide variety of investment, including domestic and foreign stocks and bonds, government securities, gold bullion and real estate stocks. This gives small investors far more diversification than they could get allocating money on their own. Some of these funds keep the proportions allocated between different sectors relatively constant, while others alter the mix as market conditions change.

Alpha

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A percentage that is a measure of the returns of a fund with its risk adjusted for. Alpha is calculated from the difference between a fund's actual returns and its expected returns given its market risk level as measured by its beta. It is also a measure of the value added or deducted by the fund's manager. An alpha of 1 means the fund produced a return 1% higher than what its beta would predict. An alpha of –1 means the fund produced a return 1% lower. Naturally, higher the alpha the better it is for the investor. No, not always. For a high alpha to be better, simultaneously, another number called the R-squared should be high enough too. Normally, with R-squared anywhere below 50, never trust the alpha however high. Alpha depends entirely on the accuracy of beta. And beta again, is calculated by the R-squared. So if you believe that beta is the definite value for risk then any positive alpha would be a sufficient condition for a fund's good performance.

Balanced fundA mutual fund scheme that invest half in corpus in equity and the other half in debt instruments. A balanced fund is less risky than an equity fund but at the same time gives better returns than an debt fund.

BetaIt is a measure of a securities risk. Each security has a certain amount of risk attached to it. Beta tries to measure the risk involved with each security. Thus an investor should choose a security which gives the highest return for a given risk level.

BondsA debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing Bond is a promise to pay the principal along with the interest after a specified period of time.

Capital GainsIt is the profit earned on selling capital assets. Capital gains are calculated by subtracting from the selling price the following 1. Indexed cost of Acquisition 2. Indexed cost of Improvement 3. And any other holding cost.

Custodian

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The bank or trust company that maintains a mutual fund’s assets, including its portfolio of securities or some records of them. Provides safekeeping of securities but has no role in portfolio management.

CorpusThe amount of money available with a scheme for investment.

DebentureThey are bonds issued by a company to raise capital There are various kinds of debentures. They could be secured or unsecured, convertible or non-convertible.

Debt/Equity Determined by dividing long-term debt by common stockholder’s equity. It is one of the most useful financial ratios. Creditors use it to see whether it is safe to lend money to the particular company. The ratio should ideally be around 2.

Distributor The individual or a corporation serving as principal underwriter of a mutual fund’s shares, buying shares directly from the fund, and reselling them to other investor.

DividendsIncome distributed to share holders. Dividends can be received from the ownership of stock or from mutual funds. Mutual fund shareholders have the option to reinvest dividends automatically in order to purchase more shares.

Gilts

Gilts are government-based securities. The name signifies that the security is very safe and is as sound as gold itself.

Growth and income fundsGrowth funds are mutual fund schemes, which invest in the equity market while income funds invest in fixed income securities.

Growth fund Growth funds are Mutual funds that invest in equities market.

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HedgingA strategy designed to reduce investment risk hedging techniques uses call options, put options, short selling, or futures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk of loss.

InstrumentAny tradable commodity whose price can be obtained from a Financial Market is called as an instrument.

Net assetsNet assets are the total amount of money that comprises the mutual fund's holdings. Small funds have millions of dollars while large funds may have over 50 billion dollars. Sometimes a manager may close a fund to new investors if its size is large

P/E ratioRatio of the price of a stock to the total earnings of the company is called as P/E ratio. Companies with very high ratios of greater than 30 are considered to be overpriced. Company stock with a low ratio is considered to be undervalued and potentially good investments. Mutual funds with a value type of investment strategy seek a portfolio consisting of stocks with low ratios with the expectation that they will increase in price.

PortfolioThe collection of all the holdings of a mutual fund, such as bonds, and stocks is called as portfolio. In a mutual fund's annual report, a list of the fund's current portfolio will usually be contained.

Preferred stockPreferred stock is a type of shares offered by a company, which pay a pre-stated dividend, before common stock dividends are issued. The benefits of owning preferred stock are realized if the company ever

goes bankrupt. If this occurs, preferred stock share holders receive their money first. Common stock holders may not receive any money, if none is remaining after paying preferred stock holders.

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ProspectusA document, usually in the form of a booklet, that provides information about a specific mutual fund; such as the funds investment and redemption policies. The prospectus, according to law, must always be accompanied with the application. Prospective investors should always read the mutual fund's prospectus before sending money.

VolatilityThe degree to which a mutual fund's share price will change in value

WithdrawalTo redeem shares of a mutual fund or stock is called as withdrawal. In a mutual fund, partial or full redemptions may be made over the phone. Some funds may impose an extra redemption fee to discourage market timers from pulling their money immediately after investing. If this is a fund's policy, it will be stated in the prospectus.

YieldIncome or dividends received from a security or mutual fund.

BIBLIOGRAPHY

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AMFI –Mutual Fund Testing Programme for Distributors & Employees of Mutual Funds in India.

Fact Sheets of various Mutual Funds

Economic Times

Web sites:- www.mutualfundindia.com

www.mutualfund.com

www.moneycontrol.com

www.saharaindiapariwar.net

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