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MAJOR MUTUAL FUNDS IN INDIA
FORAM RAJENDRA SHETH
DPGD/OC10/1081
SPECIALIZATION - FINANCE
WELINGKAR INSTITUTE OF MANAGEMENT
DEVELOPMENT AND RESEARCH
YEAR OF SUBMISSION: - AUGUST, 2012.
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ACKNOWLEDGEMENT
With Immense pleasure I would like to present this report on MAJOR MUTUALFUNDS IN INDIA
I would like to thankWelingkar Institute of Management for providing me the
opportunity to present this project.
Acknowledgements are due to my parents, family members, friends and all those
people who have helped me directly or indirectly in the successful completion of
the project.
Foram Rajendra Sheth
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CONTENTS
CHAPTER NO CONTEXT PAGE
NO
1 EXECUTIVE SUMMARY 4INTRODUCTION OF MUTUAL FUND 5
NEED OF THE STUDY 6
OBJECTIVE OF THE STUDY 7
SCOPE OF THE STUDY 8
RESEARCH METHODOLOGY 8
LIMITATIONS OF THE STUDY 9
2
CONCEPT OF MUTUAL FUND 9
TYPES OF INVESTMENT COMPANIES 10
TYPES OF MUTUAL FUND SCHEMES 12
DIFFERENT TYPES OF FUNDS 13
HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY 15
ORGANISATION OF A MUTUAL FUND 17
3IMPORTANT CHARACTERISTICS OF A MUTUAL FUND 18
OBJECTIVES OF MUTUAL FUND 19
ADVANTAGES OF MUTUAL FUNDS 19
DISADVANTAGES OF MUTUAL FUNDS 20
4
INVESTORS PROFILE 22
MUTUAL FUNDS EXPECTATIONS AND BENEFITS 23
ORGANISATION OF A MUTUAL FUND 24
ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS 25
FORMULATION & REGULATIONS 28
SCHEMES 28
INVESTMENT NORMS 29
DISTRIBUTION 29
5
MUTUAL FUND SCHEME TYPES 30
DIFFERENT MODES OF RECEIVING THE INCOME EARNED FROMMUTUAL FUND INVESTMENTS
32
MUTUAL FUND INVESTING STRATEGIES 34
ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS 35
RISKS ASSOCIATED WITH MUTUAL FUNDS 39
PERFORMANCE MEASURES OF MUTUAL FUNDS 42
6COMPANY PROFILE(KOTAK MAHINDRA) 46
DATA ANALYSIS& INTERPRETATIONS 51
SUGGESTIONS 61
CONCLUSIONS 61
FUTURE OF MUTUAL FUNDS IN INDIA 63
7 ANNEXURE 64
8 BIBLIOGRAPHY 68
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EXECUTIVE SUMMARY :
A mutual fund is a scheme in which several people invest their money for a common financial
cause. The collected money invests in the capital market and the money, which they earned, is
divided based on the number of units, which they hold.
The mutual fund industry started in India in a small way with the UTI Act creating what was
effectively a small savings division within the RBI. Over a period of 25 years this grew fairly
successfully and gave investors a good return, and therefore in 1989, as the next logical step,
public sector banks and financial institutions were allowed to float mutual funds and their
success emboldened the government to allow the private sector to foray into this area.
The advantages of mutual fund are professional management, diversification, economies of
scale, simplicity, and liquidity.
The disadvantages of mutual fund are high costs, over-diversification, possible tax consequences,
and the inability of management to guarantee a superior return.
The biggest problems with mutual funds are their costs and fees it include Purchase fee,
Redemption fee, Exchange fee, Management fee, Account fee & Transaction Costs. There are
some loads which add to the cost of mutual fund. Load is a type of commission depending on the
type of funds.
Mutual funds are easy to buy and sell. You can either buy them directly from the fund company
or through a third party. Before investing in any funds one should consider some factor like
objective, risk, Fund Managers and scheme track record, Cost factor etc.
There are many, many types of mutual funds. You can classify funds based Structure (open-
ended & close-ended), Nature (equity, debt, balanced), Investment objective (growth,
income, money market) etc.
A code of conduct and registration structure for mutual fund intermediaries, which were
subsequently mandated by SEBI. In addition, this year AMFI was involved in a number of
developments and enhancements to the regulatory framework.
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The most important trend in the mutual fund industry is the aggressive expansion of the foreign
owned mutual fund companies and the decline of the companies floated by nationalized banks
and smaller private sector players.
Reliance Mutual Fund, UTI Mutual Fund, ICICI Prudential Mutual Fund, HDFC Mutual
Fund and Birla Sun Life Mutual Fund are the top five mutual fund company in India.
INTRODUCTION OF MUTUAL FUND:
A Mutual Fund is a trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested in capital market instruments such as
shares, debentures and other securities. The income earned through these investments and the
capital appreciations realized are shared by its unit holders in proportion to the number of units
owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of securities at a
relatively low cost. The flow chart below describes broadly the working of a Mutual Fund.
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India
(SEBI) that pools up the money from individual/corporate investors and invests the same on
behalf of the investors/unit holders, in Equity shares, Government securities, Bonds, Call Money
Markets etc, and distributes the profits. In the other words, a Mutual Fund allows investors to
indirectly take a position in a basket of assets. Mutual Fund is a mechanism for pooling the
resources by issuing units to the investors and investing funds in securities in accordance with
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objectives as disclosed in offer document. Investments in securities are spread among a wide
cross-section of industries and sectors thus the risk is reduced.
Diversification reduces the risk because all stocks too may not move in the same direction in the
same proportion at same time. Investors of mutual funds are known as unit holders. The
investors in proportion to their investments share the profits or losses. The mutual funds
normally come out with a number of schemes with different investment objectives which are
launched from time to time. A Mutual Fund is required to be registered with Securities Exchange
Board of India (SEBI) which regulates securities markets before it can collect funds from the
public
DEFINITION:
Mutual funds are collective savings and investment vehicles where savings of small (or
sometimes big) investors are pooled together to invest for their mutual benefit and returns
distributed proportionately.
A mutual fund is an investment that pools your money with the money of an unlimited number
of other investors. In return, you and the other investors each own shares of the fund. The fund's
assets are invested according to an investment objective into the fund's portfolio of investments.
Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-
growing smaller companies or market segments. Aggressive growth funds are also called capital
NEED OF THE STUDY:
The projects idea is to project Mutual Fund as a better avenue for investment on a long-term or
short-term basis. Mutual Fund is a productive package for a lay-investor with limited finances,
this project creates an awareness that the Mutual Fund is a worthy investment practice. Mutual
Fund is a globally proven instrument.
Mutual Funds are Unit Trust as it is called in some parts of the world has a long and successful
history, of late Mutual Funds have become a hot favorite of millions of people all over the world.
The driving force of Mutual Funds is the safety of the principal guaranteed, plus the added
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advantage of capital appreciation together with the income earned in the form of interest or
dividend. The various schemes of Mutual Funds provide the investor with a wide range of
investment options according to his risk bearing capacities and interest besides; they also give
handy return to the investor.
Mutual Funds offers an investor to invest even a small amount of money, each Mutual Fund has
a defined investment objective and strategy. Mutual Funds schemes are managed by respective
asset managed companies sponsored by financial institutions, banks, private companies
or international firms. A Mutual Fund is the ideal investment vehicle for todays complex and
modern financial scenario.
The study is basically made to analyze the various open-ended equity schemes of different Asset
Management Companies to highlight the diversity of investment that Mutual Fund offer. Thus,
through the study one would understand how a common man could fruitfully convert a pittance
into great penny by wisely investing into the right scheme according to his risk taking abilities.
OBJECTIVE OF THE STUDY :
To give a brief idea about the benefits available from Mutual Fund investment
To give an idea of the types of schemes available.
To discuss about the market trends of Mutual Fund investment.
To study some of the mutual fund schemes and analyse them
Observe the fund management process of mutual funds
Explore the recent developments in the mutual funds in India
To give an idea about the regulations of mutual funds
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SCOPE OF THE STUDY :
In my project the scope is limited to some prominent mutual funds in the mutual fund industry.
I analyzed the funds depending on their schemes like equity, income, balance. But there is so
many other schemes in mutual fund industry like specialized (banking, infrastructure, pharmacy)
funds, index funds etc.
The study here has been limited to analyse open-ended equity Growth schemes of different Asset
Management Companies namely Kotak Mahindra Mutual Fund,Reliance Mutual Fund, HDFC
Mutual Fund, Franklin Templeton Mutual Fund, HSBC Mutual Funds each scheme is analysed
according to its performance against the other.
RESEARCH METHODOLOGY
The Methodology involves randomly selecting Open-Ended equity schemes of different fund
houses of the country. The data collected for this project is basically from one source, that is:-
1. Secondary sources: Collection of data from Internet and Books.
HYPOTHESIS :
The Hypothesis of the study involves Comparison between:
1. Kotak Opportunities fund.
2. Reliance Equity Opportunities fund.
3. Franklin India Flexi fund.
4. HDFC Core & satellite fund.
5. HSBC India Opportunities fund
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LIMITATIONS OF THE STUDY :
The time constraint was one of the major problems.
The study is limited to the different schemes available under the mutual funds selected.
The study is limited to selected mutual fund schemes.
The data provided by the prospects may not be 100% correct as they too have their limitations.
The study is limited only to the analysis of different schemes and its suitability to different
investors according to their risk-taking ability.
The study is based on secondary data available from monthly fact sheets, websites and other
books, as primary data was not accessible.
The study is limited by the detailed study of various schemes of Five Asset Management
Company
CONCEPT OF MUTUAL FUND:
A mutual fund is a common pool of money into which investors place their contributions that are
to be invested in accordance with a stated objective. The ownership of the fund is thus joint or
mutual; the fund belongs to all investors. A single investors ownership of the fund is in the
same proportion as the amount of the contribution made by him or her bears to the total amount
of the fund.
Mutual Funds are trusts, which accept savings from investors and invest the same in diversified
financial instruments in terms of objectives set out in the trusts deed with the view to reduce the
risk and maximize the income and capital appreciation for distribution for the members.
A Mutual Fund is a corporation and the fund managers interest is to professionally manage the
funds provided by the investors and provide a return on them after deducting reasonable
management fees.
The objective sought to be achieved by Mutual Fund is to provide an opportunity for lower
income groups to acquire without much difficulty financial assets. They cater mainly to the
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needs of the individual investor whose means are small and to manage investors portfolio in a
manner that provides a regular income, growth, safety, liquidity and diversification
opportunities.
TYPES OF INVESTMENT COMPANIES :
Legally known as an "open-end company," a mutual fund is one of three basic types of
investment companies. While this brochure discusses only mutual funds, you should be aware
that other pooled investment vehicles exist and may offer features that you desire. The two other
basic types of investment companies are:
Closed-end funds which, unlike mutual funds, sell a fixed number of shares at one time (in an
initial public offering) that later trade on a secondary market; and
Unit Investment Trusts (UITs) which make a one-time public offering of only a specific, fixed
number of redeemable securities called "units" and which will terminate and dissolve on a date
specified at the creation of the UIT.
"Exchange-traded funds" (ETFs) are a type of investment company that aims to achieve the same
return as a particular market index. They can be either open-end companies or UITs. But ETFs
are not considered to be, and are not permitted to call themselves, mutual funds.
Some of the traditional, distinguishing characteristics of mutual funds include the
following:
Investors purchase mutual fund shares from the fund itself (or through a broker for the fund)instead of from other investors on a secondary market, such as the New York Stock Exchange or
Nasdaq Stock Market.
The price that investors pay for mutual fund shares is the fund's per share net asset value (NAV)
plus any shareholder fees that the fund imposes at the time of purchase (such as sales loads).
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Mutual fund shares are "redeemable," meaning investors can sell their shares back to the fund (or
to a broker acting for the fund).
Mutual funds generally create and sell new shares to accommodate new investors. In other
words, they sell their shares on a continuous basis, although some funds stop selling when, for
example, they become too large.
The investment portfolios of mutual funds typically are managed by separate entities known as
"investment advisers" that are registered with the SEC.
Hedge Funds and "Funds of Hedge Funds"
"Hedge fund" is a general, non-legal term used to describe private, unregistered investment pools
that traditionally have been limited to sophisticated, wealthy investors. Hedge funds are not
mutual funds and, as such, are not subject to the numerous regulations that apply to mutual funds
for the protection of investors including regulations requiring a certain degree of liquidity,
regulations requiring that mutual fund shares be redeemable at any time, regulations protecting
against conflicts of interest, regulations to assure fairness in the pricing of fund shares, disclosure
regulations, regulations limiting the use of leverage, and more.
"Funds of hedge funds," a relatively new type of investment product, are investment companies
that invest in hedge funds. Some, but not all, register with the SEC and file semi-annual reports.
They often have lower minimum investment thresholds than traditional, unregistered hedge
funds and can sell their shares to a larger number of investors. Like hedge funds, funds of hedge
funds are not mutual funds. Unlike open-end mutual funds, funds of hedge funds offer verylimited rights of redemption. And, unlike ETFs, their shares are not typically listed on an
exchange.
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KEY POINTS TO REMEMBER :
Mutual funds are not guaranteed or insured by the FDIC or any other government agency
even if you buy through a bank and the fund carries the bank's name. You can lose money
investing in mutual funds.
Past performance is not a reliable indicator of future performance. So don't be dazzled by last
year's high returns. But past performance can help you assess a fund's volatility over time.
All mutual funds have costs that lower your investment returns. Shop around, and use a mutual
fund cost calculator at www.sec.gov/investor/tools.shtml to compare many of the costs of
owning different funds before you buy.
TYPES OF MUTUAL FUND SCHEMES ;
Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk
tolerance and return expectations etc. The table below gives an overview into the existing types
of schemes in the Industry.
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DIFFERENT TYPES OF FUNDS :
When it comes to investing in mutual funds, investors have literally thousands of choices. Before
you invest in any given fund, decide whether the investment strategy and risks of the fund are a
good fit for you. The first step to successful investing is figuring out your financial goals and risk
tolerance either on your own or with the help of a financial professional. Once you know what
you're saving for, when you'll need the money, and how much risk you can tolerate, you can
more easily narrow your choices.
Most mutual funds fall into one of three main categories money market funds, bond funds
(also called "fixed income" funds), and stock funds (also called "equity" funds). Each type has
different features and different risks and rewards. Generally, the higher the potential return, the
higher the risk of loss.
Open Ended Funds :
The holders of the shares in the Fund can resell them to the issuing Mutual Fund Company at the
time. They receive in turn the net assets value (NAV) of the shares at the time of re-sale. Such
Mutual Fund Companies place their funds in the secondary securities market. They do not
participate in new issue market as do pension funds or life insurance companies. Thus they
influence market price of corporate securities. Open-end investment companies can sell an
unlimited number of Shares and thus keep going larger. The open-end Mutual Fund Company
Buys or sells their shares. These companies sell new shares NAV plus a Loading or management
fees and redeem shares at NAV. In other words, the target amount and the period both are
indefinite in such funds
Close Ended Funds :
A closedend Fund is open for sale to investors for a specific period, after which further sales are
closed. Any further transaction for buying the units or repurchasing them, Happen in the
secondary markets, where closed end Funds are listed. Therefore new investors buy from the
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existing investors, and existing investors can liquidate their units by selling them to other willing
buyers. In a closed end Funds, thus the pool of Funds can technically be kept constant. The asset
management company (AMC) however, can buy out the units from the investors, in the
secondary markets, thus reducing the amount of funds held by outside investors. The price at
which units can be sold or redeemed Depends on the market prices, which are fundamentally
linked to the NAV. Investors in closed end Funds receive either certificates or Depository
receipts, for their holdings in a closed end mutual Fund
Money Market Funds
Money market funds have relatively low risks, compared to other mutual funds (and most other
investments). By law, they can invest in only certain high-quality, short-term investments issued
by the U.S. government, U.S. corporations, and state and local governments. Money market
funds try to keep their net asset value (NAV) which represents the value of one share in a
fund at a stable $1.00 per share. But the NAV may fall below $1.00 if the fund's investments
perform poorly. Investor losses have been rare, but they are possible.
Money market funds pay dividends that generally reflect short-term interest rates, and
historically the returns for money market funds have been lower than for either bond or stock
funds. That's why "inflation risk" the risk that inflation will outpace and erode investment
returns over time can be a potential concern for investors in money market funds.
Bond Funds
Bond funds generally have higher risks than money market funds, largely because they typically
pursue strategies aimed at producing higher yields. Unlike money market funds, the SEC's rules
do not restrict bond funds to high-quality or short-term investments. Because there are many
different types of bonds, bond funds can vary dramatically in their risks and rewards. Some of
the risks associated with bond funds include:
Stock Funds
Although a stock fund's value can rise and fall quickly (and dramatically) over the short term,
historically stocks have performed better over the long term than other types of investments
including corporate bonds, government bonds, and treasury securities.
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Overall "market risk" poses the greatest potential danger for investors in stocks funds. Stock
prices can fluctuate for a broad range of reasons such as the overall strength of the economy
or demand for particular products or services.
Not all stock funds are the same. For example:
Growth funds focus on stocks that may not pay a regular dividend but have the potential for large
capital gains.
Income funds invest in stocks that pay regular dividends.
Index funds aim to achieve the same return as a particular market index, such as the S&P 500
Composite Stock Price Index, by investing in all or perhaps a representative sample of the
companies included in an index.
Sector funds may specialize in a particular industry segment, such as technology or consumer
products stocks.
HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY :
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank the. The history of mutual funds in India
can be broadly divided into four distinct phases.
First Phase 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of
Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI
and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of
1988 UTI had Rs.6,700 crores of assets under management.
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Second Phase 1987-1993 (Entry of Public Sector Funds): 1987 marked the entry of non- UTI,
public sector mutual funds set up by public sector banks and Life Insurance Corporation of India
(LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non-
UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while
GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds): With the entry of private sector funds
in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider
choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations
came into being, under which all mutual funds, except UTI were to be registered and governed.
The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private
sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other
mutual funds.
Fourth Phase since February 2003: In February 2003, following the repeal of the Unit Trust of
India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertakingof the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of
January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator
and under the rules framed by Government of India and does not come under the purview of the
Mutual Fund Regulations.
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ORGANISATION OF A MUTUAL FUND:
There are many entities involved and the diagram below illustrates the organizational set up of a
Mutual Fund:(For detailed definitions in the above chart refer to annexure 1)Mutual Funds
diversify their risk by holding a portfolio of instead of only one asset. This is because by holding
all your money in just one asset, the entire fortunes of your six portfolios depends on this one
asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual
Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same
risk as investing in the markets, the only difference being that due top professional management
of funds the controllable risks are substantially reduced. A very important risk involved in
Mutual Fund investments is the market risk. However, the company specific risks are largely
eliminated due to professional fund management
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IMPORTANT CHARACTERISTICS OF A MUTUAL FUND :
A Mutual Fund actually belongs to the investors who have pooled their Funds. The ownership
of the mutual fund is in the hands of the Investors.
A Mutual Fund is managed by investment professional and other Service providers, who earns
a fee for their services, from the funds.
The pool of Funds is invested in a portfolio of marketable investments.
The value of the portfolio is updated every day.
The investors share in the fund is denominated by units. The value of the units changes with
change in the portfolio value, every day. The value of one unit of investment is called net asset
value (NAV).
The investment portfolio of the mutual fund is created according to the stated Investment
objectives of the Fund.
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OBJECTIVES OF MUTUAL FUND :
To Provide an opportunity for lower income groups to acquire without Much difficulty,
property in the form of shares.
To Cater mainly of the need of individual investors, whose means are small?
To Manage investors portfolio that provides regular income, growth, Safety, liquidity, tax
advantage, professional management and diversification.
ADVANTAGES OF MUTUAL FUNDS :
Diversification:
An investor undertakes risk if he invests all his funds in a single scrip. Mutual funds invest in a
number of companies across various industries and sectors. This diversification reduces the risk
of the investment.
Professional Management:
An investor lacks the knowledge of the capital market operations and does not have large
resources to reap the benefits of investment. Hence, he requires the help of an expert. Mutual
funds are managed by professional managers who have the requisite skills and experiences to
analyse the performance and prospectus of companies.
Regulatory oversight:
Mutual funds are subject to many government regulations that protect investors from fraud.
Liquidity:
It's easy to get your money out of a mutual fund. Write a check, make a call, and you've got the
cash.
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Convenience:
You can usually buy mutual fund shares by mail, phone, or over the Internet. It reduces
paperwork, saves time and makes investment easy
Low cost:
Mutual fund expenses are often no more than 1.5 percent of your investment. Expenses for Index
Funds are less than that, because index funds are not actively managed. Instead, they
automatically buy stock in companies that are listed on a specific index
Transparency
Mutual funds transparently declare their portfolio every month. Thus, an investor knows where
his/her money is being deployed and in case they are not happy with the portfolio they can
withdraw at a short notice.
Flexibility:
Mutual funds offer a family of schemes, and investors have the option of transferring their
holdings from one scheme to other.
Tax benefits
Mutual fund investors now enjoy income tax benefits. Dividends received from mutual funds
debt schemes are tax exempt to the overall limit of Rs 9000 allowed under section SOL of the
Income Tax Act.
DISADVANTAGES OF MUTUAL FUNDS:
Hidden costs:
The mutual fund industry tactfully buries costs under layers of jargon. These costs come despite
of negative returns. Examples of such costs include sales charges, annual fees, and other
expenses; and depending on the timing of their investment, investors may also have to pay taxes
on any capital gains distribution they receive even if the fund went on to perform poorly
after they bought shares.
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Lack of control:
Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor
can they directly influence which securities the fund manager buys and sells or the timing of
those trades.
Dilution:
Because funds have small holdings in so many different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the result of
a successful fund getting too big. When money pours into funds that have had strong success, the
manager often has trouble finding a good investment for all the new money
Price Uncertainty:
With an individual stock, one can obtain real-time (or close to real-time) pricing information
with relative ease by checking financial websites or through a broker, as can one observe stock
price changes by the hour or minute. By contrast, with a mutual fund, the price at which one
purchases or redeems shares will typically depend on the fund's NAV, which the fund might not
calculate until many hours after the order has been placed. In general, mutual funds must
calculate their NAV at least once every business day, typically after the major U.S. exchanges
close.
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INVESTORS PROFILE :
An investor normally prioritizes his investment needs before undertaking an investment. So
different goals will be allocated to different proportions of the total disposable amount.
Investments for specific goals normally find their way into the debt market as risk reduction is of
prime importance, this is the area for the risk-averse investors and here, Mutual Funds are
generally the best option. One can avail of the benefits of better returns with added benefits of
anytime liquidity by investing in open-ended debt funds at lower risk, this risk of default by any
company that one has chosen to invest in, can be minimized by investing in Mutual Funds as the
fund managers analyze the companies financials more minutely than an individual can do as they
have the expertise to do so. Moving up the risk spectrum, there are people who would like to take
some risk and invest in equity funds/capital market. However, since their appetite for risk is also
limited, they would rather have some exposure to debt as well. For these investors, balanced
funds provide an easy route of investment, armed with expertise of investment techniques; they
can invest in equity as well as good quality debt thereby reducing risks and providing the
investor with better returns than he could otherwise manage. Since they can reshuffle their
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portfolio as per market conditions, they are likely to generate moderate returns even in
pessimistic market conditions. Next comes the risk takers, risk takers by their nature, would not
be averse to investing in high-risk avenues. Capital markets find their fancy more often than not,
because they have historically generated better returns than any other avenue, provided, the
money was judiciously invested. Though the risk associated is generally on the higher side of the
spectrum, the return-potential compensates for the risk attached
MUTUAL FUNDS EXPECTATIONS AND BENEFITS:
Everyone expects the New year to usher an era of joy and prosperity and certainly looks forward
to a windfall in terms of good things to come. Investor is no exception to this. But before one
rushes to celebrate with new investments, it would be appropriate to take a look at how Y2K
treated Mutual Funds (MFs) - the investment vehicle of the small investor.
A happy-go-lucky-man turned investor would have nothing to write home about, had he invested
in the Year 2000 and stayed invested throughout the year. Positive returns seemed like a state of
utopia in Y2K. What a transformation in an Industry that had witnessed almost triple digit
returns in 1999 when BSE Sensex had generated returns of about 65 percent.
What was common to MFs in Y2K was the presence of technology, media & telecom sector
scrips in portfolios of most funds, especially equity growth funds. Birla Advantage Fund with
and exposure of 67%, Alliance to the tune of 71% are just to name a few.
When the bull phase came to an end and when most of the funds stood stripped with the
downslide of most of the TMT stocks, most fund managers moved to quality portfolio levels and
reduced their IT exposure to reasonable levels. Most equity diversified funds, today, maintain IT
exposure at 20% to 37% while simultaneously picking up both old and new economy stocks. But
fund managers still are willing to bet on TMT stocks despite the tumultuous experience they
have had in Y2K. While accepting the possibility of a downward revision of their growth rate,
they foresee no indications of a significant slowdown from at least India based companies. They
concur that the fundamentals of IT sector are strong with future growth, however, being at a
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modest pace. They are now of the view that a mixture of old and new economy scrip would form
an ideal portfolio.
While the crash in IT share prices has resulted in a re-balancing of portfolios, action on the old
economy front would further narrow the gap between the so called click and mortar and brick
and mortar companies-bring with it a greater diversification in MF portfolios.
MF Industry in India, like any other Industry, has had its nascent stage and is still trying to
grapple with several inconsistencies. The Industry is now approaching a stage where a cross
section of investing community has begun to comprehend that MFs provide and ideal investment
vehicle to meet their varied investment objectives in the long run with adequate emphasis on
portfolio diversification. All in all, MFs have had their share of lessons in Y2K and are waiting
for newer horizons in Y2K+1 with abated breath.
ORGANISATION OF A MUTUAL FUND:
There are many entities involved and the diagram below illustrates the organizational set up of a
Mutual Fund:(For detailed definitions in the above chart refer to annexure 1)Mutual Funds
diversify their risk by holding a portfolio of instead of only one asset. This is because by holding
all your money in just one asset, the entire fortunes of your six portfolios depends on this one
asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual
Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same
risk as investing in the markets, the only difference being that due top professional management
of funds the controllable risks are substantially reduced. A very important risk involved in
Mutual Fund investments is the market risk. However, the company specific risks are largely
eliminated due to professional fund management
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ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS :-
In India Mutual Fund usually formed as trusts, three parties are generally involved viz.
Settler of the trust or the sponsoring organization.
The trust formed under the Indian trust act, 1982 or the trust company registered under the
Indian companies act, 1956
Fund mangers or the merchant-banking unit
Custodians
MUTUAL FUNDS TRUST :-
Mutual fund trust is created by the sponsors under the
Indian trust act, 1982
Which is the main body in the creation of Mutual Fund Trust? The main functions of Mutual
Fund trust are as follows:
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Planning and formulating Mutual Funds schemes.
Seeking SEBIs approval and authorization to these schemes.
Marketing the schemes for public subscription.
Seeking RBI approval in case NRIs subscription to Mutual Fund is invited
Attending to trusteeship function. This function as per guidelines can be assigned to separately
established trust companies too. Trustees are required to submit a consolidated report six
monthly to SEBI to ensure that the guidelines are fully being complied with trusted are
also required to submit an annual report to the investors in the fund.
FUND MANAGERS (OR) THE ASSET MANAGEMENT COMPANY (AMC) :
AMC has to discharge mainly three functions as under:
I. Taking investment decisions and making investments of the funds through market
dealer/brokers in the secondary market securities or directly in the primary capital market or
money market instruments
II. Realize fund position by taking account of all receivables and realizations, moving corporate
actions involving declaration of dividends, etc to compensate investors for their investments in
units; and
III. Maintaining proper accounting and information for pricing the units and arriving at net asset
value (NAV), the information about the listed schemes and the transactions of units in the
secondary market. AMC has to feed back the trustees about its fund management operations and
has to maintain a perfect information system.
CUSTODIANS OF MUTUAL FUNDS:-
Mutual funds run by the subsidiaries of the nationalized banks had their respective sponsor banks
as custodians like canara bank, SBI, PNB, etc. Foreign banks with higher degree of automation
in handling the securities have assumed the role of custodians for mutual funds. With the
establishment of stock Holding Corporation of India the work of custodian for mutual funds is
now being handled by it for various mutual funds. Besides, industrial investment trust company
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acts as sub-custodian for stock Holding Corporation of India for domestic schemes of UTI, BOI
MF, LIC MF, etc
Fee structure:-
Custodian charges range between 0.15% to 0.20% on the net value of the customers holding for
custodian services space is one important factor which has fixed cost element.
RESPONSIBILITY OF CUSTODIANS:
Receipt and delivery of securities
Holding of securities.
Collecting income
Holding and processing cost
Corporate actions etc
FUNCTIONS OF CUSTODIANS:
Safe custody
Trade settlement
Corporate action
Transfer agents
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RATE OF RETURN ON MUTUAL FUNDS:-
An investor in mutual fund earns return from two sources:
Income from dividend paid by the mutual fund.
Capital gains arising out of selling the units at a price higher than the acquisition price
FORMULATION & REGULATIONS:
1. Mutual funds are to be established in the form of trusts under the
Indian trusts act and are to be operated by separate asset management companies (AMC s)
2. AMCs shall have a minimum Net worth of Rs. 5 crores;
3. AMCs and Trustees of Mutual Funds are to be two separate legal entities and that an AMC or
its affiliate cannot act as a manager in any other fund
4. Mutual funds dealing exclusively with money market instruments are to be regulated by
the Reserve Bank Of India
5. Mutual fund dealing primarily in the capital market and also partly money market instruments
are to be regulated by the Securities Exchange Board Of India (SEBI)
6. All schemes floated by Mutual funds are to be registered with SEBI
SCHEMES:
1. Mutual funds are allowed to start and operate both closed-end and open-end schemes;
2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs 20crore;
3. Each open-end scheme must have a Minimum corpus of Rs 50 crore
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4. In the case of a Closed End scheme if the Minimum amount of Rs 20 crore or 60% of the
target amount, which ever is higher is not raised then the entire subscription has to be refunded to
the investors;
5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50 crore or 60 percent
of the targeted amount, which ever is higher, is no raised then the entire subscription has to be
refunded to the investors.
INVESTMENT NORMS:
1. No mutual fund, under all its schemes can own more than five percent of any companys paid
up capital carrying voting rights;
2. No mutual fund, under all its schemes taken together can invest more than 10percent of its
funds in shares or debentures or other instruments of any single company;
3. No mutual fund, under all its schemes taken together can invest more than 15percent of its
fund in the shares and debentures of any specific industry, except those schemes which are
specifically floated for investment in one or more specified industries in respect to which a
declaration has been made in the offer letter.
4. No individual scheme of mutual funds can invest more than five percent of its corpus in
any one companys share;
5. Mutual funds can invest only in transferable securities either in the money or in the capital
market. Privately placed debentures, securitized debt, and other unquoted debt, and other
unquoted debt instruments holding cannot exceed 10percent in the case of growth funds and 40
percent in the case of income funds.
DISTRIBUTION:
Mutual funds are required to distribute at least 90 percent of their profits annually in any given
year. Besides these, there are guidelines governing the operations of mutual funds in dealing with
shares and also seeking to ensure greater investor protection through detailed disclosure and
reporting by the mutual funds. SEBI has also been granted with powers to over see the
constitution as well as the operations of mutual funds, including a common advertising code.
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Besides, SEBI can impose penalties on Mutual funds after due investigation for their failure to
comply with the guidelines
MUTUAL FUND SCHEME TYPES:
Equity Diversified Schemes
These schemes mainly invest in equity. They seek to achieve long-term capital appreciation by
responding to the dynamically changing Indian economy by moving across sectors such as
Lifestyle, Pharma, Cyclical, Technology, etc.
Sector Schemes
These schemes focus on particular sector as IT, Banking, etc. They seek to generate long-term
capital appreciation by investing in equity and related securities of companies in that particular
sector.
Index Schemes
These schemes aim to provide returns that closely correspond to the return of a particular stock
market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest in all the stocks
comprising the index in approximately the same weight age as they are given in that index.
Exchange Traded Funds (ETFs)
ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE Sensex. They
are similar to an index fund with one crucial difference. ETFs are listed and traded on a stock
exchange. In contrast, an index fund is bought and sold by the fund and its distributors.
Equity Tax Saving Schemes
These work on similar lines as diversified equity funds and seek to achieve long-term capital
appreciation by investing in the entire universe of stocks. The only difference between these
funds and equity-diversified funds is that they demand a lock-in of 3years to gain tax benefits.
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Dynamic Funds
These schemes alter their exposure to different asset classes based on the market scenario. Such
funds typically try to book profits when the markets are overvalued and remain fully invested in
equities when the markets are undervalued. This is suitable for investors who find it difficult to
decide when to quit from equity.
Balanced Schemes
These schemes seek to achieve long-term capital appreciation with stability of investment and
current income from a balanced portfolio of high quality equity and fixed-income securities.
Medium-Term Debt Schemes
These schemes have a portfolio of debt and money market instruments where the average
maturity of the underlying portfolio is in the range of five to seven years.
Short-Term Debt Schemes
These schemes have a portfolio of debt and money market instruments where the average
maturity of the underlying portfolio is in the range of one to two years.
Money Market Debt Schemes
These schemes invest in debt securities of a short-term nature, which generally means securities
of less than one-year maturity. The typical short-term interest-bearing instruments these funds
invest in Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money
Market.
Medium-Term Gilt Schemes
These schemes invest in government securities. The average maturity of the securities in the
scheme is over three years.
Short-Term Gilt Schemes
These schemes invest in government securities. The securities invested in are of short to medium
term maturities.
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Floating Rate Funds
They invest in debt securities with floating interest rates, which are generally linked to some
benchmark rate like MIBOR. Floating rate funds have a high relevance when interest rates are on
the rise helping investors to ride the interest rate rise.
Monthly Income Plans (MIPS)
These are basically debt schemes, which make marginal investments in the range of 10-25% in
equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly
higher return that pure long-term debt schemes at marginally higher risk.
DIFFERENT MODES OF RECEIVING THE INCOME EARNED FROM MUTUAL
FUND INVESTMENTS
Mutual Funds offer following methods of receiving income:
Growth Plan
In this plan, dividend is neither declared nor paid out to the investor but is built into the value of
the NAV. In other words, the NAV increases over time due to such incomes and the investor
realizes only the capital appreciation on redemption of his investment.
Income Plan
In this plan, dividends are paid-out to the investor. In other words, the NAV only reflects the
capital appreciation or depreciation in market price of the underlying portfolio.
Dividend Re-investment Plan
In this case, dividend is declared but not paid out to the investor, instead, it is reinvested back
into the scheme at the then prevailing NAV. In other words, the investor is given additional units
and not cash as dividend.
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Dividend Payout Option:
Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the
mutual fund scheme falls to the extent of the dividend payout.
Retirement Pension Option:
Some schemes are linked with retirement pension. Individuals participate in these options for
themselves, and corporates participate for their employees.
Insurance Option:
Certain Mutual Funds offer schemes that provide insurance cover to investors as an added
benefit.
Systematic Investment Plan (SIP):
Here the investor is given the option of preparing a pre-determined number of post-dated
cheques in favour of the fund. The investor is allotted units on a predetermined date specified in
the offer document at the applicable NAV.
Systematic Withdrawal Plan (SWP):
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the
investor the facility to withdraw a pre-determined amount / units from his fund at a pre-
determined interval. The investor's units will be redeemed at the applicable NAV as on that day.
How Funds Can Earn Money for You :
You can earn money from your investment in three ways:
Dividend Payments A fund may earn income in the form of dividends and interest on thesecurities in its portfolio. The fund then pays its shareholders nearly all of the income (minus
disclosed expenses) it has earned in the form of dividends.
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Capital Gains Distributions The price of the securities a fund owns may increase. When a
fund sells a security that has increased in price, the fund has a capital gain. At the end of the
year, most funds distribute these capital gains (minus any capital losses) to investors.
Increased NAV If the market value of a fund's portfolio increases after deduction of expenses
and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV
reflects the higher value of your investment.
With respect to dividend payments and capital gains distributions, funds usually will give you a
choice: the fund can send you a check or other form of payment, or you can have your dividends
or distributions reinvested in the fund to buy more shares (often without paying an additional
sales load).
Factors to Consider
Thinking about your long-term investment strategies and tolerance for risk can help you decide
what type of fund is best suited for you. But you should also consider the effect that fees and
taxes will have on your returns over time.
Degrees of Risk
All funds carry some level of risk. You may lose some or all of the money you invest your
principal because the securities held by a fund go up and down in value. Dividend or interest
payments may also fluctuate as market conditions change.
Before you invest, be sure to read a fund's prospectus and shareholder reports to learn about its
investment strategy and the potential risks. Funds with higher rates of return may take risks that
are beyond your comfort level and are inconsistent with your financial goals.
MUTUAL FUND INVESTING STRATEGIES:
1. Systematic Investment Plans (SIPs)
These are best suited for young people who have started their careers and need to build their
wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals in the Mutual
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fund scheme the investor has chosen, an investor opting for SIP in xyz Mutual Fund scheme will
need to invest a certain sum on money every month/quarter/half-year in the scheme.
2. Systematic Withdrawal Plans (SWPs)
These plans are best suited for people nearing retirement. In these plans, an investor invests in a
mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals to take
care of his expenses
3. Systematic Transfer Plans (STPs)
They allow the investor to transfer on a periodic basis a specified amount from one scheme to
another within the same fund family meaning two schemes belonging to the same mutual fund.
A transfer will be treated as redemption of units from the scheme from which the transfer is
made. Such redemption or investment will be at the applicable NAV. This service allows the
investor to manage his investments actively to achieve his objectives. Many funds do not even
charge any transaction fees for his service an added advantage for the active investor.
ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS:
There are several reasons that can be attributed to the growing popularity and suitability of
Mutual Funds as an investment vehicle especially for retail investors:
ASSET ALLOCATION
Mutual Funds offer the investors a valuable tool Asset Allocation. This is explained by an
example.
An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100 crores and
invested the money in various investment options, will have Rs.1 lakh spread over a number of
investment options as demonstrated below:
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Investment Type Percentage of
Allocation (%
of total
portfolio)
Total portfolio of
the Mutual
Fundscheme (Rs.
Incrores)
Investors
portfolioallocation
(Rs.)
EQUITY: 57% 57 57,000
State Bank of India 15% 15 15,000
Infosys Technologies 12% 12 12,000
ABB 10% 10 10,000
Reliance Industries 9% 9 9,000
MICO 7% 7 7,000
Tata Power 4% 4 4,000
DEBT: 43% 43 43,000
Govt. Securities 20% 20 20,000
Company Debentures 10% 10 10,000
Institution Bonds 9% 9 9,000
Money Market 4% 4 4,000
Total 100% 100 1,00,000
Thus Asset Allocation is allocating your investments in to different investment options
depending on your risk profile and return expectations.
DIVERSIFICATION
Diversification is spreading your investment amount over a larger number of investments in
order to reduce risk. For instance, if you have Rs.10, 000 to invest in Information Technology
(IT) stocks, this amount will only buy you a handful of stocks of perhaps one or two companies.
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A fall in the market price of any of these company stocks will significantly erode your
investment amount instead it makes sense to invest in an IT sector mutual fund scheme so that
your Rs.10,000 is spread across a larger number of stocks thereby reducing your risk.
PROFESSIONALS AT WORK
Few investors have the time or expertise to manage their personal investments everyday, to
efficiently reinvest interest or dividend income, or to investigate the thousands of securities
available in the financial markets. Fund managers are professionals and experienced in tracking
the finance markets, having access to extensive research and market information, which enables
them to decide which securities to buy and sell for the fund. For an individual investor like you,
this professionalism is built in when you invest in the Mutual Fund.
REDUCTION OF TRANSACTION COSTS
While investing directly in securities, all the costs of investing such as brokerage, custodial
services etc. Borne by you are at the highest rates due to small transaction sizes. However, when
going through a fund, you have the benefit of economies of scale; the fund pays lesser costs
because of larger volumes, a benefit passed on to its investors like you.
EASY ACCESS TO YOUR MONEY
This is one of the most important benefits of a Mutual Fund. Often you hold shares or bonds that
you cannot directly, easily and quickly sell. In such situations, it could take several days or even
longer before you are able to liquidate his Mutual Fund investment by selling the units to the
fund itself and receive his money within 3working days.
TRANSPARENCY
The investor gets regular information on the value of his investment in addition to disclosure on
the specific investments made by the fund, the proportion invested in each class of assets and the
fund managers investment strategy and outlook.
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SAVING TAXES
Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of the Income
Tax Act. Under this section, an investor can invest up to Rs.10, 000 per financial year in a
tax saving scheme. The rate of rebate under this section depends on the investors total income.
INVESTING IN STOCK MARKET INDEX
Index schemes of mutual funds give you the opportunity of investing in scrips that make up a
particular index in the same proportion of weightage that these scrips have in the index. Thus, the
return on your investment mirrors the movement of the index.
INVESTING IN GOVERNMENT SECURITIES
Gilt and Money Market Schemes of Mutual Funds also give you the opportunity to invest in
Government Securities and Money Markets (including the inter banking call money market)
WELL-REGULATED INDUSTRY
All Mutual Funds are registered with SEBI and they function within the provisions of strict
regulations designed to protect the interests of investors. The operations of Mutual Funds are
regularly monitored by SEBI.
CONVENIENCE AND FLEXIBILITY
Mutual Funds offer their investors a number of facilities such as inter-fund transfers, online
checking of holding status etc, which direct investments dont offer.
RISKS ASSOCIATED WITH MUTUAL FUNDS:-
Investing in Mutual Funds, as with any security, does not come without risk. One of the most
basic economic principles is that risk and reward are directly correlated. In other words, the
greater the potential risk the greater the potential return. The types of risk commonly associated
with Mutual Funds are:
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1) Market Risk
Market risk relates to the market value of a security in the future. Market prices fluctuate and are
susceptible to economic and financial trends, supply and demand, and many other factors that
cannot be precisely predicted or controlled.
2) Political Risk
Changes in the tax laws, trade regulations, administered prices, etc are some of the many
political factors that create market risk. Although collectively, as citizens, we have indirect
control through the power of our vote individually, as investors, we have virtually no control.
Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.
3) Inflation Risk
Interest rate risk relates to future changes in interest rates. For instance, if an investor invests in a
long-term debt Mutual Fund scheme and interest rates increase, the NAV of the scheme will fall
because the scheme will be end up holding debt offering lower interest rates.
Things you hear people talk about:
"Rs. 100 today is worth more than Rs. 100 tomorrow."
"Remember the time when a bus ride costed 50 paise?"
"Mehangai Ka Jamana Hai."
The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times
people make conservative investment decisions to protect their capital but end up with a sum of
money that can buy less than what the principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment. A well-diversified portfolio with
some investment in equities might help mitigate this risk.
4) Business Risk
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Business risk is the uncertainty concerning the future existence, stability, and profitability of the
issuer of the security. Business risk is inherent in all business ventures. The future financial
stability of a company cannot be predicted or guaranteed, nor can the price of its securities.
Adverse changes in business circumstances will reduce the market price of the companys equity
resulting in proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the
equity of such a company.
5) Economic Risk
Economic risk involves uncertainty in the economy, which, in turn, can have an adverse effect on
a companys business. For instance, if monsoons fail in a year, equity stocks of agriculture-based
companies will fall and NAVs of Mutual Funds, which have invested in such stocks, will fall
proportionately.
6) The Risk-Return Trade-off:
The most important relationship to understand is the risk-return trade-off. Higher the risk greater
the returns/loss and lower the risk lesser the returns/loss.
Hence it is upto you, the investor to decide how much risk you are willing to take. In order to do
this you must first be aware of the different types of risks involved with your investment
decision.
7) Credit Risk:
The debt servicing ability (may it be interest payments or repayment of principal) of a company
through its cashflows determines the Credit Risk faced by you. This credit risk is measured by
independent rating agencies like CRISIL who rate companies and their paper. A AAA rating is
considered the safest whereas a D rating is considered poor credit quality. A well-diversified
portfolio might help mitigate this risk. The possibility that company or other issuers whose bonds
are owned by the fund may fail to pay their debts (including the debt owed to holders of their
bonds). Credit risk is less of a factor for bond funds that invest in insured bonds or U.S. Treasury
bonds. By contrast, those that invest in the bonds of companies with poor credit ratings generally
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will be subject to higher risk.
8) Interest Rate Risk:
In a free market economy interest rates are difficult if not impossible to predict. Changes in
interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds
fall and vice versa. Equity might be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate this risk.
9) Liquidity Risk:
Liquidity risk arises when it becomes difficult to sell the securities that one has purchased.
Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as
internal risk controls that lean towards purchase of liquid securities.
10) Prepayment Risk:
the chance that a bond will be paid off early. For example, if interest rates fall, a bond issuer
may decide to pay off (or "retire") its debt and issue new bonds that pay a lower rate. When this
happens, the fund may not be able to reinvest the proceeds in an investment with as high a return
or yield.
PERFORMANCE MEASURES OF MUTUAL FUNDS:
Mutual Fund industry today, with about 30 players and more than six hundred schemes, is one of
the most preferred investment avenues in India. However, with a plethora of schemes to choose
from, the retail investor faces problems in selecting funds. Factors such as investment strategy
and management style are qualitative, but the funds record is an important indicator too.
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Though past performance alone cannot be indicative of future performance, it is, frankly, the
only quantitative way to judge how good a fund is at present. Therefore, there is a need to
correctly assess the past performance of different Mutual Funds. Worldwide, good Mutual Fund
companies over are known by their AMCs and this fame is directly linked to their superior stock
selection skills.
For Mutual Funds to grow, AMCs must be held accountable for their selection of stocks. In
other words, there must be some performance indicator that will reveal the quality of stock
selection of various AMCs.
Return alone should not be considered as the basis of measurement of the performance of a
Mutual Fund scheme, it should also include the risk taken by the fund manager because different
funds will have different levels of risk attached to them. Risk associated with a fund, in a
general, can be defined as Variability or fluctuations in the returns generated by it. The higher
the fluctuations in the returns of a fund during a given period, higher will be the risk associated
with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces.
First, general market fluctuations, which affect all the securities, present in the market, called
Market risk or Systematic risk and second, fluctuations due to specific securities present in the
portfolio of the fund, called Unsystematic risk. The Total Risk of a given fund is sum
of these two and is measured in terms of standard deviation of returns of the fund.
Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in
the NAV of the fund vis--vis market. The more responsive the NAV of a Mutual Fund is to the
changes in the market; higher will be its beta. Beta is calculated by relating the returns on a
Mutual Fund with the returns in the market. While Unsystematic risk can be diversified through
investments in a number of instruments, systematic risk cannot. By using the risk return
relationship, we try to assess the competitive strength of the Mutual Funds one another in a better
way. In order to determine the risk-adjusted returns of investment portfolios, several eminentauthors have worked since 1960s to develop composite performance indices to evaluate a
portfolio by comparing alternative portfolios within a particular risk class.
The most important and widely used measures of performance are:
The TreynorMeasure
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The Sharpe Measure
Jenson Model
Fama Model
1) The Treynor Measure:-
Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's
Index.This Index is a ratio of return generated by the fund over and above risk free rate of return
(generally taken to be the return on securities backed by the government, as thereis no credit risk
associated), during a given period and systematic risk associated with it(beta). Symbolically, it
can be represented as :
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where, Ri represents return on fund,
Rf is risk free rate of return,
And Bi is beta of the fund.
All risk-averse investors would like to maximize this value. While a high and positive Treynor's
Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index
is an indication of unfavorable performance.
2) The Sharpe Measure:-
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of
returns generated by the fund over and above risk free rate of return and the total risk associated
with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about.
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So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be
written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where,Si is standard deviation of the fund,
Ri represents return on fund, and
Rf is risk free rate of return.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of afund, a
low and negative Sharpe Ratio is an indication of unfavorable performance.
Comparison of Sharpe and Treynor
Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a
numerical risk measure. The total risk is appropriate when we are evaluating the risk return
relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant
measure of risk when we are evaluating less than fully diversified portfolios or individual stocks.
For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total
risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-
diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified
fund that ranks higher on Treynor measure, compared with another fund that is highly
diversified, will rank lower on Sharpe Measure.
3) Jenson Model:-
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the differential Return Method.
This measure involves evaluation of the returns that the fund has generated vs .the returns
actually expected out of the fund1 given the level of its systematic risk. The surplus between the
two returns is called Alpha, which measures the performance of a fund compared with the actual
returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as
:Ri = Rf + Bi (Rm - Rf)
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Where,Ri represents return on fund, and Rm is average market return during the given period, Rf
is risk free rate of return, and Bi is Beta deviation of the fund.
After calculating it, Alpha can be obtained by subtracting required return from the actual return
of the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation
of this model is that it considers only systematic risk not the entire risk associated with the fund
and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is
primitive.
4) Fama Model:-
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return commensurate with
the total risk associated with it. The difference between these two istaken as a measure of the
performance of the fund and is called Net Selectivity. The Net Selectivity represents the stock
selection skill of the fund manager, as it is the excess returns over and above the return required
to compensate for the total risk taken by the fund manager. Higher value of which indicates that
fund manager has earned returns well above the return commensurate with the level of risk taken
by him. Required return can be calculated as:
Ri = Rf + Si/Sm*(Rm - Rf)
Where,Ri represents return on fund,
Sm is standard deviation of market returns,
Rm is average market return during the given period, and Rf is risk free rate of return.
The Net Selectivity is then calculated by subtracting this required return from the actual return of
the fund. Among the above performance measures, two models namely, Treynor measure and
Jenson model use Systematic risk is based on the premise that the Unsystematic risk is
diversifiable. These models are suitable for large investors like institutional investors with high
risk taking capacities as they do not face paucity of funds and can invest in a number of options
to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors.
However, Sharpe measure and Fama model that consider the entire risk associated with fund are
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suitable for small investors, as the ordinary investor lacks the necessary skill and resources to
diversify. Moreover, the selection of the fund on the basis of superior stock selection ability of
the fund manager will also help in safeguarding the money invested to a great extent. The
investment in funds that have generated big returns at higher levels of risks leaves the
money all the more prone to risks of all kinds that may exceed the individual investors' risk
appetite.
COMPANY PROFILE(KOTAK MAHINDRA)
Kotak Mahindra Mutual Fund (KMMF) is managed by Kotak Mahindra AssetManagement
Company Ltd., a wholly owned subsidiary of Kotak MahindraBank Ltd. Kotak Mahindra Mutual
Fund launched its Schemes in December 1998 and today manages assets over and above Rs.
7353.82 cr. contributed by more than 1,99,818investors in various schemes. KMMF has to its
credit the launching of innovative schemes and plans like Kotak Gilt and Free Life Insurance
with Kotak Bond Deposit Plan. Kotak Mahindra is one of India's leading financial institutions,
offering complete financial solutions that encompass every sphere of life. From commercial
banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group
caters to the financial needs of individuals and corporates. The group has a net worth of around
Rs.1,700 crore and employs over 4,000 employees in its various businesses. With a presence in
74 cities in India and offices in New York, London, Dubai and Mauritius, it services a customer
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base of over 5,00,000 Kotak Mahindra has international partnerships with Goldman Sachs (one
of the world'sl argest investment banks and brokerage firms), Ford Credit (one of the world's
largest dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset
management conglomerate).
Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned
subsidiary of KMBL, is the asset manager for Kotak Mahindra Mutual Fund (KMMF).KMAMC
started operations in December 1998 and has over 1,99,818 investors in various schemes.
KMMF offers schemes catering to investors with varying risk - return profiles and was the first
fund house in the country to launch a dedicated gilt scheme investing only in government
securities.
The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance Limited.
This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &Company.
Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and that's when the
company changed its name to Kotak Mahindra Finance Limited. Since then it's been a steady and
confident journey to growth and success. Kotak Mahindra Finance Limited starts the activity of
Bill Discounting Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market.
The Auto Finance division is started the Investment Banking Division is started. Enters the
Funds Syndication sector 1995 Brokerage and Distribution businesses incorporated into a
separate company -Kotak Securities. Investment Banking division incorporated into a separate
company -Kotak Mahindra Capital Company.1996 The Auto Finance Business is hived off into a
separate company - Kotak Mahindra Primus Limited. Kotak Mahindra takes a significant stake in
Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. The launch of Matrix
Information Services Limited marks the Groups entry into information distribution.1998 Enters
the mutual fund market with the launch of Kotak Mahindra Asset Management Company.
Kotak Mahindra ties up with Old Mutual plc. For the Life Insurance business. Kotak Securities
launches kotakstreet.com - its on-line broking site. Formal commencement of private equity
activity through setting up of Kotak Mahindra Venture Capital Fund.2001 Matrix sold to Friday
Corporation Launches Insurance Services 2003 Kotak Mahindra Finance Ltd. converts to
bank Kotak Mahindra is one of India's leading financial institutions, offering complete financial
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solutions cities in India and offices in New York, London, Dubai and Mauritius, it services a
customer base of over 5,00,000.has international partnerships with Goldman Sachs (one of the
world's largest investment banks and brokerage firms), Ford Credit (one of the world's largest
dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset
management conglomerate that encompass every sphere of life. From commercial banking, to
stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the
financial needs of individuals and corporates.
The group has a net worth of around Rs.1,700 crore and employs over 4,000 employees in its
various businesses. With a presence in 74 cities in India and offices in New York, London,
Dubai and Mauritius, it services a customer base of over 5,00,000.Kotak Mahindra has
international partnerships with Goldman Sachs (one of the world's largest investment banks and
brokerage firms), Ford Credit (one of the world's largest dedicated automobile financiers) and
Old Mutual (a large insurance, banking and asset management conglomerate).Kotak Mahindra
Asset Management Company Limited (KMAMC), a wholly owned subsidiary of KMBL, is the
asset manager for Kotak Mahindra Mutual Fund (KMMF).KMAMC started operations in
December 1998 and has over 1,99,818 investors in various schemes. KMMF offers schemes
catering to investors with varying risk - return profiles and was the first fund house in the
country to launch a dedicated gilt scheme investing only in government securities.
Kotak Investment Banking* (KIB), India's premier Investment Bank is a strategic joint
venture between Kotak Mahindra Bank Limited (KMBL) and the Goldman Sachs
Group,LLP.KMBL has come into existence in March 2003 through the conversion
ofKotak Mahindra Bank Ltd. into a Commercial Bank. Kotak Mahindra is one of India's
leading financial institutions, offering complete financial solutions that encompass every sphere
of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to
investment banking, the group caters to the needs of individuals and corporates. The group has a
net worth of over Rs.1,550 crore and employs over 3,000 employees in its various businesses.
With a presence in 60 cities in India and offices in New York, London, Dubai and Mauritius, it
services a customer base of over 5,00,000.Kotak Mahindra has international partnerships with
Goldman Sachs (one of the world's largest investment banks and brokerage firms), Ford Credit
(one of the world's largest dedicated automobile financiers) and Old Mutual (a large insurance,
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banking and asset management conglomerate).Kotak Investment Banking (KIB) and Kotak
Institutional Equities represent the securities business of the Kotak Mahindra Group **(KI),
both, joint ventures with Goldman Sachs involved in brokerage, distribution and research
We are a full service Investment Bank bringing to our clients the global reach and
expertise of Goldman Sachs and the local knowledge and skills of Kotak Mahindra. As a full
service Investment Bank, Kotak Investment Banking core business areas include Equity
Issuances, Mergers & Acquisitions, Advisory Services and Fixed Income Securities and
Principal Business. Our strength lies in understanding our clients' businesses backed by a strong
research team and an extensive distribution network, which spans a wide variety of investors
across the country. We are also the first Indian Investment Bank to be registered with the
Securities & Futures Authority in the UK (through our wholly owned subsidiary) and the
National Association of Securities and Dealers in the USA. We are also the first Indian
Investment Bank to be appointed by the Government of India as a Co-lead Manager in their
international divestment of Gas Authority of India Ltd through a GDR offering. We are today
well positioned in an increasing globalised environment to provide full service to its clients
based either in India or overseas.
OBJECTIVES:
1. To project Mutual Fund as the productive avenue for investing activities.
2. To show the wide range of investment options available in Mutual Funds by explaining its
various schemes.
3. To compare the schemes based on Sharpes ratio, Treynors ratio, Co-efficient, Returns and
show which scheme is best for the investor based on his risk profile.
4. To help an investor make a right choice of investment, while considering the inherent risk
factors. To understand the recent trends in Mutual Funds world. The comparison between these
schemes is made based on the following factors
A) Sharpes Ratio
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B) Treynors Ratio
C) (Beta) co-efficient.
D) Returns
A) The Sharpes Measure :-
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which isa ratio of
returns generated by the fund over and above risk free rate of return and thetotal risk associated
with it.According to Sharpe, it is the total risk of the fund that the investors are concernedabout.
So, the model evaluates funds on the basis of reward per unit of total risk.Symbolically, it can be
written as:
Sharpe Index (Si) = (Ri - Rf)/Si
Where,Si is Standard Deviation of the fund.
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of afund, a
low and negative Sharpe Ratio is an indication of unfavorable performance.
B) The Treynor Measure :-
Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's
Index. This Index is a ratio of return generated by the fund over and above risk free rate of return
(generally taken to be the return on securities backed by the government, as thereis no credit risk
associated), during a given period and systematic risk associated with it(beta). Symbolically, it
can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.
Where,Ri represents return on fund, Rf is risk free rate of return, and Bi is beta of the fund.
All risk-averse investors would like to maximize this value. While a high and positive Treynor's
Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index
is an indication of unfavorable performance.
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C) (Beta) Co-efficient:-
Systematic risk is measured in terms of Beta, which represents fluctuations in the NAVof the
fund vis--vis market. The more responsive the NAV of a Mutual Fund is to the changes in the
market; higher will be its beta. Beta is calculated by relating the returns on a Mutual Fund with
the returns in the market. While unsystematic risk can be diversified through investments
in a number of instruments,