dessert at ion final report full

8/2/2019 Dessert at Ion Final Report Full

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AMITY SCHOOL OF BUSINESS

AMITY UNIVERSITY

DESSERTATION REPORT

ANALYSIS OF MUTUAL FUND

Submitted To:

Mrs. Mani Arora

Submitted by:

Atul Madaan


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Acknowledgment

Any attempt at any level cannot be satisfactorily completed without the support

and guidance of learned people. I would like to express my immense gratitude

to Mrs Mani Arora for her constant support and motivation that has

encouraged me to come up with this project.

I am also thankful to the authority ofAmity University for providing us with

good environment and facilities to complete this project. I also extend my

heartfelt thanks to my family and well-wishers who helped me with their

guidance from time to time in making this project despite their busy schedules.


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Table of content

s/no Particulars Page no

1 Introduction

Introduction of mutual fund Organization of a mutual fund Objectives

5

6-7

8

2 Mutual fund industry

History Types of mutual fund

9-10

11-14

3 Advantages and Drawbacks of investing through

mutual fund

15-16

4 Measure of performance 17-18

5 Comparing ICICI Prudential balanced funds withBirla Sun Life MIP

19-22

6 Investment in mutual funds

Investment plans Special schemes Risk Banks v/s mutual funds

23-25

26-29

30-33

34

7 Recent trends in mutual fund industry 35

8 Introduction to balanced and liquid funds

Balanced funds Liquid funds

36-53

54-59


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10 Analysis

Future if mutual fund industry Conclusion Suggestions bibliography

60-66

67

68-7071


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Introduction

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

share a common financial goal. The money thus collected is invested by the

fund manager in different types of securities depending upon the objective of

the scheme. These could range from shares to debentures to money market

instruments. The income earned through these investments and the capital

appreciations realized by the scheme are shared by its unit holders in

proportion to the number of units owned by them. Thus a Mutual Fund is the

most suitable investment for the common man as it offers an opportunity to

invest in a diversified, professionally managed portfolio at a relatively low cost.

The small savings of all the investors are put together to increase the buyingpower and hire a professional manager to invest and monitor the money.

Anybody with an invest-able surplus of as little as a few thousand rupees can

invest in Mutual Funds. Each Mutual Fund scheme has a defined investment

objective and strategy.


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Organisation of a Mutual Fund

There are many entities involved and the diagram below illustrates the

organisational set up of a mutual fund:

Three Key players namely Sponsor, AMC, and Mutual Fund Trust are involvedin setting up a Mutual Fund.

Sponsor:

A Mutual Fund in India is constituted in the form of a public Trust created under

the Indian Trusts Act, 1882. The sponsor forms the trust and registers it with

SEBI. The fund sponsor acts as the settler of the Trust, contributing to its initial

capital and appoints a trustee to hold the assets of the trust for the benefit of

the unit-holders, who are the beneficiaries of the Trust. The fund then invites

investors to contribute their money in the common pool, by subscribing to

units issued by various schemes established by the Trust as evidence of their

beneficial interest in the fund.

Asset Management Company (AMC)

An AMC is a firm that invests the pooled funds of retail investors in securities in

line with the stated investment objectives. For a fee, the investment company


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provides more diversification, liquidity, and professional management service

than is normally available to individual investors.

Custodian

A custodian handles the investment back office of a mutual fund. Its

responsibility includes receipt and delivery of securities, collection of income,

distribution of income and segregation of asset between schemes. The sponsor

of a mutual fund can not act as a custodian to the fund.


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Objectives

To know the purpose and performance and of investment in mutualfund

To know various factors considered by the customers while going toinvest in the mutual fund.

To study the risk and return relationship with reference to mutual funds To know the form of return on investment


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History

The first mutual funds were established in Europe. One researcher credits a

Dutch merchant with creating the first mutual fund in 1774. The first mutual

fund outside the Netherlands was the Foreign & Colonial Government Trust,

which was established in London in 1868. It is now the Foreign & Colonial

Investment Trust and trades on the London stock exchange.

Mutual funds were introduced into the United States in the 1890s. They

became popular during the 1920s. These early funds were generally of the

closed-end type with a fixed number of shares which often traded at prices

above the value of the portfolio.

The first open-end mutual fund with redeemable shares was established onMarch 21, 1924. This fund, the Massachusetts Investors Trust, is now part of

the MFS family of funds. However, closed-end funds remained more popular

than open-end funds throughout the 1920s. By 1929, open-end funds

accounted for only 5% of the industry's $27 billion in total assets.

After the stock market crash of 1929, Congress passed a series of acts

regulating the securities markets in general and mutual funds in particular.

The Securities Act of 1933 requires that all investments sold to the public,

including mutual funds, be registered with the Securities and Exchange

Commission (SEC) and that they provide prospective investors with a

prospectus that discloses essential facts about the investment. The Securities

and Exchange Act of 1934 requires that issuers of securities, including mutual

funds, report regularly to their investors; this act also created the Securities

and Exchange Commission, which is the principal regulator of mutual funds.

The Revenue Act of 1936 established guidelines for the taxation of mutual

funds, while the Investment Company Act of 1940 governs their structure.

When confidence in the stock market returned in the 1950s, the mutual fund

industry began to grow again. By 1970, there were approximately 360 funds

with $48 billion in assets. The introduction of money market funds in the high

interest rate environment of the late 1970s boosted industry growth

dramatically. The first retail index fund, First Index Investment Trust, was

formed in 1976 by The Vanguard Group, headed by John Bogle, it is now called

the Vanguard 500 Index Fund and is one of the world's largest mutual funds,

with more than $100 billion in assets as of January 31, 2011.
http://en.wikipedia.org/wiki/Foreign_%26_Colonial_Investment_Trusthttp://en.wikipedia.org/wiki/Foreign_%26_Colonial_Investment_Trusthttp://en.wikipedia.org/wiki/MFS_Investment_Managementhttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Congress_of_the_United_Stateshttp://en.wikipedia.org/wiki/Securities_Act_of_1933http://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Act_of_1934http://en.wikipedia.org/wiki/Securities_and_Exchange_Act_of_1934http://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Revenue_Act_of_1936http://en.wikipedia.org/wiki/Investment_Company_Act_of_1940http://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/The_Vanguard_Grouphttp://en.wikipedia.org/wiki/John_Boglehttp://en.wikipedia.org/wiki/Vanguard_Grouphttp://en.wikipedia.org/wiki/Vanguard_Grouphttp://en.wikipedia.org/wiki/John_Boglehttp://en.wikipedia.org/wiki/The_Vanguard_Grouphttp://en.wikipedia.org/wiki/Index_fundhttp://en.wikipedia.org/wiki/Investment_Company_Act_of_1940http://en.wikipedia.org/wiki/Revenue_Act_of_1936http://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Act_of_1934http://en.wikipedia.org/wiki/Securities_and_Exchange_Act_of_1934http://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Securities_Act_of_1933http://en.wikipedia.org/wiki/Congress_of_the_United_Stateshttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/MFS_Investment_Managementhttp://en.wikipedia.org/wiki/Foreign_%26_Colonial_Investment_Trusthttp://en.wikipedia.org/wiki/Foreign_%26_Colonial_Investment_Trust


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Fund industry growth continued into the 1980s and 1990s, as a result of three

factors: a bull market for both stocks and bonds, new product introductions

(including tax-exempt bond, sector, international and target date funds) and

wider distribution of fund shares. Among the new distribution channels were

retirement plans. Mutual funds are now the preferred investment option in

certain types of fast-growing retirement plans, specifically in 401(k) and

other defined contribution plans and in individual retirement accounts (IRAs),

all of which surged in popularity in the 1980s. Total mutual fund assets fell in

2008 as a result of the credit crisis of 2008.

At the end of 2010, there were 7,581 mutual funds in the United States with

combined assets of $11.8 trillion, according to the Investment Company

Institute (ICI), a national trade association of investment companies in the

United States. The ICI reports that worldwide mutual fund assets were $4.7

trillion on the same date.
http://en.wikipedia.org/wiki/Bull_markethttp://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Target_date_fundhttp://en.wikipedia.org/wiki/401(k)http://en.wikipedia.org/wiki/Defined_contribution_planhttp://en.wikipedia.org/wiki/Individual_retirement_accountshttp://en.wikipedia.org/wiki/Credit_crisis_of_2008http://en.wikipedia.org/wiki/Investment_Company_Institutehttp://en.wikipedia.org/wiki/Investment_Company_Institutehttp://en.wikipedia.org/wiki/Investment_Company_Institutehttp://en.wikipedia.org/wiki/Investment_Company_Institutehttp://en.wikipedia.org/wiki/Credit_crisis_of_2008http://en.wikipedia.org/wiki/Individual_retirement_accountshttp://en.wikipedia.org/wiki/Defined_contribution_planhttp://en.wikipedia.org/wiki/401(k)http://en.wikipedia.org/wiki/Target_date_fundhttp://en.wikipedia.org/wiki/Municipal_bondhttp://en.wikipedia.org/wiki/Bull_market


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Types of mutual fund

Schemes by Structure

Open-ended Fund/ Scheme Close-ended Fund/ Scheme

Schemes by investment Objective

Growth / Equity Oriented Scheme Income / Debt Oriented Scheme Balanced Scheme Money Market or Liquid Fund Scheme

Other Objective

Gilt Fund Index Funds Load AND no-load Fund Tax Saving Schemes

Open-ended Fund/ Scheme:

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

repurchase on a continuous basis. These schemes do not have a fixed maturity

period. Investors can conveniently buy and sell units at Net Asset Value (NAV)related prices which are declared on a daily basis. The key feature of open-end

schemes is liquidity.

Close-ended Fund/ Scheme:

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years.

The fund is open for subscription only during a specified period at the time of

launch of the scheme. Investors can invest in the scheme at the time of the

initial public issue and thereafter they can buy or sell the units of the scheme


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on the stock exchanges where the units are listed. In order to provide an exit

route to the investors, some close-ended funds give an option of selling back

the units to the mutual fund through periodic repurchase at NAV related

prices. SEBI Regulations stipulate that at least one of the two exit routes is

provided to the investor i.e. either repurchase facility or through listing on

stock exchanges. These mutual funds schemes disclose NAV generally on

weekly basis.

Growth / Equity Oriented Scheme:

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

long- term. Such schemes normally invest a major part of their corpus in

equities. Such funds have comparatively high risks. These schemes provide

different options to the investors like dividend option, capital appreciation, etc.

and the investors may choose an option depending on their preferences. The

investors must indicate the option in the application form. The mutual funds

also allow the investors to change the options at a later date.

Income / Debt Oriented Scheme:

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

Such schemes generally invest in fixed income securities such as bonds,

corporate debentures, Government securities and money market instruments.

Such funds are less risky compared to equity schemes. These funds are not

affected because of fluctuations in equity markets. However, opportunities of

capital appreciation are also limited in such funds. The NAVs of such funds are

affected because of change in interest rates in the country. If the interest rates

fall, NAVs of such funds are likely to increase in the short run and vice versa.

However, long term investors may not bother about these fluctuations.


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Balanced Fund:

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

such schemes invest both in equities and fixed income securities in the

proportion indicated in their offer documents. These are appropriate forinvestors looking for moderate growth. They generally invest 40-60% in equity

and debt instruments. These funds are also affected because of fluctuations in

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

less volatile compared to pure equity funds.

Money Market or Liquid Fund:

These funds are also income funds and their aim is to provide easy liquidity,

preservation of capital and moderate income. These schemes invest exclusively

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

commercial paper and inter-bank call money, government securities, etc.

Returns on these schemes fluctuate much less compared to other funds. These

funds are appropriate for corporate and individual investors as a means to park

their surplus funds for short periods.

Gilt Fund:

These funds invest exclusively in government securities. Government securities

have no default risk. NAVs of these schemes also fluctuate due to change in

interest rates and other economic factors as is the case with income or debt

oriented schemes.

Index Funds:Index Funds replicate the portfolio of a particular index such as the BSE

Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the

securities in the same weightage comprising of an index. NAVs of such

schemes would rise or fall in accordance with the rise or fall in the index,

though not exactly by the same percentage due to some factors known as

"tracking error" in technical terms. Necessary disclosures in this regard are

made in the offer document of the mutual fund scheme.


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Specific funds/schemes:

These are the funds/schemes which invest in the securities of only those sectors

or industries as specified in the offer documents. e.g. Pharmaceuticals, Software,

Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns inthese funds are dependent on the performance of the respective

sectors/industries. While these funds may give higher returns, they are more

risky compared to diversified funds. Investors need to keep a watch on the

performance of those sectors/industries and must exit at an appropriate time.

They may also seek advice of an expert.

Tax Saving Schemes:

These schemes offer tax rebates to the investors under specific provisions of the

Income Tax Act, 1961 as the Government offers tax incentives for investment in

specified avenues. E.g. Equity Linked Savings Schemes (ELSS). Pension schemes

launched by the mutual funds also offer tax benefits. These schemes are growth

oriented and invest pre-dominantly in equities. Their growth opportunities and

risks associated are like any equity-oriented scheme.

Load or no-load Fund:

A Load Fund is one that charges a percentage of NAV for entry or exit. That is,

each time one buys or sells units in the fund, a charge will be payable. This

charge is used by the mutual fund for marketing and distribution expenses.

Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%,

then the investors who buy would be required to pay Rs.10.10 and those who

offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit.

The investors should take the loads into consideration while making investmentas these affect their yields/returns. However, the investors should also consider

the performance track record and service standards of the mutual fund which

are more important. Efficient funds may give higher returns in spite of loads.

A no-load fund is one that does not charge for entry or exit. It means the

investors can enter the fund/scheme at NAV and no additional charges are

payable on purchase or sale of units.


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Advantages of investing through Mutual Fund

i) Professional investment managementMutual funds hire full-time, high-level investment professionals. Funds can

afford to do so as they manage large pools of money. The managers have real-

time access to crucial market information and are able to execute trades on

the largest and most cost-effective scale.

ii) Diversification

Mutual funds invest in a broad range of securities. This limits investment risk

by reducing the effect of a possible decline in the value of any one security.

Mutual fund unit-holders can benefit from diversification techniques usually

available only to investors wealthy enough to buy significant positions in a

wide variety of securities.

iii) Low Cost

A mutual fund let's you participate in a diversified portfolio for as little as

Rs.5,000/-, and sometimes less. And with no-load fund, you pay little or no

sales charges to own them.

iv) Convenience and Flexibility

You own just one security rather than many, yet enjoy the benefits of a

diversified portfolio and a wide range of services. Fund managers decide what

securities to trade collect the interest payments and see that your dividends on

portfolio securities are received and your rights exercised. It also uses the

services of a high quality custodian and registrar in order to make sure that

your convenience remains at the top of our mind.


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V) Personal Service

One call puts you in touch with a specialist who can provide you with

information you can use to make your own investment choices. They will

provide you personal assistance in buying and selling your fund units, providefund information and answer questions about your account status. Our

Customer service centres are at your service and our Marketing team would be

eager to hear your comments on our schemes.

vi) Liquidity

In open-ended schemes, you can get your money back promptly at net asset

value related prices from the mutual fund itself.

DRAWBACK OF INVESTING IN MUTUAL FUNDS

No Guarantees:

No investment is risk free. If the entire stock market declines in value, the

value of mutual fund shares will go down as well, no matter how balanced the

portfolio. Investors encounter fewer risks when they invest in mutual funds

than when they buy and sell stocks on their own. However, anyone who

invests through a mutual fund runs the risk of losing money.

Fees and commissions:

All funds charge administrative fees to cover their day-to-day expenses. Somefunds also charge sales commissions or "loads" to compensate brokers,

financial consultants, or financial planners. Even if you don't use a broker or

other financial adviser, you will pay a sales commission if you buy shares in a

Load Fund.

Taxes:

During a typical year, most actively managed mutual funds sell anywhere from

20 to 70 percent of the securities in their portfolios. If your fund makes a profit


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on its sales, you will pay taxes on the income you receive, even if you reinvest

the money you made.

Widely used Measures of Performance

The Treynor Measure

A ratio of return generated by the fund over and above risk free rate of return

during a given period and systematic risk associated with it (beta).Symbolically, it can be represented as:

Treynor's Index (Ti) = (RI - RF)/Bi.

Ri = Rate of return on portfolio during the period.

Rf = Risk free rate of return during the period.

Bi = Beta of the portfolio.

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 unfavourable

performance.

The Sharpe Measure

A ratio of returns generated by the fund over and above risk free rate ofreturn and the total risk associated with it.

It is the total risk of the fund that the investors are concerned about.Sharpe Index (Si) = (Ri - Rf)/Si

Ri = Rate of return on portfolio during the period.

Rf = Risk free rate of return during the period.


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Where, Si is standard deviation of the fund.

A high and positive Sharpe Ratio shows a superior risk-adjusted performance

of a fund, a low and negative is an indication of unfavourable performance.

Jenson Model

Involves evaluation of the returns that the fund has generated vs. thereturns actually expected out of the fund given the level of its systematic

risk.

The surplus between the two returns is called Alpha.Required return of a fund at a given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)

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

Fama Model

The Eugene Fama model is an extension of Jenson model. It 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 is taken as a measure of theperformance of the fund and is called net selectivity.

Required return can be calculated as:

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

Where, Sm is standard deviation of market returns.


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COMPARING ICICI PRUDENCE BALANCE FUNDS WITH

BIRLA SUN LIFE MIP.

ICICI Prudential Balanced Fund (G)

Investment Philosophy

This fund seeks to optimize the risk-adjusted return by distributing assets

between both equity and debt markets. In bullish markets equity allocation

can go up to 80%. In bearish markets equity allocation can go down to 65%.

This dynamic allocation along with core debt portfolio reduces the volatility of

return

Investor Profile

This Plan is ideal for -

Investors seeking exposure to both equity and debt markets through one fund

Investors considering reasonable returns with and lower risk through

diversification.


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Key Benefits

Provides the twin benefits of growth from equity markets and steady income

from debt markets.

Lower volatility of returns and lower risk through diversification.

FUND MANAGER Rahul Goswami

Munzal Shah/Mrinal Singh

FUND TYPE Open Ended

OPTION Growth and Dividend option

ASSET SIZE(Rs CR) 269.84

MINIMUM

INVESTMENT

Rs 5000

ENTRY LOAD Nil

EXIT LOAD 1% (Exit Load 1% if units are redeemed / switched-

out for a period of up to 1 year from the date of

allotment.)


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Birla Sun Life MIP

Birla Sun Life MIP is an open-ended income scheme which seeks to generate

regular income through investments in fixed income securities so as to make

monthly payment or distribution to Unit-holders with the secondary objective

being growth of capital through investments in equity. Birla Sun Life MIP is

primarily a debt oriented fund that seeks to ensure an uninterrupted flow to

unit holders with an additional objective of capital growth.

FUND MANAGER Satyabrata Mohanty

Nishit Dholakia

FUND TYPE Open Ended

OPTION Growth and Dividend

MINIMUM INVESTMENT Rs 5000

ENTRY LOAD Nil

EXIT LOAD Exit Load of 0.25% if redeemed

within 7 Days from the date of

allotment.


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COMPARISON

BASIS

ICICI PRUDENTIAL

BIRLA SUN LIFE

INSUANCE

CATEGORY Hybrid: Equity-oriented Hybrid- debt oriented

conservative

RISK GRADE Below Avg. Below average

RETURN

GRADE

Average Average

RATING * * * * * * * *

TURNOVER

(%)

43.00 12.00

BETA 0.89 0.74

NAV (As on

30th

Aug ,

11 )

45.78 26.88

52 weeks

( High/Low)

49.11/42.79 27.09/25.75


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INVESTMENT PLANS

The term investment plans generally refers to the services that the fundsprovide to the investors offering different ways to invest. The different

investment plans are important consideration in the investment decisions

because they determine the level of flexibility available to the investors.

Alternate investment plans offered by the fund allow the investor freedom

with respect to investing at one time or at regular intervals, making transfers

to different schemes within the same fund family or receiving income at

specified intervals or accumulating distributions. Some of the investment plans

offered are as follows:

Automatic Reinvestment Plans (ARP):

In India many funds offered two options under the same scheme the dividend

option and growth option. The dividend option or the automatic reinvestment

plan a (ARP) allows the investors to reinvest in additional units the amount of

dividend or other distribution made by the fund, instead of receiving them in

cash.Reinvestment takes place at the ex-dividend NAV. The ARP ensures that

the investors reap the benefits of compounding in his investments. Some fund

allows reinvestments into reinvestments into other schemes in the fund family.

By using an automatic reinvestment plan, an investor is able to easily make use

of his or her investment gains to produce further gains, taking advantage of

compounding. Over a period of years, the added value produced by automatic

reinvestment can turn out to be worth a substantial sum.

Automatic Investment Plans (AIP):

These requires the investor to invest a fixed sum periodically, thereby lettering

the investor save in a disciplined and phased manner. The mode of investment

could be through debit to the investors salary or bank account.


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Such plans are also known as Systematic Investment Plans. But mutual funds

do not offer this facility on all schemes. Typically they restrict it to their plain

vanilla scheme like diversified equity funds, income funds and balanced funds.

SIP works best in equity funds. It enforces saving discipline and helps you profit

from market volatility you buy more units when the market is down and

fewer when the market is up.

This is one of the best ways to save money. By "paying themselves first" many

people find they invest more in the long run. Their investments are treated as

another part of their regular budget. It also forces a person to pay for

investments automatically, which prevents them from being able to spend all

of their disposable income.

Systematic Withdrawal Plan:

Such plans allow the investors to make systematic withdrawal from his fund

investment account on a periodic basis, thereby providing the same benefit as

regular income. The investor must withdraw a specific minimum amount with

the facility to have withdrawal amounts sent to his residence by cheque or

credited directly into his bank account. The amount withdrawn is treated as

redemption of units at the applicable NAV as specified in the offer document.For example: the withdrawal could be at NAV on the first day of the month of

payment. The investor is usually required to maintain a minimum balance in

his bank account under this plan. Agents and the investors should understand

that the systematic withdrawal plans are different from the monthly income

plans, as the former allow investors to get back the principal amount invested

while the latter only pay the income part on a regular basis.

In short we can say that a systematic withdrawal plan is a financial plan thatallows a shareholder to withdraw money from an existing mutual fund

portfolio at predetermined intervals. The money withdrawn through a

systematic withdrawal plan can be reinvested in another portfolio or used to

pay for something else. Often, a systematic withdrawal plan is used to fund

expenses during retirement. However, this type of plan may be used for other

purposes as well.


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Systematic Transfer Plans (STP):

These plans allow the customers to transfer on a periodic basis a specified

amount from one scheme to another within the same fund family- meaning

two schemes by the same AMC and belonging to the same fund. A transfer willbe treated as the redemption of the units from the scheme from which the

transfer is made. Such redemption or investment will be at the applicable NAV

for the respective schemes as specified in the offer document.

It is necessary for the investor to maintain a minimum balance in the scheme

from which the transfer is made. Both UTI and other private funds now

generally offer these services to the investors in India. The service allows the

investors to maintain his investment actively to achieve his objectives. Manyfunds do not even change any transaction fees for this service.


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Special Schemes

Index Schemes:

The primary purpose of an Index is to serve as a measure of the performance

of the market as a whole, or a specific sector of the market. An Index also

serves as a relevant benchmark to evaluate the performance of mutual funds.

Some investors are interested in investing in the market in general rather than

investing in any specific fund. Such investors are happy to receive the returns

posted by the markets. As it is not practical to invest in each and every stock in

the market in proportion to its size, these investors are comfortable investing

in a fund that they believe is a good representative of the entire market. Index

Funds are launched and managed for such investors. An example to such a

fund is the HDFC Index Fund.

Tax saving schemes:

Investors (individuals and Hindu Undivided Families (HUFs)) are being

encouraged to invest in equity markets through Equity Linked Savings Scheme

(ELSS) by offering them a tax rebate. Units purchased cannot be assigned /

transferred/ pledged/ redeemed / switched out until completion of 3 years

from the date of allotment of the respective Units. The Scheme is subject to

Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the

notifications issued by the Ministry of Finance (Department of Economic

Affairs), Government of India regarding ELSS.

Subject to such conditions and limitations, as prescribed under Section 88 of

the Income-tax Act,1961, subscriptions to the Units not exceeding Rs.10, 000

would be eligible to a deduction, from income tax, of an amount equal to 20%

of the amount subscribed. HDFC Tax Plan 2000 is such a fund.


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Real Estate Funds:

Specialized real estate funds would invest in real estates directly, or may fund

real estate developers or lend to them directly or buy shares of housing

finance companies or may even buy their securitized assets.

Debt Based Schemes:

These schemes, also commonly called Income Schemes, invest in debtsecurities such as corporate bonds, debentures and government securities. The

prices of these schemes tend to be more stable compared with equity schemes

and most of the returns to the investors are generated through dividends or

steady capital appreciation. These schemes are ideal for conservative investors

or those not in a position to take higher equity risks, such as retired individuals.

However, as compared to the money market schemes they do have a higher

price fluctuation risk and compared to a Gilt fund they have a higher credit risk.

Income Schemes:

These schemes invest in money markets, bonds and debentures of corporate

with medium and long-term maturities. These schemes primarily target

current income instead of capital appreciation. They therefore distribute a

substantial part of their distributable surplus to the investor by way of dividend

distribution. Such schemes usually declare quarterly dividends and are suitable

for conservative investors who have medium to long term investment horizon

and are looking for regular income through dividend or steady capital

appreciation. HDFC Income Fund, HDFC Short Term Plan and HDFC Fixed

Investment Plans are examples of bond schemes.


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Money Market Schemes:

These schemes invest in short term instruments such as commercial paper

(CP), certificates of deposit (CD), treasury bills (T-Bill) and overnight money

(Call). The schemes are the least volatile of all the types of schemes because of

their investments in money market instrument with short-term maturities.

These schemes have become popular with institutional investors and high net

worth individuals having short-term surplus funds.

Gilt Funds:

This scheme primarily invests in Government Debt. Hence the investor usually

does not have to worry about credit risk since Government Debt is generally

credit risk free. HDFC Gilt Fund is an example of such a scheme.

Hybrid Schemes:

These schemes are commonly known as balanced schemes. These schemes

invest in both equities as well as debt. By investing in a mix of this nature,

balanced schemes seek to attain the objective of income and moderate capital

appreciation and are ideal for investors with a conservative, long-term

orientation. HDFC Balanced Fund and HDFC Childrens Gift Fund are examples

of hybrid schemes.

Constitution:

Schemes can be classified as Closed-ended or Open-ended depending upon

whether they give the investor the option to redeem at any time (open-ended)

or whether the investor has to wait till maturity of the scheme.


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Open ended Schemes:

The units offered by these schemes are available for sale and repurchase on

any business day at NAV based prices. Hence, the unit capital of the schemes

keeps changing each day. Such schemes thus offer very high liquidity toinvestors and are becoming increasingly popular in India. Please note that an

open-ended fund is NOT obliged to keep selling/issuing new units at all times,

and may stop issuing further subscription to new investors. On the other hand,

an open-ended fund rarely denies to its investor the facility to redeem existing

units.

Closed ended Schemes:

The unit capital of a close-ended product is fixed as it makes a one-time sale of

fixed number of units. These schemes are launched with an initial public offer

(IPO) with a stated maturity period after which the units are fully redeemed at

NAV linked prices. In the interim, investors can buy or sell units on the stock

exchanges where they are listed. Unlike open-ended schemes, the unit capital

in closed-ended schemes usually remains unchanged. After an initial closed

period, the scheme may offer direct repurchase facility to the investors.

Closed-ended schemes are usually more illiquid as compared to open-ended

schemes and hence trade at a discount to the NAV. This discount tends

towards the NAV closer to the maturity date of the scheme.


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Risk

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 up to 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.


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Market Risk:

Sometimes prices and yields of all securities rise and fall. Broad outside

influences affecting the market in general lead to this. This is true, may it be

big corporations or smaller mid-sized companies. This is known as Market Risk.A Systematic Investment Plan (SIP) that works on the concept of rupees cost

averaging (RCA) might help mitigate this risk.

Credit Risk:

The debt servicing ability of a company through its cash flow determines the

credit risk faced by you. This credit risk is measured by independent ratingagencies like CRISIL who rate companies and their paper. A AAA rating

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

well diversified portfolio might help mitigate this risk.

Inflation Risk:

Things you people hear people talk about:

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

Remember the time when a bus ride cost 50 paise?

Mahangai ka jamana hai?

The root cause, inflation is the loss of purchasing power over time. A lot oftimes people make conservative investment decisions to protect their capital

but end up with a sum of money that can buy less than what the principle

could at the time of the investment. This happens when the inflation grows

faster than the return on your investment. A well diversified portfolio with

some investment in equities might help mitigate this risk.


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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.

Diversification:

The nuclear weapon in your arsenal for your fight against Risk.

It simply means that you must spread your investment across different

securities (stocks, bonds, money market instruments, real estate, fixed

deposits etc.) and different sectors (auto, textile, information technology etc.).

This kind of a diversification may add to the stability of your returns, for

example during one period of time equities might underperforms but bonds

and money market instruments might do well enough to offset the effect of a

slump in the equity markets. Similarly the information technology sector might

be faring poorly but the auto and textile sectors might do well and may protect

you principal investment as well as help you meet your return objectives.

Risk vs. Reward

Before you can begin to build a successful investment portfolio, you shouldunderstand the basic elements of mutual fund investing and how they can

affect the potential value of your investments over the years. When you invest

in mutual funds, there is no guarantee that you will end up with more money

when you withdraw your investment than you put in to begin with -- and that's

a scary prospect. Loss of value in your investment is what is considered risk in

investing. Even so, the opportunity for investment growth that is possible

through investments in mutual funds far exceeds that concern for most

investors. Consider why,At the cornerstone of investing is the basic principal


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that the greater the risk you take, the greater the potential reward. Or stated

another way, you get what you pay for and you get paid a higher return only

when you're willing to accept more volatility. Risk then, refers to the volatility -

- the up and down activity in the markets and individual issues that occurs

constantly over time. This volatility can be caused by a number of factors

interest rate changes, inflation or general economic conditions. It is this

variability, uncertainty and potential for loss, that causes investors to worry.

We all fear the possibility that a stock or bond we invest in will fall

substantially. But it is this very volatility in stocks, bonds and their markets that

is the exact reason that you can expect to earn a higher long-term return from

these investments than you can from CDs and passbook savings accounts.

Different types of mutual funds have different levels of volatility or potentialprice change, and those with the greater chance of losing value are also the

funds that can produce the greater returns for you over time. So risk has two

sides: it causes the value of your investments to fluctuate, but it is precisely the

reason you can expect to earn higher returns. You might find it helpful to

remember that all financial investments will fluctuate. There are very few

perfectly safe havens and those simply don't pay enough to beat inflation over

the long run.

Management risk:

When you invest in a mutual fund, you depend on the fund's manager to make

the right decisions regarding the fund's portfolio. If the manager does not

perform as well as you had hoped, you might not make as much money on

your investment as you expected. Of course, if you invest in Index Funds, you

forego management risk, because these funds do not employ managers.

Measuring the risk in mutual funds

Total Risk = Systematic risk + Unsystematic risk.

Measured in standard deviation of returns of the fund. Systematic risk - Beta, which represents fluctuations in the NAV of the

fund with market.

Unsystematic risk can be diversified through investments in a number ofinstruments.


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Banks v/s mutual funds

BANKS MUTUAL FUNDS

Returns Low Better

Administrative exp. High Low

Risk Low Moderate

Investment options Less More

Network High penetration Low but improving

Liquidity At a cost Better

Quality of assets Not transparent Transparent

Interest calculation Min. Balance between

10th

&30th

of every month

Everyday

Guarantee Max. Rs.1 lakh on deposits None


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Recent trends in Mutual Fund industry

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.

Many nationalized banks got into the mutual fund business in the early

nineties and got off to a good start due to the stock market boom prevailing

then. These banks did not really understand the mutual fund business and they

just viewed it as another kind of banking activity. Few hired specialized staff

and generally chose to transfer staff from the parent organizations. The

performance of most of the schemes floated by these funds was not good.

Some schemes had offered guaranteed returns and their parent organizations

had to bail out these AMCs by paying large amounts of money as the

difference between the guaranteed and actual returns. The service levels were

also very bad. Most of these AMCs have not been able to retain staff, float new

schemes etc. and it is doubtful whether, barring a few exceptions, they have

serious plans of continuing the activity in a major way. The experience of some

of the AMCs floated by private sector Indian companies was also very similar.They quickly realized that the AMC business is a business, which makes money

in the long term and requires deep-pocketed support in the intermediate

years. Some have sold out to foreign owned companies, some have merged

with others and there is general restructuring going on. The foreign owned

companies have deep pockets and have come in here with the expectation of a

long haul. They can be credited with introducing many new practices such as

new product innovation, sharp improvement in service standards and

disclosure, usage of technology, broker education and support etc.


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Balanced funds & liquid funds

Balanced funds:

A fund that combines a stock component, a bond component and, sometimes,

a money market component, in a single portfolio. Generally, these hybrid

funds stick to a relatively fixed mix of stocks and bonds that reflects either a

moderate (higher equity component) or conservative (higher fixed-income

component) orientation.

Balanced mutual funds make it possible by investing in an assortment of

investment instruments such as stocks, money markets and bonds etc.

Balanced mutual funds are one of the types of various mutual funds available

in the market.

A balanced fund is geared toward investors who are looking for a mixture of

safety, income and modest capital appreciation. The amounts that such a

mutual fund invests into each asset class usually must remain within a set

minimum and maximum.

Balanced funds may lock into higher equity pie

Come June, balanced funds may have to alter their structure to step up their

equity exposures and maintain it at 65 per cent, if they are to avail themselvesof the tax benefits extended to equity oriented funds. The recent Budget

proposes to tweak the official definition of "equity oriented funds" to include

only those funds which have 65 per cent or more of their investments in

stocks. Currently, all funds that have a 50 per cent equity exposure are "equity

oriented funds". These enjoy exemption from dividend distribution tax and

lower rates of tax on short-term capital gains. Balanced funds currently

allocate between 60-65 per cent of their assets to stocks. But they have

considerable leeway in their objectives to swing between a 40 per cent and a


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60per cent equity exposure. Now, fund houses may have to tweak this

structure to "fix" the equity exposure at 65 per cent, if they want their

balanced funds to enjoy tax benefits."The tax benefits are substantial. We will

be changing the structure of the scheme and increasing the equity exposure,

but after we take a formal decision," said Mr N.Sethuram, Chief Investment

Officer of SBI Mutual Fund. SBI's Magnum Balanced Fund had a 65 per cent

exposure to equities by end-January. Mr Sethuram also feels that the changes

will blur the boundary between pure equity funds and balanced funds. "Equity

funds can hold up to 30 per cent of their portfolio in cash; balanced funds will

now have to hold 65 per cent in stocks. There is not much of a difference

between the two," he pointed out.

Franklin Templeton, which manages Franklin Templeton India Balanced Fund

and FT Dynamic P/E ratio Fund, said it is discussing the proposals with tax

consultants before finalising a decision. But the fund already has an equity

allocation of 65 per cent on FT India Balanced Fund. "Our exposure to equity

has been on the higher side, on account of our conviction about the long-term

potential of equities. Having said that, these proposals may impact the asset

allocation of balanced funds that wish to offer tax-free dividends to investors,"

said Mr Sukumar Rajah, CIO of the fund house. With the stocks markets on adream run, most fund houses have tended to take a bullish view of equities.

While most balanced funds had 60-65 per cent in stocks, HDFC Prudence was

the only outlier with a 59 per cent equity allocation by end-January. A higher

equity allocation may become a permanent feature if fund houses decide to

take advantage of the new proposals. But as one fund manager pointed out,

"You can have a lower allocation to equities over a month or two, because the

65 per cent limit is reckoned on the average of monthly balances through the

year." Funds also have a comfortable three-month window until June 1, to

make these changes. That is when these proposals, if passed into law, will take

effect The aim of balanced funds is to provide both growth and regular income

as such schemes invest both in equities and fixed income securities in the

proportion indicated in their offer documents. These are appropriate for

investors looking for moderate growth. They generally invest 40-60% in equity

and debt instruments. These funds are also affected because of fluctuations in

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


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less volatile compared to pure equity funds. These schemes generally have a

three-fold objective:

i) to conserve the initial principal,ii) to pay current income andiii) to promote long-term growth of both principal and income.

Fund managers achieve these objectives through a diversified portfolio of

equities and debt instruments. While equities provide growth, debt

instruments provide current income and stability. For the small investor, a

balanced fund is the best way to practice asset allocation, which means

dividing your portfolio among different investments such as equity and bonds.

Fund managers apportion your investment into debt and equity investments

within the limits prescribed in the offer document. Current tax laws have

accorded a tax-free status to open-ended schemes investing more than 50 per

cent in equities. Therefore, if you are looking for tax benefits, take a look at the

asset allocation table in the offer document to ensure that the fund invests

more than50 per cent in equities.

The balanced fund is ideal:

i) for those seeking a balance between stability and growth with someprotection against inflation

ii) Those unable to choose between equities and fixed incomesecurities.

iii) Those who have never invested in equities, and are eager to taketheir first step.

WORKING OF BALANCED FUNDS

Balanced mutual funds make it possible by investing in an assortment of

investment instruments such as stocks, money markets and bonds etc.

Balanced mutual funds are one of the types of various mutual funds available

in the market. This article discusses:

What is the principle behind balanced mutual fund?


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What is the objective of the balanced fund?

Differentiate between balanced funds and other types of fundsBalanced mutual funds are one of the types of various mutual funds available

in the market. If you are wondering if there is any fund that can combine

benefits of income and capital appreciation, look no further, this is it. Balanced

mutual funds make it possible by investing in an assortment of investment

instruments such as stocks, money markets and bonds etc. Alternately these

are also called as asset allocation funds. The proportion in which the balancedmutual funds allocate their assets is usually 60 % to65 % in stocks and the

balance in bonds. The proportion is not disturbed while managing the fund as

it is to remain within the pre set minimum and maximum limits. Agreed that

mutual funds provide better and safer investment domains for ordinary public,

but they are not completely devoid of risks and violent market fluctuation.

Balanced mutual funds try to address these concerns in a way unique to

mutual funds alone.

Investment in Stocks:

One can draw some similarity of balanced funds with well diversified funds.

Asset allocated for stocks are diversified into different sectors which are

performing with high returns. Fund allocation weightage is determined by thestocks' return potentials. The top stock, for example may get an allocation of

say 10% and the lesser the potential the lesser is the percentage allocation of

funds. The same pattern is then repeated for another sector of stocks. Sectors

are chosen subject to various parameters.


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Investment in Bonds:

The allocation to bonds is distributed among bonds issued by governments and

banks. Municipal bonds, called as munis, some times find their way into this.

This investment provides guaranteed returns at a steady rate over a period.This gives the stability to the entire fund cushioning the violent fluctuations of

aggressive stock investment.

Balanced Fund v/s Other Types of Funds:

The objective of the fund is to generate income while being able to grow

capital.

Blend of Growth and Safety: The unique proposition of spreading the

investment into two broad divisions of mutual fund investing is hard to find in

other class of funds.

Freedom to decide allocation: freedom to switch over from one proportion to

the other, which is from 60:40 to 40:60 patterns. You can switch over when

you perceive a growth opportunity or a threat into the other from the existing.

This you can reverse when you perceive the situation leading to it has changed.

No other type of fund has this freedom, having chosen the fund; you have to

go through the mandate of the fund. Best balanced mutual funds keep

allocation flexible and open to changes as per demands of market conditions

but subject to regulations by laws of government and SEC (Securities &

Exchange Commission).

Risky Proposition: Consider a situation when the stock market is having a bull

run (long rally). Then you can expect a great appreciation in its principal.

Naturally any manager would be tempted to divert as much cash at his

command to stocks as possible. It could go as high as 80% with just 20% for

debt instruments. Other types of funds differ here because of SEC regulations

and funds' own mandate.


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ADVANTAGES OF BALANCED FUNDS

For balanced mutual funds, this is one Budget where the devil is truly in thedetail. By tweaking the definition of equity-oriented funds to include only

those funds that have invested at least 65 per cent of their assets in equities,

the Budget proposals put balanced funds in a quandary.

Until now, funds with an equity exposure of 50 per cent or more were defined

as "equity-oriented funds". Investors in these funds are exempted from paying

long-term capital gains tax; and short-term gains are taxed at a concessional 10

per cent. Equity funds are also exempt from paying dividend distribution tax, at12.5 per cent for individuals, when they pay out dividends.

Balanced funds that would like their investors to enjoy lower rates of tax will

now be forced to retain their equity exposure at 65 per cent, or a higher

proportion, of their assets. Funds that prefer a conservative equity exposure

will have no choice but to fore go the tax benefits. Rather than lose the tax

benefits, most balanced fund managers may opt for a permanent higher

allocation to equities. The proposals, if passed into law, take effect on June 1.

More equity exposure

Given the substantial tax benefits associated with being classified as an

`equity-oriented fund', most fund-houses are likely to tweak their balanced

funds to fit in with the new objectives. The immediate impact on the asset

allocation pattern of balanced funds may not be too significant. With corporateearnings growing at a healthy clip and the stock market on a dream run, most

fund-houses have taken a bullish view on equities and maintain a high equity

allocation in their respective balanced funds.

Tilted towards equities

Of the various long-running balanced funds, Franklin Templeton India BalancedFund, Magnum Balanced Fund and Kotak Balance already had equity exposures


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of 65 per cent or more by end-January 2006. Others such as Sundaram

Balanced and PruICICIBalanced were at a 64 per cent equity exposure and

need only to peg it up a whisker to make it over the threshold. Only HDFC

Prudence had an equity allocation substantially lower than the threshold, at

59.9 per cent, by end-January.

Of course, the equity allocation for this purpose is reckoned on the average

monthly balances through the year. Therefore, a fund need not necessarily

retain a 65 per cent equity exposure at all times to be eligible for the tax

benefits. There could be temporary spikes or a shortfall in the equity allocation

over a month or two that could be made up in the rest of the year.

Since these proposals take effect only in June, funds have a fairly long, three-month window to think through and rejig their asset allocation pattern.

Less flexibility

But it is the loss of flexibility that this rule entails that is a greater worry for

investors in balanced funds. With the proportion of equity investments in a

balanced fund straitjacketed at 65 per cent, managers of such funds will haveless flexibility to move to debt investments if the equity market appears

overheated. Individual investors, on their own, are seldom savvy enough to

book profits on their equity portfolio at the right time, given the difficulty of

taking a view about stock valuations or the direction of interest rates.

Managers of balanced funds are better placed to make this call. Most balanced

funds at present have considerable leeway in their asset allocation. Their

objectives usually allow equity investments to swing between 40 per cent and

60 per cent of their assets. In practice, though, equity investments account for

60-65 per cent of the assets. This flexibility has stood some funds in good

stead. Successful balanced funds such as HDFC Prudence have turned in an

impressive performance by making this kind of "tactical" asset allocation call.If

the equity exposure in this fund is "fixed" at 65 per cent, the fund may have to

load upon stocks, irrespective of whether the fund manager is really

comfortable with such an allocation. Investors could lose out on the value

addition that comes from fluid asset allocation.


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Balanced funds still attractive

Do these proposals make investing in balanced funds an unattractive

proposition? Could an investor substitute a balanced fund by investing 65 per

cent of his money in equity funds and 35 per cent in debt funds? No, because

balanced funds will continue to offer three distinct advantages over this

strategy. One, balanced funds periodically re-balance assets between equity

and debt difficult for an individual investor to manage on his own.

Second, the tax advantages over direct investing. When a fund manager books

profits on stocks or bonds to re-balance his portfolio, the fund pays no capital

gains tax on these transactions. As an investor, you will have to pay short term

capital gains tax, if you rejig your portfolio at short intervals.

Third, balanced fund managers will still be able to add some value on asset

allocation. They could choose to have a much higher equity exposure than 65

per cent and juggle between the debt and cash components.


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SBI Magnum Balanced Fund

INVESTORS in SBI Magnum Balanced Fund may retain their holdings, as there

has been a substantial improvement in the fund's performance over the past

three years. The equity portfolio has a neat mix of mid-cap stocks and large-

cap stocks. Despite a sizeable allocation to large-cap stocks, the fund has

performed impressively. The mid-cap stocks in the portfolio have delivered

attractive returns as they have enjoyed several bouts of re-rating over the past

couple of years. It has outperformed the CRISIL Balanced Fund Index and the

BSE-100 by a comfortable margin. Over a five-year period, the NAV has,

however, remained largely flat. In the 10 years since launch, the fund has

turned in annual returns of 16 per cent; a large part of this owing to the sharp

improvement in fund performance since early 2003.The recovery of SBI

Magnum Balanced and the move to the top of the ranks along with HDFC

Prudence in the balanced funds category is in line with the trend evident in all

the SBI-managed funds. The fund has consistently maintained 60-65 per cent

of assets in equities. This has helped perk up returns, aided in no small

measure by the largely bullish equity market of the past two years. The fundhas been aggressively managed and appears to have picked the right themes

and stocks to ride the momentum in the market. Even in the large-cap space,

the fund has shuffled its portfolio over the past few months. Reliance, SBI and

Jet Airways have replaced the likes of ACC, Gujarat Ambuja and NTPC.

Among mid-cap stocks, the fund has replaced Pantaloon Retail and Uttam

Galva Steels with IVRCL Infrastructure and Adlabs Films. So far, such changes

have yielded attractive returns.

Suitability: The fund is appropriate for investors who seek a mix of equity and

debt and prefer to go through the balanced funds route.

This is especially true for investors who do not have the time and inclination to

constructa balanced portfolio and ensure that the asset allocation remains in

line with their investment objective and risk preferences.

Unlike HDFC Prudence, SBI Magnum Balanced Fund still has a small asset baseof a tadless than Rs 100 crore. This provides for a high degree of flexibility in


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asset management, coupled with the quality of stock selection, and holds

promise of the fund sustaining the momentum in NAV. Investors may opt for

the dividend option as payments are exempt from tax.

Fund facts: The fund was launched in October 1995. The minimum investmentis Rs5, 000.

The entry load is 2.25 per cent. There is no exit load. Mr Sachin S. Sawarikar is

the manager. Unit holders can retain their exposure in Magnum Balanced

Fund. A high exposure to equity during the three-year bull rally has helped SBI

Magnum Balanced Fund deliver an impressive performance through most of

this period. Over a one-year period, the fund has generated a return of 57 per

cent, which makes it one of the top performers in the category. Its returns beatthe benchmark Crisil Balanced Index by about 20 percentage points.

Over a longer time-frame, however, HDFC Prudence still enjoys a better track

record. Suitability: The latter may also be better suited for those who have a

conservative risk profile. Prudence has maintained a 60 per cent equity

allocation, compared to 65 per cent and more in most other balanced funds.

Magnum Balanced, however, had about 75 per cent invested in equity as of

April 30.It also frequently makes "tactical" asset allocation calls, with itsholdings in equity swinging widely from 62 per cent in November 2005to 86

per cent in March 2006. These calls have, no doubt, paid off for the fund over

the past year. The fund may, however, not be suitable for investors who want

a stable mix of debt and equity in their portfolios. Notably, most balanced

funds may no longer have the flexibility to substantially cut their exposure to

equity in volatile times. Already, most have at least 65 per cent of their assets

in equity. Recent changes in the definition of "equity-oriented" funds, to

determine the tax payable at the hands of the investor, are also likely to

ensure that this bias towards equity remains in most cases.

According to the new rules, a fund should have at least 65 per cent invested in

equity, as against 50 per cent earlier, for investors to enjoy the capital gains

and dividend distribution tax benefits of equity.


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Most balanced funds may, therefore, be forced to fix their equity allocation at

65 per cent for a greater part of the year, if they want their investors to enjoy

tax benefits. The distinction between these funds and equity is, therefore,

likely to blur somewhat. In this context, Magnum Balanced may not have a

much higher risk profile than others in its category. Balanced funds may, in

general, be better suited for those who want at least a 65 per cent exposure to

equity at any given time.

Portfolio overview: The fund invests in a good mix of large-cap and mid-cap

stocks.

About 30 per cent is invested in stocks with a market capitalisation of more

than Rs10, 000 crore. The top ten stocks account for about 35 per cent of itsassets. Its top three sectors consumer goods, IT and engineering account

for about a third of the portfolio. The fund invests mainly in corporate debt. It

had about 10 per cent in cash as of April 30.

Fund Facts: SBI Magnum Balanced was launched in 1995. It has an asset base

of Rs 215crore. It offers dividend and growth options. The minimum

investment is Rs 1,000.


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TWO IMPORTANT BALANCED FUNDS FLOATED

BY SBI MAGNUM

MAGNUM NRI INVESTMENT FUND FLEXI ASSET PLAN:

Investment Objective:

The investment objective of the scheme will be to provide attractive returns to

the Magnum holders either through periodic dividends or through capitalappreciation through an actively managed portfolio of debt, equity and

instruments. Income may be generated through the receipt of coupon

payments, the amortization of the discount on the debt instruments, receipt of

dividends or purchase and sale of securities in the underlying portfolio.

Asset Allocation:

Instrument % of portfolio of plan Risk profile

Corporate Debenture and

Bonds/PSU, FI Government

guaranteed Bonds including

Securitized Debt and In

Up to 90% of the

investments in debt

instruments

Medium to High

Of which Securitized Debt Not more than 30%of

the investments in debt

instruments

Medium to High

Government Securities Up to 100% of the

investments in debt

instruments

Low

Equity and equity related

instruments

At least 10% and not

exceeding 80% at any

High


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time

Derivative Instruments Within approved limits Low

Cash and Call and MoneyMarket

Up to 25% Low

Scheme Highlights:

1. All Plans have Growth and Dividend Options.2. The returns under the Growth option to be through capital appreciation

only, The Flexi Asset Plan to follow an Asset Allocation Model wherein

depending on market conditions/based on certain triggers, the Fund

Manager can take a view on the percentage of investments that can be

allocated to equity.

3. This Plan would have a minimum of 10% investment in equity relatedinstruments which can be increased up to 80% depending on market

fundamentals.4. The investment universe for equity stocks will be limited to such equity

stocks that form a part of BSE-100.

5. The scheme will declare NAV, Sale and Repurchase prices on all businessdays.

6. All Plans will have separate asset classes and will declare separate NAVsfor different options.


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Performance


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MAGNUM BALANCED FUND:

Investment Objective:

To provide investors long term capital appreciation along with the liquidity of

an open-ended scheme by investing in a mix of debt and equity. The scheme

will invest in a diversified portfolio of equities of high growth companies and

balance the risk through investing the rest in a relatively safe portfolio of debt.

Asset Allocation:

Instrument % of portfolio of plan Risk profile

Equities At least 50% Medium to High

Debt Instruments likedebentures, bonds, khokhas,

etc.

Up to 40% Medium to High

Securitized Debt Not more than 10%of

investments indebt

Medium to High

Money Market Instruments Balance Low

Scheme Highlights:

1. An open-ended scheme investing in a mix of debt and equityinstruments. Investors get the benefit of high expected-returns of

equity investments with the safety of debt investments in one scheme.


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2. On an ongoing basis, magnums will be allotted at an entry load of2.25% to the NAV.

3. Scheme opens for Resident Indians, Trusts, Indian Corporates, on a fullyrepatriable basis for NRIs and, Overseas Corporate Bodies.

4. Facility to reinvest dividend proceeds into the scheme at NAV available.5. Switchover facility to any other open-ended schemes of SBI Mutual

Fund at NAV related prices.

6. The scheme will declare NAV, Sale and repurchase price on a dailybasis.

7. Nomination facility available for individuals applying on their behalfeither singly or jointly up to three.


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Performance


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LIQUID FUNDS:

Liquid funds are used primarily as an alternative to short-term fix deposits.Liquid funds invest with minimal risk (like money market funds).Most funds

have a lock-in period of a maximum of three days to protect against procedural

(primarily banking) glitches, and offer redemption proceeds within 24 hours.

Liquid funds score over short term fix deposits. Banks give a fixed rate in the

range 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are taxable

depending on the tax bracket of the investor, which considerably pulls down

the actual return. Dividends from liquid funds are tax-free in the hands ofinvestor, which is why they are more attractive than deposits.

Liquidity:

Deposits marginally score over liquid funds as far as liquidity is concerned. In

bank deposits the investor's bank account is credited as soon as his FDR (fixed

deposit receipt) is surrendered to the bank. However, in case of liquid funds

the investor has to give are demption request to the fund within the cut off

time to receive that days NAV and the cheque is issued to him on the next

working day. However, some funds give the facility of crediting the investor's

bank account e.g. Franklin Templeton gives this facility to the HDFC bank

account holders. Factoring in all these factors, liquid funds do emerge as a

better option as compared to fixed deposits. However, while investing money

in these funds investors need to carefully evaluate the fund's performance.

There is a possibility that liquid funds may not deliver in terms of expected

returns owing to market factors. Therefore, if you have Rs 100 to invest, youshould probably split the money between a liquid fund and a fixed deposit.

Corporates park surpluses in short-term liquid funds

TURBULENT markets and expectations of hardening interest rates are forcing

corporate to move funds into short-term liquid funds. Liquid and floating rate

funds have been receiving higher inflows with the trend strengthening over the

last two weeks. The mutual fund industry expects this to maintain momentum

till the post-budget trends are visible.


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Return on Liquid Funds:

Liquid funds are used primarily as an alternative to short-term fixdeposits. Liquid funds invest with minimal risk (like money market

funds). Most funds have a lock-in period of a maximum of three days to

protect against procedural (primarily banking) glitches, and offer

redemption proceeds within 24 hours. The minimum investment size in

a liquid fund varies from Rs. 25,000 to Rs 1 lakh.

Liquid funds invest in short-term debt instruments with maturities ofless than one year. Therefore, they invest in money market instruments,

short-term corporate deposits and treasury. The maturity of instruments

held is between three and six months. A liquid fund provides good

liquidity, low interest rate risk and the prevailing yield in the market.

Liquid funds have the restriction that they can only have 10 per cent or

less mark-to-market component, indicating a lower interest rate risk.

Liquid funds have an exit load if the investor redeems before the lock-inperiod. But in most cases, the lock-in period is quite low - varying from 7

to 10 days. Liquid funds score over short term fix deposits. Banks give a

fixed rate in the range 5%-5.5% p.a. for a term of 15-30 days. Returns

from deposits are taxable depending on the tax bracket of the investor,

which considerably pulls down the actual return. Dividends from liquid

funds are tax-free in the hands of investor, which is why they are more

attractive than deposits. The sole disadvantage liquid fund is that

investors cannot take the advantage of higher returns being offered by

long-term instruments.


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Liquid Fund floated by SBI Magnum

SBI Premier Liquid Fund:

Investment objective:

The investment objective of the scheme will be to provide attractive returns to

the Magnum holders either through periodic dividends or through capitalappreciation through an activity managed portfolio of debt and money market

instruments. Income may be generated through the receipt of coupon

payments, the amortization of the discount on the debt instruments, receipt of

dividends or purchase and sale of securities in the underlying portfolio.

Asset Allocation:

Instrument % of portfolio of

plan A

% of portfolio of

plan B

Risk profile

Of which International

Bonds

Within SEBI

Stipulated limits

Within SEBI

Stipulated limits

Medium to

High

Derivative

instruments

Within approved

limits

Within

approved limits

Medium

Cash & call money

Market Instruments

Upto 100% Upto 25% Low


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Scheme Highlights:

1. There are 2 options - Institutional Plan and Super Institutional Plan. Bothplans have Growth and Dividend Options.

2. Under Dividend option of both plans, the frequency of dividend paymentwill be daily, weekly and fortnightly. Daily Dividend under Super

Institutional plan will be declared from March 24, 2007 subject to

availability of distributable surplus and incompliance with SEBI

Regulations from time to time.

3. Daily Dividend will be subject to compulsory reinvestment at applicableNAV irrespective of the amount of investment.

4. Payout and reinvestment facility will be available only under weekly andfortnightly dividend options. The payout facility under weekly andfortnightly dividend options in the Institutional Plan will be offered only

to such investors who have a minimum investment of Rs 1 crore in these

options.

5. The Fund as a whole will be managed as a single portfolio. Both planswill not charge any entry or exit load and will declare NAV on all

calendar days with effect from March 23, 2007.

6. Investors, who wish to exit from the scheme, can do it at applicable NAV,without exit load, on or before March 22, 2007.


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Performance:


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Future of Mutual Fund Industry in Indiaoutlook

2015

India has been amongst the fastest growing markets for mutual funds since

2004 witnessing a CAGR of 29 percent in the five year period from 2004 to

2008 as against global average of 4%.

The increase in revenue and profitability however has not been commensurate

with the AUM growth in last five years.

Low share of global assets under management, low penetration levels, limited

share of mutual funds in the household financial savings and the climbing

growth rates in the last few years are amongst the highest in the world, all

points to the future potential of the Indian mutual fund industry.

Low customer awareness levels and financial literacy pose the biggest

challenge to channelizing household savings into mutual funds. Further fund

houses have shown limited focus on increasing the retail penetration and

building retail AUM. Most AMC and distributors have a limited focus beyond

20 cities that is manifested in limited distribution channels and investor

servicing. The Indian mutual fund industry has largely been product-led and

not customer focused with limited focus being accorded by players to

innovation and new product development.

It will be interesting to understand the key challenges and issues faced and the

action outlined for the key stakeholders so as to surpass expectations of

industry growth and profitability.


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1. Challenges and Issues

a)

Low Levels of Customer Awareness - Low customer awareness levelsand financial literacy pose the biggest challenge to channelizing

household savings into mutual funds. The general lack of understanding

of mutual fund products amongst Indian investors is pervasive in metros

and Tier 2 cities alike and majority of them draw little distinction in their

approach to investing in mutual funds and direct stock market

investments. A large majority of retailinvestors lack in understanding of

risk return, assets allocation, portfolio diversification concepts. Low

awareness of SIPs in India has resulted in a majority of the customers

investing in a lump sum manner.

b) Limited Focus on Increasing Retail Penetration -The Indian mutual fundindustry had limited focus on building retail. AUMand has only recently

stepped up efforts to augment branch presence inTier 2 and Tier 3

towns. Players have historically garnered AUM by targeting the

institutional segment that comprises 63 percent of AUM share as at M

arch_2008.

c)

Limited Focus Beyond the Top 20 The mutual fund industry hascontinues to have limited penetration beyond the top 20 cities. Cities

beyond Top 20 only comprise approximately 10 percent of the industry

AUM as per industry practitioners. The retail population residing in Tier

2 and Tier3 towns, even if aware and willing are unable to invest in

mutual funds owing to limited access to suitable distribution channels

and investor servicing.


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d) Limited Innovation in Product OfferingsThe Indian mutual fund industry has largely been product led and not

sufficiently customer focused. The popularity of NFOs triggered a

proliferation of schemes with a large number of non-differentiated

products. Despite the regulations for Real Estate Mutual Funds (REMF)

being introduced in 2008 the market is still awaiting the first EMF launch

potential investors in mutual funds The Indian mutual fund industry

offers limited investment options viz. capital guarantee products for

the Indian investors a large majority of whom are risk averse .

e) Limited Customer EngagementMutual fund distributors have been facing questions on their

Competence degree of engagement with customer and the value

provided to the customer. In the absence of a framework to regulate

distributors, both the distributors and the mutual fund houses have

exhibited limited interest in continuously engaging with customers post

closure of sale as the commissions and incentives had been largely in the

form of upfront fees from product sales.

f) Limited Focus of the Public Sector Network on Distribution of MutualFunds

Public sector banks with large captive customer base significant reach

Beyond the Top 20 cities in semi-urban and rural areas and the potential

to build the retail investor base have so far played a very limited role in

Mutual funds distribution.


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g) Multiple Regulatory Frameworks Governing Financial Services SectorRegulatory & compliance requirements vary across verticals within Thefinancial services sector specifically mutual funds, insurance and Pension

funds each of which are governed by an independent regulatory

Framework, are competing for the share of the customers wallet.

h)Impediments to Mutual Fund Investing- Customers perspectiveReasons provided by Survey Respondents for Not Investing in Mutual

Funds-as per survey conducted by KPMG in May 2009

Reasons Percentage of customers

Insufficient funds for investments 3

High Associated risk 7

Complicate Forms 10

KYC documents demanded 17

Too many schemes 23

Complicate product features 20

Other attractive Investments 17

Not properly advised 3


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In summary, the challenges and issues faced by the Indian mutual fund

Industry will need to be addressed at the earliest to ensure long term

sustained profitable growth of the industry.

2. Action Plan for Achieving Transformational GrowthOpportunities exist for surpassing the growth potential of the Indian mutual

fund industry and making the industry more profitable. There is a need for a

collaborative effort across all key stakeholders to harness the future growthpotential and reach out to the customer viz. AMCs, distribution channel

partners, service providers such as R&T agents, custodians and fund

accountants, SEBI, AMFI and media.

Some of the key initiatives that are required to be undertaken for Indian

Mutual Fund industry to

dessert at ion final report full

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