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A

REPORT

ON

MUTUAL FUND INDUSTRY-ANALYSIS & RECENT

TRENDS

By:Rishabh Luthra

ICFAI Business School

Hyderabad07BS3428

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Kotak Mahindra Asset Management CompanyLimited

A

REPORT

ON

MUTUAL FUND INDUSTRY-ANALYSIS & RECENT TRENDS

By:

Rishabh Luthra

ICFAI Business School07BS3428

A report submitted in partial fulfillment of

the requirement of MBA Program

Submitted to:

Dr. Vijay Laxmi

Faculty Member

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ICFAI Business School, Hyderabad

AND

Mr. Adheer AwasthiRelationship Executive

Kotak Mahindra Asset Management Company Limited

ACKNOWLEDGEMENT

The success behind the completion of any good job is the support and thejoint team effort of a number of people. There are many persons, whose help

& cooperation, made this project successful.

My deepest sense of gratitude, profound respect and sincere thanks to

Dr. Vijay Laxmi (Faculty Member-ICFAI Business School, Hyderabad)

my project guide, for her valuable assistance, keen interest and constant

motivation at each step of my project and for spending her precious time. It

would not have been possible for me to reach this stage of the projectwithout her support & guidance.

My special thanks to Mr. Adheer Awasthi (Relationship Executive-

Kotak Mahindra Asset Management Co. Ltd.), my company guidewho

has been there for me throughout this entire project. He always had the

answers to my queries, be it regarding any concept related to mutual funds.

His warmth support, practical guidance and easy explanations not only

regarding the project matters but others too add to the success of my project.

His continuous interaction and support made it possible for the successfulcompletion of the project.

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I would also like to thankmy parents and my friends for all their time-to-

time assistance. Last but not the least I would like to thank God because

without his divine grace nothing would have been possible.

TABLE OF CONTENTS

Page No.Acknowledgements... 3

List of Illustrations... 6

Abstract 7

1. Introduction

a. Purpose 8b. Objective...... 8

c. Proposed Methodology....... 9

d. Limitations of the Project 9

1. About Mutual Funds

a. Concept of Mutual Funds... 10

b. Advantages of Mutual Funds..... 13

c. Disadvantages of Mutual Funds. 15

1. Mutual Fund Industry

a. Phases of Growth 16

b. Major Mutual Fund Companies......18

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c. Players in the Industry 23

d. Types of Mutual Fund 24

e. Advertisement of Mutual Funds.... 29

1. Distribution Modela. Multi-Channel Distribution Model 31

b. Distribution Channels.... 32

c. Challenges in Distribution.. 33

d. Curbing Unethical Practices... 34

e. Spreading Mutual Fund Culture 35

1. Terms associated with Mutual Funds

a. Offer Document.. 36

b. Net Asset Value.. 39

c. Pricing Of Units.. 40

d. Investment Plans. 42

e. Tax Provisions 44

f. Restriction on Investment.. 46

g. Asset Allocation Principles 48

1. Measuring & Evaluating Mutual Fund Performance

a. Measurement of Mutual Fund Performance... 56

b. Recent Trends in Mutual Fund Industry..63

i)Impact on Mutual Funds of the Union Budget

67

c. Fund Analysis

i)Equity Based

Fund. 73ii) Debt Based Fund 76

iii) ELSS Tax Saver 79

iv) Monthly Income Plans.. 82

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v) Cash Funds. 85

1. Conclusion.. 88

2. Recommendations.. 89

3. Appendices.. 91

4. Reference....

116

TABLE OF ILLUSTRATIONS

1. Working of Mutual Funds 12

2. Structure of Mutual Funds... 24

3. Mutual Fund Classification.. 244. Multi-Channel Distribution Model 31

5. Investor Earning Opportunities.... 37

6. Expenses charged by AMC. 41

7. Investor in Different Phases.. 49

8. Portfolio Model (By Jacobs).. 50

9. Wealth Cycle Classification 51

10.Comparison of Investment Products

a. By Nature of Investment.. 52

b. By Performance. 53

1. Risk-Return Grid 54

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2. Bank v/s Mutual Fund 55

3. Diagrams showing

a. Beta.. 57

b. R Squared. 58

c. Treynor Ratio.. 59

d. Sharpe Ratio 60

1. Fund Analysis (On the basis of NAV). 70

2. Different Funds which are compared. 71

3. Calculation showing Mutual Fund Performance

a. Equity Fund Scheme 73

b. Debt Fund Scheme.. 76

c. ELSS Tax Saver Scheme 79d. Monthly Income Plans 82

e. Cash Funds.. 85

ABSTRACT

If size is the measure of dominance, then the Indian mutual fund industry

can now boast on that. With the total Asset Under Management (AUM)

increasing from Rs.1,01,565 Crores in Jan 2000toRs.5,67,601.98 Crores

by April 2008, according to the Association of Mutual Funds in India

(AMFI), the industrys growth has been nothing but exceptional. It hasindeed come a long way from being a single player, single scheme (US-64)

industry to having 34 players and more than 480 schemes.

What has driven the growth? Numbers of factors have contributed to the

surge in the industrys growth. First and foremost, a buoyant domestic

economy coupled with a booming stock market has been one of the major

drivers of the growth in recent times particularly in the last five-year.

Another significant factor facilitating this growth has been a conduciveregulatory regime, thanks to increased effort by SEBI to improve market

surveillance and protect investors interests. Further, incentives, such as

making dividend tax free in the hands of investors have also provided strong

impetus to the growth.

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This research covers various aspect of mutual funds industry in India.

Starting with basic concept of mutual fund and its advantages it would give

detail about the growth of mutual fund industry in India, its present scenario.

It also throws some light on major mutual fund companies in India, the

different types of mutual funds on the basis of structure, investment, load

and schemes and also it covers the different phases of growth of mutual

fund industry. Then it covers the calculation of NAV, the various

investment plans, factors that help in calculating the mutual fund

performance.

In the end mutual fund analysis have been done on the basis of Standard

Deviation, Beta, Alpha, R Squared, Treynor Ratio & Sharpe Ratio on

various schemes like Equity based Funds, Debt based Funds, Monthly

Income Plans, Cash Funds & ELSS Tax Saver Schemes.

INTRODUCTION

Purpose of the project

This project provides better understanding to the reader by giving insights

on Indian Mutual Fund Industry through comparative analysis of differentAsset Management Companies and their schemes in India. To do a

comparative analysis of five major Mutual Funds of India namely

Kotak Mutual Fund

HDFC Mutual Fund

UTI Mutual Fund

Reliance Mutual Fund

Prudential ICICI Mutual Fund

Objective of the Project

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For every problem there is a research. As all the researches are based

on some and my study is also based upon some objective and these

are as follows:

To give a holistic and a comprehensive view of mutual fund industry

in India Comparative study of returns given by various AMC Mutual funds on

the basis of 6 parameters like Standard Deviation, Beta, Alpha, R

Squared, Treynor Ratio & Sharpe Ratio.

To understand the risk profile of the customer

To know the awareness of investors about schemes provided by

various AMCs

Proposed Methodology

In broader perspective the whole project can be divided into three sections.UnderSECTION I, on the basis of past and present the industry has beenanalyzed and based on which future outlook has been projected. This sectioncovers following things:

i. Concept of Mutual Funds and its Advantages.ii.Types of Mutual Funds.iii.Size of Industryiv.Growth trends

SECTION II focuses on the distribution Channel used by different AMC inorder to sell their schemes. This section also tries to cover

i. Distribution models.ii. Challenges in distribution.iii. Curbing Unethical Practicesiv. Spreading Mutual Fund Culture

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Section III focuses on the different tools used to measure & evaluate theperformance of different Mutual Funds. This section covers the followingthings:

i. The performance of the Mutual Funds is evaluated on the basis ofStandard Deviation, Beta, Alpha, R Squared, Treynor Ratio & SharpeRatio.

ii. Recent Trends in the Mutual Fund industryiii. Impact on Mutual Funds of the Union Budget.

Finally on the basis of findings and observation suitable recommendationswill be given.

Limitations

The analysis is completely based on the past performance and not

confirms the future performance.

The research is based on secondary data collected from other sourceslike magazines, newspapers and websites etc.

Reliability of the sources could also be limitation for the project.

ABOUT MUTUAL FUNDS

CONCEPT

Individuals or institutions when have surplusmoney, i.e. savings, would like to invest with thecommon and logical motive of growing money bygetting returns on the investments. There arevarious avenues to park money towardsfulfillment of your objective of return oninvestment.

One can invest money either where you can get

assured returns & hence the risk is low butreturns also are low compared to the high riskinvestments.

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The other way is through investing in shares i.e.equity market. Generally the returns on equityinvestments are higher than debt investment butrisk also is higher. To get good returns one really

needs to understand the economy andperformance of companies where you areinvesting money. For a common man it may becumbersome while managing own profession, jobor business.

Hence the concept of mutual fund has evolved tomanage the funds i.e. on behalf of the investor;fund managers will be taking decisions tomaximize the investors returns.

The concept of mutual funds in India dates back to the year 1963. The erabetween 1963 and 1987 marked the existence of only one mutual fundcompany in India with Rs. 67bn assets under management (AUM), by theend of its monopoly era, the Unit Trust of India (UTI). By the end of the 80sdecade, few other mutual fund companies in India took their position inmutual fund market.

The new entries of mutual fund companies in India were SBI Mutual Fund,Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank

Mutual Fund, Bank of India Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fundindustry. By the end of 1993, the total AUM of the industry was Rs. 470.04

bn. The private sector funds started penetrating the fund families. In thesame year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further givena revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in Indiawhich has now merged with Franklin Templeton. Just after ten years with

private sector player penetration, the total assets rose up to Rs. 1218.05 bn.Today there are 34 mutual fund companies in India.

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A Mutual fund is a common pool of money into which investors place theircontributions 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 allinvestors. A single investors ownership of the fund is in the same

proportion as the amount of the contribution made by him bears to the totalamount of the fund.

A mutual fund uses the money collected from investors to buy those assets,which are specifically permitted by its stated investment objective. Thus, anequity fund would buy mainly equity assets-ordinary shares, preferenceshares, warrants, etc. a bond fund would mainly buy debt instruments, suchas debentures, bonds, or government securities. It is these assets, which areowned by the investors in the proportion of their investments.

When an investor subscribes to a mutual fund, he or she buys a part of theassets or the pool of funds that are outstanding at that time. It is no different

from buying shares of a joint stock company, in which case the purchasemakes the investor a part owner of the company and its assets. In fact, in theUSA, a mutual fund is constituted as an investment company and aninvestor buys in to the fund meaning he buys the shares of the fund. InIndia, a mutual fund id constituted as a trust an investor subscribes to theunits issued by the fund, which is where the term Unit Trust comes from. .Mutual funds issues units to the investors in accordance with quantum ofmoney invested by them. Investors of Mutual funds are known as UnitHolders.

Investments in securities are spread across a wide cross-section of industriesand sectors and thus the risk is reduced. Diversification reduces the risk

because all stocks may not move in the same direction in the same proportion at the same time. The profits and losses are shared by theinvestors in proportion to their investments. Mutual funds normally comeout with a number of schemes with different investments objectives whichare launched from time to time. A mutual fund is required to be registeredwith Securities and Exchange Board of India which regulates securitiesmarkets before it can collect funds from public.

However, whether the investor gets funds shares or units is only a matter oflegal distinction. In any case, a mutual fund shareholder or unit holder is apart owner of the funds assets. The term unit-holder includes the mutualfund account-holder or closed-end fund shareholder. A unit holder in Unit

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Trust of India US-64 scheme is the same as a UTI Master shareholder or aninvestor in an alliance

Each share or unit that an investor holds needs to be assigned a value. Sincethe units held by investor evidence the ownership of the assets, the value of

the total assets of the fund when divided by the total number of units issuedby the mutual fund gives us the value of one unit. This is generally calledthe Net Asset Value (NAV) of one unit or one share. The value of aninvestors part ownership is the determined by the NAV of the number ofunits held.

Example: If the value of a funds assets stands at Rs 1000 and it has 10investors who have bought 10 units each, the total numbers of units issuedare 100, and the value of one unit is Rs 10 (1000/100). If a single investor infact owns 3 units, the value of his ownership of the fund will be Rs 30(1000/100*3). Note that the value of the funds investments will keep

fluctuating with the market price movements, causing the NAV alsofluctuate. For example, if the value of our funds assets increased from Rs1000 to Rs 1200, the value of our investors holding of 3 units (1200/100*3)Rs 36. The investment value can go up and down, depending on the marketvalue of the funds assets.

The flow chart below describes broadly the working of a mutual fund:

SOURCE: AMFI

Advantages of Mutual Funds

If mutual funds are emerging as the favorite investment vehicle, it is

because of the many advantages they have over other forma and avenues of

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investing, particularly for the investor who has limited resources available in

terms of capital and ability to carry out detailed research and market

monitoring. The following are the major benefits offered by mutual funds to

all investors:

i) Portfolio Diversification

Mutual Funds spread the investment across different securities (stocks,

bonds, money market instruments, real estate, fixed deposits etc.) by

investing in a number of companies across a broad cross-section of

industries and sectors (auto, textile, information technology etc.). This kind

of a diversification may add to the stability of your returns and reduces the

risk with far less money than you can do on your own. For example during

one period of time equities might underperform but bonds and money

market instruments might do well enough to offset the effect of a slump inthe equity markets.

ii) Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many

problems such as bad deliveries, delayed payments and follow up with

brokers and companies.

iii) Professional ManagementQualified investment professionals who seek to maximize returns and

minimize risk monitor investor's money. The investment professional has

experience in making investment decisions. It is the Fund Manager's job to

(a) find the best securities for the fund, given the fund's stated investment

objectives; and (b) keep track of investments and changes in market

conditions and adjust the mix of the portfolio, as and when required.

iv) Liquidity

In open-end schemes, the investor gets the money back promptly at net asset

value related prices from the Mutual Fund. In closed-end schemes, the units

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can be sold on a stock exchange at the prevailing market price or the

investor can avail of the facility of direct repurchase at NAV related prices

by the Mutual Fund.

v)AffordabilityInvestors individually may lack sufficient funds to invest in high-grade

stocks. A mutual fund because of its large corpus allows even a small

investor to take the benefit of its investment strategy.

vi)Variety

Mutual funds offer a tremendous variety of schemes. This variety is

beneficial in two ways: first, it offers different types of schemes to investors

with different needs and risk appetites; secondly, it offers an opportunity to

an investor to invest sums across a variety of schemes, both debt and equity.

vii) Tax Benefits

In case of Individuals and Hindu Undivided Families a deduction up to Rs.

9,000 from the Total Income will be admissible in respect of income from

investments specified in Section 80L, including income from Units of the

Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-

Tax.

viii) Transparency

Open-ended mutual funds disclose their Net Asset Value (NAV) daily and

the entire portfolio monthly. This level of transparency, where the investor

himself sees the underlying assets bought with his money, is unmatched by

any other financial instrument.

Disadvantages of Mutual Funds

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While the benefits of investing through mutual funds far outweigh the

disadvantages, an investor and his advisor will do well to be aware of few

shortcomings of using the mutual fund as an investment vehicle.

i) No Tailor-made-PortfoliosInvesting through funds means, the investor delegates the decision of

investing through which securities to fund manager. The very high-net-

worth individuals or large corporates may find this as a constraint in

achieving their objectives. However this constraint can be overcome to

some extent by offering families of schemes to investor, within the same

fund.

ii) No control over costs

Investor pays the investment management fees as long as he remains within

the fund. Fees are usually payable as a percentage of the value of his

investments, whether the fund value is rising or declining. The investor also

pays the fund distribution cost, which he would not incur in direct

investment.

iii) Managing a Portfolio of Funds

Availability of a large number of options from mutual funds can actually

mean too much choice for the investor. He may again need advice on how toselect a fund to achieve his objectives.

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MUTUAL FUND INDUSTRY

The Phases of Growth

The Indian mutual industry has come a long way since the inception of UTIin 1963.According to AMFI, the evolution of the industry can be classified

broadly into four phases, which mark its transition from a period when UTI

ruled the roost to a period of competition and increased awareness among

investors.

i) First Phase (1964-87) UTI all the way

This phase begin with the inception of the Unit Trust of India (UTI). It

remained the only mutual fund player in the country till 1987. UTI started

its operation in July 1964 with a view to encouraging savings and

investments and participation in income, profits and gains accruing to the

corporation from acquisition, holding, management and disposal of

securities. In short, it was set up by Indian government with a view to

augment small savings in the country and to channelize these savings to the

capital markets. UTI witnessed a slow and steady growth over the 1970s and

the 1980s and by the end of 1988 it had an AUM of Rs.67bn. It still

continues to be the largest player in the domestic mutual fund industry with

an AUM of Rs. 23,500 cr as on March 31, 2008.

ii) Second Phase (1987-1993) Enter Public sector Mutual Funds

Public sector mutual funds set up by public sector banks, Life insurance

Corporation of India (LIC) and the General insurance Corporation of India

(GIC) entered in the market in 1987. The first non mutual fund was the SBI

Mutual Fund established in June 1987, followed by Canbank Mutual Fund

in December 1987, Punjab National Bank Mutual Fund in August 1989,

India Bank Mutual Fund in Nov 1989, Bank of India Mutual Fund in June

1990 and Bank of Baroda Mutual Fund in Oct 1992. LIC set up its mutualFund in Jun e 1989 while GIC established its Mutual Fund in Dec 1990.

During this period, the total asset of the industry grew to about Rs. 610bn

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with the total number of schemes increasing to about 167 by the end of

1994.

iii) Third Phase of (1993-2003) Private players enter the scene

This phase marked the entry of private sector funds. The phase also signaledthe intensification of competition. Both domestic and foreign players

entered the market, offering a wide variety of schemes to investors. Kothari

Pioneer Mutual Fund was the first private sector fund to establish in

association with the foreign fund. Private players like Morgan Stanley,

Jardine Fleming, JP Morgan, George Soros and Capital International

entering the market. The total AUM by the end of Jan 31, 2003 increased to

$ 34,927mn from $23,260mn in March 1995 with a CAGR of 6.92%.

iv) Fourth Phase (since Feb 2003) UTIs restructuring and beyond

In Feb 2003 UTI ACT 1963 was replaced and UTI was bifurcated into two

separate entities: Specified undertaking of Unit Trust of India, which is still

under the Govt. of India and the UTI Mutual Fund Ltd. This was done in the

wake of the sever payment crisis that UTI suffered on account of its assured

return schemes of US-64 that finally resulted in an adverse impact on the

India capital markets. US-64 was the first scheme launched by UTI with a

significant equity exposure and the returns of which were not linked to the

market. However, the industry has overcome that shock and is hoped tohave learnt its lesson.

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Major Mutual Fund Companies in India:

i) Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of

Kotak Mahindra Bank Limited (KMBL). It is presently having more than

1,99,800 investors in its various schemes. KMAMC started its operations in

December 1998. Kotak Mahindra Mutual Fund offers schemes catering to

investors with varying risk - return profiles. It was the first company to

launch dedicated gilt scheme investing only in government securities.

ii) HDFC Mutual Fund

HDFC Asset Management Company Ltd (AMC) was incorporated under the

Companies Act, 1956, on December 10, 1999, and was approved to act as

an Asset Management Company for the HDFC Mutual Fund by SEBI vide

its letter dated June 30, 2000. HDFC Mutual Fund was setup with two

sponsors namely Housing Development Finance Corporation Limited and

Standard Life Investments Limited.

iii) Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14,

2003, manages the UTI Mutual Fund with the support of UTI Trustee

Company Private Limited. UTI Asset Management Company presently

manages a corpus of over Rs.20000 Crores. The sponsors of UTI Mutual

Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank

of India (SBI), and Life Insurance Corporation of India (LIC). The schemes

of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management

Funds, Index Funds, Equity Funds and Balance Funds.

iv) Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America,

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one of the largest life insurance companies in the US of A. Prudential ICICI

Mutual Fund was setup on 13th of October, 1993 with two sponsors,

Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential

ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management

Company Limited incorporated on 22nd of June, 1993.v) Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts

Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance

Capital Trustee Co. Limited is the Trustee. It was registered on June 30,

1995 as Reliance Capital Mutual Fund which was changed on March 11,

2004. Reliance Mutual Fund was formed for launching of various schemes

under which units are issued to the Public with a view to contribute to the

capital market and to provide investors the opportunities to make

investments in diversified securities.

vi) ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO

Trustee (India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO

Asset Management (India) Ltd. was incorporated on November 4, 2003.

Deutsche Bank AG is the custodian of ABN AMRO Mutual Fund.

vii) Birla Sun Life Mutual FundBirla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and

Sun Life Financial. Sun Life Financial is a global organization evolved in

1871 and is being represented in Canada, the US, the Philippines, Japan,

Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund

follows a conservative long-term approach to investment. Recently it

crossed AUM of Rs. 10,000 crores.

viii) Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October30, 1992 under the sponsorship of Bank of Baroda. BOB Asset Management

Company Limited is the AMC of BOB Mutual Fund and was incorporated

on November 5, 1992. Deutsche Bank AG is the custodian.

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ix) HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and

Capital Markets (India) Private Limited as the sponsor.

x) ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same

named Trustee Company. It is a joint venture of Vysya & ING. The AMC,

ING Investment Management Pvt. Ltd. was incorporated on April 6, 1998.

xi) Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India

Financial Corporation Ltd. as the sponsor. Sahara Asset Management

Company Private Limited incorporated on August 31, 1995 works as the

AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs

25.8 crore.

xii) State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to

launch offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr.

approximately. Today it is the largest Bank sponsored Mutual Fund in India.They have already launched 35 Schemes out of which 15 have already

yielded handsome returns to investors. State Bank of India Mutual Fund has

more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8

Lakhs spread over 18 schemes.

xiii) Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The

sponsors for Tata Mutual Fund are Tata Sons Ltd., and Tata Investment

Corporation Ltd. The investment manager is Tata Asset ManagementLimited and Tata Trustee Company Pvt. Ltd. Tata Asset Management

Limited's is one of the fastest in the country with more than Rs. 7,703

Crores (on April 30, 2005).

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xiv) Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored

by Standard Chartered Bank. The Trustee is Standard Chartered Trustee

Company Pvt. Ltd. Standard Chartered Asset Management Company Pvt.Ltd. is the AMC which was incorporated with SEBI on December 20, 1999.

xv) Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based

company with a global AUM of US$ 409.2 bn. (as of April 30, 2005). It is

one of the largest financial services groups in the world. Investors can buy

or sell the Mutual Fund through their financial advisor or through mail or

through their website. They have Open end Diversified Equity schemes,

Open end Sector Equity schemes, Open end Hybrid schemes, Open end TaxSaving schemes, Open end Income and Liquid schemes, Closed end Income

schemes and Open end Fund of Funds schemes to offer.

xvi) Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading

in the market in securities, investment management and credit services.

Morgan Stanley Investment Management (MISM) was established in the

year 1975. It provides customized asset management services and productsto governments, corporations, pension funds and non-profit organizations.

Its services are also extended to high net worth individuals and retail

investors. In India it is known as Morgan Stanley Investment Management

Private Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund

(MSMF).

xvii) Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance

Limited as its sponsor. The Trustee Company is Escorts Investment TrustLimited. Its AMC was incorporated on December 1, 1995 with the name

Escorts Asset Management Limited.

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xviii) Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with

Alliance Capital Management Corp. of Delaware (USA) as sponsor. The

Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance CapitalAsset Management India Private Ltd. with the corporate office in Mumbai.

xix) Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment &

Finance Company Ltd. was setup on January 3, 1997. Cholamandalam

Trustee Co. Ltd. is the Trustee Company and AMC is Cholamandalam

AMC Limited.

xx) LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June

1989. It contributed Rs. 2 Crores towards the corpus of the Fund. LIC

Mutual Fund was constituted as a Trust in accordance with the provisions of

the Indian Trust Act, 1882. . The Company started its business on 29th April

1994. The Trustees of LIC Mutual Fund have appointed Jeevan Bima

Sahayog Asset Management Company Ltd as the Investment Managers forLIC Mutual Fund.

xxi) GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India

(GIC), a Government of India undertaking and the four Public Sector

General Insurance Companies, viz. National Insurance Co. Ltd (NIC), The

New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC)

and United India Insurance Co. Ltd. (UII) and is constituted as a Trust in

accordance with the provisions of the Indian Trusts Act, 1882.

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The Players in the Mutual Fund Industry

The players in the Indian Mutual Funds Industry are similar to some extent

to the players in other financial services industry. The players are asfollows:

SEBI

The Securities Exchange Board of India (SEBI) is the regulatory authority

for all the mutual funds sponsored by the public/private sector banks,

financial institutions, private sector companies, non- banking finance

companies and foreign institutional investors. SEBI has laid down the rules

and regulations regarding the obligations of the entities involves in a mutual

fund, its establishment and launch of different schemes, investments and

valuation, financial reporting, conduct and operations of mutual funds.

Asset Management Company (AMC)

Its role is highly significant in the mutual funds operation. They are the fund

managers i.e. they invest the investors money in various securities after

proper research and analysis. They also look after the administrative

functions of a mutual fund for which they charge management fee.

Intermediaries

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They act as a link between the mutual fund companies and the investors.

The intermediaries include brokers, sub- brokers, and investment houses.

The other intermediary- registrar and transfer agents perform activities,

which are associated with maintaining records concerning units already

issued or to be issued by the company. The registrar also performs otheractivities such as dividend payment, investor grievance, etc.

Investors

Investors subscribe to the units issued by the mutual funds in the hope of

getting a return commensurate with the risk involved. SEBI protects the

interest of the investors through the guidelines laid down under SEBI

(Disclosure and Investor Protection) Guidelines, 2000. The mutual fund

investor mainly includes individual, HUF, corporate and trusts.

Types of Mutual Funds

There are many types of mutual funds available to the investor. However,

these different types of funds can be grouped into certain classifications for

better understanding.

Structure of a Mutual Fund

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SOURCE: http://amfiindia.com

Mutual Fund Classification

SOURCE: http://amfiindia.com By Structure

i) Open-ended FundsAn open-end fund is one that is available for subscription all through the

year. These do not have a fixed maturity. Investors can conveniently buy

and sell units at Net Asset Value (NAV) related prices. Hence, the unit

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capital of the schemes keeps changing each day. Such schemes thus offer

very high liquidity to investors 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 rarelydenies to its investor the facility to redeem existing units.

ii) Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally ranging

from 3 to 15 years. The fund is open for subscription only during a specified

period. 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 on the stock

exchanges where they 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.

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.

iii) Interval FundsInterval funds combine the features of open-ended and close-ended

schemes. They may be traded on the stock exchange or may be open for sale

or redemption during pre-determined intervals at NAV based prices.

B y Investment Objective

i) Growth FundsThe aim of growth funds is to provide capital appreciation over the medium

to long- term. Such schemes normally invest a majority of their corpus in

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equities. It has been proven that returns from stocks, have outperformed

most other kind of investments held over the long term. Growth schemes are

ideal for investors having a long-term outlook seeking growth over a period

of time.

ii) Income Funds

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 and Government securities. Income Funds are

ideal for capital stability and regular income.

iii) Balanced Funds

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

Such schemes periodically distribute a part of their earning and invest both

in equities and fixed income securities in the proportion indicated in their

offer documents. In a rising stock market, the NAV of these schemes may

not normally keep pace, or fall equally when the market falls. These are

ideal for investors looking for a combination of income and moderate

growth.

iv) Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation ofcapital and moderate income. These schemes generally invest in safer short-

term instruments such as treasury bills, certificates of deposit, commercial

paper and inter-bank call money. Returns on these schemes may fluctuate

depending upon the interest rates prevailing in the market. These are ideal

for Corporate and individual investors as a means to park their surplus funds

for short periods.

v) Gilt Fund

These funds invest exclusively in government securities. Governmentsecurities have no default risk. NAVs of these schemes also fluctuate due to

change in interest rates and economic factors as is the case with income or

debt oriented schemes.

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vi) Index Funds

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

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

securities in the same weight age comprising of an index. NAVs of suchschemes 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 intechnical terms. Necessary disclosure in this regard is

made in the offer document of the mutual fund scheme. There are also

exchange traded index funds launched by the mutual funds which are traded

on the stock exchanges.

On the basis of Load

i) Load Funds

A Load Fund is one that charges a commission for entry or exit. That is,

each time you buy or sell units in the fund, a commission will be payable.

Typically entry and exit loads range from 1% to 2%. It could be worth

paying the load, if the fund has a good performance history.

ii) No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit.That is, no commission is payable on purchase or sale of units in the fund.

The advantage of a no load fund is that the entire corpus is put to work.

O ther Schemes

i) Tax Saving Schemes

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

the Indian Income Tax laws as the Government offers tax incentives for

investment in specified avenues. Investments made in Equity LinkedSavings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s

88 of the Income Tax Act, 1961. The Act also provides opportunities to

investors to save capital gains u/s 54EA and 54EB by investing in Mutual

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Funds, provided the capital asset has been sold prior to April 1, 2000 and the

amount is invested before September 30, 2000.

ii) Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offerdocument. The investment of these funds is limited to specific industries

like InfoTech, FMCG, and Pharmaceuticals etc.

iii) Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or

a group of industries or various segments such as 'A' Group shares or initial

public offerings. In these funds or schemes the investor invests in the

securities of only those sectors or industries which are specified in the offer

documents. E.g. Pharmaceuticals, software, Fast Moving Consumers goods

(FMCG), petroleum stocks, etc. the return on these funds is dependent on

the performance of the respective sector/industries. While these funds may

give higher returns, they are more risky compared to the diversified funds.

Investors need to keep a watch on the performance of these sectors and must

exit at an appropriate time. They may seek an advice of an expert.

Advertisements of Mutual Funds

Advertisements through Hoardings/Posters

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It is essential for the investors to read the Offer Documents & Risk

Factors before investing in the mutual funds scheme to take well

informed investment decisions. Considering that the investors get

very little time to read the advertisements through hoardings/posters,

etc. while passing by, it is clarified that such advertisements maycarry only the following statement apart from copy of advertisement:

Mutual Fund investments are subject to market risks, read the

offer document carefully before investing

The above statement shall be displayed in black letters of at least 8

inches height or covering 10% of the display area on white

blackboard. The compliance officers shall ensure that he statement

appearing in such advertisements are in legible font.

Advertisements through Audio-Visual Media

Advertisements through audio-visual media like television, a

statement Mutual Fund investments are subject to market risks,

read the offer document carefully before investing shall be

displayed on the screen for at least 2 seconds, in a clearly legible font-

size covering at least 80% of the total screen space and accompanied

by a voice-over reiteration. The remaining 20% space can be used for

the name of the mutual fund or logo or name of scheme, etc.

Performance Advertisements

Disclosure of Benchmarks in Advertisements : All performance

advertisements disclosing return statistics shall mention the

returns on the benchmark indices, during the same time

periods.

Performance of Money Market Schemes : The investors in

cash/liquid/money market schemes have short investment

horizon therefore the mutual funds while advertising simple

annualized returns of such schemes based on a period of 30days can also advertise simple annualize returns based on 15

days period.

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Impact of Distribution Taxes : While advertising returns by

assuming reinvestment of dividends, if distribution taxes are

excluded while calculating the returns, this should also be

disclosed.

Pay- out of D ividends : While advertising pay-out dividends, itshall be disclosed that after the payment of dividend, the NAV

will fall to the extent of the payout and distribution taxes (if

applicable), in the main body of the advertisement.

Fund of Funds Advertisement

In case of Fund of Funds scheme, the mutual funds shall disclose in

the offer document as well as in the advertisements that the investors

are bearing the recurring expenses of the scheme in addition to the

expenses of other schemes in which Fund of Funds scheme makes

investment.

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Distribution Model

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BanksIFAs

AMC

Direct Sales

Institutional Brokers

Large Corporate Corporate HNWCustomer

RetailCustomer

InternetTied AgencyBrokers

Customer Segments


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Multi - Channel Distribution

Distribution Channels

In highly competitive environment, product innovation or development has

become a necessity for mutual fund players to stay ahead. Increasing

commoditization and growing needs of the customers are forcing players to

shift to solution based models from production based ones. In either model,the role of distribution channel remains critical as it helps stave off

competition by maintaining relationships, providing advisory services and

customizing need-based solution

Relationship plays a vital role while selling mutual fund products. An agent

is essential channel between investors and mutual fund products. However it

is difficult for AMCs to manage and monitor large agent force. So they take

shelter in third-party distribution AMCs like KARVY, BAJAJ Capital, and

Integrated Enterprises etc. These AMCs in turn, appoint their agents to sellthe MF to AMCs products. Agents advise the customer on the kind of

product that caters to the needs of the client. To unload their work, the

companies bear a huge market expense in the form of higher commission to

lure investors.

To control increasing operational costs, AMCs are opting for the service s of

large distributors to sell their products by leveraging their value chain,

which comprises of a brokers, sub brokers and agents. However mutual fund

players have to bear splurging marketing expenses to push their product

against others. In addition mutual fund AMCs are also using banks and Non

Banking Financial AMCs (NBFC) as distribution channels to leverage

their reach and huge client base. UTI is distributing its offerings through

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selected branches of Indian Bank, Corporation Bank, Bank of India an

Allahabad Bank, besides, they are also appointing sales personnel to meet

investors, educate them and sell their products.

The contribution of direct marketing to the total sales is miniscule, but thecost burden is huge. The post office is also used as a channel of Distribution

by mutual funds AMCs, given the fact that the post office has the largest

network then many other institution or bank in the country. As far as retail

penetration is concerned, the post office plays a vital role because its offices

are distributed through the country. Mutual fund industry is also using the

internet to distribute their products because of the cost advantages and

increased communication. However, the fact is that internet has its limits in

providing customized advice to individuals; restrict its use on large scale.

Challenges in Distribution

Lack of awareness

Risk aversion

Extensive availability of the central govt. assured return

Delay (in Liquidity)

Tardy inter-city payment system

Transaction cost of establishing contact centers

It has been a big challenge for the Mutual Fund Industry. As most of the

investors are still not aware how it functions. They sometime feel that it is a

costly affair. Educating investors about the advantages of investing in

mutual fund s compared to risk-free savings instrument is a big task for the

industry. According to the Securities Market Infrastructure- Leveraging

Expert (SMILE), the transaction cost of establishing contact centers, delay

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in fund transfer and tardy inter-city payment system are the major

impediments. So enhancing the reach through the existing distribution

model will require more investments.

As of now, mutual fund investments are confined to the metros, tier 1 and 2cities (about 50 cities). A major reason for this is high cost of developing

retail infrastructure. So, scaling up the operation by increasing investment in

other cities doesnt seem feasible.

There is also a regulatory entanglement in fund realization. Allotment of

units Net Asset Value (NAVs) is done before realization of funds, except in

liquid and money market schemes. Such delay is quite pervasive in smaller

towns, where it can be 3-5 days or more. Such hassle could prevent

investors from investing in mutual funds. However, these problems are

being resolved with appointment of registrars to meet the time-lines of

recording the transactions. In addition, technological advancements of

remittance instruments such as Electronic clearing Services (ECS),

Electronic Funds Transfer (FT) and Real- Time Gross settlement System

(RTGS), is a making the process fast and reducing delay in fund transfer

across cities.

The extensive availability of the central govt. assured return on small

products are restricting the competition as well as penetration of widevariety of mutual fund products, particularly in the smaller towns where

investors are not willing to take risk. This poses a great challenge for the

industry to realize its potential.

Curbing unethical practices

The industry faces challenge to control certain practices. AMCs are wooing

the distributors by offering more commission to push their products. In the

hope of getting more incentives, distributors may opt for unfair practiceslike false projections to sell unsuitable products, motivate the investors to

shift from one fund to another, namely high net worth investors and

persuade them to over invest. However, the clients concern and his needs

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should be pf prime importance while selling. To curb such unethical

practices, the Association of Mutual Funds in India (AMFI) has prescribed

that agents/distributors must have AMFI certification. And to control the

huge market expenses the authority has prescribed that the commission rates

also shouldnt be more than mutual funds expense limit of 2.5% for equityand 2.25 % for debt. Such regulations are required to be more effective to

stop such unethical practices.

Spreading the Mutual Fund Culture

Though the Indian Mutual Fund industry has a huge potential, it is yet to be

realized. To realize its growth potential, industry will have to focus on its

reach in the retail segment. According to Chairman of AMFI there are about

180 million households in India, of which just 11.8 millions invest in mutual

funds, making it penetration of 6.7% in the urban areas 13.7% of the

households invest in mutual funds; in rural areas this percentage is just

3.8%. So there is a need to focus on rural penetration for future growth. To

achieve its growth, educating the customer about the mutual funds as a

saving vehicle will be critical. More efforts are required from the regulators

and the industry to manage the wealth of individuals to further propel thegrowth of the industry by popularizing the use of mutual funds. The govt.

should properly regulate and monitor the regulation so that a favorable

climate can be created. Regulations should be tightened to curb unethical

practices. They should also develop a comprehensive risk management

system so that it can induce more investment. The industry should focus on

product innovation and maintain transparency, flexibility, service and

innovation to realize its potential.

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Offer Document

When an AMC or a Fund Sponsor wishes to launch a new mutual fundscheme, they are required to formulate the details of the schemes and

register it with SEBI before announcing the scheme and inviting the

investors to subscribe to the fund. Launch of a new mutual fund scheme is

called a New Fund Offer (NFO). The document containing the details of the

new fund offer that the AMC or the Sponsor prepares and circulates to the

prospective investors is called the Offer Document.

Offer Document issued by mutual funds serve the same purpose of inviting

investors and giving them the information about the new fund offer. The

offer document of the closed-end fund is issued only once at the time ofissue, as the units are normally not re-purchasable for investors. But, the

open-end fund could issue and repurchase units on an ongoing basis. This

means that the offer document of the open-end funds is valid for all the

time, until amended, though it will be first issued at the time of launch of the

scheme. SEBI requires the offer document of the open-end fund to be

revised every two years.

Options Offered to Investors: Dividend Option : The investor can choose to receive a part of the

profits of the mutual fund at some intervals before their redemption.

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This option is Dividend Option. Investors who choose dividend

option can again have 2 sub options:

Dividend Payout Option : Investors who choose the

dividend payout option on their investments will receive

dividends as and when such dividends are declared bythe scheme. Dividends are paid out to the investors in

the form of warrants or are directly credited to the

investors bank account.

Dividend Re-investment Option : Investors who opt for

the dividend reinvestment option do not take the amount

of dividend out of the scheme. They re-invest the

dividends that are declared by the mutual funds back

into the mutual funds itself, at a NAV that is prevalent

immediately after the declaration of dividend or the

NAV at the time of re-investment. This NAV is known

as ex-div NAV.

Growth Option : The investors who do not want to receive any part of

profits of the mutual fund before its redemption. Rather they want to

retain the profits made in the pool and want their returns to grow by

being compounded. Whenever they need to get some money or profitsback, they would sell a part of their units. This is Growth Option.

Investor E arn ing Opportunities :

Dividend Payout Dividend

Reinvestment

Growth Option

Dividend Yes Yes No

Change in NAV Yes Yes Yes

Lock-in Period Options:Mutual funds usually do not have lock-in periods, during which investors

cannot exit the fund. Mutual funds may create products with lock-in periods.

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Repurchase information can be found in the offer document. There are 2

normal situations when investors are restricted from exiting the fund:

An open-ended fund may announce an initial offer period, during

which time it will only sell units. There may be no repurchase during

that period. The fund will announce a date from which further salesand repurchases will take place.

Some specific funds scheme can be designed to have a minimum

period of investment.

Example: Investments in special Equity Linked Savings Scheme

are eligible for tax rebates. In order to enjoy the tax rebate, the

investor is required to stay invested for a period of 3 years.

In extra-ordinary situations, mutual funds can, with notice to the

investors through a national daily, impose temporary lock-in periods.

Investors have to check the offer document to see if the mutual fund

has sought such a right for itself.

Regulations regar ding Cutoff T imings :

All funds except liquid funds

Purchases :

In respect of valid applications received upto 3 p.m. by the

Mutual Fund, same days closing NAV shall be applicable.

In respect of valid applications received after 3 p.m. by theMutual Fund, the closing NAV of the next business day shall

be applicable.

Redemption :

In respect of valid applications received upto 3 p.m. by the

Mutual Fund, same days closing NAV shall be applicable.

In respect of valid applications received after 3 p.m. by the

Mutual Fund, the closing NAV of the next business day shall

be applicable.

Liquid funds

Purchases :

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In respect of valid applications, closing NAV of the day

immediately before the day on which funds are available for

utilization by the fund shall be applicable. However, in respect

of any application received after 1 p.m. by the Mutual Fund and

the funds are available for utilization by the fund on the sameday, closing NAV of the same day shall be applied.

Redemption

In respect of valid applications received upto 10:00 a.m. by the

Mutual Fund, previous days closing NAV shall be applicable.

In respect of valid applications received after 10:00 a.m.by the

Mutual Fund, same days NAV shall be applicable.

Net Asset Value

Net Asset Value (NAV) represents a fund's per share market value. This

is the price at which investors buy (bid price) fund shares from a fund

company and sell them (redemption price) to a fund company. It is

derived by dividing the total value of all the cash and securities in a

fund's portfolio, less any liabilities, by the number of shares outstanding.

An NAV computation is undertaken once at the end of each trading day

based on the closing market prices of the portfolio's securities.

NAV: Net Assets of the Scheme/ Number of Units Outstanding

Or

(Market Value of Investment + Receivables + Other Accrued Income +

Other Assets Accrued Expenses Other Payables Other Liabilities) /

Number of Units Outstanding on the Valuation Date

For the purpose of NAV calculation, the day on which NAV is calculated

by a fund is known as the Valuation Date. NAV of all schemes must be

calculated and published at least every Wednesday for Closed-end

schemes and daily for Open-end schemes. The days NAV must be

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posted on AMFI website by 8:00 p.m. that day. This applies to both

Open-end & Closed-end schemes.

The funds NAV is affected by these 4 factors:

Purchase & Sale of investment securities Valuation of all investment securities held

Other assets & liabilities

Units sold or redeemed

Pricing Of Units

Although NAV per unit defines the fair value of the investors holding in

the fund, the fund may not repurchase the investors units at the same price

as NAV. There can be entry or exit loads. The Sale price is NAV + Entry

Load and the Repurchase price is NAV Exit Load. SEBI requires that fund

must ensure that repurchase price is not lower than 93% of NAV (95% in

the case of a closed-end fund). On the other side, the fund may sell new

units at a price that is different from the NAV, but the sale price cannot be

higher than 107% of NAV. Also, the difference between the repurchase

price and the sale price of the unit is not permitted to exceed 7% of the sale

price.

Sale Price: Applicable NAV * (1 + Entry Load)

Repurchase Price: Applicable NAV * (1 Exit Load)

Fees & Expenses:An AMC may charge the scheme with Investment Management & Advisory

Feesthat are fully disclosed in the offer document subject to the following

limits:

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1.25% of the first Rs.100 Crores of weekly average net assets

outstanding in the accounting year, and @ 1% of weekly average net

assets in excess of Rs.100 Crores.

For no load schemes, the AMC may charge an additional

management fee up to 1% of weekly average net assets outstandingin the accounting year.

Initial Issue Expenses

Initial Issue Expenses will be permitted for Closed Ended Scheme

only and such scheme will not charge entry load.

Initial Issue Expenses of launching schemes (not to exceed 6% of

initial resources raised under the scheme)

Total Expenses :

Total Expensescharged by the AMC to a scheme, excluding issue or

redemption expenses but including investment management &

advisory fees, are subject to the following limits:

On the first Rs.100 Crores of daily or average weekly net assets 2.5%

On the next Rs.300 Crores of daily or average weekly net assets 2.25%On the next Rs.300 Crores of daily or average weekly net assets 2.0%On the balance of daily or average weekly net assets 1.75%

For Bond Funds:

On the first Rs.100 Crores of daily or average weekly net assets 2.25%

On the next Rs.300 Crores of daily or average weekly net assets 2.0%

On the next Rs.300 Crores of daily or average weekly net assets 1.75%On the balance of daily or average weekly net assets 1.5%

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Investment Plans

The term investment plans generally refers to the portfolio flexibility that

the funds to investors offering different ways to invest or reinvest. The

different investment plans are an important consideration in the investment

decision, because they determine the level of flexibility available to the

investor. Also, the investment plan offered by a fund allows the investors

freedom with respect to investing one time or at regular intervals, makingtransfers to different schemes within the same fund family, or receiving

income at specified intervals or accumulating distributions. These are some

of the investment plans offered by mutual funds in India:

Automatic Reinvestment Plans (ARP):

Many funds offer 2 options under the same scheme- the Dividend

Option & the Growth Option. The ARP allows the investor to

reinvest the amount of dividends or other distributions made by thefund in the same fund & receive additional units, instead of

receiving them in cash.

Systematic Investment Plan (SIP) :

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These require the investor to invest a fixed sum periodically, thereby

letting the investor save in a disciplined and phased manner. The

mode of investment could be though direct debit to the investors

salary or bank account. A modified version of SIP is the Voluntary

Accumulation Plan (VAP) that allows the investor flexibility withrespect to the amount and frequency of investment.

Systematic Withdrawal Plan (SWP) :

Such plans allows the investor to make systematic withdrawals 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 a cheque or credited directly into

the bank account. The amount withdrawn is treated as redemption of

units at the applicable NAV as specified in the offer document. The

investor is usually required to maintain a minimum balance in his

fund account under this plan.

Systematic Transfer Plan (STP) :

These plans allow the investor to transfer on a periodic basis a

specified amount from one scheme to another with the same fund

family- meaning two schemes managed by the same AMC andbelonging to the same mutual fund. A transfer will be treated as

redemption of units from the scheme from which the transfer is

made, and as investment in units of the scheme into 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. The investor is usually required to maintain a minimum

balance in his fund account under this plan for which the transfer is

made.

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Tax Provisions

Income earned by any mutual fund registered with SEBI

(Mutual Fund) Regulation, 1996 is fully exempt from tax

under section 10 (23D) of the IT act.

However, income distributed to unit-holders by a closed-end

or debt fund is liable to a dividend distribution tax at a rate

stipulated by the Government. This tax is not applicable to

distributions made by open-end-equity-oriented funds (funds

with more than 50% of their portfolio in Equity).

Dividend Distribution Tax is payable by the fund on its

distributions and out of its income, the investor pays

indirectly since the funds NAV and the value his

investment will come down by the amount of tax paid by the

fund.Example: If a closed-end or a debt fund declares a dividend

distribution of Rs.100, Rs.10.20 (Tax Rate 10.2%) will be

the tax in the hands of the fund. While the investor will get

Rs.100, the fund will have Rs.10.20 less to invest. The

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What is risk?

Risk can be defined as the potential for harm. But when anyone analyzing

mutual funds uses this term, what is actually being talked about is volatility.

Volatility is nothing but the fluctuation of the Net Asset Value (price of a

unit of a fund). If there is high volatility, then there will be greater

fluctuations in NAV.

Generally, past volatility is taken as an indicator of future risk and for the

task of evaluating a mutual fund, this is an adequate approximation.

How risk is measured?

There are 2 ways in which you can determine how risky a fund is.

Standard Deviation

Standard Deviation is a measure of how much the actual performance

of a fund over a period of time deviates from the average

performance.

Since Standard Deviation is a measure of risk, a low Standard

Deviation is good.

Sharpe Ratio

The Sharpe Ratio of a fund measures whether the returns that a funddelivered were commensurate with the kind of volatility it exhibited.

This ratio looks at both, returns and risk, and delivers a single

measure that is proportional to the risk adjusted returns.

Since Sharpe Ratio is a measure of risk-adjusted returns, a high

Sharpe Ratio is good.

Important Points:

Don't just look at the NAV, also look at the risks-returns

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Kotak 30 has 3 stars & Kotak Opportunities has 4 stars. That does

not mean that their NAV is approximately the same. In fact, the NAV

of Kotak 30 is 90.22 & NAV of Kotak Opportunities is 40.48

However, Kotak 30 took a below average risk and delivered an above

average return, while Kotak Opportunities took an average risk to getthe high returns. So, dont just look at the NAV also consider the

risks-returns of the fund.

Higher rating does not mean better returnsA fund with more stars does not indicate a higher return when

compared with the rest. All it means is that you will get a good return

without putting your money at too much risk.

ICICI Prudential Liquid Fund has a 4-star rating while ICICI

Prudential Growth Fund has a 3-star rating. However, the fund with

the 3-star rating has a higher NAV (109.08) than the one with the 4-

star rating (11.73).

Higher rating does not mean more risk

HDFC Top 200 has an NAV of 140.47 while UTI Infrastructure has

an NAV of 36.60

This does not necessarily mean that HDFC Top 200 is offering a

higher risk since the return is higher.In fact, according to the ratings, HDFC Top 200, a 5-star fund has a

low risk while UTI Infrastructure, a 5-star fund has an average risk.

Recent Trends in the Mutual Fund Industry

Funds betting on Natural Resources

Since Indian regulations do not permit mutual funds to investdirectly in commodities, fund houses go for schemes that invest in

stocks of mining companies.

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At least five funds, keen on investing in natural resources, are set to

hit the market, as per documents filed with the stock market

regulator SEBI. There are two funds from ING and one each from

Mirae Asset Management, Tata AMC and HSBC MF.

Systematic Transfer Plans lower Volatility Risk

Systematic Transfer Plan (STP) helps in reaching the financial goals

by investing a fixed sum in the chosen fund for a pre-determined

number of installments.STP offers an investor the security of a liquid

fund while trying to enhance returns by investing a part of the funds

in equity. This helps mitigate any risk arising from volatility or

improve the funds returns in a boom. Thus, an investor can match his

risk appetite with that of the equity scheme.

Most fund houses are already offering this STP facility to investors.

In the first week of May, JP Morgan AMC launched Optimiser

Systematic transfer plan, wherein investors can invest a lump sum in

JP Morgan India Liquid Fund or JP Morgan India Liquid Plus Fund

through STP. An amount predetermined by the investor would be

transferred periodically (daily, weekly, monthly or quarterly) from

this fund to any of the existing equity schemes managed by JP

Morgan Mutual Fund.

STP is definitely going to gain ground as aspirations, possibilities andopportunities increase among the youth. However, fund managers

feel, STP is yet to be promoted in India to its full extent. Investors

need to be adequately informed about it.

Mutual Fund industry to tap Entertainment space

To cash the bullish growth of the entertainment & media industry in

the country financial institutions are rolling out a slew of mutualfunds focusing on these spaces.

Many of the funds will cover a wide range of areas within the

entertainment arena such as retail, shopping malls, mobile content

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providers, lifestyle beyond the conventional media like television,

film, print advertising and multiplex.

Global media giants like Viacom, Walt Disney, BBC, J C Decaux and

Astro are already in the country or looking at it. The industry has

already witnessed deals such as Walt Disney-UTV, Blackstone-Eenadu and Adlabs-ADAG (Anil Dhirubhai Ambani Group).

Brand name works for Mutual Funds

A brand image is very important for mutual funds and investors base

their decisions on known and dependable brands. Brand-building

exercises are mostly taken up by foreign players and big industrial

houses which have deep pockets, while fund houses with lower

corpus can only attract investors by showing good performance.

Fund mobilisation trend in mutual funds space suggests that brand

play an important role in helping fund houses attract investors

initially although in the long term it boils down to the performance of

the schemes.

Country's MF industry holds immense potential for the existing as

well as the new players entering or those envisaging an entry into the

space, but firms with a strong brand presence definitely has a

competitive advantage.

Mutual Fund Industrys AUM advances by 7.33% in April

The asset base of the industry has grown by 7.33% to Rs. 567601.98

Crores.

Compared to the last month, April has been great for the mutual fund

industry as 28 AMCs out of 34 posted positive growth in their

AAUM. Reliance Mutual Fund has topped the chart with an AAUM

of Rs 96,386.40 Crores. ICICI Prudential MF and UTI MF continue

to be at the second and third position respectively.

Reliance MF offers life insurance cover through SIP investment

Reliance MF has introduced a scheme to encourage investors to save

and invest regularly through Systematic Investment Plan (SIP), to

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ensure that investors achieve their financial objective even in the

unfortunate event of death before completing the SIP tenure as the

balance amount towards the SIP installments remaining unpaid shall

be made good from the life insurance cover.

The nominee would be able to continue investing in the schemewithout having to make any further contribution. The cost of life

insurance premium will be borne by the AMC.

Kotak Mahindra Mutual Fund launches Sensex ETF

Kotak Mahindra Asset Management Company has announced the

launch of an exchange traded fund which will focus on the stocks that

comprise the BSE SENSEX.

Kotak Mahindra Asset Management Company has announced the

launch of an exchange traded fund which will focus on the stocks that

comprise the BSE SENSEX.

The fund is open for subscription from May 07, 2008 till May 16,

2008. The units will be listed on BSE to provide liquidity through

secondary market. Each unit of the Kotak Sensex ETF will be

approximately equal to 1/100th of the value of BSE SENSEX. The

minimum investment amount during the New Fund Offer is Rs

10,000 and in multiples of Rs 1,000.

Reliance Mutual Fund achieves a milestone

Reliance Mutual Fund, owned by Anil Ambani controlled Reliance

Capital, has achieved the coveted milestone by notching up Rs 1

trillion of assets under its management this April.

Reliance Mutual Fund is the first mutual fund in India to cross this

mark. On April 30, the total Assets Under Management (AUM) of the

fund was Rs 100812 Crores, including Rs 34000 Crores in equity

schemes and Rs 66800 Crores in debt funds.

ICICI Prudential AMC Step towards Transparency

ICICI Prudential AMC has taken a pioneering step towards

transparency and investors right to information. The company has

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disclosed the complete details on the securitizations and pass

through certificates across all its fixed income funds on a

consolidated basis in its April 08 Fact sheet.

The fact sheet will provide details of obligators, underlying asset

class, rating etc on a consolidated basis across the entire fixedincome portfolio which will play a key role in aiding investors gain

complete insight of their investment and evaluate the credit quality

of their portfolio.

Impact on Mutual Fund Industry of the Union Budget

Easing in Income Tax slabs Threshold limit of Income Tax exemption for individuals rose as

follows -

Up to Rs.150,000 - NIL

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Rs.150,001 to Rs.300,000 - 10%

Rs.300,001 to Rs.500,000 - 20%

Rs.500,001 and above - 30%

Impact This is expected to increase the disposable income in the hands of

the individuals to some extent which could translate into increased

retail investments in mutual funds.

Increase in Short Term Capital Gain Tax

Short Term Capital Gains Tax rose from 10% to 15%

Impact

Since long term capital gains tax has been left unchanged, this hikein short term capital gains tax could encourage long-term

investments which augur well to the development of the concept of

long term in the Indian Mutual Fund industry, which is

conspicuous by its absence but which is coveted by the fund

industry given the greater flexibility that this provides in funds

management.

At the same time since the short term capital gains tax is still lower

than the income tax slabs of typical capital market investors, it is not

expected to cause too many investors to turn away from mutual

funds.

Incentives for equities should be continued and the status quo on

long-term capital gain tax and STT should be maintained.

Section 80 C deduction for tax saving should be raised from the

current limit of Rs 1 lakh and Equity Linked Saving Schemes from

mutual funds should be given the benefit of the same.

Know your Customer (KYC) Compliance for Mutual Funds

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KYC is an acronym for Know your Client, a term commonly used

for Client Identification Process. SEBI has prescribed certain

requirements relating to KYC norms for Financial Institutions and

Financial Intermediaries including Mutual Funds to know their

clients. This would be in the form of verification of identity andaddress, financial status, occupation and such other personal

information. Applicant must be KYC compliant while investing with

any SEBI registered Mutual Fund.

The provisions of The Prevention of Money Laundering Act, 2002

(PMLA), has made it mandatory for all Mutual Funds to comply with

the Know Your Client (KYC) norms of the applicants desirous of

subscribing to their units. In this regard, it has been mandated to

create the necessary infrastructure in order to handle the KYC on

behalf of the Mutual Fund Industry.

As a result, all applicants will now have to submit their PAN card

copy (which serves as Proof of Identity (PoI)) and Proof of Address

(PoA) only once to the designated Point of Service (PoS) centers

spread across the country. After confirming the credentials of the

investor, the PoS issues KYC acknowledgement letter that needs to be

submitted along with the mutual fund investments.

Norms for dedicated infrastructure funds should be finalizedregarding which announcement was made in last Union Budget.

Existing open-ended equity schemes of mutual fund industry should

be included for the purpose of tax savings wherein a lock-in period of

three years can be introduced in separate plan of same schemes.

Dividend distribution taxes on Money Market Mutual Funds which

was increased last year should be brought back to earlier levels.

Service Taxes realigned for ULIPs

Asset management services provided under Unit Linked Insurance

Plans (ULIPs) would be brought on par with asset management

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services provided under mutual funds as regards chargeability to

service tax.

Services provided by stock/commodity exchanges and clearing

houses would also be brought under the service tax net.

Impact

The competitiveness of mutual funds vis--vis ULIPs in the

investment basket of investors is expected to increase somewhat.

Transactional expense levels of mutual funds are expected to go up

marginally on account of their exposure to stock and commodity

exchange which are expected to pass on the service tax. But clarity on

what would define services here and on what amount the service tax

would be levied is awaited.

FUND ANALYSIS (On the basis of NAV)Fund Category Rating 3 Year

ReturnDSPML T.I.G.E.R. Reg Equity: Diversified 45.64

Tata Infrastructure Equity: Diversified 45.31

Magnum Contra Equity: Diversified 44.80

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Kotak Opportunities Equity: Diversified 43.72

UTI Infrastructure Equity: Diversified 43.18

Magnum Multiplier Plus Equity: Diversified 43.05

Reliance Growth Equity: Diversified 42.00

Sundaram BNP Paribas SelectMidcap Reg

Equity: Diversified 41.06

HDFC Top 200 Equity: Diversified 39.65

BoB Growth Equity: Diversified 38.55

Principal Child Benefit Hybrid: Equity-oriented 36.93

Magnum Balanced Hybrid: Equity-oriented 31.37

HDFC Prudence Hybrid: Equity-oriented 29.27

Birla Sun Life Income Debt: Medium-term 8.37

ICICI Prudential Long-... Debt: Medium-term 7.54

Kotak Flexi Debt Debt: Medium-term 7.47

Sundaram BNP Paribas S... Equity: Diversified 44.86

DWS Investment Opportunity Equity: Diversified 44.10

DSPML Equity Fund Equity: Diversified 43.39

ICICI Prudential Dynamic Equity: Diversified 42.69

Kotak 30 Equity: Diversified 42.68

DSPML Top 100 Equity Reg Equity: Diversified 42.55

Magnum Equity Equity: Diversified 42.23

Source: http://amfiindia.com(on 8th May, 2008)Funds which have been compared are:

KotakCategory Fund

Equity Fund Scheme Kotak 30 Growth

Debt Fund Scheme Kotak Bond Short Term

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