icici mutual funds report

8/8/2019 Icici Mutual Funds Report

1/151

MUTUAL FUND : A STUDY OF INVESTORS PERCEPTION AND

DISTRIBUTORS EVALUATION OF MAJOR AMCs

AND THEIR SCHEMES

A project submitted for partial fulfillment of MBF Program,

IIF, Delhi

Submitted By

Shweta Trivedi


2/151

CERTIFICATE

I hereby declare that this project report titled Mutual Fund: A Study

of Investors Perception and Distributors Evaluations of major AMCs andtheir Schemes has been prepared by me during the year 2005 under the

valuable guidance and supervision ofMr. Shashank Bharadwaj, Manager,

Prudential ICICI, Lucknow and Mr. Prabhakar Yadav, Asst.Manager,

Prudential ICICI, Lucknow, as a partial fulfillment of the requirements for

the summer project.

I also declare that the project report is the result of my own sincereefforts and the information used is strictly confined for academic purposes.

Further, I would like to add that one copy of the report would be given to the

organization (Prudential ICICI) and two copies of the same would be

submitted to the institute.

Signature: ________________

Name: Shweta Trivedi

Enroll.No: 4104181181


3/151

PREFACE

As a part of MBF Program at IIF, Delhi, a student has to

undergo summer training and pursue a project duly approved by the director

of the institute. I had the privilege of doing my summer training at Prudential

ICICI AMC, Lucknow.

During my training, I received active exposure of functioning

of an AMC and had privilege of undertaking a project on Mutual Fund. My

project was to conduct a questionnaire-based survey for the company. For

this purpose, I constructed two questionnaires: One for distributors- the

purpose of this questionnaire was to study distributors evaluation of major

AMCs and their Mutual fund schemes. Second questionnaire was

constructed to study the investors perceptions of AMCs and their schemes.

Major objective of this project was to construct the

questionnaires and on the basis of the information acquired by administering

the questionnaires on distributors and investors to provide feedback to the

company so that the company may re-evaluate its functioning, services and

schemes accordingly.

The project is divided into following parts:

1. Chapter one of this study contains concept of mutual

fund, industry

background, company background, review of literature, and statement

of the problem.

2. Chapter two deals with objective of the study and

research

methodology.

3. Chapter three deals with analysis of the data andinterpretation.


4/151

4. Chapter four deals with summary of major findings,

discussion of

results, suggestions and limitations of the study.

ACKNOWLEDGEMENT

This is my opportunity to acknowledge the contributions of

individuals who helped me in various capacities. The project was to be

completed in a short duration of eight weeks, therefore it required hard work

and support from many individuals.

My gratitude to Prof.J.D.Agarwal (Chairman, IIF, Delhi), and Prof.

Aman Agarwal (Director, IIF, Delhi) for giving me an opportunity to study

at their esteemed institution and providing us state of the art facilities.My

special thanks to my learned teachers, Prof. N.R.Chatterjee, Ms.Yamini

Agarwal, Mr.Pushpender Singh Raghav, Prof.Amitabh Gupta and others

at IIF who gave me insight into the basics of finance during my first year inthe institute.

I am grateful to Prudential ICICI and its management for giving me

an opportunity to pursue my summer training at their Lucknow branch.

My sincere thanks to my project supervisor, Mr. Shashank

Bharadwaj (Manager, Prudential ICICI, Lucknow) and Mr. Prabhakar

Yadav (Asst. Manager, Prudential ICICI, Lucknow) for patiently helping

and guiding me during the entire training period.

It is also my pleasure to acknowledge the cooperation of mutual fund

distributors and investors who provided valuable information relevant to the

project.

I want to express my love and appreciation to my parents and my

sister, sakshi, who inspired and motivated me at every stage of the project.


5/151

Finally, I am thankful to everybody who directly or indirectly contributed to

my summer training and my project.

SHWETA TRIVEDI

IIF, Delhi.

CONTENTSCHAPTER- 1

INTRODUCTION

Industry background

Company Profile

Review of literature & statement of the problem

CHAPTER- 2

RESEARCH METHODOLOGY

Questionnaire Construction

Sampling

Data Collection

Analytical Tools

Operational Definitions

CHAPTER- 3

DATA & ANALYSIS

Distributors Data Analysis

Investors Data Analysis

CHAPTER- 4

Discussion

Suggestions

Limitations

QUESTIONNAIRES


6/151

APPENDIX

BIBLIOGRAPHY


7/151

CHAPTER- 1

INTRODUCTION

INDUSTRY BACKGROUND

Mutual Funds


8/151

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 isthen invested in capital market instruments such as shares, debentures and

other securities. The income earned through these investments and the

capital appreciations realized are shared by its unit holders in proportion to

the number of units owned by them. Thus a Mutual Fund is the most suitable

investment for the common man as it offers an opportunity to invest in a

diversified, professionally managed basket of securities at a relatively lowcost. The flow chart below describes broadly the working of a mutual fund:

Mutual Funds Industry in India:

The origin of mutual fund industry in India is with the introduction of

the concept of mutual fund by UTI in the year 1963. Though the growth was


9/151

slow, but it accelerated from the year 1987 when non-UTI players entered

the industry.

In the past decade, Indian mutual fund industry had seen dramatic

improvements, both quality wise as well as quantity wise. Before, the

monopoly of the market had seen an ending phase, the Assets under

Management (AUM) was Rs. 67bn. The private sector entry to the fund

family raised the AUM to Rs. 470 bn in March 1993 and till April 2004, it

reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into

comparison, the total of it is less than the deposits of SBI alone, constitute

less than 11% of the total deposits held by the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry

in India is new in the country. Large sections of Indian investors are yet to be

made aware of the concept. Hence, it is the prime responsibility of all mutual

fund companies, to market the product correctly abreast of selling.

The mutual fund industry can be broadly put into four phases

according to the development of the sector. Each phase is briefly described

as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of

Parliament. It was set up by the Reserve Bank of India and functioned under

the Regulatory and administrative control of the Reserve Bank of India. In1978, UTI was de-linked from the RBI and the Industrial Development Bank

of India (IDBI) took over the regulatory and administrative control in place

of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the

end of 1988, UTI had Rs.6,700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)


10/151

Entry of non-UTI mutual funds. SBI Mutual Fund was the first

followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual

Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90),

Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The

end of 1993 marked Rs.47,004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started

in the Indian mutual fund industry, giving the Indian investors a wider

choice of fund families. Also, 1993 was the year in which the first Mutual

Fund Regulations came into being, under which all mutual funds, except

UTI were to be registered and governed. The erstwhile Kothari Pioneer (now

merged with Franklin Templeton) was the first private sector mutual fund

registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by

a more comprehensive and revised Mutual Fund Regulations in 1996. The

industry now functions under the SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with

many foreign mutual funds setting up funds in India and also the industry

has witnessed several mergers and acquisitions. As at the end of January

2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores.

The Unit Trust of India with Rs.44,541 crores of assets under management

was way ahead of other mutual funds.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated

into two separate entities. One is the Specified Undertaking of the Unit Trust

of India with AUM of Rs.29,835 crores (as on January 2003). The Specified


11/151

Undertaking of Unit Trust of India, functioning under an administrator and

under the rules framed by Government of India and does not come under the

purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI,

PNB, BOB and LIC. It is registered with SEBI and functions under the

Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which

had in March 2000 more than Rs.76,000 crores of AUM and with the setting

up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations,

and with recent mergers taking place among different private sector funds,

the mutual fund industry has entered its current phase of consolidation and

growth. As at the end of September, 2004, there were 29 funds, which

manage assets of Rs.153108 crores under 421 schemes.

GROWTH IN ASSETS UNDER MANAGEMENT

Note:

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust ofIndia effective from February 2003. The Assets under management of the Specified Undertaking of the


12/151

Unit Trust of India has therefore been excluded from the total assets of the industry as a whole fromFebruary 2003 onwards.

Mutual Funds Organization

There are many entities involved and the diagram below

illustrates the organizational set up of a mutual fund:

Organization of a Mutual Fund

A mutual fund is set up in the form of a trust, which has sponsor,

trustees, Asset Management Company (AMC) and custodian. The trust is

established by a sponsor or more than one sponsor who is like promoter of a

company. The sponsor is required to contribute at least 40% of the minimum

net worth (Rs. 10 crore) of the asset management company. The trustees of

the mutual fund hold its property for the benefit of the unit holders. The

board of trustees manages the MF and the sponsor executes the trust deeds in

favor of the trustees. It is the job of the MF trustees to see that schemes


13/151

floated and managed by the AMC appointed by the trustees are in

accordance with the trust deed and SEBI guidelines.

Asset Management Company (AMC) approved by SEBI manages

the funds by making investments in various types of securities.

Custodian, who is registered with SEBI, holds the securities of

various schemes of the fund in its custody. The trustees are vested with the

general power of superintendence and direction over AMC. They monitor

the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of

trustee company or board of trustees must be independent i.e. they should

not be associated with the sponsors. Also, 50% of the directors of AMC must

be independent. All mutual funds are required to be registered with SEBI

before they launch any scheme.


14/151

Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needssuch as financial position, risk tolerance and return expectations etc. The

table below gives an overview into the existing types of schemes in the

Industry.

By Structure

1. Open - Ended Schemes

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.

These funds are sold at the NAV based prices, generally calculated on

every business day. These schemes have unlimited capitalization, open-

ended schemes do not have a fixed maturity - i.e. there is no cap on the

Sponsor Company(e.g. Prudential ICICI)

Managed by a board

of trustees

AMC(e.g. Pru ICICI AMC)

Establishes The Mutual Fund as a Trust.Registers The Mutual Fund with SEBI.

Provides the network for distribution of theschemes to the investor

Registrar

Custodian

Provides registrar and transfer services

Hold Unit-holders funds in MF.Enter into anagreement with SEBI & ensure compliance

Distributor

Provides custodial services.

Mutual Fund(e.g. Pru ICICI Mutual Fund

Float MF funds. Manage the fund as per SEBIGuidelines and AMC agreement


15/151

amount you can buy from the fund and the unit capital can keep growing.

These funds are not generally listed on any exchange.

Open-ended funds are bringing in a revival of the mutual fund

industry owing to increased liquidity, transparency and performance in the

new open-ended funds promoted by the private sector and foreign players.

Open-ended funds score over close-ended ones on several counts. Some of

these are listed below:

a) Any time exit option: The issuing company directly takes the

responsibility of providing an entry and an exit. This provides ready liquidity

to the investors and avoids reliance on transfer deeds, signature verifications

and bad deliveries.

b)Any time entry option: An open-ended fund allows one to enter the

fund at any time and even to invest at regular intervals (a systematic

investment plan).

c) Tax advantage

2. Close - Ended Schemes

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 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 optionof 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.
http://www.pruicici.com/pruicicin/htdocs/pruassist/risks.html#SIPhttp://www.pruicici.com/pruicicin/htdocs/pruassist/risks.html#SIPhttp://www.pruicici.com/pruicicin/htdocs/pruassist/risks.html#SIPhttp://www.pruicici.com/pruicicin/htdocs/pruassist/risks.html#SIP


16/151

By Investment Objective

1. Growth Schemes

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. Growth schemes are good for investors having a long-term outlook

seeking appreciation over a period of time.

These funds may invest in a broad range of industries or concentrate

on one or more industry sectors. Growth funds are suitable for investors who

can afford to assume the risk of potential loss in value of their investment in

the hope of achieving substantial and rapid gains.

They are not suitable for investors who must conserve their principal

or who must maximize current income.

2. Income Schemes

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 marketinstruments. 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.


17/151

Some fixed-income funds seek to minimize risk by investing

exclusively in securities whose timely payment of interest and principal is

backed by the full faith and credit of the Indian Government. Fixed-income

funds are suitable for investors who want to maximize current income and

who can assume a degree of capital risk in order to do so.

3. Balanced Schemes

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 less volatile compared to pure equity funds.

4. Money Market Schemes

For the cautious investor, these funds provide a very high stability of

principal while seeking a moderate to high current income. They invest in

highly liquid, virtually risk-free, short-term debt securities of agencies of the

Indian Government, banks and corporations and Treasury Bills. Because of

their short-term investments, money market mutual funds are able to keep a

virtually constant unit price; only the yield fluctuates.

Therefore, they are an attractive alternative to bank accounts. Withyields that are generally competitive with - and usually higher than -- yields

on bank savings account, they offer several advantages. Money can be

withdrawn any time without penalty. Although not insured, money market

funds invest only in highly liquid, short-term, top-rated money market

instruments.

Money market funds are suitable for investors who want high stability

of principal and current income with immediate liquidity.


18/151

Other Schemes

1. 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.

2. Gilt funds

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.

3. 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 investin the securities in the same weight age 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.

There are also exchange traded index funds launched by the mutual

funds which are traded on the stock exchanges.


19/151

4. Sector Specific 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 in these 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.

A summary is presented in the table below of the various funds and

their investment objectives.

Scheme type TimeHorizon

RiskProfile

Typical Investment Pattern

Objective Open Close Equity(%)

Debt(%)

Money MarketInst./Others

(%)

Money Market Yes No Short-Term Low 0 0-20 80-100

Income Yes Yes Medium-Long Term

Low toMedium

0 80-100 0-20

Growth Yes Yes Long Term High 80-100 0-20 0-20

Balanced Yes Yes Long term Medium

to high

0-60 0-40 0-20

Tax Saving Yes Yes Long term High 80-100 80-100 0-20

Additional Features of Mutual Funds Schemes:

1. Load or No-Load Fund


20/151

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 investment as 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.

Mutual funds cannot increase the load beyond the level mentioned in

the offer document. Any change in the load will be applicable only to

prospective investments and not to the original investments. In case of

imposition of fresh loads or increase in existing loads, the mutual funds are

required to amend their offer documents so that the new investors are aware

of loads at the time of investments.

2. Total Expenses that can be charged to the fund

Total expenses that can be charged to the fund (excluding entry andexit loads):

Equity Debt

On the first Rs. 100 cr. 2.50 % 2.25 %

On the next Rs. 300 cr. 2.25 % 2.00 %

On the next Rs.300 cr. 2.00 % 1.75 %

On the balance assets 1.75 % 1.50 %


21/151

- Based on average weekly net assets

Choosing a Fund:

The first step to investing in Mutual Fund is to define the objective of

investing. Investors should clearly lay down the purpose for which they

desire to invest. There are several schemes tailor made to meet certain

personal financial goals (children's education, marriage, retirement etc.)

which can be availed of. Investors should define the tenure of investment

and the risk appetite they have. Thereafter, they can select a fund type that

best meets their need i.e. income schemes, liquid schemes, tax saving

schemes, equity schemes etc. Given the plethora of fund options available to,

investors can then choose the particular fund that they are comfortable with.

People can choose the fund on various criteria but primarily

these can be the following:

The track record of performance of schemes over the last few

years managed by the fund

Quality of management and administration

Parentage of the Mutual Fund

Quality and adequacy of disclosures

Service levels

The price at which Investor can enter/exit (i.e. entry load / exit

load) the scheme and its impact on overall return

The market price of the units of the scheme (where available) to

see the discount/premium that the market assigns to the stated

NAV of the scheme

Independent rating of the schemes, if available

A person could be investing in a mutual fund either at the initial stage

when the mutual fund approaches the market through an offer document

route or at a subsequent stage.


22/151

If one chooses to invest at the initial stage, the offer document would

detail the schemes being offered and the manner of investing. The manner is

usually similar to that of investing any public issue of any security

(equity/debt).

If a person is planning to purchase the units subsequently, then the

following choices exist:

A close ended scheme. If the desired units are of a close-ended

scheme, then the investor would be able to purchase them at the stock

exchange where the MF has listed them. This purchase would resemble the

purchase of an equity share wherein the investor would pay the quoted price

of the unit as well as a brokerage for the purchase transaction. In the case of

a close ended scheme, the sale also is affected through the stock exchange

mechanism and resembles the sale of equity share. The pricing for the

transaction, as was mentioned earlier, is driven by the price the units quote.

This is driven by the NAV (Net Asset Value) of the scheme. The price,

however, may be either at a discount or premium to the NAV.

Purchasing a unit in a open-ended scheme is different as there is no

exchange where these units are traded. Their price reflects the NAV of the

scheme. The mutual fund in an open-ended scheme sells these units to the

investor at the NAV (plus a sale / entry load).

Selling units in an open-ended scheme is similar to the way they are

purchased. It is the mutual fund that buys back the units and at a price based

on the NAV. The actual price is the NAV less the exit load. The exit load issimilar in concept to the entry load.

The discussion on investment objectives would not be complete

without a discussion on the risks that investing in a mutual fund entails.

Types of Risks:


23/151

All investments involve some form of risk. Even an insured bank

account is subject to the possibility that inflation will rise faster than the

earnings, leaving a person with less real purchasing power than when he/she

started .

Following are some common types of risk

Market Risk :

At times the prices or yields of all the securities in a particular market

rise or fall due to broad outside influences. When this happens, the stock

prices of both an outstanding, highly profitable company and a fledgling

corporation may be affected. This change in price is due to "market risk".

Inflation Risk :

Sometimes referred to as "loss of purchasing power." Whenever

inflation sprints forward faster than the earnings on investment, there is a

risk that a person will actually be able to buy less, not more. Inflation risk

also occurs when prices rise faster than returns.

Credit Risk:

In short, how stable is the company or entity to which a person lends

his money when he invests? It refers to the degree of certainty that the

company will be able to pay the interest promised, or repay the principal

when the investment matures.

Interest Rate Risk :

Changing interest rates affect both equities and bonds in many ways.

Investors are reminded that "predicting" which way rates will go is rarely

successful. A diversified portfolio can help in offsetting these changes.

Exchange Rate Risk:

A number of companies generate revenues in foreign currencies and

may have investments or expenses also denominated in foreign currencies.

Changes in exchange rates may, therefore, have a positive or negative impact

on companies which in turn would have an effect on the investment of the

fund.


24/151

Investment Risk:

The sectoral fund schemes, investments will be predominantly in

equities of select companies in the particular sectors. Accordingly, the NAV

of the schemes are linked to the equity performance of such companies and

may be more volatile than a more diversified portfolio of equities.

Effect of loss of key professionals and inability to adapt :

An industries' key asset is often the personnel who run the business

i.e. intellectual properties of the key employees of the respective companies.

Given the ever-changing complexion of few industries and the high

obsolescence levels, availability of qualified, trained and motivated

personnel is very critical for the success of industries in few sectors. It is,

therefore, necessary to attract key personnel and also to retain them to meet

the changing environment and challenges, the sector offers.

Failure or inability to attract/retain such qualified key personnel may

impact the prospects of the companies in the particular sector in which the

fund invests.

Changes in the Government Policy:

Changes in Government policy especially in regard to the tax benefits

may impact the business prospects of the companies leading to an impact on

the investments made by the fund.

Managing Risk:

Mutual funds offer incredible flexibility in managing investment risk.

Diversification and Automatic Investing (SIP) are two key techniques

investors can use to reduce their investment risk considerably and reach their

long-term financial goals.

Diversification :

When an investor invests in one mutual fund, he instantly spreads his

risk over a number of different companies. He can also diversify over several


25/151

different kinds of securities by investing in different mutual funds, further

reducing his potential risk. Diversification is a basic risk management tool

that he will want to use throughout his lifetime as he rebalances his portfolio

to meet his changing needs and goals. Investors, who are willing to maintain

a mix of equity shares, bonds and money market securities, have a greater

chance of earning significantly higher returns over time than those who

invest in only the most conservative investments. Additionally, a diversified

approach to investing -- combining the growth potential of equities with the

higher income of bonds and the stability of money markets -- helps moderate

the risk and enhance the potential return.

Systematic Investment Plan (SIP):

The Unitholders of the Scheme can benefit by investing specific

Rupee amounts periodically, for a continuous period. Mutual fund SIP

allows the investors to invest a fixed amount of Rupees every month or

quarter for purchasing additional units of the Scheme at NAV based prices.

Here is an illustration using hypothetical figures indicating how the SIP can

work for investors:

Suppose an investor would like to invest Rs.1,000 under the Systematic

Investment Plan on a quarterly basis.

Amount Invested (Rs.) Purchase Price (Rs.) No. of Units

Purchased

Initial Investment 1000 10 100

1 1000 8.20 121.95

2 1000 7.40 135.14

3 1000 6.10 163.93

4 1000 5.40 185.19

5 1000 6.00 166.67

6 1000 8.20 121.95


26/151

7 1000 9.25 108.11

8 1000 10.00 100.00

9 1000 11.25 88.89

10 1000 13.40 74.63

11 1000 14.40 69.44

TOTAL 12,000 - 1,435.90

Average unit cost Rs 12,000/1,435.9 = Rs 8.36

Average unit price 109.6/12 = Rs 9.13

Unit price at beginning of next quarter Rs 14.90

Market value of investment 1435.9 * 14.90= Rs 21,395/-

The investor liquidates his units and gets back Rs 21,395/-

Using the SIP strategy the investor can reduce his average cost

per unit. The investor gets the advantage of getting more units when the

market is turned down.

Advantages of Mutual Funds

RISKS

Managing Risk

Govt. Policies

Investment

SIP

Diversification

Exchange Rate

Types of Risk

Market

Employees

Credit

Interest Rate

Inflation


27/151

The advantages of investing in a Mutual Fund are:

Diversification: The best mutual funds design their

portfolios so individual investments will react differently to the sameeconomic conditions. For example, economic conditions like a rise in

interest rates may cause certain securities in a diversified portfolio to

decrease in value. Other securities in the portfolio will respond to the

same economic conditions by increasing in value. When a portfolio is

balanced in this way, the value of the overall portfolio should gradually

increase over time, even if some securities lose value. Mutual fundsinvest 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.

Professional Management: Most mutual funds pay topflight

professionals to manage their investments. These managers decide what

securities the fund will buy and sell. Mutual funds hire full-time, high-

level investment professionals. Funds can afford to do so as they manage

large pools of money. The managers have real-time access to crucial

market information and are able to execute trades on the largest and most

cost-effective scale.

Regulatory oversight: Mutual funds are subject to many government

regulations that protect investors from fraud.

Liquidity:It's easy for investors to get their money out of a mutual fund.

Write a cheque, make a call, and you've got the cash. In open-ended

schemes, investor can get his money back promptly at net asset value

related prices from the mutual fund itself.


28/151

Convenience : An investor can usually buy mutual fund shares by mail,

phone, or over the Internet.

Low cost:Mutual fund expenses are often no more than 1.5 percent of

investment. Expenses for Index Funds are less than that, because index

funds are not actively managed. Instead, they automatically buy stock in

companies that are listed on a specific index. A mutual fund let's a person

participate in a diversified portfolio for as little as Rs.5,000/-, and

sometimes less. And with a no-load fund, one has to pay a little or no

sales charges to own them.

Transparency: Investors get regular information on the

value of their investments in addition to disclosure on the specific

investments made by the mutual fund scheme.

Flexibility: Investor owns just one security rather than many, yet enjoys

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 dividends on portfolio securities are received and investors

rights exercised. It also uses the services of a high quality custodian and

registrar in order to make sure that customers convenience remains at

the top of their mind.

Choice of schemes: There are a variety of ways in which Mutual Funds

are created, to cater to the varied risk and return requirements of

investor. Depending on the investment portfolio that is created, and the

segments of the various markets in which funds are invested, there is a

choice of funds to investors, such as Equity Funds, Debt Funds and

Hybrid Funds.

Well regulated : Mutual funds are well regulated and governed by

multiple agencies :

oMinistry of Finance/Company law board/ROC.

oSEBI


29/151

oRBI

oTrustees

oAuditors

oBoard of Directors

Personal Service: One call puts the investor in touch with a specialist

who can provide him/her with information he/she can use to make

his/her own investment choices. They will provide him/her personal

assistance in buying and selling his/her fund units, provide fund

information and answer questions about his/her account status.

Disadvantages of Mutual Funds:

Mutual funds have their drawbacks and may not be for everyone:

1. 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 whenthey 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.

2. No Tailor-made Portfolio : Mutual Fund portfolios are created and

marketed by AMCs, into which investors invest. Investors cannot create

tailor-made portfolios.

3. Taxes : During a typical year, most actively managed mutual funds sell

anywhere from 20 to 70 percent of the securities in their portfolios. If a fund

makes a profit on its sales, taxes are to be paid on the income received, even

if the money is re-invested.

4. Management risk : When a person invests in a mutual fund, he/she depends

on the fund's manager to make the right decisions regarding the fund's

portfolio. If the manager does not perform as well as hoped, investors might


30/151

not make as much money on their investment as they expected. Of course, if

they invest in Index Funds, they forego management risk, because these

funds do not employ managers.

5. No control over costs : Since investors do not directly monitor

the funds operations, they cannot control the costs effectively.

Regulators, therefore usually limit the expenses of mutual

funds.

Mutual Fund Companies in India:

The concept of mutual funds in India dates back to the year 1963. The

era between 1963 and 1987 marked the existence of only one mutual fund

company in India with Rs. 67bn assets under management (AUM), by the

end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s

decade, few other mutual fund companies in India took their position in

mutual fund market.

The new entries of mutual fund companies in India were SBI Mutual

Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, IndianBank Mutual Fund, Bank of India Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund

industry. 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 the

same year the first Mutual Fund Regulations came into existence with re-

registering all mutual funds except UTI. The regulations were further given a

revised shape in 1996.

Kothari Pioneer was the first private sector mutual fund company in

India which has now merged with Franklin Templeton. Just after ten years

with private sector players penetration, the total assets rose up to Rs. 1218.05

bn. Today there are 33 mutual fund companies in India.

Major Mutual Fund Companies in India:


31/151

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 A G is the custodian of ABN

AMRO Mutual Fund.

Prudential ICICI Mutual Fund :

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

America, 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 sponsorers, 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.

Birla Sunlife Mutual Fund :

Birla 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.

Bank of Baroda Mutual Fund :

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup

on October 30, 1992 under the sponsorship of Bank of Baroda. BOB

Asset Management Company Limited is the AMC of BOB Mutual


32/151

Fund and was incorporated on November 5, 1992. Deutsche Bank AG

is the custodian.

HDFC Mutual Fund:

HDFC Mutual Fund was setup on June 30, 2000 with two

sponsors namely Housing Development Finance Corporation Limited

and Standard Life Investments Limited.

HSBC Mutual Fund:

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

Securities and Capital Markets (India) Private Limited as the sponsor. Board

of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC

Mutual Fund.

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 and ING. The

AMC, ING Investment Management (India) Pvt. Ltd. was incorporated on

April 6, 1998.

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.

State bank Of India Mutual Fund:


33/151

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.

Tata Mutual Fund :

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

The sponsorers for Tata Mutual Fund are Tata Sons Ltd., and Tata

Investment Corporation Ltd. The investment manager is Tata Asset

Management Limited and its Tata Trustee Company Pvt. Limited. Tata

Asset Management Limited is one of the fastest in the country with more

than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund :

Kotak Mahindra Asset Management Company (KMAMC) is a

subsidiary of KMBL. It is presently having more than 1,99,818 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.

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 Crore. The sponsorers of UTI Mutual


34/151

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.

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.

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.

Franklin Templeton 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 Tax Saving schemes, Open end Income and Liquid


35/151

schemes, Closed end Income schemes and Open end Fund of Funds

schemes to offer.

Morgan Stanley Mutual Fund :

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 products to 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). This is the first close end

diversified equity scheme serving the needs of Indian retail investors

focusing on a long-term capital appreciation.

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 Trust Limited. Its AMC was incorporated on December 1, 1995

with the name Escorts Asset Management Limited.

Alliance capital mutual Fund:Alliance Capital Mutual Fund was setup on December 30, 1994

with Alliance Capital Management Corp. of Delaware (USA) as sponsorer.

The Trustee is ACAM Trust Company Pvt. Ltd. and AMC, the Alliance

Capital Asset Management India (Pvt) Ltd. with the corporate office in

Mumbai.

Benchmark Mutual Fund :


36/151

Benchmark Mutual Fund was setup on June 12, 2001 with Niche

Financial Services Pvt. Ltd. as the sponsorer and Benchmark Trustee

Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16,

2000 and headquartered in Mumbai, Benchmark Asset Management

Company Pvt. Ltd. is the AMC.

Canbank Mutual Fund :

Canbank Mutual Fund was setup on December 19, 1987 with

Canara Bank acting as the sponsor. Canbank Investment Management

Services Ltd. incorporated on March 2, 1993 is the AMC. The Corporate

Office of the AMC is in Mumbai.

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.

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 for LIC Mutual Fund.

GIC Mutual Fund :

GIC Mutual Fund, sponsored by General Insurance Corporation

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


37/151

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.

Association of Mutual Funds in India (AMFI):

With the increase in mutual fund players in India, a need for mutual

fund association in India was generated to function as a non-profit

organization. Association of Mutual Funds in India (AMFI) was

incorporated on 22nd August, 1995.

AMFI is an apex body of all Asset Management Companies (AMC)

which has been registered with SEBI. Till date, all the AMCs are that have

launched mutual fund schemes are its members. It functions under the

supervision and guidelines of its Board of Directors.

Association of Mutual Funds India has brought down the Indian

Mutual Fund Industry to a professional and healthy market with ethical lines

enhancing and maintaining standards. It follows the principle of both

protecting and promoting the interests of mutual funds as well as their unit

holders.

The objectives of Association of Mutual Funds in India:

The Association of Mutual Funds of India works with 30 registered AMCs

of the country. It has certain defined objectives which juxtaposes the

guidelines of its Board of Directors. The objectives are as follows:


38/151

This mutual fund association of India maintains high

professional and ethical standards in all areas of operation of the

industry.

It also recommends and promotes the top class business

practices and code of conduct which is followed by members and related

people engaged in the activities of mutual fund and asset management.

The agencies who are by any means connected or involved in the field of

capital markets and financial services also involved in this code of

conduct of the association.

AMFI interacts with SEBI and works according to SEBIs

guidelines in the mutual fund industry.

Association of Mutual Fund of India represents the

Government of India, the Reserve Bank of India and other related bodies

on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent

distributors. It implements a program of training and certification for all

intermediaries and other engaged in the mutual fund industry.

AMFI undertakes all India awareness programs for investors

in order to promote proper understanding of the concept and working of

mutual funds.

At last but not the least association of mutual fund of India

also disseminate information on Mutual Fund Industry and undertakes

studies and research either directly or in association with other bodies.

The sponsorers of Association of Mutual Funds in India:

Bank Sponsored:

SBI Fund Management Ltd.

BOB Asset Management Co. Ltd.


39/151

Canbank Investment Management Services Ltd.

UTI Asset Management Company Pvt. Ltd.

Institutions

GIC Asset Management Co. Ltd.

Jeevan Bima Sahayog Asset Management Co.

Ltd.

Private Sector

Indian:-

BenchMark Asset Management Co. Pvt. Ltd.

Cholamandalam Asset Management Co. Ltd.

Credit Capital Asset Management Co. Ltd.

Escorts Asset Management Ltd.

JM Financial Mutual Fund

Kotak Mahindra Asset Management Co. Ltd.

Reliance Capital Asset Management Ltd.

Sahara Asset Management Co. Pvt. Ltd

Sundaram Asset Management Company Ltd.

Tata Asset Management Private Ltd.

Predominantly India Joint Ventures:-

Birla Sun Life Asset Management Co. Ltd.

DSP Merrill Lynch Fund Managers Limited

HDFC Asset Management Company Ltd.

Predominantly Foreign Joint Ventures:-

ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd.

Fidelity Fund Management Private Limited

Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.


40/151

HSBC Asset Management (India) Private Ltd.

ING Investment Management (India) Pvt. Ltd.

Morgan Stanley Investment Management Pvt. Ltd.

Principal Asset Management Co. Pvt. Ltd.

Prudential ICICI Asset Management Co. Ltd.

Standard Chartered Asset Mgmt Co. Pvt. Ltd.

Association of Mutual Funds in India Publications:

AMFI publishes mainly two types of bulletin. One is on the monthly

basis and the other is quarterly. These publications are of great support

for the investors to get intimation of the know-how of their parked

money.

Asset Management Company and its obligations :

(1) The asset management company shall take all reasonable stepsand exercise due diligence to ensure that the investment of funds pertaining

to any scheme is not contrary to the provisions of these regulations and the

trust deed.

(2) The asset management company shall exercise due diligence and

care in all its investment decisions as would be exercised by other persons

engaged in the same business.

(3) The asset management company shall be responsible for the acts of

commissions or omissions by its employees or the persons whose services

have been procured by the asset management company.

(4) The asset management company shall submit to the trustees

quarterly reports of each year on its activities and the compliance with these

regulations.


41/151

(5) The trustees at the request of the asset management company may

terminate the assignment of the asset management company at any time:

Provided that such termination shall become effective only after the

trustees have accepted the termination of assignment and communicated

their decision in writing to the asset management company.

(6) Notwithstanding anything contained in any contract or agreement

or termination, the asset management company or its directors or other

officers shall not be absolved of liability to the mutual fund for their acts of

commission or omissions, while holding such position or office.

(7) An asset management company shall not through any broker

associated with the sponsor, purchase or sell securities, which is average of

5% or more of the aggregate purchases and sale of securities made by the

mutual fund in all its schemes.

(8) An asset management company shall not utilize the services of the

sponsor or any of its associates, employees or their relatives, for the purpose

of any securities transaction and distribution and sale of securities:

Provided that an asset management company may utilize such services

if disclosure to that effect is made to the unit holders and the brokerage or

commission paid is also disclosed in the half yearly annual accounts of the

mutual fund.

(9) The asset management company shall file with the trustees the

details of transactions in securities by the key personnel of the asset

management company in their own name or on behalf of the assetmanagement company and shall also report to the Board, as and when

required by the Board.

(10) In case the asset management company enters into any securities

transactions with any of its associates a report to that effect shall be sent to

the trustees.

(11) In case any company has invested more than 5 per cent of the net

asset value of a scheme, the investment made by that scheme or by any other


42/151

scheme of the same mutual fund in that company or its subsidiaries shall be

brought to the notice of the trustees by the asset management company and

be disclosed in the half yearly and annual accounts of the respective schemes

with justification for such investment

(12) The asset management company shall file with the trustees and

the Board

(a) Detailed bio-data of all its directors along with their interest

in other companies within fifteen days of their appointment;

and

(b) any change in the interests of directors every six months.

(c) a quarterly report to the trustees giving details and adequate

justification about the purchase and sale of the securities of

the group companies of the sponsor or the asset management

company as the case may be, by the mutual fund during the

said quarter.

(13) Each director of the Asset Management Company shall file the

details of his transactions of dealing in securities with the trustees on a

quarterly basis.

(14) The asset management company shall not appoint any person as

key personnel who has been found guilty of any economic offence or

involved in violation of securities laws.

(15) The asset management company shall appoint registrars and share

transfer agents who are registered with the SEBI.(16) The asset management company shall abide by the Code of

Conduct as specified in the Fifth Schedule.

Performance of Mutual Funds in India:


43/151

The concept of mutual fund took birth in India. The year was 1963.

Unit Trust of India invited investors or rather to those who believed in

savings, to park their money in UTI Mutual Fund.

For 30 years it goaled without a single second player. Though the

1988 year saw some new mutual fund companies, but UTI remained in a

monopoly position.

The performance of mutual funds in India in the initial phase was not

even closer to satisfactory level. People rarely understood, and of course

investing was out of question. But yes, some 24 million shareholders was

accustomed with guaranteed high returns by the beginning of liberalization

of the industry in 1992. This good record of UTI became marketing tool for

new entrants. The expectations of investors touched the sky in profitability

factor. However, people were miles away from the preparedness of risks

factor after the liberalization.

The Assets under Management of UTI was Rs. 67bn. by the end of

1987. Let us concentrate about the performance of mutual funds in India

through figures. From Rs. 67bn. the Assets under Management rose to Rs.

470 bn. in March 1993 and the figure had a three times higher performance

by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when

stock prices started falling in the year 1992. Those days, the market

regulations did not allow portfolio shifts into alternative investments. There

were rather no choices apart from holding the cash or to further continueinvesting in shares. One more thing to be noted, since only closed-end funds

were floated in the market, the investors disinvested by selling at a loss in

the secondary market.

The performance of mutual funds in India suffered qualitatively. The

1992 stock market scandal, the losses by disinvestments and of course the

lack of transparent rules in the whereabouts rocked confidence among the

investors. Partly owing to a relatively weak stock market performance,


44/151

mutual funds have not yet recovered, with funds trading at an average

discount of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a

transparent and competitive environment in mutual funds. Some of them

were like relaxing investment restrictions into the market, introduction of

open-ended funds, and paving the gateway for mutual funds to launch

pension schemes.

The measure was taken to make mutual funds the key instrument for

long-term saving. The more the variety offered, the quantitative will be

investors.

At last to mention, as long as mutual fund companies are performing

with lower risks and higher profitability within a short span of time, more

and more people will be inclined to invest until and unless they are fully

educated with the dos and donts of mutual funds.

Mutual Fund Industry Data:

(Refer to Appendix A)

Future of Mutual Funds in India:

By December 2004, Indian mutual fund industry reached Rs 1,50,537

crore. It is estimated that by 2010 March-end, the total assets of all

scheduled commercial banks should be Rs 40,90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest

of the decade. In the last 5 years we have seen annual growth rate of 9%.

According to the current growth rate, by year 2010, mutual fund assets will

be double.

Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)

Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03Mar-04

Sep-04 4-Dec


45/151

Deposits 605410 851593 989141 1131188 1280853 - 1567251 1622579

Change in % over lastyr

15 14 13 12 - 18 3

Source - RBI

Mutual Fund AUMs Growth

Month/Year Mar-98 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Sep-04 4-Dec

MF AUM's 68984 93717 83131 94017 75306 137626 151141 149300

Change in % over last yr 26 13 12 25 45 9 1

Source - AMFI

Some facts about the growth of mutual funds in India:

100% growth in the last 6 years.

Numbers of foreign AMCs are in the queue to enter the Indian

markets like Fidelity Investments, US based, with over

US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only

channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds, which are much less

than US having more than 800. There is a big scope for

expansion.

'B' and 'C' class cities are growing rapidly. Today most of the

mutual funds are concentrating on the 'A' class cities. Soon they

will find scope in the growing cities.

Mutual fund can penetrate rural areas like the Indian insurance

industry with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds.

Emphasis on better corporate governance.

Trying to curb the late trading practices.

Introduction of Financial Planners who can provide need based

advice.


46/151

COMPANY PROFILE


47/151


48/151

The AMC has already launched a range of products to suit different risk and

maturity profiles.

Prudential ICICI Asset Management Company Limited has a networth

of about Rs. 80.14 crore as of March 31, 2004. Both Prudential and ICICI

Bank Ltd have a strategic long-term commitment to the rapidly expanding

financial services sector in India.

Guiding principles of the company:

Pru ICICI conducts its business with :

Honesty and trustworthiness in all interactions.

A pioneering spirit and excellence in action.

Collaboration and teamwork.

An understanding of customer needs and the desire to satisfy

them.

The highest service standards.

A consistently above average performance.

Sponsors

Prudential plc (formerly known as Prudential Corporation plc)

Founded in 1848, Prudential plc is the largest life insurance

company in the United Kingdom (Source: Standard & Poors UK LifeFinancial Strength Digest 1998) and one of the leading life insurance

companies in the world. Prudential is a global player in the medium to long-

term savings market and has a presence in over 10 countries. Prudential is no

stranger to Asia. It has over 70 years of experience in the region and has

operations in Singapore, Hong Kong, Malaysia, Indonesia, Thailand,

Taiwan, Vietnam and Philippines. Recently, it has received permission to

start life insurance operations in China.


49/151

Prudential manages the savings of over 10 million investors

worldwide and its products cater to the diverse risk profiles and needs of a

cross section of investors. Prudential has significant experience in product

development, distribution through varied and multiple channels, and

investment management of a diverse portfolio of assets including equity,

fixed income, real estate and other investments. Its equity holdings in the UK

account for 4% (as of April 1998) of the market capitalization of the London

Stock Exchange. Prudential as of November 30, 1999 had over US$ 250

billion (Rs.10,90,500 crores) of assets under management.

ICICI Limited (formerly, The Industrial Credit and Investment

Corporation of India Limited) (ICICI)

ICICI is a diversified term lending institution founded on January 5,

1955 through the initiative of the Government of India, World Bank and

representatives of Indian industry. The principal business of ICICI is to

provide industry with medium to long term project finance, leasing and other

financial services. Since inception, ICICI has financed all major sectors of

the economy, covering 6811 companies and 16,632 projects. As of

December 31, 1999 it has disbursed a total of over Rs.106,504.32 crores

since inception. Over the years, ICICI has developed an expertise in

appraising and monitoring projects across the cross section of industry.

ICICI has a consistent track record of profitable operations.

The Trustee Company

Prudential ICICI Trust Limited

Prudential ICICI Trust Limited (The Trustee), a company incorporated

under the Companies Act, 1956 is the Trustee to the Fund vide Trust Deed

dated August 25, 1993 as amended from time to time. Prudential plc,

through its wholly owned subsidiary, Prudential Corporation Holdings


50/151

Limited, U.K. holds 55% of the shares of the Trustee and ICICI holds the

balance 45%.

Directors of the trustee company:

Mr. Vishnu Bhagwandas Haribhakti

Mr. Eruch B Desai

Mr.D.J.Balaji Rao

Mr.Nagesh D.Pinge

Mr. Sham P Subhedar

Mr.M.S.Parthasarathy

Management of the AMC

Prudential ICICI Asset Management Company Limited (AMC)

(formerly known as ICICI Asset Management Company Limited), has been

appointed as the Asset Management Company of Prudential ICICI Mutual

Fund vide Investment Management Agreement dated September 3, 1993.

The aggregate assets under management by the AMC are over Rs.15,298.28

crores as on March 31, 2005.

Management team:

1. Mr. Pankaj RazdanManaging Director

2. Mr. Nilesh ShahChief Investment Officer

3. Mr. Vasant Sanzgiri

Sr. Vice-President & Head Human Resources

4. Mr.Kalyan PrasadVice-President, Information Technology

5. Mr. Ranganath AthreyaSr. Vice-President-Legal, Compliance and C.S.


51/151

Board of Directors:

The Prudential ICICI AMC Board comprises reputed people from the

finance industry both from India and abroad.

Mr. Mark Norbom

Mr.Ajay Srinivasan

Ms. Shikha Sharma

Mr. N.S.Kannan

Mr. K.S. Mehta

Mr. Dadi Engineer

Mr. B.R.Gupta

Mr. Pradip P. Shah

Dr.(Mrs.) Swati A. Piramal

Mr.Pankaj Razdan

Auditors

N. M. Raiji & Co., Chartered Accountants, Mumbai have been

appointed as Auditors of the Scheme by the Trustee.

RegistrarComputer Age Management Services (P) Limited (CAMS), Rayala

Towers, 1st Floor, No. 781 - 785, Anna Salai, Chennai 600 002 are the

Registrar for the Scheme. The Registrar is registered with SEBI. As

Registrars to the Scheme, CAMS handles communications with investors,

performs data entry services and dispatches Account Statements. The AMC

and the Trustee have satisfied themselves that the Registrar can provide theservices required and has adequate facilities and the system capabilities.


52/151

Custodian

HDFC Bank is the custodian for the Scheme. The Custodian has been

registered with SEBI The Custodian is responsible for safe custody of the

securities and carrying out activities related to corporate actions. The

Custodian is also entitled to remuneration for its services in accordance with

the terms of the Custodian Agreement.

Funds offered by the company

Equity Funds: The funds offered under this category are:

1.Prudential ICICI Growth Plan

2.Prudential ICICI FMCG Fund3.Prudential ICICI Technology Fund

4.Prudential ICICI Tax Plan

5.Prudential ICICI Index Fund

6.Prudential ICICI Power

7.Prudential ICICI Dynamic Plan

8.Prudential ICICI Discovery Plan

9.Prudential ICICI Emerging S.T.A.R. Fund.

Debt Funds: The funds offered under this category are

1. Prudential ICICI Income Plan

2. Prudential ICICI Gilt-Treasury Fund

3. Prudential ICICI Gilt-Investment Fund4. Prudential ICICI Liquid plan


53/151

5. Prudential ICICI Fixed Maturity Plan

6. Prudential ICICI Short Term Plan

7. Prudential ICICI Long Term Plan

8. Prudential ICICI Sweep Plan

9. Prudential ICICI Income Multiplier Fund

10. Prudential ICICI Monthly Income Plan

11. Prudential ICICI Flexible Income Plan

12. Prudential ICICI Gilt Fund PF Option

13. Prudential ICICI Long Term Floating Rate Plan

14. Prudential ICICI Floating Rate Plan.

Balanced Funds: The funds offered under this category are

1. Prudential ICICI Balanced Fund

2. Prudential ICICI Child Care Plan.

SPIcE Fund: (Sensex Prudential ICICI Exchange Traded Fund)

Prudential ICICI Mutual Fund, country's largest private sector

mutual fund, has launched its first Exchange Traded Fund (ETF) on

the country's benchmark Index- SENSEX christened SPIcE

(SENSEX Prudential ICICI Exchange Traded Fund). SPIcE is a

passive investment tool tracking the SENSEX.

An ETF is a hybrid product having features of both an open-

ended mutual fund and an exchange listed security. The price of one

SPIcE unit will be equal to approximately 1/100th of SENSEX value.

For example, if the current SENSEX is at 3300, one SPIcE unit will

trade at around Rs. 33. The scheme is to be managed by Prudential

ICICI AMC Ltd. and listed on both The Stock Exchange, Mumbai

(BSE) and The Delhi Stock Exchange (DSE).


54/151

One unique feature of SPIcE is that it can be bought and sold

like any other equity share on Stock Exchange through a stockbroker.

The minimum lot size is one unit of SPIcE. Effectively, a retail

investor can buy one SPIcE unit for around Rs. 33 (in the above

example assuming SENSEX is at 3300) and hold it in his Demat

account just like any other security.

SPIcE is the country's first Exchange Traded Fund on

SENSEX. Globally, there are 279 ETFs listed and traded across the

world with assets under management of US$ 120 billion. In US, the

major ETFs include SPDRs (linked to S&P 500 Index), QQQs

(linked to Nasdaq-100 Index) and Diamonds (linked to DJIA). More

than 60% of trading volume on American Stock Exchange (AMEX)

is in ETFs.

Specifications of Prudential ICICI Mutual Fund

Prudential ICICI Asset Management Company Limited, the

Investment Manager to the Prudential ICICI Mutual Fund, manages assets

over Rs.15,298.28 crores as of March,2005.

It is the second largest asset management company in the private

sector in the country. Being open-ended Schemes, Units may be purchased

or redeemed on every Business Day at NAV based prices. The Fund , under

normal circumstances, endeavors to dispatch redemption cheques within 3

Business Days for Growth Plan, Income Plan, FMCG Fund, Technology

Fund and Balanced Fund, 2 Business Days for Gilt Fund and 1 Business Day

for Liquid Plan.

Under the Flexible Lifetime Investment Program, investors may

choose to alter the allocation of their investment among the schemes in order

to meet their changing circumstances during their lifetime.


55/151

The investors under the Schemes can choose between a Growth

Option and a Dividend Option. Dividend Reinvestment facility is also

available.

The following Tax benefits are available under the prevailing tax

laws and subject to change thereto:

As per the provisions of Section 10(33) of the Income-tax Act, 1961,

dividend distributions by the Fund will be tax exempt in the hands of

Unitholders.

For equity oriented scheme, as per the provisions of Section 115 R of

Income-tax Act, 1961, the Fund will not pay, for a period of three years

commencing from the Assessment Year 2000-2001, tax on the dividends

distributed by it.

For debt oriented schemes the Fund will pay a dividend tax as per the

provisions of Income-tax Act, 1961. Tax benefits are available for

investments made under Sections 54 EA and 54 EB of the Income-tax Act,

1961.

There will be no tax deduction at source (TDS) on redemptions

(irrespective of the amount redeemed) for Unitholders resident in India.

Investments in the Scheme will be exempt from Wealth Tax. For gift of

units, Gift Tax will not be payable either by the donor or the donee. Investors

who redeem units held for more than 12 months will get benefit of long term

capital gains tax and resident investors will get the benefit of indexation.

Who can Invest?

The following persons are eligible and may apply for subscription to

the Units of the Scheme (subject, wherever relevant, to purchase of units of

Mutual Funds being permitted under respective constitutions and relevant

statutory regulations):

Resident adult individuals either singly or jointly (not exceeding three)

Minor through parent/lawful guardian


56/151

Companies, Bodies Corporate, Public Sector Undertakings,

association of persons or bodies of individuals and societies registered

under the Societies Registration Act, 1860 (so long as the purchase of

units is permitted under the respective constitutions)

Religious and Charitable Trusts under the provisions of 11(5)(xii) of

Income-tax Act, 1961 read with Rule 17C of Income-Tax Rules, 1962

Partnership Firms

Karta of Hindu Undivided Family (HUF)

Banks & Financial Institutions

Non-resident Indians/Persons of Indian origin residing abroad (NRIs)

on full repatriation basis or on non-repatriation basis (Except in the

Tax Plan)

Overseas Corporate Bodies, firms and societies which are held

directly or indirectly but ultimately to the extent of at least 60% by

NRIs and trusts in which at least 60% of the beneficial interest is

similarly held irrevocably by such persons (OCBs), on full repatriation

basis.

Foreign Institutional Investors (FIIs) registered with SEBI on full

repatriation basis (Except in the Tax Plan)

Army, Air Force, Navy and other para-military funds

Scientific and Industrial Research Organizations

Mutual fund schemes

Investments made in Tax Plan by Resident Adult Individuals and Kartas ofHindu Undivided Families only will qualify for Tax Benefits under Section

88.

How to apply ?

Application Forms are available with Customer Service Centers, at the

corporate office of the AMC and the office of the Registrar. Applications


57/151

complete in all respects, may be submitted at the Customer Service Centers

or may be sent by mail to the Registrar, Computer Age Management

Services Pvt. Ltd., Rayala Towers, 1st Floor, No. 781 - 785, Anna Salai,

Chennai 600002. The Trustee shall have absolute discretion to accept/reject

any application for purchase of Units, if in the opinion of the Trustee,

increasing the size of Schemes Unit capital is not in the general interest of

the Unitholders, or the Trustee for any other reason believes it would be in

the best interest of the Schemes or its Unitholders to accept/reject such an

application.

Redemption of Units

The Units can be redeemed (i.e., sold back to the Fund), at the Applicable

NAV. A Unitholder may request redemption of a specified amount or a

specified number of Units, (subject to the minimum redemption amount).

Unitholders may also request for redemption of their entire holding and close

the account. The 54EA and 54EB Investment Plans will have to be locked-in

for a period of 3 years and 7 years, respectively and the Units so allotted

cannot be redeemed during the specified lock-in period.

Applicable NAV

Applicable NAV is the Net Asset Value per Unit at the close of the Business

Day on which the application is accepted. An application will be consideredaccepted on that day, subject to it being complete in all respects and received

prior to the cutoff time on that Business Day.

Net Asset Value

NAV of Units under the Scheme shall be calculated as shown below :


58/151

NAV = Market Value of Schemes investments Liabilities

No. of Funds Units Outstanding

The NAV of the Scheme is calculated at the close of every Business Day.

The valuation of the Schemes assets and calculation of the Schemes NAV

are subject to audit on an annual basis and such regulations as may be

prescribed by SEBI from time to time.

Unit Holders Services and Rights

Investor Friendly Services:

In order to provide efficient service the Fund endeavors to continuously

establish and upgrade systems to handle transactions efficiently and resolve

any investor grievances promptly.

Problem Resolution

The Fund is constantly in touch with Customer Service Centre and Registrar

for complaints and enquiries received from investors with an endeavor to

resolve them promptly.


59/151

REVIEW OF

LITERATURE


60/151

In order to accelerate economic development, it isnecessary to not only increase the rate of savings but also to hold them in

appropriate form. If savings are held in the form of currency or used mainly

to buy non-productive physical assets such as gold and non-agricultural land

etc., either they would remain idle or they would be used unproductively or

be wasted. The financialization of savings i.e. savings in the form of

financial assets other than currency is therefore one of the requirements forfaster economic growth. Although financialization of savings has taken place

in urban India to a large extent but it has yet to happen in rural India.

The household sector has been the only surplus sector in India but

they have played a minor role, while private corporate and public sectors

have generally played a dominant role in the accumulation of national

surplus.

In a country like India where individual savers are widely dispersed in

rural areas, which lack quicker means of communication, equities have

remained unimportant, while there is an increasing trend of indirect

ownership of direct securities. While the number of shareholders has

increased about four times from 1980 to 2000, numbers of Mutual Fund

holders have increased by more than fifty times.

Mutual Fund industry in India has achieved a remarkable expansion

during last two decades. However, there are certain weaknesses from which

Mutual Fund industry suffers. There are many areas to which serious

attention ought to be devoted with a view of improving the functioning of

Indian financial system in general and Mutual Fund industry in particular.

More and more people are trying to make quick money through

middlemans margin, commissions, consultancy fee and so on. Of late, an


61/151

indiscriminate growth of financial services industry has taken place in India.

But the investors feel cheated in respect of the risk, return and liquidity of

their investments. For instance:

The liquidity of financial assets for small investors is low.

The risk of investments is high due to dishonest practices, scams and

frauds committed and unethical investment culture in India.

There has been a mushroom growth of Mutual Funds and their

schemes. The ordinary investor is likely to get bewildered or lost in

too many products. It also acts as a drag on the administrative

resources of the Mutual Fund industry.

The activities of the Mutual Funds have significantly diversified

the portfolio of financial asset. However too many schemes, too much

competition, unaccountability, unsound documentation and so on

characterize many of them.

On the whole, there is a tremendous scope for improving the

operational, functional and allocational efficiency of the Mutual Fund

industry in India.

Investors needs, expectations and perceptions have changed in

recent times. Only those Mutual Funds that deliver what investors want in

terms of quality, returns, service and costs will prosper in todays highly

competitive environment. This continues to be an age of total quality

management (TQM), management dedicated to ensuring that an organization

and all of its members are committed to high quality, continuous

improvements and customer satisfaction. Quality in this sense means that

investors needs, expectations and perceptions are met. This requires

continuous improvement of products and services. Anything and everything

done and policy decisions taken should be continuously evaluated and

reformulated on the basis regular feedback from managers, distributors,

agents and investors.


62/151

Consistent with this approach is creation of investor

driven Mutual Fund organizations that are dedicated to quality and service.

This notion can be expressed in

icici mutual funds report

Documents