wealth management
TRANSCRIPT
Rizvi Academy of Management
A
Project report
On
(Wealth Management
(Mutual Fund) )
In partial fulfillment of the requirements of
the Summer Internship of
Post Graduate Diploma in Business Management
Through
Rizvi Academy of Management
under the guidance of
(Prof. Jitin Gulati)
Submitted by
(Shah Bhavin k..)
PGDBM
Batch: 2010 – 2012.
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CERTIFICATE
This is to certify that Mr. Bhavin Shah k., a student of Rizvi Academy of Management, of
PGDBM III bearing Roll No. 13 and specializing in Finance has successfully completed the
project titled.
“To study Mutual Fund Industry under Wealth Management “
under the guidance of Prof. Jitin Gulati in partial fulfillment of the requirement of Post
Graduate Diploma in Business Management by Rizvi Academy of Management for the
academic year 2010 – 2012.
_______________
Prof. Jitin Gulati
Project Guide
______________ _______________
Prof. Umar Farooq Dr. Kalim Khan
Academic Coordinator Director
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CHAPTER No. PARTICULAR PAGE
No.
1 WHAT IS WEALTH MANAGEMENT 5
2 STEPS IN WEALTH MANAGEMENT 6
3 COMPARISION OF INVESTMENT IN USA & INDIA 7
4 WHAT IS MUTUAL FUND 8
5 ADVANTAGE & DISADVANTAGE OF MUTUAL FUND 10
6 TYPES OF MUTUAL FUND 15
7 DEBT FUND 29
8 ELSS & OTHER TYPES OF MUTUAL FUND 31
9 TAX PROVISION FOR MF IN EQUITY 39
10 TAX PROVISION FOR MF IN DEBT 40
11 COMPARISION OF TOP 2 MF SCHEMES 41
12 COMPOUNDING INTEREST 51
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EXECUTIVE SUMMARY
The project undertaken is based on the study of Mutual Fund & to understand mutual fund
industry very well in Wealth Management
The Wealth Management System (WMS) is comprised of an Asset Allocation Model (AAM)
implemented using a variety of tax advantaged wealth management vehicles. It's objectives
are to Keep more and Protect what you keep. It is supported by The Wealth Management
Group (WMG) forum and a very experienced (over 100+ total years) group of Wealth
Management Consultants.
A mutual fund raises money from investors to invest in stocks, bonds and other securities. It
is a package made up of several individual investments. When those investments gain or lose
value, you gain or lose as well. When they pay dividends, you get a share of them. Mutual
funds also offer professional management and diversification. They do much of your
investing work for you.
The data used in this project has been collected from websites based on related topics in mutual fund. The information displayed may be limited, as each and every aspect related with the project that is provided by the available sources might not be complete in all respects.
Chapter 1
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WEALTH MANAGEMENT BACKGROUND
Wealth management is investment advisory discipline that incorporates financial
planning, investment portfolio management and a number of aggregated financial
services. High Net Worth Individuals (HNWIs), small business owners and families who
desire the assistance of a credentialed financial advisory specialist call upon wealth managers
to coordinate retail banking, estate planning, legal resources, tax professionals and investment
management. Wealth managers can be an independent Certified Financial Planner, MBAs, ,
CFA Charter holders or any credentialed professional money manager who works to enhance
the income, growth and tax favored treatment of long-term investors. Wealth management is
often referred to as a high-level form of private banking for the especially affluent. It must
already have accumulated a significant amount of wealth for wealth management strategies to
be effective.
Chapter 2
STEPS IN WEALTH MANAGEMENTS
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1- Recognize the need for wealth management planning
2- Identify the components of a successful wealth management plan
3- Select your wealth management team and define each member’s role
4- Adhere to well-established , scientific , and appropriate investment principles
5- Establish the legal foundation to execute one’s wishes to provide the maximum possible
Benefits to the heirs through the creation and implementation of an estate plan
6- Update your beneficiaries and accurately title your assets
7- Properly manage your liabilities (debt)
8- Learn and adopt good financial management habits
9- Plan your retirement , health , and long term care needs
10- Contribute to the well-being of others by gifting during your lifetime or at death in tax
advantageous manner
11- Minimize and manage your tax liabilities
12- Develop a business succession plan and / or deal with company stock option issues and
highly concentrated investment positions whether in specific stocks or certain sectors of the
market
13- Develop and implement an asset protection strategy
14- Utilize insurance to mitigate against losses and to leverage premiums paid for a host of
insurance uses and benefits
15- Select a wealth advisor to oversee your wealth management process and plan
implementation
Chapter 3
COMPARISION OF INVESTMENT IN USA & INDIA
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Particulars USA INDIA
% of House Hold Savings Invested in MFs >30% <1%
MF Industry size as % of the GDP 83% 6%Bank Deposits as X times of Mutual Fund Assets
0.75 10.5
Total Mutual Fund Assets (In Lac Crores) 469 5Total Population (In Crores) 30 108
Chapter 4
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WHAT IS MUTUAL FUND
MF is a professionally managed type of collective investment that pools money from many
investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
FEATURES OF MF -
Equity Mutual Funds: Predominantly investing in Equity & Equity related instruments
(Diversified)
Particulars US India
% of House Hold Savings Invested in MFs >30% <1%
MF Industry size as % of the GDP 83% 6%
Bank Deposits as X times of Mutual Fund Assets 0.75 10.5
Total Mutual Fund Assets (In Lac Crores) 469 5
Total Population (In Crores) 30 108
1. Sector Funds: Technically called thematic funds, investing in particular sectors.
2. Index Funds: Investing in BSE listed stocks, managing the funds passively.
3. Fund of funds: Investing in the best performing Mutual Funds.
4. Tax Saver Mutual Funds: Section 80 C benefits, where the invested amount is locked
for three years.
5. Debt Mutual Funds: Investing in Govt. related instruments.
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6. Monthly Income Plans: Where the monthly dividend is paid back to the investor.
7. Liquid Funds: Investing in money market funds with high liquidity.
8. Floating Rate Short term Funds.
9. Gilt Funds: Investing in govt. related securities.
10. Fixed Maturity Plans: Fixed returns up to the maturity period.
11. Gold Exchange Traded Funds: investing in Gold commodity stocks.
12. New Fund Offers: The new funds launched by Fund Houses at a face value of Rs.10
Chapter 5
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ADVANTAGE & DISADVANTAGE OF MUTUAL FUND
ADVANTAGE OF MUTUAL FUND
Professional expertise:
Investing requires skill. It requires a constant study of the dynamics of the markets and of the
various industries and companies within it. Anybody who has surplus capital to be parked as
investments is an investor, but to be a successful investor, you need to have someone
managing your money professionally.
Just as people who have money but not have the requisite skills to run a company (and hence
must be content as shareholders) hand over the running of the operations to a qualified CEO,
similarly, investors who lack investing skills need to find a qualified fund manager.
Mutual funds help investors by providing them with a qualified fund manager. Increasingly,
in India fund managers are acquiring global certifications like CFA and MBA which help
them be at the cutting edge of the knowledge in the investing world.
Diversification:
There is an old saying: Don't put all your eggs in one basket. There is a mathematical and
financial basis to this. If you invest most of your savings in a single security (typically
happens if you have ESOPs (employees stock options) from your company, or one
investment becomes very large in your portfolio due to tremendous gains) or a single type of
security (like real estate or equity become disproportionately large due to large gains in the
same), you are exposed to any risk that attaches to those investments.
In order to reduce this risk, you need to invest in different types of securities such that they
do not move in a similar fashion. Typically, when equity markets perform, debt markets do
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not yield good returns. Note the scenario of low yields on debt securities over the last three
years while equities yielded handsome returns. Similarly, you need to invest in real estate, or
gold, or international securities for you to provide the best diversification.If you want to do
this on your own, it will take you immense amounts of money and research to do this.
However, if you buy mutual funds -- and you can buy mutual funds of amounts as low as Rs
500 a month! -- you can diversify across asset classes at very low cost. Within the various
asset classes also, mutual funds hold hundreds of different securities (a diversified equity
mutual fund, for example, would typically have around hundred different shares).
Low cost of asset management:
Since mutual funds collect money from millions of investors, they achieve economies of
scale. The cost of running a mutual fund is divided
between a larger pool of money and hence mutual funds are able to offer
you a lower cost alternative of managing your funds. Equity funds in India typically charge
you around 2.25% of your initial money and around 1.5% to 2% of your money invested
every year as charges. Investing in debt funds costs even less. If you had to invest smaller
sums of money on your own, you would have to invest significantly more for the professional
benefits and diversification.
Liquidity:
Mutual funds are typically very liquid investments. Unless they have a pre-specified lock-in,
your money will be available to you anytime you want. Typically funds take a couple of days
for returning your money to you. Since they are very well integrated with the banking system,
most funds can send money directly to your banking account.
Ease of process:
If you have a bank account and a PAN card, you are ready to invest in a mutual fund: it is as
simple as that! You need to fill in the application form, attach your PAN (typically for
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transactions of greater than Rs 50,000) and sign your cheque and you investment in a fund is
made.
In the top 8-10 cities, mutual funds have many distributors and collection points, which
make it easy for them to collect and you to send your application to.Well regulated:
India mutual funds are regulated by the Securities and Exchange Board of India, which helps
provide comfort to the investors. Sebi forces transparency on the mutual funds, which helps
the investor make an informed choice. Sebi requires the mutual funds to disclose their
portfolios at least six monthly, which helps you keep track whether the fund is investing in
line with its objectives or not.
However, most mutual funds voluntarily declare their portfolio once every month.
Minimum Initial Investment:
Most funds have a minimum initial purchase of $2,500 but some are as low as $1,000. If you
purchase a mutual fund in an IRA, the minimum initial purchase requirement tends to be
lower. You can buy some funds for as little as $50 per month if you agree to dollar-cost
average, or invest a certain dollar amount each month or quarter
DISADVANTAGE OF MF
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1) Mutual Funds Have Hidden Fees
If fees were hidden, those hidden fees would certainly be on the list of disadvantages of
mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While
these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual
fund prospectus and can be found on the mutual funds’ web sites. Many mutual funds do not
charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual fund that does not
charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because
they are not hidden and there are thousands of mutual funds that do not charge 12b-1 fees.
2) Mutual Funds Lack Liquidity
How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and
closed-end funds? If you sell a mutual fund, you have access to your cash the day after the
sale. ETFs, stocks and closed-end funds require you to wait three days after you sell the
investment. I would call the “lack of liquidity” disadvantage of mutual funds a myth. You can
only find more liquidity if you invest in your mattress.
3) Mutual Funds Have High Sales Charges
Should a sales charge be included in the disadvantages of mutual funds list? It’s difficult to
justify paying a sales charge when you have a plethora of no-load mutual funds. But, then
again, it’s difficult to say that a sales charge is a disadvantage of mutual funds when you have
thousands of mutual fund options that do not have sales charges. Sales charges are too broad
to be included on my list of disadvantages of mutual funds.
4) Mutual Funds and Poor Trade Execution
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If you buy or sell a mutual fund, the transaction will take place at the close of the market
regardless of the time you entered the order to buy or sell the mutual fund. I find the trading
of mutual funds to be a simple, stress-free feature of the investment structure. However,
many advocates and purveyors of ETFs will point out that you can trade throughout the day
with ETFs. If you decide to invest in ETFs over mutual funds because your order can be
filled at 3:50 pm EST with ETFs rather than receive prices as of 4:00 pm EST with mutual
funds, I recommend that you sign up for the Stress Management Weekly Newsletter at
About.com.
5) All Mutual Funds Have High Capital Gains Distributions
If all mutual funds sell holdings and pass the capital gains on to investors as a taxable event,
then we have a found a winner for the list of disadvantages of mutual funds list. Oh well, not
all mutual funds make annual capital gains distributions. Index mutual funds and tax-efficient
mutual funds do not make these distributions every year. Yes, if they have the gains, they
must distribute the gains to shareholders. However, many mutual funds (including index
mutual funds and tax-efficient mutual funds) are low-turnover funds and do not make capital
gains distributions on an annual basis.
Chapter 6
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TYPES OF MUTUAL FUND
2 Types of Fund-
1) Constitution
A) Open ended fund scheme
Unfortunately for investors, the festive season commenced on a sorry note with markets
slumping sharply. After being poised to breach the 13,000 level (12,928 on October 16,
2006), markets corrected to settle at 12,737 points (BSE Sensex).
However, week on week (up 0.01%), markets were stagnant. On the same lines, the CNX
Nifty appreciated marginally (0.22%) to close at 3,684 points. In a small reversal of sorts, the
CNX Midcap (-0.19%) turned the other way to close at 4,767 points.
The latest article in our series on thematic/sector funds fails to throw any new findings. This
time we brought pharma funds under the scanner, we compared them with diversified equity
funds to ascertain if they added any value to the investor's portfolio.
The results were no different from the other comparisons we have done in the past -- over a
3-5 year period, sector/thematic funds have failed to beat diversified equity funds lending
credence to the view that it's best to be with diversified equity funds over the long-term.
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Leading open-ended diversified equity funds
Diversified Equity Funds NAV (Rs) 1-Wk 1-Mth 1-year SD SR
Ing Vysya Atm G 10.31 1.48% 6.40% - 10.99% 0.03%
Pruicici Dynamic G 57.76 1.41% 5.90% 64.73% 7.36% 0.54%
Kotak Global India Scheme G 23.96 1.36% 6.03% 41.52% 6.29% 0.40%
Pruicici Emerging Star G 25.00 1.30% 6.79% 51.15% 7.99% 0.45%
Kotal Mid-Cap G 17.99 1.14% 5.22% 40.05% 7.91% 0.34%
(Source: Credence Analytics. NAV data as on Oct. 20, 2006. Growth over 1-year is
compounded annualised)
(The Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a
risk-free instrument) (Standard deviation highlights the element of risk associated with the
fund.)
In a surprising development, we have ING Vysya ATM (a contrarian fund) at the top of the
heap with 1.48% appreciation over last week. It was a particularly good week for equity
funds from Kotak Mutual Fund and PruICICI Mutual Fund as they had two funds each in the
top 5 rankings.
Leading open-ended long-term debt funds
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Debt Funds (LT) NAV (Rs) 1-Wk 1-Mth 1-year 3-year SD SR
Grindlays Super Saver G 16.59 0.34% 0.52% 3.94% 2.08% 0.36% -0.55%
PruICICI Flexible Income 13.27 0.14% 0.59% 5.30% 3.66% 0.25% -0.34%
Kotak Flexi Debt G 11.25 0.14% 0.59% 6.69% - 0.07% -0.42%
Principal Income G 17.2 0.14% 0.81% 6.25% 3.83% 0.38% -0.15%
Birla Dynamic Bond Retail G 11.16 0.13% 0.74% 5.81% - 0.17% -0.59%
(Source: Credence Analytics. NAV data as on Oct. 20, 2006. Growth over 1-year is
compounded annualised)
Grindlays Super Saver (0.34%) led the long-term debt fund rankings by a significant margin.
Its closest competitors were -- PruICICI Flexible Income, Kotak Flexi Debt and Principal
Income -- all at 0.14%.
The 10-year 7.59% GOI yield closed at 7.66% (October 20, 2006), 3 basis points above the
previous weekly close. Bond yields and prices are inversely related with rising yields
translating into lower bond prices and net asset value (NAV) for debt fund investors.
Leading open-ended balanced funds
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Balanced Funds NAV (Rs) 1-Wk 1-Mth 1-year 3-year SD SR
Kotak Balance 22.58 0.79% 3.66% 41.50% 38.83% 4.70% 0.56%
Birla Sun Life 95 G 165 0.73% 3.18% 34.17% 34.28% 4.54% 0.49%
FT India Balanced G 30.64 0.36% 4.11% 40.63% 31.78% 4.76% 0.43%
LIC Balance C G 42.42 0.30% 2.56% 40.56% 23.99% 5.21% 0.35%
DSP ML Bal G 35.98 0.28% 3.54% 41.65% 33.48% 4.49% 0.46%
(Source: Credence Analytics. NAV data as on Oct. 20, 2006. Growth over 1-year is
compounded annualised)
With Kotak Balance (0.79%) heading the balanced fund rankings, this was a bumper week
for Kotak Mutual Fund with its schemes featuring among the leaders across the three
categories under review.
In addition to the festival season, visitors of Personalfn.com had some more reason to cheer
as Money Simplifiedcompleted its 25th issue. This easy-to-understand, financial planning
guide is arguably India's most popular and widely read (and distributed) investor handbook.
B) Close ended fund
Closed-end schemes the way ahead for investors in mutual funds in India ? You would
certainly think so considering the fact that in the last six months, six out of 10 equity schemes
launched were closed-end.
The returns from the Morgan Stanley Growth Fund and the equity-linked savings schemes,
which reflect the locked-in nature of funds, are lower than that of their counterparts in the
open-ended category - both over a three-year and five-year investment horizon
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Even if rolling returns are considered to eliminate period bias, the schemes barely outperform
the diversified equity funds. The closed-end structure also takes away investors' most potent
risk-mitigation strategy in a volatile market - steady, systematic investment.
The sudden surge
The reason closed-end funds are suddenly in vogue may not have anything to do with market
conditions or tailoring products to suit investor requirements better. The prologue to the
resurrection of the closed-end schemes lies in the Sebi guidelines issued in April 2006, which
disallowed open-ended schemes from amortising the initial issue expenses incurred in
launching a new fund offer.
Earlier, all funds - closed or open - could amortise six per cent of their collections from the
NFO as initial issue expenses. Such expenses have to be now borne by the AMC for all open-
ended funds, while closed-end funds can still charge these.
This has made them attractive to fund houses, as it enables hiving off huge marketing costs
involved in a new offering to investors. A look at the initial issue expenses charged by the
recently launched closed-end schemes show that except Franklin India Smaller Companies
Fund, which hasn't charged any initial issue expense, and Prudential ICICI Fusion Fund,
which has charged only 3.75 per cent, all others have charged the full six per cent of the
amount mobilised to the schemes. Is it a coincidence, then, that fund houses are enamoured
by closed-end schemes?
Why closed-end funds?
The mutual fund industry in India seems to have come a full circle. In the late 1980s,
inexperienced fund managers struggling to find investment opportunities in an equity market
that was neither liquid, nor efficient found the relative stability of a closed-end fund easier to
manage.
But with economic reforms, equity markets became vibrant entities that offered investors the
opportunity to participate in the Indian growth story. The restricted flow of funds to closed-
end schemes became a drag on the fund's ability to invest and generate returns and the
industry saw a shift to open-ended schemes. Prior to April this year, of the 267 equity-
oriented schemes managed by the industry, only 15, or 5.6 per cent, were closed-end
schemes.
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What then is the justification for closed-end schemes now? The proponents point to the need
for funds with a long-term perspective to be able to generate returns in markets that are at
unprecedented highs.
The bull run on the Indian stockmarkets since 2003 has fed the appetite of investors for short-
term returns. The equity schemes of mutual funds have not remained unaffected by this trend.
The fund managers have been under enormous pressure to manage liquidity on one hand, and
generate returns on the other.
A three-month investment in highly liquid stocks like Reliance or ITC would have generated
23 per cent and 12 per cent respectively, while an investment over the same period in a less
liquid stock like Eicher Motors would have generated 65 per cent returns. The choices have
been tough.
Also, look at the current market scenario. Despite the dip the market took in May, there has
not been a long or serious correction. With the Sensex trading above 13,000, small investors
are getting jittery and looking to book their profits before the market falls.
Fund houses have been facing redemption pressure on several schemes due to this. In
October, when the markets traced record highs, mutual funds were net sellers to the tune of
Rs 3.51 crore (Rs 35.1 million) as their investors were redeeming their units. Meanwhile, FIIs
bought Rs 8,013 crore (Rs 80.13 billion) worth of equity in the same period. This necessity to
buck the main market trend in the fund manager's investing strategy can be avoided in closed-
end funds.
Since liquidity pressures are removed in a closed-end fund, the fund manager can concentrate
on generating returns. The other takeaway, say advocates, is lower costs since the need to
churn the portfolio frequently for liquidity and short-term returns is eliminated.
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Is the case closed?
Does this build a case for the closed-end fund? Not quite. A look at the performance of the
MSGF and closed-end ELSSs over a five-year horizon shows that while the expenses were
lower, the returns at 39.93 per cent and 45.59 per cent, respectively, were also lower than an
open-ended ELSS at 56.67 per cent, or a diversified equity fund at 64.48 per cent.
Since the ELSSs are weighted in favour of mid- and small-cap stocks, which have under-
performed in the last one year, one must look at the rolling returns to remove this period bias.
These show they have only done marginally better. The average monthly rolling returns for
top-performing ELSS ranges between 3.6 per cent and 4.5 per cent, which is comparable to
that of diversified equity funds.
Also, the ELSSs had expense ratios and portfolio turnover ratios (which measure the amount
of buying and selling done by the fund), comparable to that of diversified funds. Clearly, the
locked-in nature of the funds has not translated into significant additional returns for the
investors.
While the new closed-end funds are too recent to be evaluated, there is no reason to believe
they are going to fare any better, particularly because these schemes offer limited redemption
facility to the investor and will, therefore, face the same redemption pressures as the open-
ended schemes during such periods.
Another important factor, at the high levels that markets are now, is that these funds do not
permit periodic investing. An investor, putting in a fixed sum periodically under a systematic
investment plan, gets more units when the net asset values come down due to market
correction.
This enables an investor to average out the cost. To put things in perspective, a one-time
investment in the Prudential ICICI Tax Plan at inception would have generated a 36 per cent
return as compared to 45 per cent over the same period in case of a SIP.
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The verdict
The drawbacks of the closed-end fund far outweigh the benefits, if any, to investors. The
investor is better off identifying open-ended schemes with strong, consistent performance and
commitment to stated investment objectives, which meet his requirements and invest in them
systematically.
But for this, it is essential that investors of mutual funds be empowered with knowledge and
information. The benefits of long-term investing discipline will accrue automatically to the
investor and to the fund if the profile of the fund matches the investor's risk, return
requirements and investment horizon.
None of the newly-launched schemes have chosen to list on stock exchanges
C) Interval Funds
An interval fund is a type of investment company that periodically offers to repurchase its
shares from shareholders. That is, the fund periodically offers to buy back a stated portion of
its shares from shareholders. Shareholders are not required to accept these offers and sell
their shares back to the fund.
Legally, interval funds are classified as closed-end funds, but they are very different from
traditional closed-end funds in that:
Their shares typically do not trade on the secondary market. Instead, their shares are subject
to periodic repurchase offers by the fund at a price based on net asset value.
They are permitted to (and many interval funds do) continuously offer their shares at a priced
based on the fund’s net asset value.
An interval fund will make periodic repurchase offers to its shareholders, generally every
three, six, or twelve months, as disclosed in the fund’s prospectus and annual report. The
interval fund also will periodically notify its shareholders of the upcoming repurchase dates.
When the fund makes a repurchase offer to its shareholders, it will specify a date by which
shareholders must accept the repurchase offer. The actual repurchase will occur at a later,
specified date.
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The price that shareholders will receive on a repurchase will be based on the per share NAV
determined as of a specified (and disclosed) date. This date will occur sometime after the
close of business on the date that shareholders must submit their acceptances of the
repurchase offer (but generally not more than 14 days after the acceptance date).
Interval funds are permitted to deduct a redemption fee from the repurchase proceeds, not to
exceed 2% of the proceeds. The fee is paid to the fund, and generally is intended to
compensate the fund for expenses directly related to the repurchase. Interval funds may
charge other fees as well.
An interval fund’s prospectus and annual report will disclose the various details of the
repurchase offer. Before investing in an interval fund, you should carefully read all of the
fund’s available information, including its prospectus and most recent shareholder report.
Interval funds are regulated primarily under the Investment Company Act of 1940 and the
rules adopted under that Act, in particular Rule 23c-3. Interval funds are also subject to the
Securities Act of 1933 and the Securities Exchange Act of 1934.
2) Investment Objective-
A) Eqyity scheme
The primary investment objective of the Scheme is to seek to generate capital appreciation
and provide long term growth opportunities by investing in equity and equity related
securities of companies domiciled in India whose predominant economic activity is in the:-
(a) discovery, development, production, or distribution of natural resources, viz., energy,
mining etc; (b) alternative energy and energy technology sectors, with emphasis given to
renewable energy, automotive and on-site power generation, energy storage and enabling
energy technologies.
The Scheme will also invest a certain portion of its corpus in the equity and equity related
securities of companies domiciled overseas, which are principally engaged in the discovery,
development, production or distribution of natural resources and alternative energy and/or the
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units/shares of BlackRock Global Funds – New Energy Fund, BlackRock Global Funds
– World Energy Fund and similar other overseas mutual fundschemes. The secondary
objective is to generate consistent returns by investing in debt and money market securities.
Plans Minimum Investment
Regular
Institutional
Regular – Rs. 5,000 and multiples of Re. 1/- thereafter
Institutional - Rs. 1 crore and multiples of Re 1/- thereafter
SIP – Rs. 500 (min 12 installments)
Options Minimum Additional Purchase
Growth
Dividend - Payout– Reinvest
Regular – Rs.1000
Institutional – Rs.1000
Expense Ratio* Exit Load
Plan Ratio Plan % Load Holding Period
Regular 2.31% Regular(For Regular &
SIP Purchase)
1% < 12 months
Nil ≥ 12months
Institutional 1% < 12 months
Nil ≥ 12months
* Financial year beginning April 30, 2011
Entry Load: NIL
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Asset Allocation Pattern of the Scheme
Types of Instruments Indicative
Allocation (% of
Corpus)
Risk Profile
Equity and Equity related Securities of companies
domiciled in India, and principally engaged in the
discovery, development, production or distribution of
Natural Resources and Alternative Energy
65% - 100% High
(a) Equity and Equity related Securities of companies
domiciled overseas, and principally engaged in the
discovery, development, production or distribution of
Natural Resources and Alternative Energy (b)
Units/Shares of (i) BlackRock Global Fund – New Energy
Fund (ii) BlackRock Global Fund – World Energy Fund
and (iii) Similar other overseas mutual fund schemes
0% - 35% High
Debt and Money Market Securities 0% - 20% Low to
Medium
Investor Benefits & General Services:
Sale (at Purchase Price) and redemption (at Redemption Price) on all Business Days
(Redemption normally within 3 Business Days).
SWP, STP & nomination facilities available (If the SEBI limits for overseas investments by
the schemes of the Mutual Fund are expected to be exceeded, subscriptions, switches into the
Scheme may be temporarily suspended/SIP/STP into the Scheme may be terminated).
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Declaration of NAV for each Business Day by 10 a.m. of the next Business Day.
As on April 30, 2011
Top 10 Sectors Top 10 Stocks
Industry % to Net Assets Name of Instrument % to Net Assets
Petroleum Products 23.22% Castrol India 8.11%
Gas 18.94% Reliance Industries 4.84%
Fertilisers 11.64% SRF 4.15%
Oil 10.92% Bharat Petroleum Corpn. 4.14%
Non - Ferrous Metals 8.00% Cairn India 3.67%
Ferrous Metals 6.44% Petronet LNG 3.65%
Auto Ancillaries 6.18% GAIL (India) 3.61%
Minerals / Mining 5.37% Sterlite Industries ( India ) 3.56%
Consumer Non Durables 2.37% Coromandel International 3.45%
Foreign Security 2.32% Oil India 3.35%
B) Index fund
Index fund or index tracker is a collective investment scheme (usually a mutual
fund or exchange-traded fund) that aims to replicate the movements of an index of a specific
financial market, or a set of rules of ownership that are held constant, regardless of market
conditions.
Tracking
Tracking can be achieved by trying to hold all of the securities in the index, in the same
proportions as the index. Other methods include statistically sampling the market and holding
"representative" securities. Many index funds rely on a computer model with little or no
human input in the decision as to which securities are purchased or sold and is therefore a
form of passive management.
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Fees
The lack of active management generally gives the advantage of lower fees and lower taxes
in taxable accounts. Of course, the fees reduce the return to the investor relative to the index.
In addition it is usually impossible to precisely mirror the index as the models for sampling
and mirroring, by their nature, cannot be 100% accurate. The difference between the index
performance and the fund performance is known as the "tracking error" or informally "jitter".
Index funds are available from many investment managers. Some common indices include
the S&P 500, the Nikkei 225, and the FTSE 100. Less common indexes come from
academics like Eugene Fama and Kenneth French, who created "research indexes" in order to
develop asset pricing models, such as their Three Factor Model. The Fama-French three-
factor model is used by Dimensional Fund Advisors to design their index funds. Robert
Arnott and Professor Jeremy Siegel have also created new competing fundamentally based
indexes based on such criteria as dividends, earnings,book value, and sales.
Origin
In 1973, Burton Malkiel wrote A Random Walk Down Wall Street, which presented academic
findings for the lay public. It was becoming well-known in the lay financial press that most
mutual funds were not beating the market indices. Makiel wrote
What we need is a no-load, minimum management-fee mutual fund that simply buys the
hundreds of stocks making up the broad stock-market averages and does no trading from
security to security in an attempt to catch the winners. Whenever below-average performance
on the part of any mutual fund is noticed, fund spokesmen are quick to point out "You can't
buy the averages." It's time the public could.
There is no greater service [the New York Stock Exchange] could provide than to sponsor
such a fund and run it on a nonprofit basis.... Such a fund is much needed, and if the New
York Stock Exchange (which, incidentally has considered such a fund) is unwilling to do it, I
hope some other institution will.
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John Bogle graduated from Princeton University in 1951, where his senior thesis was titled:
"Mutual Funds can make no claims to superiority over the Market Averages." Bogle wrote
that his inspiration for starting an index fund came from three sources, all of which confirmed
his 1951 research: Paul Samuelson's 1974 paper, "Challenge to Judgment", Charles Ellis'
1975 study, "The Loser's Game", and Al Ehrbar's 1975 Fortune magazine article on indexing.
Bogle founded The Vanguard Group in 1974; it is now the largest mutual fund company in
the United States as of 2009.
Bogle started the First Index Investment Trust on December 31, 1975. At the time, it was
heavily derided by competitors as being "un-American" and the fund itself was seen as
"Bogle's folly".[2]Fidelity Investments Chairman Edward Johnson was quoted as saying that
he "[couldn't] believe that the great mass of investors are going to be satisfied with receiving
just average returns".[3] Bogle's fund was later renamed the Vanguard 500 Index Fund, which
tracks the Standard and Poor's 500 Index. It started with comparatively meager assets of $11
million but crossed the $100 billion milestone in November 1999; this astonishing increase
was funded by the market's increasing willingness to invest in such a product. Bogle
predicted in January 1992 that it would very likely surpass theMagellan Fund before 2001,
which it did in 2000.
John McQuown and David G. Booth at Wells Fargo and Rex Sinquefield at American
National Bank in Chicago both established the first Standard and Poor's Composite Index
Funds in 1973. Both of these funds were established for institutional clients; individual
investors were excluded. Wells Fargo started with $5 million from their own pension fund,
while Illinois Bell put in $5 million of their pension funds at American National Bank. In
1971, Jeremy Grantham and Dean LeBaron at Batterymarch Financial Management
"described the idea at a Harvard Business School seminar in 1971, but found no takers until
1973. For its efforts, Batterymarch won the "Dubious Achievement Award" from Pensions
managers.& Investments magazine in 1972. Two years later, in December 1974, the firm
finally attracted its first index client."[4]
In 1981, David Booth and Rex Sinquefield started Dimensional Fund Advisors (DFA), and
McQuown joined its Board of Directors many years later. DFA further developed indexed
based investment strategies.
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Chapter 7
DEBT FUND
There different types of debt funds available to Indian investors.
1. Monthly Income Plans:
We start with MIPs first because I have already written a post about them in the past, and
these are funds that primarily invest in debt instruments, and try to give you a monthly
income in the form of dividends. The income is not guaranteed of course, and they only pay
out a dividend if they are profitable for that time period.
This type of a debt fund is for people who have a big corpus initially, and would like to
generate a monthly income for them with low to moderate risk. When I wrote that last post
about MIP I got an email asking if you could do a SIP in a MIP. While that rhymes together
nicely, I don’t see merit in investing monthly in a product whose premise is generating a
m0nthly income, so I’d avoid that.
2. Capital Protection Plans:
Capital Protection Plans are debt instruments that guarantee your capital, and then invest a
portion of the funds in equity in the hopes of generating excess returns. I personally don’t see
any compelling reason to invest in these type of funds because you can create such a portfolio
yourself fairly easily, and avoid paying the mutual fund fees that they will charge you.\
3. Gilt Funds:
Gilt Funds invest in government debt viz. the debt issued by Reserve Bank of India on
behalf of the government. They also invest in securities issued by state governments. The
investments are done in ultra safe paper because they are backed by the government itself
but that doesn’t mean the Gilt Funds are risk free. They can go down in value because
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when interest rates rise the value of the debt goes down. So, there could be a possibility
that the debt funds lose some part of their NAV also.
Gilt funds can be short term gilt funds, or long term gilt funds. The short term Gilt Funds
are meant for people looking to invest their money for shorter durations of say 3 – 6
months.
4. Liquid Funds:
Liquid Funds are funds that are used by investors for extremely short time durations, and
in most cases instead of a savings account. The current savings account interest rate is
3.5% per annum, whereas funds like the SBI Magnum Cash Liquid Float, LIC MF
Liquid Fund and JM High Liquidity Fund have returned over 5% since last year. These
funds are not meant to keep money in for longer durations because these same funds
return in the range of 6.5% when you look at their returns for the past 3 years.
5. Floating Rate Funds:
Floating rate funds are funds that invest in predominantly floating rate debt instruments,
and can invest in government and corporate securities.
You can have a short term floating rate fund, or a long term floating rate fund. A look at
the top floater plans on the Moneycontrol page shows that the 1 year return for the funds
that performed in the last year range in 5.3 to 6.1% area, and the 3 year returns range
between 6.9% to 7.9%.
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Chapter 8
ELSS & OTHER TYPES OF MUTUAL FUND
ELSS
ELSS is a variety of diversified equity fund. An investment in an ELSS is tax deductible
under Section 80C of the Income Tax Act. An ELSS is like any other equity fund. However,
the lock-in period is three years. It comes with all the usual trappings of an equity fund,
including the choice between dividend and growth options, and systematic investment plans
(SIP).Under the IT Act, investors investing in an ELSS can claim benefits under Section 80C.
The limit under this Section is Rs 1 lakh. The dividends earned in an ELSS are tax-free. The
returns at maturity are also tax-free. Among all tax-saving options an ELSS stands out.
However, in the present conditions, the returns have not been as good as in the past. The
stock markets have given huge negative returns in the last year and all equity schemes,
including tax-saving ones, were down.
If you have a 3-5 year time frame, should go for an ELSS. The market may be down in the
short term, but still have the potential to earn better returns over a long term. There are many
advantages of an ELSS tax-saving option. The SIP option would help to start tax planning
from the beginning of the financial year. It also imparts a certain financial discipline in
investors. It may expect better returns vies-a-visa other savings instruments that offer a fixed
rate of return. The returns from an ELSS may vary. Stocks have the potential to out-perform
all other asset classes in the long run.
ELSS also beats other equity mutual fund schemes, as it has a mandatory three-year lock-in
period. This gives it the freedom to invest in stocks with huge potential and wait to unlock the
value. The amount to be invested in an ELSS should be in multiples of Rs 500 with a
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minimum of Rs 500. The fund should allot the units in respect of all complete applications ,
made in the specified form, not later than March 31 every year. Further, the plan should be
open for a minimum period three months.
Investments in the plan will have to be kept for a minimum period of three years from the
date of allotment of units. After the period of three years, the investor will have the option to
tender the units to the fund for repurchase. In case of death of the investor, the nominee or
legal heir will be able to withdraw the investment only after the completion of one year from
the date of allotment of the units to the investor or anytime later. The units issued under the
plan can be transferred, assigned or pledged after three years of its issue. An investment made
in any plan will be acknowledged by the fund through a certificate of investment or a
Statement of account.
A plan operated by the fund would be terminated at the close of the tenth year from the year
in which the allotment of units is made under the plan. If 90 percent or more of the units
under any plan are repurchased before completion of 10 years, the fund may terminate that
plan even before the stipulated period of 10 years and redeem the outstanding units at the
final repurchase price to be fixed by them. The funds collected by the fund are invested in
equities, cumulative convertible preference shares and fully convertible debentures and bonds
of companies. Investments may also be made in partly convertible issues of debentures and
bonds including those issued on rights basis subject to the condition that the non-convertible
portion of the debentures so acquired will be disinvested within a period of one year.
The fund needs to ensure the funds of the plan remain invested to the extent of at least 80
percent in securities as specified. The investments should be made within a period of six
months from the date of closure of the plan every year. Pending investment of funds of a
plan, the fund may invest the funds in short-term money market instruments or other liquid
instruments. After three years of the date of allotment of the units, the fund may hold up to 20
percent of net assets of the plan in short-term money market instruments and other liquid
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instruments to enable them to redeem investments of those unit holders who seek to tender
the units for repurchase. ELSS offers an excellent mode of investing in the equity markets
and saving on tax. As the investments are locked in for a period of three years, the returns are
also good in these schemes. Further, considering the tax advantages, the yield on investments
is generally high.
Fixed Maturity Plans (FMPs)
Fixed Maturity Plans (FMPs) are quite similar to fixed deposits in the sense that these funds
are usually close ended, which saves you from interest rate risk, and even if rates move
upwards the fund NAV doesn’t go down. The way the fund works is that a fund house
announces a new fund offer specifying the duration of the fund say 18 months or so, and then
they collect money from investors which is then invested in debt of the same duration.
These funds have become popular because of a sort of a tax advantage where interest on fixed
deposits are charged at a higher tax rate than dividends from FMPs for individuals who are in
the higher tax bracket.
The risk of investing in FMPs is that they might invest the money in lower quality debt, and
then during times such as the last crisis might come under pressure, and in that sense your
capital is not really assured as it is in the case of say a fixed deposit with SBI.
FUND OF FUND
Fund of Fund is an investment strategy of holding a portfolio of other investment funds
rather than investing directly in shares, bonds or other securities. This type of investing is
often referred to as multi-manager investment. A fund of funds may be 'fettered', meaning
that it invests only in funds managed by the same investment company, or 'unfettered',
meaning that it can invest in external funds.
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There are different types of 'fund of funds', each investing in a different type of collective
investment scheme (typically one type per FoF), eg. 'mutual fund' FoF, hedge fund
FoF , private equity FoF or investment trust FoF.
Features
Investing in a collective investment scheme may increase diversity compared to a small
investor holding a smaller range of securities directly. Investing in a fund of funds may
achieve greater diversification. According to modern portfolio theory, the benefit of
diversification can be the reduction of volatility while maintaining average returns. However,
this is countered by the increased fees paid on both the FoF level, and of the underlying
investment fund.
An investment manager may actively manage with a view to selecting the best securities. A
FoF manager will try to select the best performing funds to invest in based upon the managers
past performance and other factors. If the FoF manager is skillful, this additional level of
selection can provide greater stability and take on some of the risk relating to the decisions of
a single manager. As in all other areas of investing, there are no guarantees for regular
returns. As a fund of funds invests in the scheme of other funds, it provides a greater degree
of diversification. Instead of investing in different stocks of mutual funds and keeping records
of all of them, it is much easier to invest and track only one fund which in turn invests in
other mutual funds.
Considerations
Management fees for Funds Of Funds are typically higher than those on traditional
investment funds because they include the management fees charged by the underlying
funds.] As in the case of schemes of mutual funds, FOF schemes also work under the due
diligence of a fund manager. This gives the scheme an additional expertise. It also helps to
provide access to information which may be difficult to obtain information by an investor on
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a case by case basis. Every fund manager has a particular style of diversification. This
diversification has a perfect correlation with the number of managers involved. Once a FOF
reached a certain level of managers, adding more flattens return curve and diversifies away
alpha (Harry Prasun Kat2). Since a fund of funds buys many different funds which
themselves invest in many different securities, it is possible for the fund of funds to own the
same stock through several different funds and it can be difficult to keep track of the overall
holdings.
Funds of funds are often used when investing in hedge funds and private equity funds, as they
typically have a high minimum investment level compared to traditional investment funds
which precludes many from investing directly. In addition hedge fund and private equity
investing is more complicated and higher risk than traditional collective investments The lack
of accessibility favors a FoF with a professional manager and built-in spread of risk.
Pension funds and other institutions often invest in funds of hedge funds for part or all of
their "alternative asset" programs, i.e. investments other than traditional stock and bond
holdings.
After allocation of the two levels of fees payable and taxation, returns on FoF investments
will generally be lower than single-manager funds.
The due diligence and safety of investing in FoFs has come under question as a result of
the Bernie Madoff scandal, where many FoFs put substantial investments into the scheme. It
became clear that a motivation for this was the lack of fees by Madoff which gave the illusion
that the FoF was performing well. The due diligence of the FoFs apparently did not include
asking why Madoff was not making this charge for his services. 2 008 and 2009 saw fund of
funds take a battering from investors and the media on all fronts from the hollow promises
made by over-eager marketers to the strength (or lack) of their due diligence processes to
those carefully explained and eminently justifiable extra layers of fees, all reaching their
zenith with the Bernie Madoff fiasco.
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Private Equity Fund of Fund
According to (formerly known as Private Equity Intelligence), in 2006 funds investing in
other private equity funds (i.e., fund of funds, including secondary funds) amounted to 14%
of all committed capital in the private equity market. The following ranking of private equity
fund of fund investment managers is based on information published by Private Equity
Intelligence
Fund of hedge funds
A fund of hedge funds is a fund of funds that invests in a portfolio of different hedge funds to
provide broad exposure to the hedge fund industry and to diversify the risks associated with a
single investment fund. Funds of hedge funds select hedge fund managers and construct
portfolios based upon those selections. The fund of hedge funds is responsible for hiring and
firing the managers in the fund. Some funds of hedge funds might have only one hedge fund
in it, this lets ordinary investors into a highly-acclaimed fund, or many hedge funds.
Funds of hedge funds generally charge a fee for their services, always in addition to the
hedge fund's management and performance fees, which can be 1.5% and 15-30%,
respectively. Fees can reduce an investor's profits and potentially reduce the total return
below what could be achieved through a less expensive mutual fund or ETF.
While funds of funds conceptually can provide extremely useful services for many hedge
fund investors, they have been criticised for the significant incremental costs they impose.
(The underlying hedge funds usually charge fees of between 1 and 2% of assets managed and
incentive fees of 15–25% of profits generated. The funds of funds typically add additional
fees of 1% and 10%, respectively). Moreover, fund-of-funds behavior has often exhibited
crowd-following tendencies, suggesting the managers of these funds prefer to match indices
rather than seek opportunities.
The industry has recently been criticized by some hedge fund managers for a reputation of
holding a short-term view. Some hedge funds have even started turning away fund of hedge
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funds money. “It is really beginning to irritate those funds of hedge funds that approach their
investments sensibly,”
The first fund of funds was started by the Rothschild family in Europe in 1969 under the
name Leveraged Capital Holdings. In 1971, Richard Elden founded Grosvenor Capital
Management in Chicago, Illinois, introducing the concept of fund of funds to the United
States.
Fund of venture capital funds
A fund of venture capital funds is a fund of funds that invests in a portfolio of
different venture capital funds to access to private capital markets. Clients are usually
university endowments and pension funds
Venture capital (VC) is financial capital provided to early-stage, high-potential, high
risk, growth startup companies. The venture capital fund makes money by owning equity in
the companies it invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology, IT, software, etc. The typical venture capital
investment occurs after the seed funding round as growth funding round (also referred
as Series A round) in the interest of generating a return through an eventual realization event,
such as an IPO or trade sale of the company. It is important to note that venture capital is a
subset of private equity. Therefore all venture capital is private equity, but not all private
equity is venture capital.
In addition to angel investing and other seed funding options, venture capital is attractive for
new companies with limited operating history that are too small to raise capital in the public
markets and have not reached the point where they are able to secure a bank loan or complete
a debt offering. In exchange for the high risk that venture capitalists assume by investing in
smaller and less mature companies, venture capitalists usually get significant control over
company decisions, in addition to a significant portion of the company's ownership (and
consequently value).
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Venture capital is also associated with job creation (accounting for 21% of US GDP),] the
knowledge economy, and used as a proxy measure of innovation within an economic sector
or geography. Every year there are nearly 2 million businesses created in the USA, and only
600-800 get venture capital funding. According to the National Venture Capital Association
11% of private sector jobs come from venture backed companies and venture backed revenue
accounts for 21% of US GDP.
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Chapter 9
TAX PROVISION FOR MF IN EQUITY
Dividends
Income received from units of a mutual fund registered with the Securities and Exchange
Board of India is exempt in the hands of the unit holder. A debt-oriented mutual fund is liable
to pay income distribution tax of 14.1625% and 22.66% on the distribution of income to
individual / Hindu Undivided Fund and other persons, respectively. In the case of “money
market mutual funds” and “liquid mutual funds” (as defined under SEBI regulations), the
income distribution tax is 28.325% across all categories of investors.
Capital Gains
Long-term capital gains arising on the transfer of units of an ‘equity oriented’ mutual fund is
exempt from income tax, if the Securities Transaction Tax (STT) is paid on this transaction
i.e., the transfer of such units should be made through a recognised stock exchange in India
(or such units should be repurchased by the relevant mutual fund). ‘Equity oriented’ mutual
fund means a fund where the investible corpus is invested by way of equity shares in Indian
companies to the extent of more than 65% of the total proceeds of the fund. Short-term
capital gains arising on such transactions are taxable at a base rate of 15% (increased by
surcharge as applicable, education cess of 2% and secondary and higher education cess of
1%). If a transaction is not covered by STT, the long-term capital gain tax rate would be 10%
without indexation or 20% with indexation, depending on which the assessee opts for. Short-
term capital gains on such transactions are taxable at normal rates.
A taxable ‘capital loss’ (i.e., a transaction on which there is a liability to pay tax if the result
were ‘gains’ instead of ‘loss’) can be set-off only against ‘capital gains’. An exempt capital
loss (i.e., a transaction which is exempt from tax if the result were ‘gains’ instead of ‘loss’)
cannot be set-off against taxable capital gains. A taxable long-term capital loss can be set-off
only against long-term capital gains. However, a taxable short-term capital loss can be set-off
against both short-term and long-term capital gains.
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Chapter 10
TAX PROVISION FOR MF IN DEBT
As per Section 10(33) of the Income Tax Act, 1961 (‘Act’) income received in respect of
units of a mutual fund specified under Section 10(23D) is exempt from income tax in India
and the mutual funds are subject to pay distribution tax in debt-oriented schemes. Hence all
dividends are tax-free in the hands of non-resident investors and no TDS is applicable on the
same.
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Chapter 11
TWO TOP MF SCHEMES PERFORMING WELL
1) RELIANCE REGULAR SAVING FUND
ORIGIN
Scheme Particulars
Type Open Ended
Nature Equity (Equity: 95.47%, Debt: 0%, Cash:
4.53%)
Option Growth
Inception Date Jun 9, 2005
Face Value 10
Fund Size (Rs.Crore) 0 as on May 31, 2011
Fund Manager Omprakash Kuckien .
Portfolio Turnover Ratio(%) 57
Minimum Investment (Rs) 500
Purchase Redemptions Daily
NAV Calculation Daily AT 8 PM
Entry Load Entry Load is 0%.
EXIST LOAD If redeemed bet.0 Year to 1 Year; Exit load is
1%.
LATEST NAV PRICE Rs. 29.84 (June 15, 2011)
29.32 0.8 (2.81%) NAV – as on Jun-24-2011
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INVESTMENT OBJECTIVE
The primary investment objective of this option is to seek capital appreciation and/or to
generate consistent returns by actively investing in Equity &Equity-related Securities
RESEARCH
Features of fund-
1) fund for the family of income funds.
2) fund is positioned towards the retail/HNI/SME kind of fixed income investors.
3) Limited amt. of invest monthly.
4) Small investors can also start with small amount.
5) The fund basically seeks to benefit from any opportunity available in the debt market
space at different points in time.
6) This fund invests based on short to medium term interest rate view and shape of the yield
curve.
7) Duration between 1 - 2 years
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Reliance Regular Savings Fund provides you the choice of investing in Debt,
Equity or Hybrid options with a pertinent investment objective and pattern for each option.
NAV Performance as on 29/04/2011
Absolute Compounded Annualized
6 months 1
Year
3
Years
5
Years
Since
Inception
Reliance Regular Savings Fund Debt
Option - Growth Plan
2.97 4.71 6.19 5.30 4.96
Investment Objective-
Reliance Regular Savings Fund provides you the choice of investing in Debt,
Equity or Hybrid options with a pertinent investment objective and pattern for each option.
1) Debt Option :
It generate optimal returns consistent with a moderate level of risk.
This income may be complemented by capital appreciation of the portfolio.
Investments will predominantly be made in Debt & Money Market Instruments.
2) Equity Option :
A) The primary investment objective of this option is to seek capital appreciation
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B) To generate consistent returns by actively investing in Equity & Equity-related
Securities.
3) Hybrid Option :
A) The primary investment objective of this option is to generate consistent returns by
investing a major portion in Debt & Money Market Securities
B) A small portion in Equity & Equity-related Instruments.
Investment Pattern
Debt Option Asset Allocation
Debt Instruments (including Securitised Debt) with maturity of more than 1 year
65%-100%
Money Market Instruments (including Call Money & Reverse Repo) and Debentures with maturity of less than 1 year
0%-35%
Securitised Debts will be a part of the Debt Securities, upto 25% of corpus.
Equity Option Asset Allocation
Equities & Equity-related Securities 65%-100%
Debt & Money Market Instruments with an average maturity of 5-10 years
0%-20%
Securitised Debts will be a part of the Debt Securities, upto 20% of corpus.
Balanced Option Asset Allocation
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Equities & Equity-related Securities 0%-20%
Fixed Income Securities 80% - 100% (Debt & Money
Market Instruments) with an average maturity of 1-7 years
80%-100%
BEHIND SUCCESS-
1) Reliance Capital Asset Management Limited has been adjudged as “Best Mutual
Fund House.
2) Runner up as “Best Equity Fund” House by Outlook Money Awards 2010 under the
category “Best Wealth Creator Award.
3) This award has been granted for a three year period ended June 30,2010.
4) RMF has been judged fund house of the year by ICRA.
5) Reliance Mutual Fund Awards 2011 in the Debt Category.
6) RMF awarded ICRA FIVE STAR FUND.
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2) HDFC TOP 200
ORIGIN
Nature of Scheme Open Ended Growth Scheme
Inception Date October 11, 1996
Option/Plan Dividend Option, Growth Option. The Dividend Option
offers Dividend Payout and Reinvestment Facility.
Entry Load
(purchase / additional
purchase / switch-in)
NIL
(With effect from August 1, 2009)
Exit Load
(as a % of the Applicable
NAV)
In respect of each purchase / switch in of units, an Exit
Load of 1.00% is payable if Units are redeemed /
switched-out within 1 year from the date of allotment. No
Exit Load is payable if Units are redeemed / switched-out
after 1 year from the date of allotment.
Minimum Application
Amount
For new investors: Rs.5000 and any amount thereafter.
For existing investors: Rs. 1000 and any amount
thereafter.
Lock-In-Period Nil
Net Asset Value Periodicity Every Business Day.
Redemption Proceeds Normally dispatched within 3 Business days
Tax Benefits As per present Laws
Current Expense Ratio (#)
(Effective Date 22nd May
2009)
On the first 100 crores average weekly net assets
2.5000%
On the next 300 crores average weekly net assets 2.25%
On the next 300 crores average weekly net assets 2.00%
On the balance of the assets 1.75%
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Investment Objective
To generate long term capital appreciation from a portfolio of equity and equity-linked
instruments primarily drawn from the companies in BSE 200 index.
The investment strategy of primarily restricting the equity portfolio to the BSE 200 Index
scrips is intended to reduce risks while maintaining steady growth. Stock specific risk will be
minimised by investing only in those companies / industries that have been thoroughly
researched by the investment manager's research team. Risk will also be reduced through a
diversification of the portfolio.
SIP (Syestamatic Investment Plan)
Serial No.
Scheme Name
Minimum Application Amount(Rs.)
Entry Load
Exit Load
1 HDFC Top 200 Fund - Dividend / Growth
Rs.500 for Monthly & Rs.1500 for Quarterly
NIL In respect of each purchase / switch-in of units, an Exit Load of 1.00% is payable if Units are redeemed / switched-out within 1 year from the date of allotmentNo Exit Load is payable if Units are redeemed / switched-out after 1 year from the date of allotment.
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HDFC PORTFOLIO
Portfolio - Holdings (as on May 31, 2011)
EQUITY & EQUITY RELATED INDUSTRY % to NAV
State Bank of India Banks 6.56
ICICI Bank Ltd. Banks 6.12
Infosys Technologies Ltd. Software 5.42
Reliance Industries Ltd. Petroleum Products 4.54
ITC Ltd. Consumer Non
Durables
4.16
Bank of Baroda Banks 3.57
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Coal India Limited Minerals/Mining 3.45
Tata Consultancy Services Ltd. Software 3.40
Titan Industries Ltd. Consumer Non
Durables
2.92
Tata Motors Ltd. DVR Auto 2.50
Total of Top Ten Equity Holdings 42.64
Total Equity & Equity Related Holdings 94.46
Total Money Market Instrument & Other
Credit Exposures (aggregated holdings
in a single issuer)
0.00
Cash margin 0.20
Other Cash, Cash Equivalents and Net
Current Assets
5.34
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Rizvi Academy of Management
Grand Total 100.00
Net Asset (Rs. In Lakhs) 10,64,484.06
Returns
HDFC Top 200 Fund (NAV as at evaluation date 31-May-11, Rs.209.334 Per unit)
Date Period NAV Per
Unit (Rs.)
Returns
(%)^$$
Benchmark
Returns (%)
March 30, 2007 Last 1523 days 104.504 18.12** 9.82**
November 30,
2010
Last Six months
(182 days)
221.614 -5.54* -6.11*
May 31, 2010 Last 1 Year
(365 days)
184.857 13.24* 6.94*
May 30, 2008 Last 3 Years
(1096 days)
137.675 14.98** 4.13**
May 31, 2006 Last 5 Years
(1826 days)
87.333 19.09** 12.27**
May 31, 2001 Last 10 Years
(3652 days)
14.510 30.57** 19.56**
May 31, 1996 Last 15 Years
(5478 days)
N.A N.A. N.A.
October 11,
1996
Since Inception
(5345 days)
10.000 24.76** 14.58**
1) * Absolute Returns ** Compounded Annualised Returns
2) # BSE 200
3) ^ Past performance may or may not be sustained in the future
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4) $$ Adjusted for the dividends declared under the scheme prior to its splitting into the
Dividend and Growth Plans.
SIP Returns
SIP
Investments
Since
Inception
15 Year 10 Year 5 Year 3 Year 1 Year
Total Amount
Invested (Rs.)
176,000 N.A. 120,000 60,000 36,000 12,000
Market Value
as on May 31,
2011 (Rs.)
1,565,694.
27
N.A. 597,188.06 94,560.6
3
51,413.6
9
11,978.2
6
Returns
(Annualised)*
(%)
26.48% N.A. 30.19% 18.27% 24.63% -0.34%
Benchmark
Returns
(Annualised)
(%)#
16.61% N.A. 19.63% 10.40% 16.81% -4.45%
Market Value
of SIP in
Benchmark#
670,053.44 N.A. 337,494.60 77,919.9
0
46,119.5
3
11,711.3
1
BEHIND SUCCESS-
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1) HDFC Top 200 Fund Growth Option was assigned ‘CRISIL Mutual Fund Rank 1’ in the
‘Open End Large Cap Oriented Equity Schemes’ Category for the 2 year period ending
March 31, 2011 by CRISIL.
2) ‘CRISIL Mutual Fund Rank 1’ # in the ‘Open End Consistent Equity’ Category (out of 40
schemes) for the 5 year period ending March 31, 2011 by CRISIL.
Chapter 12
COMPOUNDING INTEREST
When you borrow money from a bank, you pay interest. Interest is really a fee charged for
borrowing the money, it is a percentage charged on the principle amount for a period of a
year usually.
If you want to know how much interest you will earn on your investment or if you want to
know how much you will pay above the cost of the principal amount on a loan or mortgage,
you will need to understand how compound interest works.
Interest that accrues on the initial principal and the accumulated interest of a principal
deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster
rate than simple interest, which is calculated as a percentage of only the principal amount.
The more frequently interest is added to the principal, the faster the principal grows and the
higher the compound interest will be. The frequency at which the interest is compounded is
established at the initial stages of securing the loan. Generally, interest tends to be calculated
on an annual basis, although other terms may be established at the time of the loan.
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* Compound interest is paid on the original principal and on the accumulated past interest.
Formula:
P is the principal (the initial amount you borrow or deposit)
r is the annual rate of interest (percentage)
n is the number of years the amount is deposited or borrowed for.
A is the amount of money accumulated after n years, including interest.
When the interest is compounded once a year:
A = P(1 + r)n
However, if you borrow for 5 years the formula will look like:
A = P(1 + r)5
This formula applies to both money invested and money borrowed.
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Frequent Compounding of Interest:
What if interest is paid more frequently?
Here are a few examples of the formula:
Annually = P × (1 + r) = (annual compounding)
Quarterly = P (1 + r/4)4 = (quarterly compounding)
Monthly = P (1 + r/12)12 = (monthly compounding)
The Three Things That Determine Your Compound Interest Returns
There are three things that will influence the rate at which your money compounds. These
are:
1. The interest rate your earn on your investment or, alternatively, the profit you earn; e.g.,
if you are investing in stock, this would be your total profit from capital gains and
dividends.
2. The length of time you can leave your money to compound. The longer your money can
remain uninterrupted, the bigger your fortune can grow. It's no different than planting a
tree. Naturally, the tree is going to be larger when it is 50 years old than it was when it
was 20 years old.
3. The tax rate, and the timing of the tax, you have to pay to the government. You will end
up with far more money if you don’t have to pay taxes at all, or until the end of the
compounding period rather than at the end of each year. That's why accounts such as the
Traditional IRA or Roth IRA, 401(k), SEP-IRA, and such are so important.
Compound Interest Tables - The Value of $10,000 Invested In a Lump Sum
Years 4% 8% 12% 16%10 Years $14,802 $21,589 $31,058 $44,114
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20 Years $21,911 $46,610 $96,463 $194,60830 Years $32,434 $100,627 $299,600 $858,50040 Years $48,010 $217,245 $930,510 $3,787,21250 Years $71,067 $469,016 $2,890,022 $16,707,038
CONCLUSION
This paper documents the tendency of mutual fund managers to follow analyst
recommendation revisions when theytrade stocks, and the impact of these analyst revision-
motivated mutual fund ³herds´ on stock prices. We find evidence that mutual fund herding
impacts stock prices to a much greater degree during our sample period than during prior-
studied periods. Most importantly, we find that mutual fund herds form most prominently
following consensus revision in analyst recommendations. Positive consensus
recommendation revisions result, most frequently, in a herd of funds buying a stock, while
negative revisions result, most frequently, in a herd of funds selling. This relation remains
robust after we control for stock characteristics and investment signals that influence both
fundtrading and analyst revisions and after using alternative measures of analyst revisions. In
addition, mutual funds react more strongly to analyst information when it appears to be more
credible.
Perhaps our most interesting result is that mutual funds appear to over react when they follow
analyst revisions upgraded stocks heavily bought by herds tend to underperform their size,
book-to-market, and momentum cohortsduring the following year, while downgraded stocks
heavily sold outperform their cohorts. These findings suggest that funds initially over react to
analyst revisions. Further evidence indicates that once we account for herding in response to
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analyst recommendation revisions, herding, in general, does not cause subsequent return
reversals, nor does analyst revisions by themselves
.Finally, we find that the selling of funds with greater career concerns (i.e., funds with poor
past performance) plays agreater role in destabilizing stock prices, supporting the conjecture
that analyst revision-induced herding is driven partly by non-information related incentives.
Further investigation into other incentives that drive herding on analyst revisions is left to
future research.
BIBLIOGRAPHY
www.valueresearchonline.com
www.finance.indiamart.com
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