SUMMER INTERNSHIP

REPORT 2018

1
Project report of the
OJT(on the job training)
AT

AT.PATNA
A
2
 TOPIC;
Systematic investment planning
&
basic terminology used in mutual fund

Submitted By
GAUTAM KUMAR
BBA 5thsem(2016-19)
ID NO:- 20447

SUMMER PROJECT CERTIFICATE

This is to certify that Mr. GAUTAM KUMAR (ID No. 20447) a student of
CIMAGE PROFESSIONAL COLLEGE has worked on a summer project titled
“systematic investmet planning with & basic terminology used in mutual
fund“ at KARVY Stock Broking Limited, Patna in Semester-V in partial
fulfillment of the requirement for the Three year full time Undergraduate
Program in Bachelor of Business Administration (2016-19). This is his original
work to the best of my knowledge.

3
Date: Signature
Dean CIMAGE,
Patna

DECLARATION

I hereby declare that the following project report titled “systematic invest
met planning with & basic terminology used in mutual fund“ is an authentic
work done by me. This is to declare that all work indulged in the completion
of this work such as research, data collection, analysis is a profound and
honest work of mine.

4
Date:
Place: GAUTAM KUMAR
BBA AKU 5th sem

ACKNOWLWDGEMENT

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I would like to thank employees of KARVY Stock Broking Limited for giving me
an opportunity to intern with them. The training at the company was held
over a period of 4 weeks. During this period I was guided by Mr. Shailesh
Kumar. The project report and the learning process would not have been
possible without his inputs and guidance at critical points of the project. He
imparted to me the knowledge of mutual funds and shared with me the
practical marketing techniques of mutual funds. He also made me sure that I
was exposed to all the distribution channels, the operational processes and
also was exposed to the sale of mutual funds. Under his guidance I was able
to enhance my marketing and interpersonal skills.

During the course of 4 weeks I came across other people who put in their
time and effort towards acclimatizing me towards the working of their
organization. I express my thanks to every one of them.

These 4 weeks were very important to me as it helped me in going beyond

the class room and get a practical feel of how things worked.

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 TABLE OF CONTENT
DECLARATION 04-05

ACKNOWLEDGEMENT 05-06

EXECUTIVE SUMMARY 09

COMPANY PROFILE 11-12

OBJECTIVES OF STUDY 21-22

SYSTEMATIC INVESTMENT PLANNING 22-27

MUTUAL FUNDS 28-51

SEBI GUIDELINES 51-61

RECOMMENDATIONS 61

Annexure 63-67

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8
 EXECUTIVE SUMMARY

This project has been a great learning experience for me at the same time it
gave me enough scope and knowledge to implement my analytical ability and
enhance my skills.

In few years Mutual Fund has emerged as a tool for ensuring one’s financial
well being. Mutual Funds have not only contributed to the India growth story
but have also helped families tap into the success of Indian Industry. As
information and awareness is rising more and more people are enjoying the
benefits of investing in mutual funds. The main reason the number of retail
mutual fund investors remains small is that nine in ten people with incomes in
India do not know that mutual funds exist. But once people are aware of
mutual fund investment opportunities, the number who decide to invest in
mutual funds increases to as many as one in five people. The trick for
converting a person with no knowledge of mutual funds to a new Mutual Fund
customer is to understand which of the potential investors are more likely to
buy mutual funds and to use the right arguments in the sales process that
customers will accept as important and relevant to their decision.

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10
COMPANY PROFILE

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Karvy Stock Broking Ltd.

The Karvy group was formed in 1983 at Hyderabad, India. KARVY, is a premier integrated
financial services provider, and ranked among the top five in the country in all its business
segments, services over 16 million individual investors in various capacities, and provides
investor services to over 300 corporates, comprising the who is who of Corporate India.

KARVY covers the entire spectrum of financial services such as Stock broking, Depository
Participants, Distribution of financial products like mutual funds, bonds, fixed deposit,
Merchant Banking & Corporate Finance, Insurance Broking, Commodities Broking,
Personal Finance Advisory Services, placement of equity, IPOs, among others. Karvy has a
professional management team and ranks among the best in technology, operations, and
more importantly, in research of various industrial segments.

Karvy computer share limited is India’s largest registrar and transfer agent with a client
base of nearly 500 blue chip corporate, managing over 2 crores accounts. Karvy stock
brokers limited, member of national stock exchange of India and the Bombay stock
exchange, rank among the top five stock brokers in India with over six lakh active account
it ranks among the top five depositary participants in India, registered with NSDL and
CSDL, Karvy commorade, member of NCDEX and MCX ranks among the top three
commodities brokers in the country. A Karvy insurance broker is registered as a broker with
IRDA and ranks among the top five insurance agent in the country. Registered with AMFI
as a corporate agent, Karvy is also among top mutual fund mobilize with over Rs 5000
crores under management. Karvy realty services, which started in 2006, have quickly
established itself as a broker, who adds value in the realty sector. Karvy global offer niche
off to off shoring services to U.S clients.

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 Karvy has 575 offices in 375 locations across India and overseas at Dubai and New York.
Over 9000 highly qualified people staff Karvy.

Vision of Karvy:

To achieve & sustain market leadership, Karvy shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide world class
quality services. In the process Karvy shall strive to meet and exceed customer's satisfaction
and set industry standards.

Mission statement:
“Our mission is to be a leading and preferred service provider to our customers, and we aim
to achieve this leadership position by building an innovative, enterprising , and technology
driven organization which will set the highest standards of service and business ethics.”

THE KARVY CREDO

 “Our Clients. Our Focus


Clients are the reason for our being.”

Personalized service, professional care; pro-activeness are the values that help the
organisation nurture enduring relationships with clients.

 Respect for the individual Each and every individual is an essential building
block of the organization.


 Teamwork

None of us is more important than all of us


 Responsible Citizenship

A social balance sheet is as rewarding as a business one.

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As a responsible corporate citizen, Karvy’s duty is to foster a better environment in the
society where we live and work. Abiding by its norms, and behaving responsibly towards
the environment, is some of our growing initiatives towards realizing it.

KARVY GROUP

I. Karvy Stock Broking Limited

Consists of five units namely stock broking servics, depository participant, advisory
services, distribution of financial products, advisory services and private client groups.
KARVY Stock Broking Limited is a member of: 1) National Stock Exchange (NSE) , 2)
Bombay Stock Exchange (BSE)

II. Karvy Comtrade Limited

Karvy Comtrade Limited is another venture of the prestigious Karvy group. The company
provides investment, advisory and brokerage services in Indian Commodities Markets. And
most importantly, it offer a wide reach through our branch network of over 225 branches
located across 180 cities.

III. Karvy Insurance Broking Limited

lt is also a part of Karvy stock broking ltd. At Karvy Insurance Broking Limited both
life and non-life insurance products are provided to retail individuals, high net-worth
clients and corporates. Their wide national network, spanning the length and breadth of

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 India, further supports these initiatives. Their strengths include personalized service
provided by a dedicated team committed in giving hassle-free service to the clients.

IV. Karvy Investor Services Limited

Karvy Investor Services Limited (‘KISL’), a SEBI registered Merchant Banker has
emerged as a leading Investment Banking entity in the country with over a decade of
experience. KISL has built its reputation by capitalizing on its qualified professionals, who
have successfully executed a large number of complex and unique transactions. Its
clientele includesinclude leading corporates, State Governments, foreign institutional
investors, public and private sector companies and banks, in Indian and global markets.

V. Karvy Realty(India) Limited

Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group, India’s
largestfinancial services group. Karvy Realty (India) Limited is engaged in the business of
real estate and property services offering:

Buying/ selling/ renting of properties

Identifying valuable investments opportunities in the real estate sector
Facilitating financial support for real estate and investments in properties
Real estate portfolio advisory services.

VI. Karvy Financial Services Limited

VII. Karvy Computershare(P) Limited

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 Karvy Computershare Private Limited is a joint venture between
Computershare,Australia and Karvy Consultants Limited, India in the registry
management services industry.
Computershare, Australia is the world’s largest and only global share registry
providing financial market services and technology to the global securities
industry.

VIII. Karvy Global Services Limited

Karvy Global is a leading business and knowledge process outsourcing Services

Company offering creative business solutions to clients globally. It operates in
banking and financial services, inurance, healthcare and pharmaceuticals, media ,
telecom and technology. It has its sales and business development office in New
York, USA and theoffshore global delivery center in Hyderabad, India.

IX. Karvy Data Management Services

Limited

Karvy Data Management Services is the domestic BPO arm of the Karvy Group
and services corporates across various industry verticals and business horizons.
KDMS is committed to provide best in class, value driven business solutions to its
clients by way of its innovative techniques and technology framework. KDMSL is
a fully owned subsidiary of Karvy Stock Broking Limited (KSBL), incorporated
in April 2008 and is head quartered at Hyderabad.

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 X. Karvy Consultants Limited
The first securities registry to receive ISO 9002 certification in India. Registered
with SEBI as Category I Registrar, is Number 1 Registrar in the Country.

KARVY Mutual Fund Services:

Mutual funds have servings for everybody. Whichever type of investor you are, you will
surely get a mutual fund meeting your requirements. But investing in mutual funds is no
child’s play therefore Karvy mutual fund advisory services is there to guide in each and
every step of investment in mutual funds so that the dream of wealth creation doesn’t turns
into nightmares. Its offerings includes: products of all the 33 major AMCs, research report
about all the existing funds as well as NFOs, customized mutual fund portfolios designed
for individual as well as institutional customers, it not only design the portfolios rather it
offers continuous portfolio revision too depending on changing market outlook and
evolving trends, it further gives access to its online consolidated portfolio statement. Thus
Karvy with its various offerings makes the investor feel safe in this dynamic environment of
the Indian financial market.

Karvy Computershare mutual fund services offers investors services, distributor services and client
services. It can be said that Karvy is dedicated towards providing quality service to all these three
facets of the investment process.

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Karvy being an intermediary is well registered with the Association of Mutual Funds of India
(AMFI). KARVY has got the registration no [ARN 0018] for mutual funds, which is mentioned on
every form. After the procurement of forms from various AMCs, the forms are passed on to its
various zonal and branch offices (as per their requirements) and then further processing is done
either directly or through sub-brokers.

Karvy operates through its sub- brokers, associates and its excellent pool of own direct employees.
The employees are offered salary by Karvy whereas the sub- brokers and associates get certain
commission. Karvy has 70 branches and 3 franchisees in the eastern region. All the work of mutual
funds is regulated from Rashbehari avenue branch, an extension of the JDR branch.

The main source of earning for KARVY is the brokerage offered by the various AMCs known as
pay-in. The amount offered may vary from AMC to AMC. Also, the franchisees have to pay a
certain amount every month. Now Karvy also pay a certain amount to the sub brokers and associates
known as pay-out. The payout is decided according to the procurement done by them.

List of Mutual Fund Clients of KARVY:

1 Alliance Mutual Fund

2 Birla Mutual Fund

3 Bank of Baroda Mutual Fund

4 Can Bank Mutual Fund

5 Chola Mutual Fund

6 Deutsche Mutual Fund

7 DSP Merrill Lynch Mutual Fund

8 Franklin Templeton Investments

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 9 GIC Mutual Fund

10 HDFC Mutual Fund

11 HSBC Mutual Fund

12 IL & FS Mutual Fund

13 JM Mutual Fund

14 Kotak Mutual Fund

15 LIC Mutual Fund

16 Punjab National Bank Mutual Fund

17 Prudential ICICI Mutual Fund

18 Principal Mutual Fund

19 Reliance Mutual Fund

20 State Bank of India Mutual Fund

21 Standard Chartered Mutual Fund

22 Sundaram Mutual Fund

23 SUN F&C Mutual Fund

24 Tata Mutual Fund

Quality policy:
To achieve and retain leadership, Karvy shall aim for complete customer
satisfaction, by combining its human and technological resources, to provide
superior quality financial services. In the process, Karvy will strive to exceed
Customer's expectations.

Quality Objectives
As per the Quality Policy, Karvy will:

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  Build in-house processes that will ensure transparent and harmonious
relationships with its clients and investors to provide high quality of
services.

 Establish a partner relationship with its investor service agents and vendors
that will help in keeping up its commitments to the customers.

 Provide high quality of work life for all its employees and equip them
with adequate knowledge & skills so as to respond to customer's
needs .
 Continue to uphold the values of honesty & integrity and strive to
establish unparalleled standards in business ethics.

 Use state-of-the art information technology in developing new and
innovative financial products and services to meet the changing needs of
investors and clients.

 Strive to be a reliable source of value-added financial products and services
and constantly guide the individuals and institutions in making a judicious
choice of same.

 Strive to keep all stake-holders (shareholders, clients, investors,

employees, suppliers and regulatory authorities) proud and satisfied.

Achievements

Among the top 5 stock brokers in India (4% of NSE volumes)

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 India's No. 1 Registrar & Securities Transfer Agents

Among the top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT users in India by MIS Asia

Full Fledged IT driven operations.

VALUES:
 Trust

 Integrity

 Dedication

 Commitment

 Transparency

 Enterprise

 Hard work and team play

 Learning & innovation

 Empathy and humility

OBJECTIVES OF THE STUDY

A big boom has been witnessed in Mutual Fund Industry in recent times.
A large number of new players have entered the market and trying to gain
market share in this rapidly improving market.

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 1. To find out the Preferences of the investors for Asset
Management Company.
2. To know the Preferences for the portfolios.
3. To know why one has invested or not invested in Mutual fund
4. To find out the most preferred channel.
5. To find out what should do to boost Mutual Fund Industry

SYSTEMATIC INVESTMENT
PLANNING

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23
 SYSTEMATIC INVESTMENT PLANNING

What is Systematic Investment Plan (SIP)?

SIP is an investment option that is presently available only with mutual funds. The other investment
option comparable to SIP is the recurring deposit schemes from Post Offices and Banks. Basically,
under an SIP option, an investor commits to making a regular (monthly) investment in a particular
mutual fund/deposit.

How to invest in SIP?

The SIP option is available with all types of funds like equity, income or gift.

An investor can avail the SIP option by giving post-dated cheques of Rs.500 or Rs.1000
according to the funds’ policy.

If an investor wants to put more than Rs.500 or Rs.1000 in any given month he will have to fill
in a new form for SIP intimating the fund that he is changing his SIP structure. Also he will be
allowed to change the SIP structure only in the multiples of the SIP amount.

If an investor is investing in two different schemes of the same fund he can fill in a common
SIP form for all the schemes. However, if the first holders in those schemes are different then
they will have to fill different SIP forms, as the first holder has to sign on the form.

The investor can get out of the fund i.e. redeem his units any time irrespective of whether he
has completed his minimum investment in that scheme. In that case, his post-dated cheques
will be returned back to him.

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 Let’s take an example:

An investor ‘ARJUN’ wants to invest in fund ‘A’ which can be an equity, income or
gift.

The policy of fund ‘A’ for entering in an SIP is that the investor will have to issue 6
post-dated cheques of Rs.500/- in case of monthly option or 4 cheques in a quarterly
option. The minimum investment for all its schemes is Rs.5000. ‘ARJUN’ issues 6
post-dated cheques of Rs.500/- each in the name of fund ‘A’ with the first cheque being
dated as on 7thMay 2001.

Now in the month of August 2001 ‘ARJUN’ wants to change his SIP structure from
Rs.500/- to Rs.1000/-. In this case, he will have to intimate the fund and will have to fill
a new SIP form issuing new post-date cheques of Rs.1000/- each.

‘ARJUN’ is investing in three different schemes of fund ‘A’. In two of the schemes
‘ARJUN’ is the first holder and in the third scheme his wife is the first holder. In this
case, he can fill a common SIP form where he is the first holder and where his wife is
he first holder, e will have to fill in a new SIP form.

In the month of September 2001, ‘ARJUN’ wants to exit from the fund. He will just
have to give a redemption request to the fund wherein is units will be redeemed and his
remaining post-dated cheques will be returned back to him irrespective of whether he
has completed his minimum investment in the fund.

Investing in SIP is also known as Rupee Cost Averaging. The advantage of rupee cost averaging is
that the Net Asset Value (NAV) is averaged out, as the investor will be entering the fund at different
NAV’s, which may be higher or lower depending on the market condition.

Let’s take the example of ‘ARJUN’ he has started investing in units every month since he issued the
first cheque on 7th May 2001. In this example we assume that he does not change his SIP structure and
also does not redeem the units.

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Investment in fund ‘A’ of Mr. ARJUN

Period Investment(Rs.) NAV(Rs. per unit) Units allocated

7th May’01 500.00 10.00 50
7th June’01 500.00 13.00 38.5
7th July’01 500.00 10.50 47.6
7th Aug’01 500.00 9.50 52.6
7th Sep’01 500.00 8.00 62.5
TOTAL a=2500 b=251.2

Actual average NAV (Rs.) = Rs.10.2 per unit

NAV for ARJUN= Rs.9.95 per unit (a/b)

The above table shows clearly how rupee cost averaging works and how it was beneficial to
‘ARJUN’. The actual average NAV of a fund is Rs.10.2/- per unit, but the average NAV for
‘ARJUN’ is Rs.9.95/- per unit, which is lower than the current NAV.

An investor who is not having a lump-sum amount to invest and also does not want to take much
risk on his investment should always select a ‘Systematic Investment Plan’ option. This will enable
him to invest regularly i.e. improve investing discipline. Also, the investor stands to benefit from
rupee cost averaging.

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ADVANTAGES OF SIP

Power of Compounding

SIP helps you to start investing at an early age to meet the greater expenses of your life.
Saving a small sum of money regularly makes money work with greater power of
compounding with significant impact on wealth accumulation.

Rupee Cost Averaging

SIP minimizes the effects of investing in volatile markets. It helps you average out your cost
by generating superior returns in the long run. It reduces the risk associated with lump-sum
investments. Since you get more units when the NAV drops and fewer when it rises, the cost
averages out over time. Thus the average cost of your investment is often reduced.

Convenience and Regularity

SIP gives you the convenience to pay through Axis Bank Electronic clearance service (ECS) or
Auto Debit. You can decide the amount and the mutual fund scheme. A fixed amount will
automatically get debited from your account on a date specified by you.

Disciplined Approach towards Investment

Since you invest regularly, it makes you disciplined in your savings, which leads to
wealth accumulation. Disciplined investing is vital to earning good returns.

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MUTUAL FUNDS

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 MUTUAL FUNDS

A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual
fund as a company that brings together a group of people and invests their money in stocks, bonds, and
other securities. Each investor owns shares, which represent a portion of the holdings of the fund.
Mutual fund is a trust that pools the savings of a number of investors who share a common financial
goal. This pool of money is invested in accordance with a stated objective. The joint ownership of the
fund is thus “Mutual”, i.e. the fund belongs to all investors. The money thus collected is then invested
in capital market instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciations realized are shared by its unit holders in
proportion the number of units owned by them. Thus a Mutual Fund is the most suitable investment
for the common man as it offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost. A Mutual Fund is an investment tool that allows small
investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Units are issued and can be redeemed as needed. The fund’s
Net Asset value (NAV) is determined each day. Investments in securities are spread across a wide
cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk
because all stocks may not move in the same direction in the same proportion at the same time. Mutual
fund issues units to the investors in accordance with quantum of money invested by them. Investors of
mutual funds are known as unit holders.

You can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income
it receives over the year to fund owners in the form of a distribution.

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2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also
pass on these gains to investors in a distribution.

3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in
price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice
either to receive a check for distributions or to reinvest the earnings and get more shares.
The competition among funds has led to the launch of newer products, tailor-made
to suit the requirements of investors. Mutual funds now offer products for the entire range of needs of
investors. The encouraging response to index funds and sector funds shows the growing maturity
among investors. Open-end funds, which provide liquidity to investors at daily NAV related prices are
growing in popularity. The funds have been adopting technology to provide good service to investors
and with the proposed introduction of electronic funds transfer and the growing trend towards E-
Commerce; the efficiency of service will increase even further.
In the coming years mutual funds as saving intermediaries will play a greater role in bringing the gap
between investors and issuers, especially in the area of equity funds. At present these funds represents
13% of BSE market capitalization. This is expected to go up with increasing flows into financial
savings, especially the mutual fund with the growth and stability in the capital market flows into
equity funds are expected to go up.
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial
goal. The money thus collected is then invested in capital market instruments such as shares,
debentures and other securities. The income earned through these investments and the capital
appreciation realized is shared by its unit holders in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to
invest in a diversified, professionally managed basket of securities at a relatively low cost.
Mutual funds, also referred to as investment companies, offer an alternative investment choice for
individuals with a long-term horizon. The way they operate is that individual investor money are
pooled and invested in many different companies. Assets are professionally managed to meet various
investment objectives. They issue and sell shares to share holders and also redeem them (buy them
back) upon request. Prices of shares are set daily at the close of business, based on the

30
value of all investments in the mutual fund’s portfolio. Their major advantages are diversification and
professional management, which are not readily available to small investors outside the mutual fund
arena. Money market mutual funds are short-term funds. They invest in short-term cash and cash
equivalent instruments, such as Treasury bills, certificates of deposit, and short term notes. Mutual
funds may own stocks and bonds of many different companies.
A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario.
Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other
assets have become mature and information driven. Price changes in these assets are driven by global
events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills,
inclination and time to keep track of events, understand their implications and act speedily. An
individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues
and bank transactions etc.

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When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets
of the fund in the same proportion as his contribution amount put up with the corpus (the total
amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit
holder.
Any change in the value of the investments made into capital market instruments (such as shares,
debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the

32
market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is
calculated by dividing the market value of scheme's assets by the total number of units issued to
the investors.

HISTORY OF MUTUAL FUNDS

In 1924 three Boston securities executives pooled their money together to create the first mutual fund.
The idea of pooling money together for investing purposes started in Europe in the mid-1800s. The
first pooled fund in the U.S was created in 1893 for the faculty and staff of Harvard University on
March 21st, 1924 the first official mutual fund was born. It was called the Massachusetts Investors
Trust.
However in India UTI was the first to introduce mutual funds in the Indian markets and it commenced
its operations from July 1964, Government allowed public sector banks and institutions to set up
mutual funds.
In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of
SEBI are – to protect the interest of investors in securities and to promote the development of and to
regulate the securities market.
As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to
protect the interest of the investors. SEBI notified regulations for the mutual funds in1993. Thereafter,
mutual funds sponsored by private sector entities were allowed to enter the capital market. The
regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has
also issued guidelines to the mutual funds from time to time to protect the interests of investors.
All mutual funds whether promoted by public sector or private sector entities including those
promoted by foreign entities are governed by the same set of regulations. There is no distinction in
regulatory requirements for these mutual funds and all are subject to monitoring and inspections by
SEBI. The risks associated with the schemes launched by the mutual funds sponsored by these entities
are of similar type. It may be mentioned here that Unit Trust of India (UTI) is not registered with SEBI
as a mutual fund (as on January 15, 2002. The end of millennium marks 36 years of existence of
mutual funds in our country. The ride through these 36 years is not been smooth. Investor opinion is
still divided. While some are for mutual funds others are against it.

33
Mutual fund schemes:
Mutual funds offer a variety of schemes to investor so as to provide steady income or growth or both.
They differ according to the investment policies. The funds like individual investor have a different
goal. Of the investor who will first ascertain his investment objectives, thinking that the units of a fund
have an investment goal paralleling his objectives.

Mutual Funds Basics:

As you probably know, mutual funds have become extremely popular over the last 20 years. What was
once just another obscure financial instrument is now a part of our daily lives.
In fact, to many people, investing means buying mutual funds. After all, it's common knowledge that
investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a
savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that
mutual fund salespeople speak a strange language that, sounding sort of like English, is interspersed
with jargon like MER, NAVPS, load/no-load, etc.
Originally mutual funds were heralded as a way for the little guy to get a piece of the market. Instead
of spending all your free time buried in the financial pages of the investment Journal, all you have to
do is buy a mutual fund and you'd be set on your way to financial freedom. As you might have
guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't
always delivered. Not all mutual funds are created equal, and investing in mutual funds isn't as easy as
throwing your money at the first salesperson who solicits your business.

34
Important Characteristics of a Mutual Fund:

A Mutual Fund actually belongs to the investors who have pooled their Funds.
The ownership of the mutual fund is in the hands of the Investors.

A Mutual Fund is managed by investment professional and other Service

providers, who earns a fee for their services, from the funds.

The pool of Funds is invested in a portfolio of marketable investments.

The value of the portfolio is updated every day.

The investor’s share in the fund is denominated by“units”. The value of the units changes with
change in the portfolio value, every day. The value of one unit of investment is called net asset
value (NAV).

The investment portfolio of the mutual fund is created according to The stated
Investment objectives of the Fund.

Advantages of Mutual Funds:

Professional Management-The primary advantage of funds (at least
theoretically ) is the professional management of your money. Investors purchase funds
because they do not have the time or the expertise to manage their own portfolio. A mutual
fund is a relatively inexpensive way for a small investor to get a full-time manager to make and
monitor investments.

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 Diversification -By owning shares in a mutual fund instead of owning individualstocks or
bonds, your risk is spread out. The idea behind diversification is to invest in a large number of
assets so that a loss in any particular investment is minimized by gains in others. In other
words, the more stocks and bonds you own, the less any one of them can hurt you (think about
Enron). Large mutual funds typically own hundreds of different stocks in many different
industries. It wouldn't be possible for an investor to build this kind of a portfolio with a small
amount of money.

Economies of Scale -Because a mutual fund buys and sells large amounts ofsecurities at a
time, its transaction costs are lower than you as an individual would pay.

Liquidity -Just like an individual stock, a mutual fund allows you to request that yourshares
be converted into cash at any time.

Simplicity -Buying a mutual fund is easy! Pretty well any bank has its own line ofmutual
funds, and the minimum investment is small. Most companies also have automatic purchase
plans whereby as little as Rs 500 can be invested on a monthly basis.

Disadvantages of Mutual Funds:

Professional Management -Did you notice how we qualified the advantage
ofprofessional management with the word "theoretically"? Many investors debate over whether
or not the so-called professionals are any better than you or I at picking stocks. Management is
by no means infallible, and, even if the fund loses money, the manager still takes his/her cut.

Costs -Mutual funds don't exist solely to make your life easier--all funds are in it for aprofit.
The mutual fund industry is masterful at burying costs under layers of jargon. Because funds
have small holdings in so many different companies, high returns from a few investments often
don't make much difference on the overall return. Dilution is also the result of a successful

36
 fund getting too big. When money pours into funds that have had strong success, the manager
often has trouble finding a good investment for all the new money.

Taxes -When making decisions about your money, fund managers don't consider your
personal tax situation. For example, when a fund manager sells a security, a capital-gain

tax is triggered, which affects how profitable the individual is from the sale. It might have been
more advantageous for the individual to defer the capital gains liability.

Risk Involved in Mutual Funds

All investments involve some form of risk, which should be evaluated them potential rewards when an
investment is selected.

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”.

Interest rate risk

Sometimes referred to as “loss of purchasing power”. Whenever inflation sprints
forward faster than the earnings on your investment, you run the risk that you will
actually be able to buy less, not more. Inflation risk also occurs when prices rise faster
than your returns.

Credit risk
In short, how stable is the company or entity to which you lend your money when you invest? How
certain are you that it will be able to pay the interest you are promised, or repay your principal when
the investment matures?

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Inflation 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.

Effect of loss of key professional and inability to adopt

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.

Exchange risks
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.

Investment risks
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.

Changes in 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.

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 HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at
the initiative of the Government of India and Reserve Bank. Though the growth was 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 a dramatic improvement, both qualities
wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the
Assets Under Management (AUM) was Rs67 billion. The private sector entry to the fund family
raised the Aum to Rs. 470 billion in March 1993 and till April 2004; it reached the height if Rs.
1540 billion.

The Mutual Fund Industry is obviously growing at a tremendous space with 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 by the
Reserve Bank of India and functioned under the Regulatory and administrative control of
the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial

39
 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)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks
and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India
(GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987
followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89),
Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund
(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund
in December 1990.At the end of 1993, the mutual fund industry had assets under
management of Rs.47,004 crores.

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

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

40
(Mutual Fund) Regulations 1996. As at the end of January 2003, there were 33 mutual funds
with total assets of Rs. 1,21,805 crores.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other schemes

The 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. consolidation and
growth. As at the end of September, 2004, there were 29 funds, which manage assets of
Rs.153108 crores under 421 schemes.

CATEGORIES OF MUTUAL FUND:

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Mutual Funds Can Be Classified As Follow :
Based on their structure:

Open-ended funds:Investors can buy and sell the units from the fund, at any point
of time.
Close-ended funds: These funds raise money from investors only once. Therefore,after the offer period,

fresh investments cannot be made into the fund. If the fund is listed on a stocks exchange the units can be traded like

stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided

liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified

intervals. Therefore, such funds have relatively low liquidity.

Based on their investment objective:

Equity funds: These funds invest in equities and equity related instruments.
Withfluctuating share prices, such funds show volatile performance, even losses.
However, short term fluctuations in the market, generally smoothens out in the long
term, thereby offering higher returns at relatively lower volatility. At the same time,
such funds can yield great capital appreciation as, historically, equities have

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 outperformed all asset classes in the long term. Hence, investment in equity funds
should be considered for a period of at least 3-5 years. It can be further classified as:

i) Index funds- In this case a key stock market index, like BSE Sensex or Niftyis
tracked. Their portfolio mirrors the benchmark index both in terms of composition and
individual stock weightages.

ii) Equity diversified funds- 100% of the capital is invested in equities spreading
across different sectors and stocks.

iii|) Dividend yield funds- it is similar to the equity diversified funds except thatthey invest in
companies offering high dividend yields.

iv) Thematic funds- Invest 100% of the assets in sectors which are related
through some theme.
e.g. -An infrastructure fund invests in power, construction, cements sectors etc.

v) Sector funds- Invest 100% of the capital in a specific sector. e.g. - A bankingsector fund
will invest in banking stocks.

vi) ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

Balanced fund: Their investment portfolio includes both debt and equity. As aresult, on the
risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal
mutual funds vehicle for investors who prefer spreading their risk across various instruments.
Following are balanced funds classes:

i) Debt-oriented funds -Investment below 65% in equities.

ii) Equity-oriented funds -Invest at least 65% in equities, remaining in debt.

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Debt fund: They invest only in debt instruments, and are a good option forinvestors averse to
idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income
instruments like bonds, debentures, Government of India securities; and money market
instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put
your money into any of these debt funds depending on your investment horizon and needs.

i) Liquid funds- These funds invest 100% in money market instruments, a largeportion being
invested in call money market.

ii) Gilt funds ST- They invest 100% of their portfolio in government securities of
and T-bills.

iii) Floating rate funds - Invest in short-term debt papers. Floaters invest in debtinstruments
which have variable coupon rate.

iv) Arbitrage fund- They generate income through arbitrage opportunities due tomis-pricing
between cash market and derivatives market. Funds are allocated to equities, derivatives and
money markets. Higher proportion (around 75%) is put in money markets, in the absence of
arbitrage opportunities.

v) Gilt funds LT- They invest 100% of their portfolio in long-term governmentsecurities.

vi) Income funds LT- Typically, such funds invest a major portion of theportfolio in long-
term debt papers.

vii) MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and anexposure of
10%-30% to equities.

viii) FMPs- fixed monthly plans invest in debt papers whose maturity is in linewith that of the
fund.

INVESTMENT STRATEGIES

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 1. Systematic Investment Plan: Under this a fixed sum is invested each monthon a fixed date
of a month. Payment is made through post dated cheques or direct debit facilities. The investor
gets fewer units when the NAV is high and more units when the NAV is low. This is called as
the benefit of Rupee Cost Averaging (RCA).

2. Systematic Transfer Plan: Under this an investor invest in debt oriented fundand give
instructions to transfer a fixed sum, at a fixed interval, to an equity
scheme of the same mutual fund.

3. Systematic Withdrawal Plan: If someone wishes to withdraw from a mutualfund then he can
withdraw a fixed amount each month.

Working of a Mutual fund:

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The entire mutual fund industry operates in a very organized way. The investors, known as unit
holders, handover, their savings to the AMCs under various schemes. The objective of the investment
should match with the objective of the fund to best suit the investors’ needs. The AMCs further invest
the funds into various securities according to the investment objective. The return generated from the
investments is passed on to the investors or reinvested as mentioned in the offer document.

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, Indian Bank 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.

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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

ABN AMRO MUTUL 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.

Birla Sun Life 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 organisation evolved in 1871 and is being represented in Canada, the US,

47
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 (BOB 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 Fund and was incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC MUTUL 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.

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 USA. Prudential ICICI Mutual Fund was setup on 13th of October, 1993
with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company formed is Prudential ICICI
Trust Ltd. and the AMC is Prudential ICICI Asset Management Company Limited incorporated on
22nd of June, 1993.

Sahara Mutual Fund:-

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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:-

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 sponsors 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's
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 sponsors of UTI Mutual Fund are
Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of India (SBI), and Life Insurance
Corporation of India (LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset
Management Funds, Index Funds, Equity Funds and Balance Funds.

49
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 India Mutual Fund:-

The group, Franklin Templeton Investments is a California (USA) based company with a global AUM
of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world.
Investors can buy or sell the Mutual Fund through their financial advisor or through mail or through
their website. They have Open end Diversified Equity schemes, Open end Sector Equity schemes,
Open end Hybrid schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes,
Closed end Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India:-

Morgan Stanley is a worldwide financial services company and its leading in the market in securities,
investment management and credit services. Morgan Stanley Investment Management (MISM) was
established in the year 1975. It provides customized asset management services and 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.

50
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 sponsor. 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:-

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the
sponsor 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 Fu nd:-

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

51
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 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.

SEBI GUIDELINES FOR MUTUAL FUND

Mutual funds cannot invest more than 10 per cent of the total net assets of a scheme in the short-term
deposits of a single bank, the Securities and Exchange Board of India said on Monday.

Announcing guidelines for parking of funds in short-term deposits of scheduled commercial banks
(SCBs) by mutual funds, the regulator said that investment cap would also take into account the
deposit schemes of the bank's subsidiaries.

52
The SEBI has also defined 'short term' for funds' investment purposes as a period not exceeding 91
days.

Besides, the parking of funds in short-term deposits of all SCBs has been capped at 15 per cent of the
net asset value (NAV) of a scheme, which can be raised to 20 per cent with prior approval of the
trustees.

The parking of funds in short-term deposits of associate and sponsor SCBs together should not exceed
20 per cent of total deployment by the MF in short-term deposits, it added.

The SEBI said that these guidelines are aimed at ensuring that funds collected in a scheme are invested
as per the investment objective stated in the offer document of an MF scheme.

The new guidelines would be applicable to all fresh investments whether in a new scheme or an
existing one. In cases of an existing scheme, where the scheme has already parked funds in short-term
deposits, the asset management company have been given three-months time to conform with the new
guidelines.

The SEBI has also asked the trustees of a fund to ensure that no funds are parked by a scheme in short
term deposit of a bank, which has invested in that particular scheme.

The SEBI guidelines say that asset management companies (AMCs) shall not be permitted to charge
any investment and advisory fees for parking of funds in short-term deposits of banks in case of liquid
and debt-oriented schemes.

What are the new SEBI guidelines all about?

Relevant extract of the SEBI circular released on June 30, 2009 (SEBI/IMD/CIR No. 4/168230/09) is
as follows:

'In order to empower the investors in deciding the commission paid to distributors in accordance with
the level of service received, to bring about more transparency in payment of commissions and to
incentivize long term investment, it has been decided that:

There shall be no entry load for all mutual fund schemes

53
 The scheme application forms shall carry a suitable disclosure to the effect that the upfront
commission to distributors will be paid by the investor directly to the distributor, based on his
assessment of various factors including the service rendered by the distributor.

Of the exit load or CDSC charged to the investor, a maximum of 1% of the redemption
proceeds shall be maintained in a separate account which can be used by the AMC to pay
commissions to the distributor and to take care of other marketing and selling expenses. Any
balance shall be credited to the scheme immediately

The distributors should disclose all the commissions (in the form of trail commission or any
other mode) payable to them for the different competing schemes of various mutual funds
from amongst which the scheme is being recommended to the investor.

This circular shall be applicable for :

Investments in mutual fund schemes (including additional purchases and switch-in to a scheme
from other schemes) with effect from August 1, 2009

Redemptions from mutual fund schemes (including switch-out from other schemes) with effect
from August 1, 2009

BASIC TERMINOLOGY
IN MUTUAL FUNDS

UNIT

54
Unit means the interest of the unit holders in a scheme which consists of each unit
representing one undivided share in the asset of a scheme. A person holding one or
more units in a scheme of a Mutual Fund is referred to as Unit-holder.

NET ASSET VALUE

The net asset value (NAV) of a mutual fund is simply its assets minus its liabilities. In
other words, NAV equals the fund's worth. If a fund has assets of $50 million and
liabilities of $10 million, it would have a NAV of $40 million.

This number is important to investors, because it is from NAV that the price per unit of
a fund is calculated. By dividing the NAV of a fund by the number of outstanding units,
you are left with the price per unit. In our example, if the fund had 4,000,000 shares
outstanding, the price-per-share value would be $40 million divided by 4,000,000,
which equals $10.

The NAVs of funds are constantly changing and, as such, so are their price per shares.
Funds usually wait until the end of each trading day to recalculate their NAV and
individual share prices.

We should note that simply analyzing the NAV is not a good measure of the fund's
growth. Funds are constantly paying out distributions of both capital gains and
dividends, which reduce the NAV of the fund and do not reflect any appreciation in the
price per unit. Say a fund's price per unit increased from $10 to $15, but the fund also
distributed $5 per share to all unit holders. The fund hasn't simply appreciated by 50%
($10*1.5 = $15), as the per-unit cost would suggest; it has actually appreciated 100%
($10*2 = $20). So do not mistake a fund's per-share price based on NAV for the actual
earnings of the fund

Load

This is a fee charged when you buy or sell the units of a fund. When you buy the units
of a fund, you pay a percentage of it as a fee. This is known as the entry load.

Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs
200 as the entry load and Rs 9,800 is invested in the fund.

55
Now, let's assume you are selling the units of your fund. And the Rs 10,000 you
invested initially is now Rs 15,000. Let's further assume that the exit load is 2%. So you
pay Rs 300 and get back Rs 14,700.

Generally, if funds charge an entry load, they will not charge an exit load. Or vice
versa. Only one of the loads is charged.
The load is a percentage of the NAV.

Portfolio

This is the term given to all the investments made by the fund as well as the amount
held in cash.

Corpus

Let's assume a very small mutual fund has an initial investment of 1,000 units and each
unit is worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred
to as the Corpus. Later, some other investors invest Rs 2,000. Now the corpus will be
Rs 12,000 (Rs 10,000 + Rs 2,000).
The total amount invested (Rs 12,000) is called the corpus or the total amount of
money invested in the fund.

56
AUM

Assets Under Management is the total value of all the investments currently being
managed by the fund.
Let's say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has
invested in, the value of the units has increased. So the Rs 12,000 invested is now
worth Rs 15,000. This figure is referred to as AUM

SALES PRICE
It is the price that a person pays when he invests in a scheme. It is also called OFFER
PRICE. It may include a sales load.

REPURCHASE PRICE
It is the price at which a close-ended scheme repurchases its units and it may include a
back-end load. This is also called BID-PRICE.

REDEMPTION PRICE
It is the price at which open-ended schemes repurchase their units and close-ended
schemes redeem their units on

Open Ended Schemes: As the name implies the size of the scheme (Fund) is open –
i.e., not specified or pre-determined. Entry to the fund is always open to the investor
who can subscribe at any time. Such fund stands ready to buy or sell its securities at
any time. It implies that the capitalization of the fund is constantly changing as
investors sell or buy their shares. Further, the shares or units are normally not traded
on the stock exchange but are repurchased by the fund at announced rates. Open-
ended schemes have comparatively better liquidity despite the fact that these are not
listed. The reason is that investors can any time approach mutual fund for sale of such
units. No intermediaries are required. Moreover, the realizable amount is certain since
repurchase is at a price based on declared net asset value (NAV). No minute to minute
fluctuations in rates haunt the investors. The portfolio mix of such schemes has to be
investments, which are actively traded in the market. Otherwise, it will not be possible
to calculate NAV. This is the reason that generally open-ended schemes are equity
based. Moreover, desiring frequently traded securities, open-ended schemes hardly
have in their portfolio shares of comparatively new and smaller companies since these
are not generally traded. In such funds, option to reinvest its dividend is also available.
Since there is always a possibility of withdrawals, the management of such funds
becomes more tedious as managers have to work from crisis to crisis. Crisis may be on

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two fronts, one is, that unexpected withdrawals require funds to maintain a high level
of cash available every time implying thereby idle cash. Fund managers have to face
questions like ‘ what to sell’. He could very well have to sell his most liquid assets.
Second, by virtue of this situation such funds may fail to grab favourable opportunities.
Further, to match quick cash payments, funds cannot have matching realisation from
their portfolio due to intricacies of the stock market. Thus, success of the open-ended
schemes to a great extent depends on the efficiency of the capital market and the
selection and quality of the portfolio.

Close Ended Schemes: Such schemes have a definite period after which their shares/
units are redeemed. Unlike open-ended funds, these funds have fixed capitalisation,
i.e., their corpus normally does not change throughout its life period. Close ended fund
units trade among the investors in the secondary market since these are to be quoted
on the stock exchanges. Their price is determined on the basis of demand and supply
in the market. Their liquidity depends on the efficiency and understanding of the
engaged broker. Their price is free to deviate from NAV, i.e., there is every possibility
that the market price may be above or below its NAV. If one takes into account the
issue expenses, conceptually close ended fund units cannot be traded at a premium or
over NAV because the price of a package of investments, i.e., cannot exceed the sum
of the prices of the investments constituting the package. Whatever premium exists
that may exist only on account of speculative activities. In India as per SEBI (MF)
Regulations every mutual fund is free to launch any or both types of schemes.
MUTUAL FUNDS - ORGANISATION

There are many entities involved and the diagram below illustrates the
organisational set up of a mutual fund:

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 Organisation of a Mutal Fund

MUTUAL FUND CONSTITUENTS

All mutual funds comprise four constituents – Sponsors, Trustees, Asset Management
Company (AMC) and Custodians.
Sponsors:
The sponsors initiate the idea to set up a mutual fund. It could be a registered
company, scheduled bank or financial institution. A sponsor has to satisfy certain
conditions, such as capital, record (at least five years’ operation in financial services),
de-fault free dealings and general reputation of fairness. The sponsors appoint the
Trustee, AMC and Custodian. Once the AMC is formed, the sponsor is just a
stakeholder.

Trust/ Board of Trustees:

Trustees hold a fiduciary responsibility towards unit holders by protecting their
interests. Trustees float and market schemes, and secure necessary approvals. They
check if the AMC’s investments are within well-defined limits, whether the fund’s
assets are protected, and also ensure that unit holders get their due returns. They also
review any due diligence by the AMC. For major decisions concerning the fund, they
have to take the unit holders consent. They submit reports every six months to SEBI;
investors get an annual report. Trustees are paid annually out of the fund’s assets – 0.5
percent of the weekly net asset value.

Fund Managers/ AMC: They are the ones who manage money of the investors. An
AMC takes decisions, compensates investors through dividends, maintains proper
accounting and information for pricing of units, calculates the NAV, and provides

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information on listed schemes. It also exercises due diligence on investments, and
submits quarterly reports to the trustees. A fund’s AMC can neither act for any other
fund nor undertake any business other than asset management. Its net worth should
not fall below Rs. 10 crore. And, its fee should not exceed 1.25 percent if collections
are below Rs. 100 crore and 1 percent if collections are above Rs. 100 crore. SEBI can
pull up an AMC if it deviates from its prescribed role.

Custodian: Often an independent organisation, it takes custody of securities and other

assets of mutual fund. Its responsibilities include receipt and delivery of securities,
collecting income-distributing dividends, safekeeping of the units and segregating
assets and settlements between schemes. Their charges range between 0.15-0.2
percent of the net value of the holding. Custodians can service more than one fund.

COSTS INVOLVED IN MUTUAL FUNDS

Costs are the biggest problem with mutual funds. These costs eat into your return, and
they are the main reason why the majority of funds end up with sub-par performance.

There are two broad categories of Mutual Fund Costs, namely – (a) Operating
expenses , (b) Sales charges. The latter may be sub-divided under (i) Front end loads ,
(ii) Back end loads. These terms are explained below

OPERATING EXPENSES

Costs involved in operating Mutual Funds include advisory fees paid to investment
managers, custodial fees, audit fees, transfer agent fees, trustee fees, agents
commission etc. The break-up of these expenses is required to be reported in the
schemes offer document. When the operating expenses are divided by the average net
asset, the expense ratio is arrived at. Based on the type of scheme and the net assets,
operating expenses are determined within the limits indicated by SEBI Mutual Funds
Regulations, 1996. Expenditure which is in excess over the specified limits shall be
borne by Asset Management Company, the Trustees or the Sponsors. Operating
expenses are calculated on an annualized but are accrued on a daily basis. Therefore,
an investor face expenses prorated for the time he has invested in the fund.

SALES CHARGES

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These are otherwise called as sales loads and are charged directly to the investors.
Mutual Funds use the sales loads for payment of agents commission and expenses for
distribution and marketing. Sales charges have no impact on the performance of the
scheme as these are collected from the investors.

FRONT-END LOADS is a one time fixed fee which is paid by an investor while he buys
into a scheme.. Printed loads determines the public offer price (POP) which in turn
determines how much of the initial investment gets actually invested. Front end loads
decreases as the initial investment amounts increases.

BACK END LOAD : THIS WILL BE A FIXED FEE REDEMPTION LOAD OR A CONTINGENT
DEFERRED SALES CHARGE. AS REDEMPTION LOAD EXISTS PERMANENTLY AND IS PAID
ONLY AT THE TIME OF REDEEMING OR SELLING UNITS OF A LOAD.

No Load Funds also operate in the market. Funds selling their shares directly to the
public at the NAV do not collect sales charges. The expenses are borne by the fund
itself. As there are no brokerage firms involved, the investor deals directly with the
investment company which offers the funds.

RISKS INVOLVED IN MUTUAL FUNDS

Mutual Funds do not provide assured returns. Their returns are linked to their
performance. They invest in shares, Debentures, Bonds etc. All these investments
involve an element of risk. The unit value may vary depending upon the performance
of the company and if a company defaults in payments of interest/principal on their
debentures/bonds the performance of fund may get affected. Besides in case there is
a sudden downturn in an industry or the government comes with new regulation
which affects a particular industry or company the fund can again be adversely
affected. All these factors can influence the performance of mutual funds.

Some are the risks to which Mutual Funds are exposed to is given below:

MARKET RISK

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If the overall stock or bond markets fall on account of overall economic factors, the
value of stock or bond holdings in the fund’s portfolio can drop, thereby impacting the
fund performance.

NON-MARKET RISKS

Bad news about an individual company can pull down its stock price, which can
negatively affect fund holdings. This risk can be reduced by having a diversified
portfolio that consists of a wide variety of stocks drawn from different industries.

INTEREST RATE RISK

Bond prices and interest rates move in opposite directions. When interest rate rises,
Bond prices falls and this decline in underlying securities affect the fund negatively.

CREDIT RISK

Bonds are debt obligations. So when the funds invest in corporate bonds, they run the
risks of the corporate defaulting on their interest and principal payment obligations
and when that risk crystallizes, it leads to a fall in the value of the bond causing the
NAV of fund to take a beating.

In this way we can say that investing in Mutual Funds is not a foolproof way of getting
returns from it as it also involve various aforesaid risks which might affect the certainty
of returns.

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 RECOMMENDATIONS

There is potential market for Mutual Fund Advisors in PATNA, but this market needs to be explored
as investors are still hesitated to invest their money in Mutual Funds.

In PATNA investors have inadequate knowledge about Mutual Funds, So proper Marketing of
various schemes is required, company should arranges more and more seminars on Mutual Funds.

Awareness of MF services provided by Karvy is also very low so company needs proper marketing of
their all services by advertising, distribution of pamphlet, arranging seminars etc.

Company should also provide knowledge about the growth rate and the expected growth rate of
Mutual Fund industry in India.

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 ANNEXURE
QUESTIONNAIRE
Name: Mobile No:
Address:
E-mail:
(1) Would you tell me which of these age bands you fall into?

(A) 18 to 25
(B) 26 to 30
(C) 31 to 40
(D) 41 to 50
(E) 51 to 60
(F) 61 above

(2) What is the highest educational level that you have attained?

(A) University- level education

(B) Technical/vocational education
(C) Complete secondary school
(D) Complete primary school
(E) No formal education

(3) Which of these best describes your current work situation?

(A) Self-employed [work for yourself]

(B) Government Job
(C) Private Job
(D) Retired

64
 (E) Student

(4) Can you tell me which of these categories your Annual income usually falls
into?

(A) 00 to 2.5 Lakh

(B) 2.5 to 05 Lakh
(C) 05 Lakh to 10 Lakh
(D) 10 Lakh to 20 Lakh
(E) 20 Lakh & above
(F) Refused

(5) Sometimes people find that their income does not quite cover their living
costs. In the last 12 months, has this happened to you?

(A) Yes
(B) No
(C) Don’t Know
(D) Not Applicable
(E) Refused

(6) Please can you tell me whether you have heard of any of these types of
financial products?

(A) Stocks/ Shares

(B) Mutual Fund
(C) Unit Linked Insurance Plan
(D) Bond
(E) Currency Derivatives

(7) Can you tell me whether you currently hold any of these types of products
(personally or jointly)?

(A) Stocks/ Shares

(B) Mutual Fund
(C) Unit Linked Insurance Plan

(8) Can you tell me whether you are interested to invest into these types of
financial products?

(A) Stocks/Shares

65
 (B) Mutual Fund
(C) Unit Linked Insurance Plan

(9) What will you do if someone offers you the chance to make a lot of money
there is also a chance that you will lose a lot of money?

(A) I shall take a chance

(B) I never take a chance

(10) Please can you tell me whether you have heard the name “KARVY STOCK
BROKING LTD.”?

(A) Yes
(B) No

(11) Please can you tell me whether you are interested to take an expert advice
for further investment?

(A) Yes
(B) No

(signature)

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 BIBLIOGRAPHY
www.wikipedia.com
www.sebi.gov.in
www.amfi.com
www.licmf.com
www.banking.com
www.investsmartindia.com
www.google.com

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