Mutual Fund Summer Report Final

Summer Project Repot Systematix Group India Ltd.
TABLE OF CONTENTS
EXECUTIVE SUMMARY.............................................................................................................................2
VARIOUS INVESTMENT OPTIONS: MUTUAL FUNDS STANDOUT................................................6
BANK.............................................................................................................................................................7
CONSIDERED AS THE SAFEST OF ALL OPTIONS, BANKS HAVE BEEN THE ROOTS OF THE FINANCIAL SYSTEMS IN INDIA.
PROMOTED AS THE MEANS TO SOCIAL DEVELOPMENT, BANKS IN INDIA HAVE INDEED PLAYED AN IMPORTANT ROLE IN THE
RURAL UPLIFTMENT. FOR AN ORDINARY PERSON THOUGH, THEY HAVE ACTED AS THE SAFEST INVESTMENT AVENUE
WHEREIN A PERSON DEPOSITS MONEY AND EARNS INTEREST ON IT. THE TWO MAIN MODES OF INVESTMENT IN BANKS,
SAVINGS ACCOUNTS AND FIXED DEPOSITS HAVE BEEN EFFECTIVELY USED BY ONE AND ALL. HOWEVER, TODAY THE
INTEREST RATE STRUCTURE IN THE COUNTRY IS HEADED SOUTHWARDS, KEEPING IN LINE WITH GLOBAL TRENDS. WITH THE
BANKS OFFERING LITTLE ABOVE 4 PERCENT IN THEIR FIXED DEPOSITS FOR ONE YEAR, THE YIELDS HAVE COME DOWN
SUBSTANTIALLY IN RECENT TIMES. ADD TO THIS, THE INFLATIONARY PRESSURES IN ECONOMY AND YOU HAVE A POSITION
WHERE THE SAVINGS ARE NOT EARNING. THE INFLATION IS CREEPING UP, TO ALMOST 8 PERCENT AT TIMES, AND THIS
MEANS THAT THE VALUE OF MONEY SAVED GOES DOWN INSTEAD OF GOING UP. THIS EFFECTIVELY MARS ANY CHANCE OF
GAINING FROM THE INVESTMENTS IN BANKS. .........................................................................................................7
POST OFFICE SCHEMES.......................................................................................................................................8
JUST LIKE BANKS, POST OFFICES IN INDIA HAVE A WIDE NETWORK. SPREAD ACROSS THE NATION, THEY OFFER FINANCIAL
ASSISTANCE AS WELL AS SERVING THE BASIC REQUIREMENTS OF COMMUNICATION. AMONG ALL SAVING OPTIONS, POST
OFFICE SCHEMES HAVE BEEN OFFERING THE HIGHEST RATES. ADDED TO IT IS THE FACT THAT THE INVESTMENTS ARE SAFE
WITH THE DEPARTMENT BEING A GOVERNMENT OF INDIA ENTITY. SO THE TWO BASIC AND MOST SOUGHT FOR FEATURES,
THOSE OF RETURN SAFETY AND QUANTUM OF RETURNS WERE BEING HANDSOMELY TAKEN CARE OF. THOUGH CERTAINLY
NOT THE MOST EFFICIENT SYSTEMS IN TERMS OF SERVICE STANDARDS AND LIQUIDITY, THESE HAVE STILL MANAGED TO
ATTRACT THE ATTENTION OF SMALL, RETAIL INVESTORS. HOWEVER, WITH THE GOVERNMENT ANNOUNCING ITS INTENTION
OF REDUCING THE INTEREST RATES IN SMALL SAVINGS OPTIONS, THIS AVENUE IS EXPECTED TO LOSE SOME OF THE
INVESTORS. PUBLIC PROVIDENT FUNDS ACT AS OPTIONS TO SAVE FOR THE POST RETIREMENT PERIOD FOR MOST PEOPLE
AND HAVE BEEN CONSIDERED GOOD OPTION LARGELY DUE TO THE FACT THAT RETURNS WERE HIGHER THAN MOST OTHER
OPTIONS AND ALSO HELPED PEOPLE GAIN FROM TAX BENEFITS UNDER VARIOUS SECTIONS. THIS OPTION TOO IS LIKELY TO
LOSE SOME OF ITS SHEEN ON ACCOUNT OF REDUCTION IN THE RATES OFFERED.............................................................8
.....................................................................................................................................................................8
COMPANY FIXED DEPOSITS................................................................................................................................9
ANOTHER OFTEN USED ROUTE TO INVEST HAS BEEN THE FIXED DEPOSIT SCHEMES FLOATED BY COMPANIES. COMPANIES
HAVE USED FIXED DEPOSIT SCHEMES AS A MEANS OF MOBILIZING FUNDS FOR THEIR OPERATIONS AND HAVE PAID INTEREST
ON THEM. THE SAFER A COMPANY IS RATED, THE LESSER THE RETURN OFFERED HAS BEEN THE THUMB RULE. HOWEVER,
THERE ARE SEVERAL POTENTIAL ROADBLOCKS IN THESE. FIRST OF ALL, THE DANGER OF FINANCIAL POSITION OF THE
COMPANY NOT BEING UNDERSTOOD BY THE INVESTOR LURKS. THE INVESTORS RELY ON INTERMEDIARIES WHO MORE OFTEN
THAN NOT, DON’T REVEAL THE ENTIRE TRUTH. SECONDLY, LIQUIDITY IS A MAJOR PROBLEM WITH THE AMOUNT BEING
RECEIVED MONTHS AFTER THE DUE DATES. PREMATURE REDEMPTION IS GENERALLY NOT ENTERTAINED WITHOUT CUTS IN
THE RETURNS OFFERED AND THOUGH THEY PRESENT A REASONABLE OPTION TO COUNTER INTEREST RATE RISK (ESPECIALLY
WHEN THE ECONOMY IS HEADED FOR A LOW INTEREST REGIME), THE SAFETY OF PRINCIPAL AMOUNT HAS BEEN FOUND
LACKING. ........................................................................................................................................................9
BENEFITS OF MUTUAL FUNDS.............................................................................................................14

Sectoral schemes...................................................................................................................................19
Index schemes.......................................................................................................................................20
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the
NSE 50. These schemes invest in the securities in the same weightage comprising of an index. NAVs
of such schemes would rise or fall in accordance with the rise or fall in the index. Necessary
disclosures in this regard are made in the offer document of the mutual fund scheme. ......................20
Tax Saving schemes..............................................................................................................................20
FUND MANAGER............................................................................................................................................28
NET ASSET VALUE.........................................................................................................................................28
Mutual Fund Research and Portfolio Management 1

THE GROUND RULES OF MUTUAL FUND INVESTING..................................................................29

RIGHTS OF A MUTUAL FUND UNIT HOLDER..................................................................................32
WHEN TO SAY GOODBYE TO YOUR MUTUAL FUND....................................................................35
SCENARIO IN THE U.S..............................................................................................................................38
SCHEMES PAST RETURN...................................................................................................................................40
AUM OF SCHEME..........................................................................................................................................40
SECTOR EXPOSURES.......................................................................................................................................40
FUND MANAGERS..........................................................................................................................................40
INVESTMENT STYLE........................................................................................................................................40
1 SCHEMES PAST RETURN: THIS CRITERIA SHOW THE PERFORMANCE OF SCHEME.......................................................40
2 AUM OF THE SCHEME: THIS CRITERIA SHOW THE INVESTOR’S INTEREST IN SCHEME
.........................................................................................................................................................................40
3 SECTOR EXPOSURE: THIS CRITERIA SHOWS WEIGHTAGE OF SECTOR IN A SCHEME
.........................................................................................................................................................................40
4 FUND MANAGER: THIS CRITERIA SHOWS THE FUND MANAGER PERFORMANCE IN
VARIOUS SCHEMES..................................................................................................................................40
5 INVESTMENT STYLE: THIS CRITERION SHOWS THE INVESTMENT OBJECTIVE OF
THE SCHEME..............................................................................................................................................40
6 RECOMMENDED SCHEME BY EXPERTS [BROKING HOUSES AND MAGAZINES]: THIS
CRITERIA SHOWS THE MAINLY FAMOUS SCHEME IN THE MARKET...................................40
7 BETA OF SCHEME: THIS CRITERION HELPS TO CALCULATE THE RISK OF THE
SCHEME IN REFERENCE TO MARKET RISK AND BENCHMARK OF THE SCHEME............40
8 S.D. OF SCHEME: THIS CRITERION SHOWS THE VOLATILITY OF THE SCHEME AS
COMPARE TO THE BENCHMARK AND OTHER PEER GROUP SCHEMES...............................40
CONCLUSION..............................................................................................................................................47
SUGGESTIONS............................................................................................................................................48
Executive summary
The Indian capital market has been increasing tremendously during last few years.
With the reforms of economy, reforms of industrial policy, reforms of public sector and
reforms of financial sector, the economy has been opened up and many developments
have been taking place in the Indian money market and capital market. In order to help
the small investors, mutual fund industry has come to occupy an important place.
The economic development model adopted by India in the post-independence era
has been characterized by mixed economy with the public sector playing a dominating

role and the activities in private industrial sector control measures emaciated from time to
time. The industrial policy resolution was introduced by the government in the 1948,
immediately after the independence. This outlined the approach to industrial growth and
development. The industrial policy statement of 1980 focussed attention on the need for
promoting competition in the domestic market, technological upgradation and
modernisation. A number of policy and procedural changes were introduced in 1985 and
1986, aimed at increasing productivity, reducing costs, improving quality, opening
domestic market to increase competition and making free the public sector from
constraints. Overall, in the seventh plan period (1985-86 to 1989-90), Indian industries
grew by an impressive average annual rate of 8.5 percent. The last two decades have seen
a phenomenal expansion in the geographical coverage and financial spread of our
financial system. The spread of the banking system has been a major factor in promoting
financial intermediation in the economy and in the growth of financial savings. With
progressive liberalization of economic policies, there has been a rapid growth of capital
market, money market and financial services industry including merchant banking,
leasing and venture capital. Consistent with this evolution of the financial sector, the
mutual fund industry has also come to occupy an important place.
In the last few years, a lot of new players have entered into the Indian mutual fund
industry. There is however enough place for all – especially since the declining interest
rates on traditional investment avenues have made them unattractive. Though there was a
bad patch in the industry, the past two years have been good and gradually, investors are
beginning to look at mutual funds as an alternative and lucrative investment option.
The main objective of this paper is to provide a comprehensive outlook about
what mutual funds are, mutual funds globally, the Indian mutual fund industry and its
growth as also make some suggestions for the success of mutual funds in India.

SYSTEMATIX GROUP {I} Ltd.
Systematix Group is a conglomerate of five strategic business entities that offer

comprehensive services in the field of finance, investment and consulting. The group has
witnessed tremendous growth since its inception over a decade and a half ago. By
providing excellent services to its clients it has been able to earn a great reputation in the
industry.
The various arms of the Systematix Group have enabled it to become a one stop service

provider that offers a rich spectrum of financial services encompassing Merchant

Banking, Capital Market Services, Consulting and Broking.
Promoted by Mr. C.P. Khandelwal, a renowned personality in the finance service

industry, the group commenced by consulting and providing services to the SME
segment. Today, the group has strategically branched into five business units and offers
holistic financial, investment & consulting services to medium and large organizations in
both the domestic and international markets. It caters to a broad range of industry
segments from Manufacturing to Entertainment
and IT.
SYSTEMATIX SHARES & STOCKS (I) LTD.
The broking arm of the Systematix Group offers personalized broking services to its
institutional, corporate and individual clients. It has a strong presence in big cities such as
Mumbai, Chennai, Hyderabad, Indore, Jaipur, Coimbatore, and Kota. Currently, it has
more than 100 franchises across the nation and is expanding rapidly.
It is proud to be one of the few comprehensive broking houses in the country offering
total integrated services in broking. SSSL is a member of BSE (Capital) segment, NSE
(Capital and Futures & Options) segment and is also a depository participant of CDSL.
A strong research team of competent and experienced professionals work continuously to

pick up the best investment opportunities for our valuable customers. The activities of the
group also provide the synergy for optimizing the growth of business by adding greater
value to our client's business.
SSSL has established state of art infrastructure in order to provide smooth and hassle free
trading. The front office and back office software installed by the company are latest
which ensure error free nonstop services to the customers. All offices are interconnected
through state-of-art Database Management Systems for providing speedy service and

optimizing the operational efficiency
Mission
"To enhance the economic value of our client's business by providing integrated financial
investment services and products."
Vision
“In the next 5 years we envisage to figure among the top 5 financial powerhouses in
India.”
Services
• Broking
o High Net worth Individuals
o Retail
o Corporate
o Institutions
• Depository Participant of CDSL
• Cash
• Futures & Options
• Mutual Fund Distribution
• Research {Equity and Mutual Funds}
• Portfolio Management Service.
Various Investment Options: Mutual Funds standout
Savings form an important part of the economy of any nation. With the savings
invested in various options available to the people, the money acts as the driver for
growth of the country. Indians save on an average upto 30% of their income hence Indian
financial markets presents a plethora of avenues to the investors. Though certainly not the
best or deepest of markets in the world, it has reasonable options for an ordinary man to
invest his savings. Let us examine several of them:

Bank
Considered as the safest of all options, banks have been the roots of the financial
systems in India. Promoted as the means to social development, banks in India have
indeed played an important role in the rural upliftment. For an ordinary person though,
they have acted as the safest investment avenue wherein a person deposits money and
earns interest on it. The two main modes of investment in banks, savings accounts and
fixed deposits have been effectively used by one and all. However, today the interest rate
structure in the country is headed southwards, keeping in line with global trends. With the
banks offering little above 4 percent in their fixed deposits for one year, the yields have
come down substantially in recent times. Add to this, the inflationary pressures in
economy and you have a position where the savings are not earning. The inflation is
creeping up, to almost 8 percent at times, and this means that the value of money saved
goes down instead of going up. This effectively mars any chance of gaining from the
investments in banks.

Post office schemes

Just like banks, post offices in India have a wide network. Spread across the nation,
they offer financial assistance as well as serving the basic requirements of
communication. Among all saving options, Post office schemes have been offering the
highest rates. Added to it is the fact that the investments are safe with the department
being a Government of India entity. So the two basic and most sought for features, those
of return safety and quantum of returns were being handsomely taken care of. Though
certainly not the most efficient systems in terms of service standards and liquidity, these
have still managed to attract the attention of small, retail investors. However, with the
government announcing its intention of reducing the interest rates in small savings
options, this avenue is expected to lose some of the investors. Public Provident Funds act
as options to save for the post retirement period for most people and have been
considered good option largely due to the fact that returns were higher than most other
options and also helped people gain from tax benefits under various sections. This option
too is likely to lose some of its sheen on account of reduction in the rates offered.
 Bonds
In finance, a bond is a debt security, in which the authorized issuer owes the holders
a debt and is obliged to repay the principal and interest (the coupon) at a later date,
termed maturity. A bond is simply a loan, but in the form of a security, although
terminology used is rather different. The issuer is equivalent to the borrower, the bond
holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance
long-term investments with external funds.
In a Bond face value, coupon rate (interest rate), maturity date, issue price is
important. There are various types of bonds such as fixed rate bond, floating rate bond,
high yield bond, deep discount bond, junk bond etc. Bond market is not that developed in
India. The debt market is much more popular than the equity markets in most parts of the
world. In India the reverse has been true. Nevertheless, the Indian debt market has
transformed itself into a much more vibrant trading field for debt instruments from the
rudimentary market about a decade ago.

Company Fixed Deposits

Another often used route to invest has been the fixed deposit schemes floated by
companies. Companies have used fixed deposit schemes as a means of mobilizing funds
for their operations and have paid interest on them. The safer a company is rated, the
lesser the return offered has been the thumb rule. However, there are several potential
roadblocks in these. First of all, the danger of financial position of the company not being
understood by the investor lurks. The investors rely on intermediaries who more often
than not, don’t reveal the entire truth. Secondly, liquidity is a major problem with the
amount being received months after the due dates. Premature redemption is generally not
entertained without cuts in the returns offered and though they present a reasonable
option to counter interest rate risk (especially when the economy is headed for a low
interest regime), the safety of principal amount has been found lacking.
 Real estate
This is one investment avenue which involves huge sum of money to be invested and
also lots of risk. There has been a boom in this sector since last few years specially the
prices of property; land has increased in metro cities drastically. Under this investment
avenue one can invest in land, plots, flats, bungalows etc. The options discussed above
are essentially for the risk-averse, people who think of safety and then quantum of return,
in that order. For the brave, it is dabbling in the stock market. Stock markets provide an
option to invest in a high risk, high return game. While the potential return is much more
than 15% - 20% which none of the above mentioned instruments can generate, the risk is
undoubtedly of the highest order. However, as enticing as it might appear, people
generally are clueless as to how the stock market functions and in the process can
endanger the hard-earned money.
For those who are not adept at understanding the stock market, the task of
generating superior returns at similar levels of risk is arduous to say the least. This is
where Mutual Funds come into picture.
 Mutual Fund

Mutual Funds are essentially investment vehicles where people with similar
investment objective come together to pool their money and then invest accordingly.
Each unit of any scheme represents the proportion of pool owned by the unit holder
(investor). Appreciation or reduction in value of investments is reflected in net asset value
(NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual
fund schemes are managed by respective Asset Management Companies (AMC).
Different business groups/ financial institutions/ banks have sponsored these AMCs,
either alone or in collaboration with reputed international firms.
Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is invested different types of securities
depending upon the objective of the scheme. These could range from shares to debentures
to money market instruments. The income earned through these investments and the
capital appreciation realized by the scheme 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 portfolio at a relatively low cost. Anybody with an investable surplus of as little
as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a
defined investment objective and strategy.
For instance XYZ Information Technology Fund, a scheme launched by a mutual
fund, lays down that its investment objective is to achieve growth through investment in
equities of Information Technology (IT) companies. Thus, all people interested in
investing their money in IT stocks would contribute their money to the scheme, which in
turn will deploy them in equities of IT companies. Or, ABC Income Fund can lay down
its investment objective as generation of steady income with safety of capital. All people
with a similar investment objective will pool their money into ABC Income Fund, which
in turn will deploy the money in various debt instruments to generate regular income.
The mutual funds normally come out with a number of schemes with different
investment objectives, which are launched from time to time. A mutual fund is required
to be registered with Securities and Exchange Board of India (SEBI), which regulates
securities markets before it can collect funds from the public. An investor can invest his
money in one or more schemes of Mutual Fund according to his choice and becomes the

unit holder of the scheme. Each Mutual Fund is managed by qualified professional men,
who use this money to create a portfolio, which includes stock and shares, bonds, gilt,
money-market instruments or combination of all. Thus Mutual Fund will diversify your
portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest
even a small amount of money.
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. A mutual fund is the answer to all these situations. It appoints
professionally qualified and experienced staff that manages each of these functions on a
full time basis. The large pool of money collected in the fund allows it to hire such staff
at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies
of scale in all three areas - research, investments
and transaction processing. While the concept of
individuals coming together to invest money
collectively is not new, the mutual fund in its
present form is a 20th century phenomenon. In
fact, mutual funds gained popularity only after the
Second World War. Globally, there are thousands
of firms offering tens of thousands of mutual
funds with different investment objectives. Today,
mutual funds collectively manage almost as much
as or more money as compared to banks.

Risk Return Spectrum

High
Equity
Real Estate
Return potential
Gold
Debt Funds
PPF, NSC, KVP, PO Deposits, RBI Bonds
Liquid Funds
Savings Bank/ FD
Low
Low Risk High

Note: The above chart is for illustrati ve pur pose onl y and is not mar k ed to scal e. The chart is based
on our percepti on of the risk and retur n potential of various in vestment avenues
15
MUTUAL FUNDS IN INDIA

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 . The history of
mutual funds in India can be broadly divided into four distinct phases
First phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was
set up by the Reserve Bank of India and functioned under the Regulatory and
administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the
RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs.6,700 crore 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.
Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund families. Also,
1993 was the year in which the first Mutual Fund Regulations came into being, under
which all mutual funds, except UTI were to be registered and governed. The erstwhile
Kothari Pioneer (now merged with Franklin Templeton) was the first private sector
mutual fund registered in July 1993
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 Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.
Benefits of mutual funds

 Professional management
The AMCs managing the funds have employees who are professionally trained to
manage money. They have a thorough knowledge of stock markets, debt markets, money
markets, the overall economy etc. Therefore, they are better placed than ordinary people
like you and me to manage money. Moreover, since their only work is to manage money,
they devote themselves completely to the task. This, however, should not be taken as an
assurance of performance. Like all investors professional managers too go wrong but the
probability is far less.
 Diversification
Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do all stocks
decline at the same time and in the same proportion. You achieve this diversification
through a Mutual Fund with far less money than you can do on your own. Returns in the
mutual funds are generally better than any other option in any other avenue over a
reasonable period of time. People can pick their investment horizon and stay put in the
chosen fund for the duration. Equity funds can outperform most other investments over
long periods by placing long-term calls on fundamentally good stocks. The debt funds too
will outperform other options such as banks. Though they are affected by the interest rate
risk in general, the returns generated are more as they pick securities with different
duration that have different yields and so are able to increase the overall returns from the
portfolio.
 Convenient administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such
as bad deliveries, delayed payments and follow up with brokers and companies. Mutual
Funds save your time and make investing easy and convenient.
 Return potential

Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.
 Low costs
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage, custodial and
other fees translate into lower costs for investors.
 Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a
stock exchange at the prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the Mutual Fund. Fixed deposits with
companies or in banks are usually not withdrawn premature because there is a penal
clause attached to it. The investors can withdraw or redeem money at the Net Asset Value
related prices in the open-end schemes. In closed-end schemes, the units can be transacted
at the prevailing market price on a stock exchange. Mutual funds also provide the facility
of direct repurchase at NAV related prices. The market prices of these schemes are
dependent on the NAVs of funds and may trade at more than NAV (known as Premium)
or less than NAV (known as Discount) depending on the expected future trend of NAV
which in turn is linked to general market conditions. Bullish market may result in
schemes trading at Premium while in bearish markets the funds usually trade at Discount.
This means that the money can be withdrawn anytime, without much reduction in yield.
Some mutual funds however, charge exit loads for withdrawal within a specified period
of time.
 Transparency

Mutual funds are very transparent. Most open-ended mutual funds today disclose
their NAV daily and full portfolio quarterly. They give detailed information about your
investments, the proportion in which investments have been made in different asset
categories, fund manager's investment strategy, and goals of the mutual fund.
 Flexibility
Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, you can systematically invest or withdraw funds according
to your needs and convenience.
 Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the benefit of
its investment strategy.
Reduction in costs
Mutual funds have a pool of money that they have to invest. So they are often involved in
buying and selling of large amounts of securities that will cost much lower than when you
invest on your own.
 Well regulated
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of investors. The
operations of Mutual Funds are regularly monitored by SEBI.

Types of Mutual Funds Schemes
While looking for schemes we want ones that best fit our investment objective. So, now
which are those schemes that suit our objectives best?
The obvious next step then is to look all fund schemes and make a match between their
and our investment objectives, correct?
That's not as simply done as it sounds. Unless you have all the time in the world, going
through each of the 789 or so schemes in the market today and reading their investment
objectives is a foolhardy job. What makes life easier is that based on their objectives
schemes have been clubbed together in categories. These are broad market classifications
and help investors narrow down their search for a scheme. After short listing schemes by
their common objectives one can further look into each scheme for more specific
differences in their objectives.
By Structure
• Open – Ended Schemes: In India majority of mutual funds are open-ended. Fund
that float open ended schemes can sell as many units as investors demand. These
do not have a fixed maturity period. Investors can buy or sell units at NAV-related
prices from and to the mutual fund on any business day. Most people prefer open-
ended mutual funds because they offer liquidity. Such funds can issue and redeem
units any time during the life of a scheme. Hence, unit capital of open ended funds
can fluctuate on a daily basis.
• Close – Ended Schemes: These have fixed maturity periods (ranging from 2 to 15
years). You can invest in the scheme at the time of the initial issue. That's because
such schemes can not issue new units except in case of bonus or rights issue. All
is not lost if you missed out on units of a closed scheme. After the initial issue,
you can buy or sell units of the scheme on the stock exchanges where they are
listed (certain Mutual Funds however, in order to provide investors with an exit

route on a periodic basis do repurchase units at NAV related prices). The market
price of the units could vary from the NAV of the scheme due to demand and
supply factors, investors' expectations and other
market factors.
Difference in Open Ended and Close Ended Schemes

Open ended funds can issue and redeem units any time during the life of the
scheme while close ended funds can not issue new units except in case of bonus or rights
issue. Hence, unit capital of open ended funds can fluctuate on daily basis while that is
not the case for close ended schemes. Other way of explaining the difference is that new
investors can join the scheme by directly applying to the mutual fund at applicable Net
Asset Value related prices in case of open ended schemes while that is not the case in
case of close ended schemes new investors can buy the units from secondary market only.
By Investment Objective
 Equity Funds
Funds that invest in stocks represent the largest category of mutual funds.
Generally, the investment objective of this class of funds is long-term capital growth with
some income. There are, however, many different types of equity funds because there are
many different types of equities .
Sectoral schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a
group of industries or various segments. These are the funds/schemes, which invest in the
securities of only those sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks,
etc. The returns in these funds are dependent on the performance of the respective
sectors/industries. While these funds may give higher returns, they are more risky
compared to diversified funds. Investors need to keep a watch on the performance of
those sectors / industries and must exit at an appropriate time. They may also seek advice
of an expert

Index schemes
Index Funds attempt to replicate the performance of a particular index such as the
BSE Sensex or the NSE 50. These schemes invest in the securities in the same weightage
comprising of an index. NAVs of such schemes would rise or fall in accordance with the
rise or fall in the index. Necessary disclosures in this regard are made in the offer
document of the mutual fund scheme.
Tax Saving schemes
These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the Government offers tax incentives for investment in
specified avenues. These schemes are growth oriented and invest pre-dominantly in
equities. Their growth opportunities and risks associated are like any equity-oriented
scheme
 Debt Funds
Income funds are named appropriately: their purpose is to provide income on a

steady basis. When referring to mutual funds, the terms "fixed-income," "bond," and
"income" are synonymous. These terms denote funds that invest primarily in government
and corporate debt. While fund holdings may appreciate in value, the primary objective
of these funds is to provide a steady cash flow to investors. As such, the audience for
these funds consists of conservative investors and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money
market investments, but bond funds aren't without risk. Because there are many different
types of bonds, bond funds can vary dramatically depending on where they invest. For
example, a fund specializing in high-yield junk bonds is much more risky than a fund that
invests in government securities.
 Fixed Maturity Plans (FMPs)

FMPs are perhaps the most innovative products to have hit the debt funds segment
in recent times. FMPs are close-ended products (investing predominantly in debt
instruments), wherein the yield is locked-in at the time of investment. Hence investors
know with a reasonable degree of certainty the return that their investment will generate
and the tenure of investment as well. In effect, FMPs are also structured to offer capital
protection (although implicitly), to investors.
Another variant from the FMPs segment is the one wherein a smaller portion (usually
upto 20%) is invested in equity assets. Such FMPs offer the twin advantage of capital
protection (taken care of by the debt portfolio) and capital appreciation (provided by the
equity portfolio).
FMPs hold an edge over other avenues like fixed deposits (FDs) in terms of tax-
efficiency. Hence for investors in the higher tax brackets, who wish to invest in the debt
funds segment, FMPs could make an appropriate fit. Investors would do well to
appreciate that FMPs are structured to offer capital protection and appreciation; however,
there is no explicit guarantee on either front. To that end, FMPs are different from FDs
and would rank higher in terms of a risk-return trade off as well.
 Monthly Income Plans (MIPs)

As the name suggests, MIPs intend to offer income on a regular i.e. monthly basis
to investors. However the monthly income is not assured, the same depends on the fund’s
performance, which in turn is a factor of the markets. Generally, MIPs invest around
75%-80% of their corpus in debt instruments and the balance (20%-25%) is held in
equities.
Often the equity component is the defining factor for MIPs. While low-risk MIPs
would typically hold between 10%-15% of their assets in equities, the high risk ones can
hold as high as 30% of their assets in equities. Like most hybrid instruments, MIPs offer
the proposition of diversification across asset classes. The debt component is intended to
offer stability to the portfolio, while the equity component is utilised to offer the much-
needed impetus i.e. capital appreciation.
 Balanced Funds

The objective of these funds is to provide a balanced mixture of safety, income

and capital appreciation. The strategy of balanced funds is to invest in a combination of
fixed income and equities. A typical balanced fund might have a weighting of 60% equity
and 40% fixed income. The weighting might also be restricted to a specified maximum or
minimum for each asset class.
A similar type of fund is known as an asset allocation fund. Objectives are similar
to those of a balanced fund, but these kinds of funds typically do not have to hold a
specified percentage of any asset class. The portfolio manager is therefore given freedom
to switch the ratio of asset classes as the economy moves through the business cycle.
 Liquid and short-term floaters

Liquid funds invest in of short-term debt instruments, mostly Treasury bills.
These funds are safe park your money. You won't get great returns, but you won't have to
worry about losing your principal. A typical return is twice the amount you would earn in
a regular checking/savings account and a little less than the average certificate of deposit.
Not forgetting the liquidity factor while comparing with certificate of deposit
When yields rise, investors can benefit only if they are invested in short tenured debt
instruments, especially the floating rate ones. Floating rate instruments have their coupon
rates reset in line with that of a benchmark rate (like MIBOR) at fixed time intervals.
Hence in a rising interest rate scenario, the instrument is equipped to deliver higher
returns.
Liquid funds (which typically have very low maturity profiles) can prove to be the
appropriate avenue for investors who wish to park their funds for shorter time frames.
Investors who have an investment horizon of a couple of weeks should go in for “Liquid
Plus” funds, which offer a relatively better yield, without taking on much additional risk.


TAX IMPLICATIONS
With reference to sale/transfer of units of equity funds :

Under Section 2(42A) of the Act, a unit of a mutual fund is treated as short-term capital
asset if the same is held for less than 12 months. The units held for more than twelve
months are treated as long-term capital asset.
Under Section 10(38) of the Act, long term capital gains arising from transfer of a unit
of mutual fund is exempt from tax if the said transaction is undertaken after October 1,
2004 and the securities transaction tax is paid to the appropriate authority. This makes
long-term capital gains on equity-oriented funds exempt from tax from assessment year
2005-06.
Short term capital gains on equity-oriented funds are chargeable to tax @10% (plus
education cess, applicable surcharge). However, such securities transaction tax will be
allowed as rebate under Section 88E of the Act, if the transaction constitutes business
income.
With reference to sale/transfer of units of debt funds:

Long-term capital gains on debt-oriented funds are subject to tax @20% of capital
gain after allowing indexation benefit or at 10% flat without indexation benefit,
whichever is less.
Short-term capital gains on debt-oriented funds are subject to tax at the tax bracket
applicable (marginal tax rate) to the investor.
With reference to dividends received: Dividends declared by debt-oriented mutual funds
(i.e. mutual funds with less than 65% of assets in equities), are tax-free in the hands of the
investor. However, a dividend distribution tax of 14.03% (including surcharge) is to be
paid by the mutual fund on the dividends declared. Long-term debt funds, government
securities funds (gsec/gilt funds), monthtly income plans (MIPs) are examples of debt-
oriented funds.
Dividends declared by equity-oriented funds (i.e. mutual funds with more than 65% of
assets in equities) are tax-free in the hands of investor. There is also no dividend
distribution tax applicable on these funds. Diversified equity funds, sector funds,
balanced funds (with more than 65% of net assets in equities) are examples of equity-
oriented funds.

Amount invested in tax-saving funds (ELSS) would be eligible for deduction under
Section 80C, however the aggregate amount deductible under the said section cannot
exceed Rs 100,000.
Important Terminology
 Asset management company:
Investing and managing the collected money is a difficult task. The fund company
delegates this to a company of professional investors, usually experts who are known for
smart stock picks. This company is the Asset Management Company (AMC) and the fund
company usually delegates the job of investment management for a fee.

Assets of a fund {AUM}:
Asset, of course, is the investments of a mutual fund. And value is the market value of
investments. What exactly is market value?
Let's say a fund has invested its money in stocks. Then, the price of those stocks on the
stock market multiplied by the number of stocks owned gives you the value of all the
investments made by that mutual fund. This value can change either when the market
valuation changes or if people are joining or leaving the scheme.
MUTUAL FUNDS & ASSETS UNDER MANAGEMENT
(Rs.in crores)
Mutual Fund Name No. of Corpus Under management
Schemes* As on Corpus As on Corpus Net
inc/dec in
corpus
Jun 30, May 31,
ABN AMRO Mutual Fund 152 6,895.98 6,874.43 21.552
2007 2007
AIG Global Investment Jun 30,
4 1,100.69 - - -
Group Mutual Fund 2007
Jun 30, May 31,
Benchmark Mutual Fund 9 7,199.80 6,417.86 781.945
2007 2007
Jun 30, May 31, -4194.133
Birla Mutual Fund 224 19,525.33 23,719.46
2007 2007
Jun 30, May 31,
BOB Mutual Fund 22 97.46 97.59 -0.131
2007 2007
Jun 30, May 31,
Canbank Mutual Fund 43 2,796.41 2,910.04 -113.64
2007 2007
Jun 30, May 31,
DBS Chola Mutual Fund 68 3,018.15 2,473.09 545.06
2007 2007
Jun 30, May 31, -374.141
Deutsche Mutual Fund 125 6,909.54 7,283.68
2007 2007

DSP Merrill Lynch Mutual Jun 30, May 31,

127 12,753.29 11,853.29 899.998
Fund 2007 2007
Jun 30, May 31,
Escorts Mutual Fund 24 135.98 132.48 3.509
2007 2007
Jun 30, May 31, -220.392
Fidelity Mutual Fund 27 8,593.10 8,813.49
2007 2007
Franklin Templeton Jun 30, May 31,
188 26,469.44 26,276.36 193.086
Investments 2007 2007
Jun 30, May 31, -516.854
HDFC Mutual Fund 212 35,629.81 36,146.67
2007 2007
Jun 29, May 31, -271.755
HSBC Mutual Fund 133 14,313.89 14,585.64
2007 2007
ICICI Prudential Mutual Jun 30, May 31, -7089.245
262 43,613.76 50,703.00
Fund 2007 2007
Jun 30, May 31, -371.731
ING Mutual Fund 154 5,346.13 5,717.86
2007 2007
Jun 29, May 31,
JM Financial Mutual Fund 123 3,757.99 3,772.50 -14.506
2007 2007
Jun 30,
JPMorgan Mutual Fund 3 824.77 - - -
2007
Kotak Mahindra Mutual Jun 30, May 31,
140 16,721.78 16,722.56 -0.772
Fund 2007 2007
Jun 30, May 31, -682.356
LIC Mutual Fund 77 9,222.07 9,904.42
2007 2007
Jun 29, May 31,
Lotus India Mutual Fund 102 4,165.36 3,623.15 542.216
2007 2007
Morgan Stanley Mutual Jun 29, May 31,
1 3,291.38 3,180.67 110.707
Fund 2007 2007
Jun 30, May 31, -1597.161
PRINCIPAL Mutual Fund 129 11,551.35 13,148.51
2007 2007
Jun 30, May 31,
Quantum Mutual Fund 5 68.72 61.06 7.668
2007 2007
Jun 30, May 31,
Reliance Mutual Fund 243 59,857.01 59,143.48 713.537
2007 2007
Jun 30, May 31,
Sahara Mutual Fund 29 186.86 176.47 10.393
2007 2007
Jun 30, May 31,
SBI Mutual Fund 158 20,272.97 19,660.83 612.145
2007 2007
Standard Chartered Mutual Jun 30, May 31, -3224.023
203 12,946.20 16,170.22
Fund 2007 2007
Jun 30, May 31, -745.122
Sundaram Mutual Fund 143 9,400.16 10,145.29
2007 2007
Jun 30, May 31,
Tata Mutual Fund 255 14,837.08 14,081.89 755.193
2007 2007
Jun 29, May 31,
Taurus Mutual Fund 14 307.76 305.47 2.29
2007 2007
Jun 30, May 31, -1038.294
UTI Mutual Fund 208 39,031.87 40,070.17
2007 2007
* indicates currently in operation
MUTUAL FUND DATA FOR THE MONTH ENDED - May 31 , 2007

Fund Manager
The portfolio of mutual fund is managed by a "Fund Manager", whose responsibility
is to invest and satisfy the desire of the investors. While selecting the securities for
investment, these managers analyze economic conditions, industry trends, government
regulations and their impact on the stocks, and forecasts for the specific stocks to the
project the future outcome generated by the companies. As we all know that the
economic and business condition do not remain constant, so these managers also revise
their portfolio with the passage of time, as the circumstances demand.
Net Asset Value

The net asset value (NAV) of a scheme is defined as the market value of the
scheme's investments less all liabilities. Simply stated, NAV is price at which unit in that
scheme is valued on a particular business day. It is calculated at the end of the trading
day. NAVs are the basis of determining the purchase/redemption prices of units. If a
scheme has an entry load, then the purchase price will be the NAV plus the entry load.
Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual fund.
Mutual funds invest the money collected from the investors in securities markets. In
simple words, Net Asset Value is the market value of the securities held by the scheme.
Since market value of securities changes every day, NAV of a scheme also varies on day-
to-day basis. The NAV per unit is the market value of securities of a scheme divided by
the total number of units of the scheme on any particular date. For example, if the market
value of securities of a mutual fund scheme is Rs 200 lakhs and the mutual fund has
issued 10 lakhs units of Rs. 10 each to the investors, then the NAV per unit of the fund is
Rs.20. NAV is required to be disclosed by the mutual funds on a regular basis - daily or
weekly - depending on the type of scheme.
NAV = Total Assets – Total Liabilities
No. of units outstanding

 What is a scheme?
A fund collects money from investors through various schemes. Each scheme is
differentiated by its objective of investment or in other words, a broadly defined purpose
of how the collected money is going to be invested. Based on these broad purposes
schemes are classified into a dozen or so categories about which more lately.
 Units of a scheme:
When you buy into a scheme of a mutual fund you are holding units of the scheme.
Buying units is like owning shares of a scheme.
 Scheme's objective
Much like for an individual investor, a scheme's objective is the result that a fund manger
desires out a scheme. While setting objective for a scheme the manager asks the question:
what are the kind of returns I expect the scheme to deliver and to get assure such returns
what are the securities and in what proportion should I invest in.
 Expense ratio:
The part of mutual fund assets that gets removed each year for expenses (which includes
management fees, annual operating costs, administrative expenses and all other costs
incurred by the fund) expressed as a percentage is the expense ratio. It provides a quick
check of efficiently the fund manager is handling the fund.
The Ground rules of Mutual Fund Investing
Moses gave to his followers 10 commandments that were to be followed till

eternity. The world of investments too has several ground rules meant for investors who
are novices in their own right and wish to enter the myriad world of investments. These
come in handy for there is every possibility of losing what one has if due care is not
taken.

1. Assess yourself: Self-assessment of one’s needs; expectations and risk profile is

of prime importance failing which; one will make more mistakes in putting money
in right places than otherwise. One should identify the degree of risk bearing
capacity one has and also clearly state the expectations from the investments.
Irrational expectations will only bring pain.
2. Try to understand where the money is going: It is important to identify the
nature of investment and to know if one is compatible with the investment. One
can lose substantially if one picks the wrong kind of mutual fund. In order to
avoid any confusion it is better to go through the literature such as offer document
and fact sheets that mutual fund companies provide on their funds.
3. Don't rush in picking funds, think first: One first has to decide what he wants
the money for and it is this investment goal that should be the guiding light for all
investments done. It is thus important to know the risks associated with the fund
and align it with the quantum of risk one is willing to take. One should take a look
at the portfolio of the funds for the purpose. Excessive exposure to any specific
sector should be avoided, as it will only add to the risk of the entire portfolio.
Mutual funds invest with a certain ideology such as the "Value Principle" or
"Growth Philosophy".
Both have their share of
critics but both
philosophies work for
investors of different
kinds. Identifying the
proposed investment philosophy of the fund will give an insight into the kind of
risks that it shall be taking in future.
4. Invest. Don’t speculate: A common investor is limited in the degree of risk that
he is willing to take. It is thus of key importance that there is thought given to the
process of investment and to the time horizon of the intended investment. One
should abstain from speculating which in other words would mean getting out of
one fund and investing in another with the intention of making quick money. One

would do well to remember that nobody can perfectly time the market so staying
invested is the best option unless there are compelling reasons to exit.
5. Don’t put all the eggs in one basket: This old age adage is of utmost importance.
No matter what the risk profile of a person is, it is always advisable to diversify
the risks associated. So putting one’s money in different asset classes is generally
the best option as it averages the risks in each category. Thus, even investors of
equity should be judicious and invest some portion of the investment in debt.
Diversification even in any particular asset class (such as equity, debt) is good.
Not all fund managers have the same acumen of fund management and with
identification of the best man being a tough task, it is good to place money in the
hands of several fund managers. This might reduce the maximum return possible,
but will also reduce the risks.
6. Be regular: Investing should be a habit and not an exercise undertaken at one’s
wishes, if one has to really benefit from them. As we said earlier, since it is
extremely difficult to know when to enter or exit the market, it is important to beat
the market by being systematic. The basic philosophy of Rupee cost averaging
would suggest that if one invests regularly through the ups and downs of the
market, he would stand a better chance of generating more returns than the market
for the entire duration.
7. Do your homework: It is important for all investors to research the avenues
available to them irrespective of the investor category they belong to. This is
important because an informed investor is in a better decision to make right
decisions. Having identified the risks associated with the investment is important
and so one should try to know all aspects associated with it. Asking the
intermediaries is one of the ways to take care of the problem.
8. Find the right funds: Finding funds that do not charge much fees is of
importance, as the fee charged ultimately goes from the pocket of the investor.
This is even more important for debt funds as the returns from these funds are not
much. Funds that charge more will reduce the yield to the investor. Finding the
right funds is important and one should also use these funds for tax efficiency.
Investors of equity should keep in mind that all dividends are currently tax-free in

India and so their tax liabilities can be reduced if the dividend payout option is
used. Investors of debt will be charged a tax on dividend distribution and so can
easily avoid the payout options.
9. Keep track of your investments: Finding the right fund is important but even
more important is to keep track of the way they are performing in the market. If
the market is beginning to enter a bearish phase, then investors of equity too will
benefit by switching to debt funds as the losses can be minimized. One can always
switch back to equity if the equity market starts to show some buoyancy.
10. Know when to sell your mutual funds: Knowing when to exit a fund too is of
utmost importance. One should book profits immediately when enough has been
earned i.e. the initial expectation from the fund has been met with. Other factors
like non-performance, hike in fee charged and change in any basic attribute of the
fund etc. are some of the reasons for to exit
Rights of a Mutual Fund Unit holder
A unit holder in a Mutual Fund scheme governed by the SEBI (Mutual Funds)
Regulations is entitled to:
1. Receive unit certificates or statements of accounts confirming the

title within 6 weeks from the date of closure of the subscription or within 6
weeks from the date of request for a unit certificate is received by the
Mutual Fund.

2. Receive information about the investment policies, investment

objectives, financial position and general affairs of the scheme.
3. Receive dividend within 42 days of their declaration and receive
the redemption or repurchase proceeds within 10 days from the date of
redemption or repurchase.
4. Vote in accordance with the Regulations to:-
a. Approve or disapprove any change in the fundamental investment

policies of the scheme, which are likely to modify the scheme or affect
the interest of the unit holder. The dissenting unit holder has a right to
redeem the investment.
b. Change the Asset Management Company.
c. Wind up the schemes.
Inspect the documents of the Mutual Funds specified in the scheme's offer document
Everything is not rosy about it {Risks}

Contrary to the common place thinking, mutual funds do carry risks. And there are some
that can become as risky as stocks. Given the almost diverse objectives with which
schemes operate, there are some with more risks and some relatively safer. Ask yourself
if you are ready for a scheme whose investment value might fluctuate every week or one
that gives a minimum amount of risk?
Or are you in for a short-term loss in order to achieve a long-term potential gain?
At this point it is good to ask oneself how you will take it if your investment fails to

deliver the returns you expected or makes losses. Knowing this will reduce your chances
(or even temptation) to select a fund that doesn't come close to your objective. Evaluate a
scheme by looking at how its NAV has behaved over the past. Do you see the scheme
behaving rather erratically i.e., the NAV changes just too often?
More the volatility more are the risks involved. Great returns are not the only
thing to look for in a scheme. If you feel while researching a scheme, which we will do
later, that its returns are modest and steady and good enough for your needs, avoid other
schemes that have recently delivered high returns. Because great returns in the past are no
guarantee for the fabulous performance to continue in the future. Never forget one of the
commonplace morals of investment: The schemes that are expected to give the highest
returns have the greatest probability to fall flat!
Investing through mutual funds is not exactly all summer and sunshine. There are at least
half a dozen pinpricks.
 Not all mutual funds are winners. Some have often under-performed the stock
market index.
 Quite a few funds have lost money.
 The relationship between the funds and the unit holder is depersonalised.
 Not always is the investor safeguarded from the unethical practices of the stock
market.
 Selecting the right mutual fund could be like picking a needle from the haystack.
 All mutual funds charge expenses. Whether they are marketing, management or
brokerage fees fund expenses are generally passed back to the investors.
 Investors exercise no control over what securities the fund buys or sells.

 The buying and selling of securities within the mutual fund portfolio generates
capital gains and losses which are passed back to investors even if they have not
sold any of their mutual fund shares.
When to say goodbye to your Mutual Fund
While there are many investment consultants, some by profession, some self-
professed, who suggest on when to invest in a particular avenue, there is a certain paucity
of people who talk of when to exit. People looking to invest get in many options and
mutual funds happen to be one such preferred destination for people who want more
returns than their fixed deposits would earn them. It’s also a preferred option for the
people who are circumspect about investing into stocks directly and believe that mutual
funds can manage risks and funds better than they could.
The recent crash will have several lessons for the investor but will not drive them
away from the mutual funds in the wake of falling returns because they still are among
the best investment avenues available to them. The primary of the lessons learnt is, not to
chase returns. One of the biggest flaws in the process of investing is to chase the
performance of funds alone. While they do give an indication to how well a fund can
perform, they remain just indicative, for all good reasons. Take for example, the case of
several equity funds that were riding sky-high between October 99 and March 2000.
Alliance Equity Fund posted absolute returns of 168 percent between October 1, 99 and
March 7, 2000. Birla Advantage posted 125 gains and ING Growth Fund posted mind-
boggling returns of 193 percent during the same period. The recommendation by the
consultants still remained "buy". However, investors who chased the returns of these
schemes have learnt the bitter and eternal truth that "what goes up must come down", the
hard way. These funds have posted negative returns of 64 percent, 61 percent and 82
percent respectively since peaking on the same day, March 7, 2000. And so, while
chasing hot funds might be a good idea in a market that has started to rise, it certainly is a
sure recipe to doom in a peaking market. The only people to have gained from investing
in these schemes were the ones who exited while it was still profitable.

The others did not know when to exit and so we are just trying to put forward
some situations when the investor should consider withdrawing their investments from
the funds. The following are some of the reasons why an investor should bid his fund
goodbye:-
 Fund is not performing
This reason for selling, although valid in certain conditions, is where most
investors make a mistake. When calculating performance one shouldn’t look at too short
a period and make a mistake by comparing apples to oranges.
It is important to base the decision on relative performance and not absolute

performance. When one fund is down 5% while other funds or the market in general are
up 10%, it is very tempting to switch over to what is "hot." Chasing Performance is the
best way to shoot oneself in the foot.
When studying relative performance, one should look at his fund and compare it
to its peers. However, comparisons should be drawn between parallels and so equity
funds can not and should not be compared with debt funds. When choosing a benchmark,
one must select funds in the same category. If one’s fund was down 2% and the average
equity fund was down 4%, then there is no good enough reason to sell it. One should
compare the returns posted by his fund with that of the peers across various horizons such
as 1-year, 3-year and above. If it has underperformed the average of its peers in all cases,
then it sure is one of the better reasons to exit from the fund.
 A major change in any basic attribute of the fund
When the fund changes any basic attribute as mentioned by it in its offer
documents, the investors have a choice of getting out of it. Changes like a change in
Asset Management Company or in investment style of fund or change of structure say

from closed-end to open-end etc. are good enough reasons for an investor to consider
switching or exiting from it as they are certainly likely to affect the fund in a major way.
 Fund doesn’t comply with its objective
One of the important parameters in the selection of the fund is alignment of the
risk profiles of the investor and fund. The objective of the fund says a lot about how the
fund plans to invest. If the objective is not being complied with, it is one of the exit points
worth considering.
 The Fund's Expense Ratio Rises
A small rise in an expense ratio is not a big deal, however a significant rise can
result in substantial reduction of yields and so it would be better to exit the fund. In the
case of bond funds or money market funds, it is highly unlikely that the fund can increase
its returns enough to justify an increase in the fund's expenses.
 The Fund Manager Has Changed
A simple change of fund managers, in itself, is not enough reason to sell a fund on
a short-term basis. If it is a passively managed fund (index fund), then one has little to no
reason to worry. However, if it is an actively managed fund, then has to keep the eyes
open on the new manager. Observing the styles, stock picking and risks undertaken by the
new manager is important for it discloses a lot about how the fund might fare in the
future. If satisfied, one will have no reason to complain later but the process needs time
and so an investor has to observe the fund manager for some time before one takes a
decision.
 Enough has been earned
However, nothing is as important as to rein the horses in time. The primary

principle behind safety of investment is to take risks that can be tolerated. The principle

also is specific on the expectations that the investor must have from any investment. Just
as it is important to set realistic targets that one hopes to achieve from the investment, it is
also important to exit when target as expected has been achieved irrespective of the fact
that it might be generating better returns in a short-term. Waiting longer might not prove
beneficial, as one need not be lucky all the time. Equity investments are volatile and it
doesn’t take long for the moods in the markets to swing either way. So, it would only be
wise to move out when the going is still good. Otherwise, the investors sanguine of
generating even higher returns than what the fund generated in its peak days would be
cursing themselves for not exiting.
Scenario in the U.S
There are now approximately 10,000 actively managed mutual funds in the United
States, with wide variations in size, age, purpose and policy. The oldest have been in

existence for more than 65 years; many have been established in the last 10 years. Some
have only several million dollars under management, while others measure their assets in
the tens of billions. The greatest growth of mutual funds occurred after World War II and
has continued since with only occasional pauses. In 1946 mutual fund companies
managed just over $2 billion in assets. By 1956 this had grown to $10.5 billion, and to
more than $39 billion in 1966. In the 1980s growth exploded, jumping from $64 billion in
1978 to more than $1 trillion by the end of 1991. Today, there are approximately $7
trillion dollars invested in all types of mutual funds. While a great deal of this growth has
derived from the return on invested assets, most growth has come from new money going
into the funds.
• The money market mutual fund segment has a total corpus of $ 7 trillion in the
U.S. against a corpus of Rs.120 crores in India.
• Out of the top 10 mutual funds worldwide, eight are bank- sponsored.
• In the U.S. the total number of schemes is higher than that of the listed
companies while in India we have just around 700 schemes
• In the U.S. about 9.7 million households manage their assets on-line, such a
facility is not yet of avail in India.
• On- line trading is a great idea to reduce management expenses from the
current 2 % of total assets to about 0.75 % of the total assets.
• 72% of the core customer bases of mutual funds in the top 50-broking firms in
the U.S. are trade on-line.
Selection Criteria of Mutual Fund Schemes

Schemes past return

AUM of scheme
Sector Exposures
Fund Managers
Investment Style
1. Recommended scheme by experts- 2 Broking houses and Magazines
2. Beta of Scheme
3. Std. Deviation. of the Scheme
4. Sharp Ratio of Scheme
5. Trey nor ratio of Scheme
6. .Net Selectivity of Stocks
7. Expense Ratio
Description:
1 Schemes past return: This criteria show the performance of scheme
2 AUM of the scheme: This criteria show the investor’s interest in scheme
3 Sector Exposure: This criteria shows weightage of sector in a scheme
4 Fund Manager: This criteria shows the Fund Manager performance in various schemes.
5 Investment Style: This criterion shows the investment objective of the scheme.
6 Recommended scheme by experts [Broking houses and Magazines]: This Criteria

Shows the mainly famous scheme in the market.
7 Beta of Scheme: This criterion helps to calculate the risk of the scheme in reference to
market risk and Benchmark of the scheme.
8 S.D. of Scheme: This criterion shows the volatility of the scheme as compare to the
Benchmark and other peer group schemes.
Frequently Asked Questions

1.} What are the basic factors to look for while stock picking?
There are many theories and techniques about how to choose a winner, how to
separate the wheat from the chaff. Some are homegrown, others are technically
sophisticated. But beyond the jargon, there are three basic factors to look for while
picking a stock: The company itself is external environment The behavior of its stock
2.} Why use mutual funds, why not individual stocks?

There are several advantages mutual funds have over stocks. The key advantage
funds have over stocks is diversification. Any fund normally invests in a diverse basket of
securities, which may include stocks. Consider one of the market favorites, Burlap
Advantage Fund, a growth scheme with 26.43% of its portfolio in Infuses, 14.75% in
Visual Soft and another 8.22% in SSI. With an investment of Rs.50,000 in the scheme
you could own Rs.13,215 worth of Infuses, Rs.7375 of Visual Soft and Rs.4110 of SSI.
Likewise you would own 27 other stocks that the scheme has put its money in. Is that
more satisfying than purchasing seven stocks of Infuses on your own with the same
money. Hence, funds make it possible for individual investors to achieve more
diversification and with less of their effort than compared to investing in individual
stocks. Funds are also professionally managed and backed by an investment research
team. The team looks at the performance of companies and then makes investments in
them to achieve the objectives of the scheme. Compared to investing in stocks, your
experience with fund investing will show you that you save a lot of paperwork as well as
time. Under normal functioning, fund investment also does away with common problems
associated with stocks like bad deliveries, delayed payments and the frequent visits to
brokers and companies.
3.} Should I leave a scheme because it changed the fund manager?

Do you stop frequenting the Udupi joint round the corner just because a new cook
cooked your favorite appam even if it was to your liking? Similarly, there is not much
reason to opt out of a fund just because it has a new manager. Managers usually work to
the fund house's objective set for a scheme. However, do keep track what the new

manager is up to. Is the manager handling the portfolio in a way that it reflects the fund's
objectives? If the new manager churns the portfolio upside down, it might mean more
capital gains distributions, and hence more taxes. Obviously then, (and before appams
start tasting like idlis) time you looked for another fund.
4.} When selling a scheme will I get paid for each unit equal to the NAV?
No, you may not actually get that much when you redeem your units. That is
because of the charges levied by some mutual funds. Though NAV is a good enough
figure to tell you what the price of each unit is, it is not an exact one. Funds charge fee for
managing your money called the annual expense fee. Some funds also charge a fee when
you buy or sell units called the entry and exit load.
5.} Does rupee depreciation affect scheme performance?

It does in case of schemes that have invested in government instruments like
debentures and government securities e.g., debt schemes and some balanced schemes.
The volatility of debt schemes depends entirely on the health of the economy e.g., rupee
depreciation, fiscal deficit, inflationary pressure.
6.} While buying a debt fund what should I look for?

In debt funds, it is useful to compare the extent to which the growth in NAV
comes from interest income and from changes in valuation of illiquid assets like bonds
and debentures. This is important because as of today there is no standard method for
evaluation of un-traded securities. The valuation model used by the fund might have
resulted in an appreciation of NAV.
7.} Are bank deposits better than mutual funds?
Sustained periods of low absolute performance are a cause for concern. It is okay
to look at returns vis-à-vis market indices; but if a particular scheme produces absolute
returns less than the cumulative returns for a fixed deposit of a bank, then the latter option
is better when evaluated on the parameter of risk adjusted returns. This is because
generally it is safer to invest in a fixed deposit of a bank than to invest in a debt fund.

8.} What is rupee cost averaging?
This term finds place in the literature of practically all mutual funds. What it
basically implies is that a price risk at the entry level can be eliminated to some extent by
buying units at various points of time. But this assumes that the NAV will rise eventually.
If it does not, you are worse off than by not adopting this strategy.
9.} Do we a have benchmark performance for funds?
All mutual funds schemes have different objectives and therefore their
performance would vary. But are there some standards for comparison? Schemes are
usually benchmarked against commonly followed market indexes. The relevant index can
be chosen after taking into consideration the asset class of the scheme. For example BSE
Sensex can be used a benchmark for an equity scheme and I-Bex for an income fund. But
if you switch the benchmarks, conclusions could be misleading. Benchmarking also
requires a relevant time period of comparison. Ideally, one should compare the
performance of equity or an index fund over a 1-2 year horizon. Short-term volatile price
movements would distort any comparison over a shorter period. Similarly, the ideal
comparison period for a debt fund would be 6-12 months while that for a liquid/money
market fund would be 1-3 months. So if a comparison reveals a scheme to be out
performing its index, does it mean it is going to deliver super returns? Not necessarily. In
several cases it is noticed that the funds performance is volatile and driven by few scripts.
In other words, the fund manager has taken significantly higher risks to achieve higher
returns. That brings us back to the often-repeated moral in the investment market: The
funds that have the potential for the greatest returns also have the greatest potential for
losses. From an investor's point of view, while looking at impressive returns in the past,
he cannot derive confidence and comfort in the fund managers' ability to repeat the
performance in future.
10.} Why is it important to watch out for the expenses of a scheme?

It's a trick company ads often do. A tempting offer is always accompanied with
the fine print tucked in a corner at the bottom of the ad. And sometimes reading the
applied conditions in the fine print might squeeze all the attractiveness out of a great
sounding offer. Buying a scheme also requires that you give a careful look at the fine
print. Should it matter to you if the fund house purchases a new computer?
11.}What are load and no-load funds? Why are loads charged?
Some asset management companies (AMCs) levy service charges for allowing
subscribers entry into/exit from mutual fund schemes. The service charge is termed as
entry/exit load and such schemes are called "load" schemes. In contrast, funds for which
no entry/exit charge is levied are called no-load funds.
The load is levied to cover the up-front cost incurred by the AMC in the process of
marketing and selling the fund and other one-time transaction processing costs.
11.}Can a mutual fund impose fresh load or increase the load beyond the level
mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer document.
Any change in the load will be applicable only to prospective investments and not to the
original investments. In case of imposition of fresh loads or increase in existing loads, the
mutual funds are required to amend their offer documents so that the new investors are
aware of loads at the time of investments.
12.} What is an assured return scheme?

Assured return schemes are those schemes that assure a specific return to the unit holders
irrespective of performance of the scheme. A scheme cannot promise returns unless such
returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in
the offer document.
13.}

Can a mutual fund change the asset allocation while deploying funds of investors?
Considering the market trends, any prudent fund managers can change the asset
allocation i.e. he can invest higher or lower percentage of the fund in equity or debt
instruments compared to what is disclosed in the offer document. It can be done on a
short term basis on defensive considerations i.e. to protect the NAV. Hence the fund
managers are allowed certain flexibility in altering the asset allocation considering the
interest of the investors. In case the mutual fund wants to change the asset allocation on a
permanent basis, they are required to inform the unit holders and giving them option to
exit the scheme at prevailing NAV without any load.
14.}How do I evaluate mutual funds performance?
Good performance in the past does not guarantee for anything in the future, but it is an
important factor to consider if you want to assess the fund on its objectives and compare
it with other funds. One way is to identify the top 5 best performing funds over various
time periods (3 months, 6 months, 1 year, 3 years) that have your investment objectives.
The funds that come in the top five in each time period can be short listed as they are not
only good but consistent performers.
15.}What are the benefits and risks of investing in sector specific schemes?
A sector specific scheme allows an investor to benefit from potential growth

opportunities in a particular sector. Although such a fund stands to benefit from the
growth potential in a particular sector, it also faces the risk of value erosion in case the
sector does not perform as per expectation. Such funds have a higher risk-return trade-off.
16.}Is mutual funds out performance always good?
Mutual fund performance of index may not always be a positive indicator. In
several cases one notices that the funds performance is very lop sided and is driven by
few scrips. In other words the fund manager has taken significantly higher risks and in the
game of probability he would have made more money. But it is very likely that if his call

had not been right, he would have under performed and lost badly. From an investor’s
point of view, when he is looking at such out-performances in the past, he cannot derive
confidence and comfort in the fund managers' ability to repeat the performance in future.
As markets are not rational, there is no methodology in the world to scientifically predict
stock prices. Therefore it is not possible for anyone to beat the market on a consistent
basis and hence there is no guarantee that the fund manager would perform well all the
while.

Conclusion
As mutual fund has entered into the Indian Capital market, growing profitable
enough to attract competitors into this cherished territory encouraging competition among
all the mutual fund operators, there is need to take some strategy to bring more
confidence among investors for which mutual fund would be able to project the image
successfully.
Fund selling has improved considerably from earlier where nobody could
distinguish between an equity and fixed income fund. Technology is going to make a big
difference down the road both in terms of servicing as well as a fundamental change in
the business model.
Internationally, on-line investing continues its meteoric rise. Many have debated
about the success of e-commerce and its breakthroughs, but it is true that this aspect of
technology could and will change the way financial sectors function. However, mutual
funds cannot be left far behind. They have realized the potential of the Internet and are
equipping themselves to perform better.
With new funds being launched regularly the choice for investors is becoming
difficult. The first rule while choosing a fund is that one should never go by the name of
the scheme but check out the way funds are invested. The choice today varies from an
equity fund, which is diversified across different sectors to an equity fund investing only
in one sector eg FMCG/ pharma/ IT stocks.
In developed countries like the U.S.A there are funds to satisfy everybody’s
requirement, but in India only the tip of the iceberg has been explored. The real growth
stage for mutual funds in India started only after the introduction of private players in the
market. While the mutual fund industry in the U.S has reached its maturity stage, in India
there is still a lot more scope for growth. Some big names like Fidelity, Principal, Old
Mutual etc. are looking at Indian market seriously. Unlike the U.S, India still has to
witness the introduction of real estate funds, gold funds, precious metals fund etc.

In other developed countries, mutual funds attract much more investments as

compared to the banking sector but in India the case is reverse. We lack awareness about
the benefits that are offered by these schemes. It is time that investors irrespective of their
risk capacities, made intelligent decisions to generate better returns and mutual funds are
definitely one of the ways to go about it.
Suggestions
 It is necessary to develop the ability to provide competitive solutions to fulfill the

needs of the customer and the investor.
 Analysis of the customer is very important to cater to customer needs.
 Uniform coordinated regulations by a single agency should be formed which

would provide the shelter to the investors.
 Investors are not willing to invest in mutual fund unless a minimum return is
assured, it is very essential to create in the mind of the investors that mutual funds
are market instruments and associated with market risk hence mutual fund could
not offer guaranteed income.
 Steps should be taken for funds to make fair and truthful disclosures of
information to the investors, so that subscribers know what risk they are taking by
investing in fund.
 Mutual funds need to take advantage of modern technology like computer and
telecommunications to render service to the investors.
 With the structural liberalisation policies no doubt Indian economy is likely to

return to a high grow path in few years. Hence mutual fund organisations are
needed to upgrade their skills and technology.

 Investors need to be educated on the rules of the stock market. Due to lack of
knowledge, investors usually invest when the prices are high and redeem when
they fall. The case should be reverse.
 The rural markets in India provide a tremendous potential for the mutual fund
industry. Mutual fund companies should look at targeting the rural markets by
educating the rural customers and launching specialized schemes to cater to the
rural customers.


Mutual Fund Summer Report Final

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Mutual Fund Summer Report Final

Hochgeladen von

Copyright:

Verfügbare Formate

Summer Project Repot Systematix Group India Ltd.

BENEFITS OF MUTUAL FUNDS.............................................................................................................14

Mutual Fund Research and Portfolio Management 1

THE GROUND RULES OF MUTUAL FUND INVESTING..................................................................29

Mutual Fund Research and Portfolio Management 2

Mutual Fund Research and Portfolio Management 3

SYSTEMATIX GROUP {I} Ltd.

Systematix Group is a conglomerate of five strategic business entities that offer

Mutual Fund Research and Portfolio Management 4

provider that offers a rich spectrum of financial services encompassing Merchant

Promoted by Mr. C.P. Khandelwal, a renowned personality in the finance service

SYSTEMATIX SHARES & STOCKS (I) LTD.

A strong research team of competent and experienced professionals work continuously to

Mutual Fund Research and Portfolio Management 5

optimizing the operational efficiency

Various Investment Options: Mutual Funds standout

Mutual Fund Research and Portfolio Management 6

Mutual Fund Research and Portfolio Management 7

Post office schemes

Mutual Fund Research and Portfolio Management 8

Company Fixed Deposits

Mutual Fund Research and Portfolio Management 9

Mutual Fund Research and Portfolio Management 10

Mutual Fund Research and Portfolio Management 11

Risk Return Spectrum

Low Risk High

MUTUAL FUNDS IN INDIA

Mutual Fund Research and Portfolio Management 12

First phase – 1964-87

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

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

Fourth Phase – since February 2003

Mutual Fund Research and Portfolio Management 13

Benefits of mutual funds

Mutual Fund Research and Portfolio Management 14

Mutual Funds invest in a number of companies across a broad cross-section of

Mutual Fund Research and Portfolio Management 15

Mutual Fund Research and Portfolio Management 16

Investors individually may lack sufficient funds to invest in high-grade stocks. A

Mutual Fund Research and Portfolio Management 17

Types of Mutual Funds Schemes

Mutual Fund Research and Portfolio Management 18

Difference in Open Ended and Close Ended Schemes

Mutual Fund Research and Portfolio Management 19

Tax Saving schemes

Income funds are named appropriately: their purpose is to provide income on a

 Fixed Maturity Plans (FMPs)

Mutual Fund Research and Portfolio Management 20

 Monthly Income Plans (MIPs)

Mutual Fund Research and Portfolio Management 21

The objective of these funds is to provide a balanced mixture of safety, income

 Liquid and short-term floaters

Mutual Fund Research and Portfolio Management 22

Mutual Fund Research and Portfolio Management 23

With reference to sale/transfer of units of equity funds :

Mutual Fund Research and Portfolio Management 24

With reference to sale/transfer of units of debt funds:

Mutual Fund Research and Portfolio Management 25

Mutual Fund Research and Portfolio Management 26

DSP Merrill Lynch Mutual Jun 30, May 31,

MUTUAL FUND DATA FOR THE MONTH ENDED - May 31 , 2007

Mutual Fund Research and Portfolio Management 27