FUNDAMENTALS OF MUTUAL FUNDS

A mutual fund is a pool of money, collected from investors, and is

invested according to certain investment objectives.

A mutual fund is created when investors put their money together. It is

therefore a pool of investors’ funds. The most important characteristic of
mutual fund is that the contributor and the beneficiaries are the same class
of people, namely the investors. The term “mutual” means that investors
contribute to the pool, and also benefit from the pool. There are no other
claimants to the funds. The pool of fund held mutually is a mutual fund.

A mutual fund’s business is to invest the funds thus collected, according

to the wishes of the investors who created the pool. In many markets these
wishes are articulated as “investment mandate.” Usually, the investors
appoint professional investment managers, to manage their funds. The
same objective is achieved when professional investment managers create
a “product,” and offer it for investment to investors. This product
represents a share in the pool, and pre-states investment objectives. For
example, a mutual fund, which sells a “money market mutual fund,” is
actually seeking an investor willing to invest in a pool that would invest
predominantly in the money market instruments.
 IMPORTANT PHASES IN THE HISTORY OF MUTUAL
FUNDS INDUSTRY 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 the
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 in 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 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)

With the entry of private sector funds in 1993, a new era started in the
Indian mutual fund industry, giving the Indian investors a wider choice of
fund families. Also, 1993 was the year in which the first Mutual Fund
Regulations came into being, under which all mutual funds, except UTI
were to be registered and governed. The erstwhile Kothari Pioneer (now
merged with Franklin Templeton) was the first private sector mutual fund
registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were
substituted by a more comprehensive and revised Mutual Fund
Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India. The industry has also witnessed
several mergers and acquisitions. As at the end of January 2003, there
were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit
Trust of India with Rs.44,541 crores of assets under management was way
ahead of other mutual funds.

Fourth Phase – since February 2003

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, functions under an
administrator and under the rules framed by Government of India and does
not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in
March 2000 more than Rs.76,000 crores of assets under management and
with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual
Fund Regulations, and with recent mergers taking place among different
private sector funds, the mutual fund industry has entered its current
phase of consolidation and growth. As at the end of June 30, 2003, there
were 31 funds, which manage assets of Rs.104762 crores under 376
schemes.

The graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT

 GENESIS OF MUTUAL FUNDS

Indian mutual fund industry is more than three decades old. The monolith
investment intermediary - Unit Trust of India has come a long way since
its inception in July 1964. This big brother of Indian mutual funds
flourished in a competition free market and grew as a hybrid investment
company till 1987 when Rajiv Gandhi opened up mutual fund industry to
the public sector banks. From 1987 to 1990, five public sectors banks
sponsored their mutual funds. This gold rush was again witnessed when
the Indian economy was opened up to the private sector in 1991. The
Indian private sector mutual funds made their debut in 1992. The process
of liberalization saw the entry of foreign mutual funds in our land in the
year 1994.

A history of 32 years is not a long one when compared with the US mutual
fund industry, which is 72 years old with 4000 funds and aggregate assets
under management of US$ 6.9 trillion. Yet, there is a vast potential for
the rapid growth of the industry in India. The foray of public sector banks
into the mutual fund business in the late eighties had then added color and
competition to the industry. Bt the same token, the entry of private sector
thereafter has accelerated the process of all round growth of the Indian
mutual funds in terms of product innovation, investor education and
customer service.
STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY

The Indian Mutual Fund industry was dominated by the Unit Trust of
India which, prior to its bifurcation, had a total corpus of Rs 700 Billion
collected from over 20 million investors. The UTI has many funds/
schemes in all categories i.e. Equity, balanced, income etc. with some
being open ended and some being closed ended. The Unit scheme 1964
commonly referred to as US 64, a balanced fund, which even today is the
biggest scheme, had at one time a corpus exceeding Rs20000 crores. UTI
was floated by financial institutions and is governed by a special act of
Parliament. Most of its investors believe that the UTI is government
owned and controlled, which, while legally incorrect, is true for all
practical purposes.

The second category of mutual funds were the ones floated by

nationalized banks and the financial institutions LIC and GIC. Canbank
Asset Management floated by Canara Bank and SBI Funds Management
floated by State Bank of India were the largest of these. GIC AMC floated
by General Insurance Corporation and Jeevan Bima Sahayog AMC floated
by the LIC were some of the other prominent ones.

The third category of mutual funds, which today is the largest, is the ones
floated by the private sector and by foreign asset management companies.
The largest of these are HDFC Asset Management, Prudential ICICI AMC
and Birla Capital AMC and. The aggregate corpus of the assets managed
by this category of AMC’s is about Rs.85000 crores.
In terms of market share, the position of the different categories of funds
as on 31 s t August, 2003 is as under:

Assets Under
Category Sales-All Schemes Redemption
Management
Total
From Total Cumulative Cumulative
From new For As on 31st
Existing For the Apr'03 to Apr'03 to
schemes the August 2003
schemes Month Aug '03 Aug '03
Month
No. Amount Amount
A) Bank
- - 2219 2219 14616 2891 12928 23025
Sponsored (5)
B) Institutions
2 58 1751 1809 7655 1472 5668 6308
(3)
C) Private
Sector
1 Indian
- - 11866 11866 48606 9717 42396 17312
(8)#
2 Foreign
- - 1566 1566 6552 1358 5943 2508
(1)
3 Joint
Ventures :
- - 10829 10829 52595 9352 43690 28537
Predominantly
Indian(5)#
4 Joint
Ventures :
- - 17205 17205 79894 15639 66725 43350
Predominantly
Foreign (9)
Total
- - 41466 41466 187647 36066 158754 91707
(1+2+3+4)
Grand Total
2 58 45436 45494 209918 40429 177350 121040
(A+B+C)

Source : AMFI MONTHLY REPORT FOR AUGUST 2003

 MUTUAL FUND CONSTITUENTS

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

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, track 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 –
the fees being generally expressed as a percentage, say 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 information on 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. The AMC fee should not exceed 1.25 percent
of collections below Rs. 100 crore and 1 percent of collections above Rs.
100 crore. SEBI can pull up an AMC if it deviates from its prescribed
role.

Custodian: An independent organization, 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 securities 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.

Registrars: A Registrar & Transfer Agent is appointed by the AMC to

accept and process investors’ applications for purchase of units, allot
units, accept and process transfer, transmission and repurchase of units
and handle correspondence with the unit holders on behalf of the fund.
 WORKING AND PERFORMANCE OF MUTUAL FUNDS

It needs to be clarified that mutual funds invest their funds in capital

market instruments such as shares; debentures, bonds and money market
instruments and therefore the net asset value of such investments will
reflect the market values of underlying assets. These market values
fluctuate and therefore the net asset values of the mutual fund schemes
also fluctuate.

All the capital market instruments have varying degrees of risk, the degree
of risk being the highest in equities, lower for debt and least for money
market instruments. The risk factor is highlighted in the respective offer
documents as well as in the abridged offer documents. The investor
therefore is in the full knowledge and understanding of the risks involved
in various schemes. As per SEBI regulation all mutual funds disclose their
portfolio periodically and all open-ended funds offer exit option to
investors at NAV based price.

In recent years, the share market had passed through a bear phase with
prices falling across the board, and more steeply in the technology scrips.
Reflecting this fall in share prices, the NAVs of most of the equity
schemes in general and of the technology funds in particular had also
fallen. This fall in the NAVs should be viewed in the context of the fall in
the share prices, a phenomenon which was then worldwide. The fall in
NAVs not only affects the investors but it has an impact on the fees and
earnings of the investment managers also.

It may be recalled that the mutual funds have given good returns while the
market was in the upswing and even in the current financial year, with the
bull run in the stock market, equity schemes have so far provided very
competitive rates of returns as compared to debt schemes. With interest
rates continuously moving down, investors would necessarily have to go
for equity investments to earn decent returns over the long term.

Open
Ended

Schemes: As the name implies the duration 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 units at any time. It implies that the capitalization of the fund is
constantly changing as investors sell or buy their units. Further, the 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
investor 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 difficult as
managers have to ensure sufficient liquidity at all times to meet
redemption pressure. Difficulty may be on 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 favorable opportunities. Further, to match quick cash payments,
funds cannot have matching realizations 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.

Close Ended Schemes: Such schemes have a definite period after which
their units are redeemed. Unlike open-ended funds, these funds have fixed
capitalization, 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 cannot exceed the sum of the prices of the
investments constituting the package. If at all any 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.

Interval funds: Interval funds combine the feature of open-ended and

closed-ended schemes. They are open for sale or redemption during pre-
determined intervals at NAV related prices.

 BY INVESTMENT OBJECTIVE:

GROWTH FUNDS

The aim of growth funds is to provide capital appreciation over the

medium to long term. Such schemes normally invest a majority of their
corpus in equities. It has been proven that the returns from stocks have
outperformed most other kind of investments held over the long term.
Growth schemes are ideal for investors having a long-term outlook
seeking growth over a period of time.

INCOME FUNDS

The aim of income funds is to provide regular and steady income to

investors. Such schemes generally invest in fixed income securities such
as bonds corporate debentures and government securities. Income funds
are ideal for capital stability and regular income.

BALANCED FUNDS
The aim of balanced fund is to provide both growth and regular income.
Such schemes periodically distribute a part of their earning and invest
both in equities and fixed income securities in the proportion indicated in
their offer documents. In a stock market, NAV of these schemes may not
normally keep pace, or fall equally when the market falls. These are ideal
for investors looking for a combination of income and moderate growth.

MONEY MARKET FUNDS

The aim of money market funds is to provide easy liquidity, preservation

of capital and moderate income. These schemes generally invest in safer
short-term instruments such as treasury bills, certificates of deposits,
commercial paper and inter- bank call money. Returns on these schemes
may fluctuate depending upon the interest rates prevailing in the market.
These are ideal for corporate and individual investors as a means to park
their surplus funds for short periods.

LOAD FUNDS

A load fund is one that charges a commission for entry or exit. That is ,
each time an investor buys or sells units in the fund, he is charged a
commission to cover the transaction costs. Typically entry and exit loads
range from 1% to 2% . It could be worth paying if the load fund has a
good performance history.

NO-LOAD FUNDS
A no-load fund is one that does not charges a commission for entry or
exit. That is no commission is payable on purchase or sale of units in the
fund. The advantage of a no load fund is that entire corpus is put to work.

 OTHER SCHEMES

TAX SAVING SCHEMES:

These schemes offer tax rebates to the investors under specific provisions
of the Indian Income Tax laws as the government offer tax incentives in
specific avenues. Tax rebate u / s 88 of the Income Tax Act, 1961 is
allowed on investments up to Rs 10000/- made in any financial year in
Equity Linked Saving Schemes (EISS) and Pension Schemes.

INDUSTRY SPECIFIC SCHEMES

Industry specific schemes invest only in the industries specified in the

offer document. The investment of these funds is limited to the specific
industries life FMCG, INFO TECH, pharmaceuticals etc.
 MUTUAL FUNDS FOR WHOM?

These funds can survive and thrive only if they can live up to the hopes
and trusts of their individual members. These hopes and trusts echo the
needs of such investors who face following constraints while making
direct investments:

(a) Limited resources in the hands of investors quite often take them away
from stock market transactions.

(b) Lack of funds forbids investors to have a balanced and diversified

portfolio.

(c) Lack of professional knowledge associated with investment business

does not permit investors to operate gainfully in the market. Small
investors can hardly afford to have expensive investment consultations.

(d) To buy shares, investors have to engage share brokers who are the
members of stock exchange and have to pay their brokerage.

(e) They hardly have access to price sensitive information in time.

(f) It is difficult for them to know the developments taking place in share
market and corporate sector.

(g) Firm allotments are not possible for small investors when there is a
trend of over subscription to public issues.
 WHY MUTUAL FUNDS?

Mutual Funds are becoming a very popular form of investment

characterized by many advantages that they share with other forms of
investment and what they possess uniquely themselves. The primary
objectives of an investment proposal would fit into one or combination of
the two broad categories, i.e., Income and Capital gains. How mutual fund
is expected to score over an individual in achieving the said twin
objectives is what attracts investors to opt for mutual funds. Mutual fund
route offers several important advantages.

i. Diversification : A proven principle of sound investment is that of

diversification which is the idea of not putting all your eggs in one basket.
By investing in many companies the mutual funds can protect themselves
from unexpected drop in values of some shares. The small investor cannot
achieve wide diversification on his own because of many reasons, mainly
lack of funds at his disposal. Mutual funds on the other hand, pool funds
of lakhs of investors and thus can participate in a large basket of shares of
many different companies. Majority of people consider diversification as
the major strength of mutual funds.

ii. Expertise Supervision : Making investments is not a full time

assignment of investors. So they hardly have a professional attitude
towards their investment. When investors buy mutual fund scheme units,
an essential benefit one acquires is expert management of the money he
puts in the fund. The professional fund managers who supervise fund’s
portfolio take the essential investment decisions viz., what scrips are to be
bought, what investments are to be sold and more appropriate decision as
to timings of such buy and sell. They have extensive research facilities at
their disposal, can spend full time to investigate and can give the fund a
constant supervision. The performance of mutual fund schemes, of course,
depends on the quality of fund managers employed.
 iii. Liquidity of Investment : A distinct advantage of a mutual fund over
other investments is that there is always a market for its units. Moreover,
Securities and Exchange Board of India (SEBI) requires the mutual funds
in India have to ensure liquidity. Mutual funds units of close-ended
schemes can be sold in the share market as SEBI has made it obligatory
for closed-ended schemes to list themselves on stock exchanges. For open-
ended schemes investors can always approach the fund for repurchase at
net asset value (NAV) based prices. Such repurchase price and NAV is
advertised in newspaper for the convenience of investors and also put up
on the fund’s web site and that of AMFI.

iv. Reduced risks : Risk in investment is as to recovery of the principal

amount and as to return on it. Mutual fund investments provide a
comfortable situation for investors on both fronts .The expert supervision,
diversification and liquidity of units ensured in mutual funds minimize the
risks. Investors are no longer expected to come to grief by falling prey to
misleading and motivating ‘headline’ leads and tips, if they invest in
mutual funds.

v. Safety of Investment : Besides depending on the expert supervision

of fund managers, the legislation in a country (like SEBI in India) also
provides for the safety of investments. Mutual funds have to broadly
follow the laid down provisions for their regulation, SEBI acts as a
watchdog and attempts whole-heartedly to safeguard investors interests.

vi. Tax Shelter : Depending on the scheme of mutual funds, tax shelter is
also available. As per the Union Budget 2003, income earned through
dividends from mutual funds is 100% tax-free in the hands of investors..

vii. Minimize Operating Costs : Mutual funds having large investible

funds at their disposal avail economies of scale. The brokerage fee or
trading commission may be reduced substantially. The reduced operating
costs obviously increases the income available for investors.

Investing in securities through mutual funds has many advantages like –

option to reinvest dividends, strong possibility of capital appreciation,
regular returns, etc. Mutual funds are also relevant in national interest.
The test of their economic efficiency as financial intermediary lies in the
extent to which they are able to mobilize additional savings and
channelising to more productive sectors of the economy.
Mutual Funds Function Within Strict Regulatory Framework

The different entities such as the Mutual Fund, the Asset Management
Company and the Custodian operate as per the provisions of the SEBI
Mutual Fund Regulation 1996 and the rules and guidelines issued by
SEBI. Each of these entities has independent Boards of Directors and
separate auditors.

SEBI keeps a close watch on the mutual funds through periodical reports
and every three months, each mutual fund submits to SEBI a report
conforming compliance with regulatory provisions and mutual funds are
required to record their investment decisions. Any deficiency or non-
compliance is dealt with suitably by SEBI.

Every year, each mutual fund is inspected by SEBI and such inspection is
both a detailed scrutiny of operations and a rectification exercise. Thus,
the mutual funds are strictly supervised and regulated entities and the
regulatory provisions match with international standards.

AMFI also is engaged in upgrading professional standards and in

promoting best industry practices in diverse areas such as valuation,
disclosure, transparency etc.
REGULATORY JURISDICTION OF RBI OVER MUTUAL FUNDS

RBI is the monetary authority of the country and is also the regulator of
the banking system. Earlier bank sponsored mutual funds were under the
dual regulatory of RBI and SEBI. Money market mutual funds, which
invested in short term investments, were also regulated by RBI. These
provisions are no longer in vogue. SEBI is the regulator of all the mutual
funds. The present position is that RBI is involved with the mutual fund
industry, only to the limited extent of being the regulator of the sponsors
of bank-sponsored mutual funds. Specifically, if the sponsor has made any
financial commitment to the investor of the mutual funds, in the form of
guaranteeing assured returns, such guarantees can no longer be made
without the prior approval of the RBI.
Recent Trends in the Mutual Funds Industry

The most important trend in the mutual fund industry is the aggressive
explosion of the foreign owned mutual funds companies and the decline of
the companies floated by nationalized banks and small private sector
players.

Many nationalized banks got into the mutual funds business in the early
nineties and got of to a good start due to the stock market boom prevailing
then. These banks did not really understand the mutual funds business and
they viewed it as another kind of banking activity. Few hired specialized
staff and generally chose to transfer staff from parent organizations. The
performance of most of the schemes floated by these organizations was
not good. Some schemes had offered guaranteed returns and there parent
organizations had to bail out these AMCs by paying large amount of
money as the difference between the guaranteed and actual returns. The
service levels were also not up to the mark. Most of these AMCs have not
been able to retain staff, float new schemes etc. And it is doubtful
whether, barring a few exceptions, they have serious plans of continuing
the activity in a major way.

The experience of some of the AMCs floated by the private sector Indian
companies was also very similar. They quickly realized that the AMC
business is a business, which makes money in the long term and requires
deep- pocketed support in the intermediate years. Some have sold out to
foreign owned companies, some have merged with others and there is a
general restructuring going on.

The foreign owned companies have deep pockets and have come here with
the expectations of a long haul. They can be credited with the introduction
of many new practices such as new product innovation, sharp
improvement in the service standards and disclosure, usage of technology,
broker education and support etc. In fact, they have forced the industry to
upgrade itself and service levels of organizations like UTI have improved
dramatically in the in the last few years in response to the competition
provided by these funds.

Last six years have been the most turbulent as well as exciting ones for
the industry. New players have come in, while others have decided to
close shop by either selling of or merging with others. Product innovation
is now passé with the game shifting to performance delivery in fund
management as well as service. Those directly associated with the fund
management industry like distributors, registrars and transfer agents, and
even the regulators have become more mature and responsible. The
industry is also having a profound impact on financial markets. While UTI
has always has been a dominant player on the bourses as well as the debt
markets, the new generations of private funds, which have gained
substantial mass, are now seen flexing their muscles. Fund managers, by
their selection criteria for stocks have forced corporate governance on the
industry. By rewarding the honest and transparent management with
higher valuations, a system of risk-reward has been created where the
corporate sector is more transparent then before.

What is particularly noteworthy is that bulk of the mobilization has been

by the private sector mutual funds rather than public sector mutual funds.
Indeed private MFs have now been seeing greater net inflows than public
sector funds.

Mutual funds are now also competing with commercial banks in the race
for retails investors’ saving and corporate float money. The power shift
towards mutual funds has become obvious. The coming few years will
show that the traditional saving avenues are losing out in the current
scenario. Many investors are realizing that investment in savings accounts
is as good as locking up their deposits in a closet. The fund mobilization
trend by mutual funds in the current year indicates that money is going to
mutual funds in a big way.

India is at the first stage of a revolution that has already peaked in the
U.S. The U.S boasts of an asset base that is much higher than its bank
deposits. In India, mutual fund assets are not even 10% of the bank
deposits, but this trend is beginning to change and it is expected that over
time the rate of growth in mutual funds will out-strip the growth in bank
deposits. This is forcing a large number of banks to adopt the concept of
narrow banking wherein the deposits are kept in gilts and some assets,
which improves liquidity and reduces risks. The basic fact remains that
banks cannot be ignored and they will not close down completely. Their
role as intermediaries cannot be ignored. It is just that mutual funds are
going to change the way banks do business in future
ROLE OF MUTUAL FUNDS IN PROMOTING CORPORATE
GOVERNANCE

Mutual funds can play a very active role in promoting healthy corporate
governance practices. They have now, the most efficient tool to promote
corporate governance in the investor companies- the voting power. This
has been conferred to them by The Companies (Amendments) Bill,1996.
There are two ways of promoting better corporate governance practices
through mutual funds:

1. Behavioral Interventions.

2. External Interventions.

BEHAVIORAL INTERVENTIONS

These can be adopted in three ways:

1. Mutual funds as Trustee of Investors Money

The mutual funds may enhance their role of the trustee of investors’
money. For example, if today a particular mutual fund is holding shares of
a company which is not traded or traded infrequently at insignificant
prices compared to their true worth, then it will hold those shares or
dispose them off at the earliest opportunity. A more sensitive mutual fund
will find out the company and initiate board reforms to release high value
returns for the shareholders and ultimately for its unit holders.
2. Mutual funds as Partners in Business

Mutual funds consider themselves as investors in the investee company

without realizing that an investment in equity confers upon them a
proportionate ownership of the company. And therefore, they are
partners in the business. Hence, they need to be more convincing,
assertive and active to ensure that the corporate boards run the
business operations more effectively.

EXTERNAL INTERVENTIONS

Another way of promoting better corporate governance practices is

through external interventions.

1. Devise Guidelines

Mutual funds may devise a set of guidelines for activism on the corporate
boards which may enable them to take decisions not only on the basis of
inputs by the management but more importantly on the basis of third party
opinions.

For example, decision on the following corporate actions can be taken

only after soliciting a third party opinion on the consequences of the
respective corporate actions in terms of shareholders’ value.

2. Encourage Contestability on Corporate Boards

Mutual funds can ask the existing management to regularly release

additional and authentic information about the company in the market.
They may also enforce adequate and timely disclosures in the market. This
would allow the competing managements to have a fair idea of the value
of the company thereby keeping the management alert about its
performance. The consistent performance will make the corporate boards
more responsive towards their stakeholders- by adopting better corporate
governance practices.

3. Involvement in Strategic Planning Exercises

Mutual funds can ensure that the boards take active interest in the
strategic planning of the company by initiating a corporate restructuring
exercise when it is warranted. The benchmark would be the shareholders’
value expected to be released by such decisions. For example, potentially
sick companies, at the initial stage, may initiate negotiations and a
political process to turnaround the company. Later, they may solicit bids
for the company. This may lead to competition for corporate control.

4. Initiating the Political Process

Contest or competition can be replaced by a public debate as active

shareholders identify specific operating policies for the targeted
companies and then invent new mechanisms to get their messages across
to the existing management. The new form of governance will be based on
politics or political ability of the activist rather than the ability to raise
finance. It may take one of the many forms: shareholders’ committee,
issue campaigns, friendly monitoring and proxy fights.

5. Realign ownership with performance

Mutual funds may also initiate realignment of ownership with

performance. Experiences of domestic and multinational companies
suggest that the managers act at their best when the ownership of shares
aligns with their performance. In such circumstances, in an endeavour to
increase their own wealth, the managers end up increasing the wealth of
the owners.
 NET ASSET VALUE (NAV)

The net asset value of the fund is the cumulative market value of the asset
fund net of its liabilities. In the other words, if the fund is dissolved or
liquidated, by selling off all the assets in fund, this amount that the
shareholders would collectively own. This gives rise to the concept of net
asset value per unit, which is the value, represented by the ownership of
one unit in the fund. It is calculated simply by dividing the net asset value
of the fund by the number of units. However, most people refer loosely to
the NAV per unit as NAV, ignoring the “per unit”.

CALCULATION OF NAV

The most important part of the calculation is the valuation of the assets
owned by the fund. Once it is calculated, the NAV is simply the net value
of assets divided by the number of units outstanding. The detailed
methodology for the calculation of the asset value is given below.

Asset value is equal to

Sum of market value of shares/ debentures
+ Liquid assets/ cash held, if any
+ Dividend / interest accrued
- Amount due on unpaid assets
- Expenses accrued but not paid
 THE PRESENT SCENERIO
At present, a total of 32 mutual funds (including UTI) are operational in the
market with a plethora of Schemes on offer. The break-up of the assets under
management under the different types of schemes is as under:

ASSETS UNDER MANAGEMENT AS ON 31st August 2003 (Rs crores )

Type of Scheme Open End Close End Assured return Total
Income 69680 367 116 70163
Growth 13266 2486 - 15752
Balanced 2961 728 - 3689
Liquid/Money
23578 - - 23578
Market
Gilt 6291 - - 6291
ELSS 452 1115 - 1567
Total 116228 4696 116 121040
Source: AMFI MONTHLY REPORT FOR AUGUST 2003

The industry has successfully experimented product innovation.

Objective wise, growth schemes, Income Schemes, Balanced (Income-
cum-growth) schemes, Tax-saving schemes, Industry-specific and Market
specific schemes, Index-based schemes and Exchange Traded Funds have
already been floated in the market. Still a plethora of new types E.g., Real
Estate Fund, Bullion Fund, Commodity Funds, Fund of Funds etc. are
waiting in the wings.
Besides, a product-mix, mutual funds have recently offered
investor-friendly option like switchover option, roll-over option, lateral
shift and buy-back options. Mutual funds have now though belated, turned
their attention to investor education (or investor communication to use
AMFI’s label) by providing them periodical information on the economy,
industry and schemes. They are mailing out to their customers pamphlets,
new letters and annual reports, some of them publish periodically their
bulletins in newspapers. SEBI has also recently launched an initiative
towards investor education and both AMFI and the Mutual Funds are
expected to provide support to take this all over the country.

The Future
The growth and expansion of the industry so far is by no means
meagre. In a span of just over 3 decades, we have 32 mutual funds more
than 350 schemes with a corpus fund exceeding Rs.120000 crores.

Since 1991 when the process of economic reforms was initiated,

many developments have taken place in the financial sector - the rapid
growth in the size of listed companies, abolition of CCI, proportionate
allotment system, free pricing of public issued, raising the minimum
subscription amount to Rs.5, 000, allowing the promoters to retain 75 per
cent holding, empowering SEBI, to regulate all intermediaries in the
capital market, bringing the oldest and the largest fund -UTI - under the
jurisdiction of SEBI, institutionalization of the stock markets are a few
among financial sector reforms worth mentioning in this context. All these
reforms directly concern the mutual funds industry and these
developments should help to increase the inflow in mutual funds. The
ever-increasing size of the small and retail investors will provide a
flourishing market for the mutual funds. However, there is no substitute
for satisfactory performance by the funds.

Once bitten, investors will be twice shy. Understandably, they

prefer to keep out of the new schemes. All tall claims will not convince
the investors unless they are getting a reasonable return on their
investment.

What mutual fund investors had experienced during the prolonged

bear phase in the stock market when almost all the schemes were deeply
discounted to their net assets value drove away the small investors from
the mutual funds. However there has been a reversal of this trend recently
which augurs well for the industry.

So one can only hope that the funds keep up the smart turn around
and retain the investor confidence in good shape. Consistently better
performance, improved services, greater disclosure, more transparency.
prudent accounting norms and sustained investor communication - all
these shall go a long way in making the funds investor-friendly and
ensuring them an enduring and exponential growth.
 DISCLOSURE NORMS FOR MUTUAL FUNDS

The Indian fund managers declare the NAV at regular intervals

-weekly for close-ended schemes and daily for open-ended schemes.. In
addition, mutual funds are required to publish their half-yearly accounts
and annual reports. The complete portfolio of the scheme is required to be
disclosed to the investors on a half –yearly basis. Most funds disclose
their scheme portfolios on a monthly basis. All this information is made
available to the investor to enable him to take a decision whether to
continue in the scheme.

It is incumbent on fund managers to publish not just the NAV of the

scheme but also indicate the investment pattern in detail specifying not
merely the names of companies in which the funds are invested but also
their specific quantities. The disclosure norms do not just begin with the
offer letter and end with the balance sheet to be published annually. There
are monthly bulletins, informing the investor on the details of allocation
of the investible assets. The mutual funds are the repositories of
investors’ funds and hence charged with the responsibility of not merely
investing the funds but also disclosing the nature and quantum of
transactions as visible evidence of the fund managers having exercised
prudential norms.
 TAX TREATMENT OF INVESTMENTS

 TO THE MUTUAL FUND

The entire income of the fund is exempt from income tax in accordance
with the provisions of section 10(23D) of Income Tax Act, 1961. The
income received by the fund is not liable for-deduction of tax at source.

Under section 115R, the fund will be liable to pay additional income tax
@12.5% plus surcharge on the income distributed by the fund (other than
in open ended equity oriented funds ).

 TO THE UNIT HOLDERS

INCOME TAX
Under the provisions of Section 10(35) of the Income Tax Act, 1961
income (other than income arising on transfer of units) received by all
categories of unit holders will be exempt from Income Tax in their
hands. In view of this position, no tax need be deducted at source from
such distribution by the fund.

LONG TERM CAPITAL GAINS

Long-term Capital Gains in respect of units for period of more than 12

months will be chargeable under Section 112 of the Income Tax Act,
1961, at a rate of 20% plus surcharge, as applicable. Capital Gains would
be computed after taking into account cost of acquisition as adjusted by
Cost inflation Index notified by the Central Government and expenditure
incurred wholly and exclusively in connection with such transfer. An
assessee has an option to apply concessional rate of 10% plus surcharge,
provided the long-term capital gains are computed without substituting
indexed cost in place of cost of acquisition.

 SHORT TERM CAPITAL GAINS

Short term Capital Gains in respect of units held for a period of not more
than 12 months is added to the total income. Total income including short-
term capital gains is chargeable to tax as per the relevant slab rates.

 TAX DEDUCTION AT SOURCE ON CAPITAL GAINS

No tax is required to be deducted at source on capital gains arising at the
time of repurchase / redemption of units to any resident unit holder under
section 194K vide circular No. 715 dated August 8, 1995 issued by the
Central Board for Direct Taxes (CBDT)

 INVESTMENT BY CHARITABLE AND RELIGIOUS TRUSTS

Units of mutual finds referred to in clause 23D of section 10 of the
Income Tax Act, 1961, constitute an eligible avenue for investment by
charitable or religious trust per rule 17C of the income Tax Rules, 1962,
read with clause (xii) of sub-section (5) of section 11 of the Income Tax
Act, 1961.

WEALTH TAX
Units held under the scheme of the fund are not treated as assets within
the meaning of Section 2(ea) of the Wealth Tax Act, 1957, and are,
therefore, not liable to Wealth Tax.

GIFT TAX
Units of the fund may be given as gift and no gift tax will be payable
either by the donor or the donee, as the Gift Tax Act has been abolished.
 RESTRICTIONS ON INVESTMENT.

 Mutual fund can invest only in marketable securities.

 All investment by the mutual fund have to be delivery basis, that is, a
mutual fund has to pay for each buy transaction, and delivery securities
for sell transaction. It cannot enter in to trades with the view to
squaring off the positions.
 A mutual fund under all its schemes cannot hold more than 10% of the
paid-up capital of a company.
 Except in the case of sectoral funds and index funds, a mutual fund
scheme cannot invest more than 10% of its NAV in a single company.
 Investments is rated investment grade issues of a single issuer cannot
exceed 15% of the net asset and can be extended to 20%, with the
approval of the trustees.
 Investment in unrated securities cannot exceed 10% of the net asst of
one scheme and 25% of net asset of all the scheme.
 Investment in unlisted shares cannot exceed 5% of the net assets for an
open-ended scheme, and 10% of the net asset for a close-ended scheme.
 Mutual funds can invest in ADRs/GDRs up to a maximum limit of 10%
of net asset or $50 million, which ever is lower. The limit for the
mutual fund industry as a whole is $500 million.
LISTING OF MUTUAL FUNDS ON STOCK EXCHANGES

Units of close-ended mutual funds schemes are listed on the stock

exchanges. It is essential that only the growth schemes be listed on the
stock exchanges. Technically there is no ban in income schemes being
listed, but this in effect is feasible and practicable only when the units of
such schemes have potential of considerable capital appreciation.
Repurchase by the fund after a certain period is an essential safety net and
investors should be wary of mutual funds who choose to throw them to the
mercies of the bear and the bull.

Once a scheme is listed after completion of due formalities, its units are
traded like shares of any other company and are subject to the same
procedure of sale and purchase through the brokers, governed by similar
transfer mechanism and regulated by the same guideline of the stock
exchange where the scheme is listed.

OBEJECTIVES OF LISTING

Listing thus confers the ‘ trading privileges’ of a stock exchange to a

company, in this case a mutual fund. According to the definitions of the
stock exchange, the objectives of listing are as follows:-

 To provide ready marketability and impart liquidity and free

negotiability to stocks and shares

 Ensure supervision and control of dealing therein

 Protect the interest of shareholders and of the general investing public.

 HDFC MUTUAL FUND

Sponsors : HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC)

HDFC was incorporated in 1977 as the first specialized housing

finance institution in India. HDFC provides financial assistance to
individuals, corporate and developers for the purchase or
construction of residential housing. It also provides property related
services (e.g. property identification, sales services and valuation),
training and consultancy. Of these activities, housing finance remains
the dominant activity. HDFC currently has a client base of over
5,00,000 borrowers, 13,00,000 depositors, 1,00,000 shareholders and
52,000 deposit agents. HDFC raises funds from international agencies
such as the World Bank, IFC (Washington), USAID, CDC, ADB and
KfW, domestic term loans from banks and insurance companies,
bonds and deposits. HDFC has received the highest rating for its
bonds and deposits program for the eighth year in succession. HDFC
Standard Life Insurance Company Limited, promoted by HDFC was
the first life insurance company in the private sector to be granted a
Certificate of Registration (on October 23, 2000) by the Insurance
Regulatory and Development Authority to transact life insurance
business in India.

THE TRUSTEE
HDFC Trustee Company Limited, a company incorporated under the
Companies Act, 1956 is the Trustee to the Mutual Fund vide the Trust
deed dated June 8, 2000, as amended from time to time. HDFC Trustee
Company Ltd is wholly owned subsidiary of HDFC.
HDFC ASSET MANAGEMET COMPANY (AMC)

HDFC was incorporated under the Companies Act, 1956, on December 10,
1999, and was approved to act as an Asset Management Company for the
Mutual Fund by SEBI on July 3, 2000. The registered office of the AMC
is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Back bay
Reclamation, Churchgate, Mumbai - 400 020. In terms of the Investment
Management Agreement, the Trustee has appointed HDFC Asset
Management Company Limited to manage the Mutual Fund. The paid up
capital of the AMC is Rs. 75.161 crore.
The present share holding pattern of the AMC is as follows:

% OF THE PAID UP SHARE

PARTICALARS CAPITAL

HDFC 50.10
 UTI MUTUAL FUND

UTI Mutual Fund has come into existence with effect from 1st
February 2003. UTI Asset Management Company presently manages
42 NAV based domestic SEBI compliant schemes and 4 Offshore
funds having a corpus Rs.15,243 crore from about 10 million investor
accounts.

UTI Mutual Fund has a track record of managing a variety of

schemes catering to the needs of every class of citizenry over a
period of 39 years. It has a nationwide network consisting 54 branch
offices, 3 UTI Financial Centers (UFCs) and representative offices in
Dubai and London. With a view to reach to common investors at
district level, 18 satellite offices have also been opened in select
towns and districts. It has 2400 committed employees and over
10,000 active agents and 266 chief representatives to sell and service
its schemes. It has a well-qualified, professional fund management
team, who have been highly empowered to manage funds with greater
efficiency and accountability in the sole interest of unit holders. The
fund managers are also ably supported with a strong in-house equity
research department. To ensure better management of funds, a risk
management department is also in operation. It has reset and
upgraded transparency standards for the mutual funds industry. All
the branches, UFCs and registrar offices are connected on a robust IT
network to ensure cost-effective quick and efficient service. All these
has evolved UTI Mutual Fund to position as a dynamic, responsive,
restructured, efficient, transparent and SEBI compliant entity.
UTI Mutual Fund has recently opened out yet another investor
friendly vista for its investors on the Internet i.e. ‘MyUTI’ whereby
an investor can transact through the Internet. With this the investors
need not visit UTI offices, or write letters for non monetary changes,
not involving any document submission for transactions viz. change
of address, bank particulars mandate (mode of payment), update
income tax details and view, download and print the latest statement
of account (SoA).
As on January 31, 2003, almost all schemes/funds have outperformed
the respective benchmark indices over various periods. These
schemes have distributed income/bonuses consistently. Over and
above the faith reposed by the investor community on UTI has also
been reflected by fresh sales mobilization over Rs.5,200 crores in the
last 7 months, commencing 1st July 2002. US 95 has been awarded
with CNBC Mutual Fund Award for the year for the best performance
in the open-end balance fund category under the three-year segment.

UTI Mutual Fund is poised to meet the challenges of the future with
its dedicated human resources, vast reservoir of funds and 38-year
track record. Speed, Quality and Transparency is the edifice on which
it desires to stride ahead for the benefit of its investors.
 UTI MUTUAL FUND
Corpus under management (Rs.16388 Crs. as on Jul 31, 2003)
NO. OF SCHEMES 20
NO. OF SCHEMES (incl. Options) 42
EQUITY SCHEMES 1
DEBT SCHEMES 41

SCHEMES

 UTI liquid fund UTI Liquid Fund.

 ULIP71 Unit Linked Insurance Plan.
 UTIRIS UTI Regular Income Scheme.
 UTI Bond Inc UTI Bond fund Income Option- Open Ended Debt.
 UTI Bond Gro UTI Bond fund Growth Option - Open Ended Debt.
 UTI GSEC Gro G-Sec Fund (Growth Option).
 SIF Small Investors’ Fund (SIF).
 RBP Retirement Benefit Plan (RBP) .
 UTI GSEC Inc G-Sec Fund (Income Option).
 MUS UTI Mahila Unit Scheme.

MONEY MARKET FUND: -

 UTI MMF INC (income option)

 UTI MMF GRO (growth option)

BALANCED FUND

 US 95 INC (US 95 open ended balanced Income option)

 US 95 GRO (US 95 open ended balanced Growth option)
 CRTS (Charitable and Religious Trust)
 CCP (Children Career Plan)
 FRANKLIN TEMPLETON MUTUAL FUND

Templeton Asset Management Company, a company incorporated under

the Companies Act, 1956, is a part of the Franklin Templeton Group. The
sponsor of the Fund Templeton International Inc., is a wholly owned
subsidiary of Templeton Worldwide Inc., which in turn is a wholly owned
subsidiary of Franklin Resources Inc. The Franklin Templeton Group is
one of the world s largest Investment Management Companies. It has over
50 years of experience in International Investment Management with 34
offices in over 23 countries, which service over 10 million unit holders.
Templeton started operations in Mumbai, India in January 1996.Templeton
in India has 8 different funds. Templeton has eleven offices including
Mumbai, Delhi, Calcutta, Pune, Chennai, Bangalore, Cochin and
Hyderrabad

CORPUS UNDER MANAGEMENT

Rs.13033 Crs. as on Aug 29, 2003
NO. OF SCHEMES 60
NO. OF SCHEMES INCLUDING 117
OPTION
EQUITY SCHEMES 40
DEBT SCHEMES 47
SHORT TERM DEBT SCHEMES 12
EQUITY AND DEBT 8
GILT FUND 10

SCHEMES
DIVERSIFIED EQUITY FUNDS
Templeton India Growth Fund (TIGF)
Franklin India Blue chip Fun (FIBCF)
Franklin India Index Fund (FIIF)
Franklin India Tax shield (FIT)

SECTOR EQUITY FUNDS

Franklin InfoTech Fund (FIF))

Franklin FMCG Fund (FFF)
Franklin Pharma Fund (FPF)

DEBT FUNDS
Templeton India Income Fund (TIIF)
Templeton Monthly Income Plan (TMIP)
Templeton India Government Securities Fund (TGSF)
FT India Gilt Fund (FTIGF)
Templeton Floating Rate Income Fund (TFIF)

HYBRID FUNDS
FT India Asset Allocation Fund (FTIAAF)
Templeton India Children's Asset Plan (TICAP).
Franklin India Balanced Fund (FIBF)
 SELECT MUTUAL FUNDS & ASSETS UNDER
MANAGEMENT
(Rs.in crores)
NET
MUTUAL NO. OF INC/DEC
FUND SCHEMES AS ON CORPUS AS ON CORPUS IN
CORPUS

JULY31 JUNE
42 2003 16388.00 30 2003 16015.00 373
UTI
AUG 31 JULY
75 2003 13,119.00 31 2003 12,421.09 697.91
HDFC
AUG 29 JULY31
FRANKLIN 95 2003 13,033.00 2003 12,002.00 1031
TEMPLETON

Market Timing: The mantra of a successful investor

Investing successfully in equity market demands a great deal of
knowledge about the market apart from large sum of money. This market
is driven by a number of forces and the mechanics of the same is quite
difficult to understand. More often than not, a common investor misjudges
the prospects of the scrips and consequently ends up short of what he had
invested. Another constraint in his way to success is his miniscule
investible fund, as compared to the large volume of transactions of the
stock market, which restricts his diversification across a broad cross-
section of industries and sectors. He may also find himself helpless, in
investing in large-cap scrips. Above all these even if he invests in a well
diversified portfolio of high-grade stocks, success is not guaranteed. For
him, to be a successful investor, it is required to learn the mantra of
market timing. It is often seen that the odd lotter enters when the market
tops and exits at its bottoms and makes some intelligent investors a bit
richer during the process. So, the question here is "what is the way out?"

The best way for him to get rid of all these shortcomings of direct
investment in equity market is to invest in Mutual Funds. By investing
in mutual funds, he will get the services of experienced and skilled
professionals, backed by a dedicated investment research team that
analyses the performance and prospects of companies and selects suitable
investment options at right time.

But even now the exact problem is not solved as he may end up in losses
as NAVs of mutual fund can also decline and if right timing is not done an
investor may end up loosing his money.

Coaches never win matches for the players. Not long back, the markets
were touching new highs with each passing day. This was in the first
quarter of Y2K, when the InfoTech sector was booming. The result of a
stock market boom was that the NAVs of equity funds were touching dizzy
heights. Annualized returns jacked up to astronomical levels. At this
stage, some investors, who had invested prior to the market frenzy,
withdrew from the peaking market having made a bounty. However,
consider the plight of people who got in to the funds at such high levels.
Because the markets have since then been engulfed in a turmoil rarely
seen, the NAVs have been spiraling downwards for most funds. Under
these conditions, some investors, not having the nerves of steel,
succumbed to the pressures of depreciating investments and redeemed
under losses. What had then appeared to be a necessary correction in the
overheated market robbed many such investors of hard-earned money. The
investors, who sustained the pressure and understood the concept of
market correction, stayed invested for a long period and reduced the
losses after the market bounced back. It is advised that the investment
made during peak days is not going to bear any fruit till the markets reach
the levels again. The most important mantra for successful investor is of
"getting in" & "moving out" at the right time. An ideal investor is one
who enters the market at its bottom or at average levels and leaves the
market when it gives the first sign of sinking. Since, it is not possible for
a common investor to correctly time the market, it is advisable to invest
regularly in small amounts when the market appears to be low and
withdraw regularly in small amounts when market appears to be high.

In any case, he should at least avoid entering at the market peaks and exiting at bottoms.
The effect of "moving in" at a wrong time i.e. at market peak, can be negated to some
extent if one can stay put for a long period. This is because the market cycles will take
care of the intermediate volatility. The effect of "moving out" at wrong time however,
will continue to haunt the investors should they fall victim to greed.

"Even a bumper crop may not help farmer have high yields, if there is delay in
harvesting"

Union Budget 2003 - 04 - Impact on MF Industry

MF Industry

The Budget 2003-04 has brought some cheers to the mutual fund industry.
The budget has following proposals for the MF investors:

 Investors, once again, will get the tax-free dividends from MF units.
Dividends from Equity Funds will be tax free While Debt Mutual
Funds have to pay distribution tax amounting to 12.5 percent of the
dividends declared.
 Long-term capital gains tax on equity funds remains at 20 per cent
with indexation, or 10 per cent, whichever is lower. Investments
made in listed equity shares, for one year from April 2003, will be
exempted from long-term capital gains tax.
 Administered interest rates on PPF and small-savings have been
reduced by 1 per cent. Interest on Relief and Savings bonds will
also be reset accordingly. This is likely to give a boost to the debt
schemes of mutual funds.

Personal Taxation

On the taxation front Budget 2003-04 has the following proposals –

 Standard deduction for income tax raised to 40 % or Rs 30,000

whichever is lower, on income up to Rs 5 Lakh p.a.
 Standard deduction for income exceeding Rs 5 Lakhs will be Rs
20,000. Exemption under Section 80L of the Income Tax Act
increased to Rs 15,000, which includes Rs 3000 exclusively for
interest from Government securities.
 Surcharge on corporate tax halved to 2.5 % from 5 %.10 %
surcharge for income above Rs 8.5 Lakh p.a. Tax rebate u/s 88 to
include expenditure on children's education up to Rs 12000 per
child for a maximum of 2 children.
 Tax rebate for senior citizens u/s 88 hiked from Rs 15,000 to Rs
20,000.
 Tax exemption on the interest payments on housing loans remains
unaltered to Rs 1.5 Lakh.
 Dividend tax abolished in the hand of the taxpayer. Long Term
Capital Gains on shares removed.
 FINANCIAL PLANNING THROUGH INVESTMENT
IN MUTUAL FUNDS

Only when wealth achieves growth through a systematic and well-planned

strategy and when it is protected through appropriate insurance plans, can
we say that an individual is following the principles of “Comprehensive
Financial Planning ”.

There are several steps involved in the financial planning process.

The first step that an individual should take is to determine the various
financial goals that he may have during various stages of life such as
children’s education, children’s marriage, purchase of house etc. the next
step is to determine one’s portfolio of investment and the amount that one
can save on regular basis. After this is done, an individual should, in
consultation with a financial planner, choose the level of risk, he is
comfortable and determine his investment strategy to achieve his financial
goals. Having developed an investment strategy, the financial planning
process further involves continuous monitoring of the investment portfolio
again in consultation with a professional planner. The final step in the
financial planning process involves ascertaining the right plan for
insurance and the amount of coverage and acquisition of the same through
a regular premium plan commensurate to saving potential.

HOW TO TAKE INVESTMEMT DECISIONS ?

As we saw a crucial step in the financial planning process involved
determining an investment strategy and choosing a portfolio of investment
options. There are some important factors that must be kept in mind when
choosing amongst various investment options. One of these is that as far
as possible the returns must be tax efficient and the investor should look
at returns from various instruments on a post tax basis for purpose of
comparison. Further, even if one looks at post tax returns, as the prime
factor, the investor should post tax returns are higher than the expected
than the 2-3% to ensure that inflation does not eat into the value of his
investments.Liquidity is another important criteria determining the choice
of investment option. This is particularly important for the short- term.
Many investment have lock-in periods and may be available for long
term. Also, an investor should avoid consuming his savings, meant for the
long-term, to finance short=term requirements. Finally the investor should
understand all the risk factors associated with the choice of his investment
option, safety is a significant factor. It is important to know that different
investor would categorize an investment option differently in terms of
safety as this would determine by the risk profile of investor. Your risk
profile could be ‘conservative’, ‘moderately aggressive’ or ‘aggressive’.
As pointed out before an individual consult a financial planner to know
about his and his family risk-taking ability to help decide in the right mix
of investment products.

After having determined one’s risk level the financial planning process
revolves round determining a set of investment options commensurate
with risk taking ability of the individual. While there are several
instruments available for investment, debt mutual finds are an option,
which provides several benefits to investor regardless of their risk profile
Debt mutual funds generally provide superior returns compared to bank deposits taken
for the same period. At the same they offer comparable liquidity wherein one can enter or
exit an open ended scheme any time. Technically one can invest in these funds
continuously for 30 to 40 years, i.e. till one retires and thereby one can take the advantage
of the ‘power of compounding’. Leading International and Indian asset management
companies such as ICICI, HDFC, TATA, TEMPLETON etc offers such schemes have
proven track record and the returns generated by diversified Debt funds in last 1 to 3
years have been more than the returns generated by any other class of asset like Gold,
Real Estate, Equity Markets, and Bank Deposits.

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. The SIPs
(Systematic Investment Plans) offered by all funds helps in being
systematic. All that one needs to do is to give post-dated cheques to
 the fund and thereafter one will not be harried later. The Automatic
investment Plans offered by some funds goes a step further, as the
amount can be directly/electronically transferred from the account
of the investor.
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.

Investments in mutual funds too are not risk-free and so investments

warrant some caution and careful attention of the investor. Investing in
mutual funds can be a dicey business for people who do not remember to
follow these rules diligently, as people are likely to commit mistakes by
being ignorant or adventurous enough to take risks more than what they
can absorb. This is the reason why people would do well to remember
these rules before they set out to invest their hard-earned money.

RISK MANAGEMENT AND MUTUAL FUNDS

The basic objective of a mutual fund is to provide a diversified portfolio
so as to reduce the risk in investments at a lower cost. The mutual fund
industry worldwide is based on this premise. Investors who take up mutual
fund route for investments believe that their risk is minimized at lower
costs, and they get an optimum portfolio of securities that match their risk
appetite. They are ignorant about the diverse techniques and hedging
products that can be used for minimizing the market volatility and hence
take the help of the fund managers. It is very daunting to note that the
drop in the NAV of some of the schemes is higher than the erosion of
value in some of the ICE stocks. The recent survey conducted by
PricewaterhouseCoopers (PWC) on risk management by mutual funds has
posted interesting as well as worrying results. According to the survey, as
many as 50 percent of the respondent mutual funds are not managing risk
properly. If this is not all, 50 percent of the respondents did not even have
documented risk procedures or dedicated risk managers. The respondents
included among others, some of the heavyweights of the Indian MF
industry viz. Templeton, Alliance, Prudential and IDBI Principal MF.

Worrisome news it is, for the investor who still believes MFs are a route
to manage one’s money in a better and safe manner. The recent wild
movements in the NAVs of several equity funds have belied all
expectation of a diversified portfolio from the fund managers when the
basic tenet behind portfolio management is risk management. Mr. Shyam
Bhat, Fund Manager-Tata Asset Management Ltd. said ‘Indian Mutual
fund industry is not using statistical techniques of risk management but is
using diversification effectively within the market limitations. As far as
use of derivatives is concerned, they are not presently used because of the
low volumes, low liquidity and absence of sufficient hedging products in
the market ’.

Aggression has been the key word followed by the AMCs when it comes to
taking positions in stocks. With investment in volatile ICE sectors being
the driver of growth last season, almost everybody had taken big
exposures to them. Birla MF maintained its exposures in Infosys to almost
25 percent in all of its equity schemes throughout last year. The same is
true of ING Savings Trust that has Rs. 60 crores invested in Wipro and
Infosys out of the total fund size of 135 crores in its growth fund. The
result of these exposures is that the fund witnessed a movement of almost
9 percent in a single day on budget when the market saw an appreciation
of around 4.36 percent. In their quest for growth, many funds have seen
very volatile movements in NAVs. The investor confidence may not be
lost but such volatility sure dents it. The point is not whether AMCs
should be chastised or not but just to question the practices as the fate of
many investors is linked to it. An ordinary investor considers mutual
funds as the experts in investment decisions and so naturally expects the
decision of investing in mutual funds to bear fruit. However, AMCs often
leave a lot to be desired as they falter on important fronts like NAV and
portfolio disclosure besides posting high fluctuations and poor returns.

It is unfortunate that the fund managers are not taking due care for
minimizing the risk and are in a race to post higher and higher returns
during the phase of bull-run. They should understand that the investors
forget the high returns posted in any specific period very soon but they
take hell lot of time to forget the burns they get during periods of losses.
Hence for maintaining the confidence of the retail investors it is very
important to control wild fluctuations in the NAVs. The basic technique of
portfolio management thrusts on diversification, which preaches inclusion
of negative beta, stocks in the portfolio so as to minimize the impact of
fluctuation in the market. Diversification always has a cost and investors
are willing to pay for it if it is properly done. The fund manager should
disclose what they are doing at the hedging front. They should come up
and tell their investors as to what they do at times of high fluctuations.
Normally it has been seen that they outperform the broad market indices
during the bull-runs and under-perform the indices during the bear-phases.
The industry needs to revise their attitude and try to streamline their
actions with their objectives. Some mutual fund houses are quite
disciplined but every body should embrace the same spirit. There are some
infrastructural problems but fund managers need to be more vigilant on
the market movements. Mr. Bhupinder Sethi, Fund Manager - Dundee
Mutual Fund said ‘We are actively monitoring the market movements and
taking calls accordingly. Though we are presently not using derivatives
for hedging of risk because of lack of depth in the market for the product,
but we go into cash when we see the expectations of huge corrections
coming in.’

Poor performance, poor servicing to clients and failure of third party

service providers, are the three major risk factors identified in the survey
by PWC. These are also going to be crucial in a rapidly growing
competitive scenario. Under this setting, it is not just growth that should
be the focus area but also better management of all risks and hence, AMCs
would do well to keep the investor and his interest in mind before taking
any decision.

ARTICLES
  AMFI, SEBI sing different tunes on making AMFI an SRO (On Sep 13,
2003)

As reported in a leading business daily, Association of Mutual Funds of

India (AMFI) and Securities and Exchange Board of India (SEBI) have a
difference of opinion on the role of AMFI in the Indian mutual fund
industry. SEBI wants AMFI to take on the mantle of a self-regulatory
organization (SRO) for the mutual fund industry, so as to make regulation
easier and infuse self discipline at the industry level. But AMFI seems to
have different ideas, although it has in principle agreed to be an SRO.
AMFI wants to work closely with SEBI in framing regulations and
bringing in best practices. A committee appointed by AMFI has
recommended that AMFI should act on an SRO in limited areas such as
valuation, disclosures and also in regulating distributors and agents
registered with it. The direct implication of making AMFI an SRO would
be that it would have to take on the responsibility of enforcing the
regulations as well. This would be an onerous task, as even in developed
nations like the US, the bodies monitoring mutual funds are not SROs.
The concept of SRO is being practiced in Korea, Taiwan and Japan.

 Debt Mutual Funds: A paragon for VRS beneficiaries

Mutual Fund Industry is gearing up with prognostic saplings to woo VRS
beneficiaries. The potential of the VRS beneficiaries has forced the
industry to create the prophecy by announcing new schemes that are
tailor- made to gratify the investors.

The banking industry, in an attempt to optimise their efficiency and

effectiveness, has decided upon curtailing their workforce after adequate
compensation to its employees. The idea has also been received with
fanaticism. Around 22000 public sector bank employees have opted for
VRS-2000 scheme. The obsession was such that Bank of Maharashtra
received 1500 applications from employees opting for VRS during the
first ten days of the announcement of the scheme. A number of banks and
corporates are still in the advanced stage for finalizing the structures of
their VRS. Cash stripped banks like United Bank of India is still
struggling to find out the mode of funding the voluntary retirement
programme. The bank is looking at shedding almost 10-12 per cent from a
total strength of 21,000 employees.

Mutual Fund industry could not stop itself from getting wowed. Mr. K. K.
Mittal, Fund Manager of Escorts Mutual Fund said "This is the right time
to invest in mutual funds as the stock market is very low and the interest
rate in the economy has stabilised. Intelligent investors will have
confidence in the industry and mutual funds will garner good portion of
the money collected by VRS". The Fund-houses have started the arduous
task of educating the VRS beneficiaries with vigor through camps and
banners at banks and other strategic places. Especially designed danglers,
posters and advertisements in the media are trying their might to attract
investors. The huge money of around Rs. 20,000 crores flowing from the
VR scheme can revolutionise the industry.

Mr. Akhilesh Gupta, Associate Vice President and fund manager of

Dundee Mutual Fund said "The investment objective of the employees
opting for VRS is to get regular returns with safety of capital. They also
have long-term investment horizon, so open ended gilt funds and bond
funds will be very good options for investment. Investors with high-risk
profile may also invest in balanced funds or growth funds".

Private sector Mutual Funds in an attempt to be called a solution to the

investors’ requirement have also dedicated themselves to carve new
schemes to suit the investment requirements of the employees going for
VRS. First in the list is IDBI Principal Mutual Fund which has decided to
launch a scheme for the specific purpose. This shall be done in a tie-up
with various banks that have come out with a VRS scheme. The fund
proposes to have an asset allocation scheme where the investor will be
allowed to decide upon the investment allocation based on his risk
perception. This allocation would be allowed to change over a certain
period of time or at pre-decided trigger points. The mutual fund is also the
first to have a tie up with post offices regarding the distribution of its
schemes. Prudential ICICI has filed the draft prospectus of its new scheme
- Prudential ICICI Fixed Maturity Plan which targets investors who
want to wave off the interest rate risk by defining their time horizon at the
time of investment. The level of risk comes down drastically in fixed
maturity plans as they invest in securities that mature on a fixed date and
hence the money that the investors will be getting at the time of maturity
will be somewhat fixed. The list of other innovators comprises of Fund-
houses like Kotak Mahindra and Reliance Mutual Fund who have tailored
serial plans which indicate the rate of return the investors will be getting
with a higher degree of precision.

If mutual funds are trying to woo the VRS beneficiaries, they are not
doing anything, which is against the investors’ interest. As an investment
option, Mutual funds have no match in terms of the benefits provided by
them. They are tailored to match the requirements of the investors. The
only problem the industry is facing in India is in terms of low level of
awareness about the product among investors and their irrational
expectations.

For a VRS beneficiary regular returns and safety are the basic
requirements apart from liquidity and tax efficiency. Banks can be
one of the options for parking VRS money but the investor will have to
compromise on the return front. The returns from bank deposits are
very low implying a high premium for the level of safety provided by
them. If the investor has the capability to understand his requirements,
the best product for a VRS beneficiary can be Open Ended Debt funds.
Open Ended Debt funds provide high quality customer service. As far
as safety of the investments is concerned, Debt Funds are highly safe
as they invest in very high quality debt instruments and that too after a
rigorous research by a team of experts. The portfolio is disclosed
regularly to imbibe confidence among the investors. The net asset
value (NAV) is announced daily and sale / purchase of units is done on
the NAV related prices on any working day. Above all, the dividends
are tax-free in the hands of the investors. At redemption, the Long
Term Capital Gains from mutual fund units are taxed at a maximum
rate of 10 % whereas the maturity proceeds from a bank deposit are
considered to be Short Term Capital Gains and are taxed at normal
rates depending upon the tax slab of the investor and can go as high as
38.5%. In mutual funds, investors can ask for dividends at convenient
frequency. The best part is that investors can do away with the interest
rate risk that is attached to the bank deposits by investing in open
ended debt funds. The investor in a bank deposit at a particular rate
can not get the gains of increase in market rate of interest but this
element of risk is not there in Mutual Funds. The NAV of mutual fund
schemes are marked to market regularly and the movements in the
interest rate are adjusted on the daily basis. The only challenge before
the industry in India is to juxtapose the right mutual fund schemes and
 the investors according to the investors’ risk profile. This is the only
reason why our mutual fund industry is not as huge as that in the
developed economies. As far as performances of the fund managers are
concerned, we have world-class fund managers but we are unable to
match the collection in the industry to that in banking industry because
of lack of awareness among investors.

SEBI STEPS IN TO CHECK SINGLE INVESTOR SCHEMES

The Securities and Exchange Board of India has cautioned mutual funds
again on the concentration of few investors in some of their schemes and
risks emerging from upsurge in the stock prices especially mid-cap
scrimps.

"Early this week, chairman GN Bajpai held meeting with directors of some
asset management companies and discussed issue of few schemes being
run exclusively for some investors", Sebi sources said on Thursday.

Earlier, Sebi had called meeting of MF chief executives in July to discuss

issue of some funds being run as portfolio management schemes.

The current market situation also came up for review and Sebi officials
expressed concern over the surge in mid-cap stock, sources said

The regulator has emphasized need to look at developments behind the

price and examine if the surge of adequately backed by fundamentals, they
added.
 MFs witness net inflow of Rs 5,065 cr in August: AMFI

Mutual Fund schemes witnessed lower net inflow of Rs 5,065 crore in

August 2003 with total assets under management of Rs 1,21,040 crore,
according to Association of Mutual Funds in India's data.

Last month, the schemes collectively witnessed a net inflow of Rs 7,480

crore.

The growth funds -- schemes which invests most of their corpus in equity
and equity related instruments -- saw a net inflow of Rs 498 crore in
August (Rs 779 crore last month) and their AUMs stood at Rs 15,752
crore, AMFI said in its data released on Friday.

The total sales and redemptions for the reporting month were Rs 45,494
crore and Rs 40,429 crore, respectively, AMFI said.

The asset management companies raised only Rs 58 crore through two new
schemes.

The liquid\money market funds witnessed net inflow of Rs 491 crore with
sales and redemption/repurchases of Rs 27,779 crore and Rs 27,288 crore,
respectively while AUM of these schemes stood at Rs 23,578 crore as on
August 31, 2003.

The predominantly foreign-owned joint venture MFs raised raised Rs

17,205 crore while their redemptions stood at Rs 15,639 crore,
respectively, it said.

The predominantly Indian-owned joint venture MFs raised Rs 10,829 crore

with outgo on account of redemptions and repurchases at Rs 9,352 crore.
Indian-owned private funds witnessed sales and redemptions of Rs 11,866
crore and Rs 9,717 crore in the month of August, it said.

FREQUENTLY USED TERMS

Net Asset Value (NAV)

Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by
the number of units outstanding on the Valuation Date.

Sale Price

Is the price you pay when you invest in a scheme. Also called Offer Price. It
may include a sales load.

Repurchase Price 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 Is the price at which open-ended schemes repurchase

their units and close-ended schemes redeem their units on maturity. Such
prices are NAV related.

Sales Load Is a charge collected by a scheme when it sells the units. Also
called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No
Load’ schemes.

Repurchase or ‘Back-end’ Load

Is a charge collected by a scheme when it buys back the units from the
unitholders.

*****