MUTUAL FUNDS

Page 1

SR.NO .

TOPIC

PAGE NO.

1 2 3 4 5 6 7 8

GETTING STARTED LITTLE FUNDS MORE ABOUT

3 MUTUAL 5

THE BASICS INVESTING

OF MUTUAL FUNDS 6 8

MUTUAL FUND WHEEL OF FORTUNE MUTUAL FUNDS INVESTING V/S

STOCK 9 11 12

THE IDEAL VEHICLE FOR INVESTING WHY INVEST IN MUTUAL FUNDS

DISCOVER THE VARIETY OF 14 FLAVOURS OFFERED THAT MUTUAL FUNDS COME IN HOW TO SELECT A MUTUAL FUND 17 SCHEME CREATE AN INVESTMENT PORTFOLIO 20 HOW TO TRACK YOUR INVESTMENTS 26

9 10 11

MUTUAL FUNDS

Page 2

12 13 14 15

READING THE NEWSPAPER LISTINGS 27 MARKET INSIGHT MUTUAL FUND VENDETTA STRATEGIC CHOICES FUND BUSINESS VIEWPOINT) 28 30

IN MUTUAL 32 (MARKETING FUND 40

16 17

ICICI CHILDRENS GROWTH (MARKETING STRATEGY)

TREND WATCH: COMPARISONS 42 BETWEEN THE US AND THE INDIAN MUTUAL FUND INDUSTRY AND THE GAMES FUNDS PLAY THE YEAR THAT WAS: FUND PEOPLE ANNEXURE BIBLIOGRAPHY 51 53

18 19 20 21

MUTUAL FUNDS

Page 3

GETTING STARTED
Before I dive into the concept of a Mutual Fund, it is important that you have a basic understanding of stocks and bonds. STOCKS Stocks represent shares of ownership in a public company. Examples of public companies include IBM, Microsoft, Ford, Reliance and Infosys. Stocks are the most common ownership investment traded on the market. Stocks or equity securities represent ownership shares in a company and the right to share in both its profits (stock dividends) and its growth (rising share price). For both of these reasons, stocks have become an "investment of choice," particularly for millions of investors looking for capital appreciation.

While the stock market is known for its ups and downs, and individual stocks can rise or plummet overnight, as a whole, stocks have delivered a larger return on investment over the long run than any of the alternatives.

BONDS Bonds are basically a chance for you to lend your money to the government or a company. You can receive interest and your principle back over predetermined amounts of time. Bonds are the most common lending investment traded on the market. Fixed-income securities or notes, bills and bonds allow you to lend your money to a company or government entity for a year or more, in return for interest payments. When the bond matures at the end of the designated period (up to 30 years), the borrower returns your original investment, or principal, to you.

You don't participate in future profits of the borrower. And while an increase or decrease in the price of a bond is possible, studies show that 90% or more of the earnings in the bond market come

MUTUAL FUNDS

Page 4

from the interest payments; only a small portion comes from price appreciation. Traditionally, bonds have formed the backbone of conservative investment portfolios, providing steady income with little effort and relatively moderate risk. Over time, bonds have generated a return on investment that is second only to stocks. MONEY MARKETS Closely related to the bond market are very short-term fixed-income instruments known as money market instruments. Treasury bills, commercial paper and certificates of deposit are among the dozens of fixed-income investments that mature in one year or less and comprise this large marketplace. While bonds are used primarily to generate income, money market instruments are used more like savings accounts: to preserve your principal while generating a more modest level of income. There are many other types of investments other than stocks and bonds (including annuities, real estate, precious metals and art work), but the majority of Mutual Funds invest in stocks and/or bonds. CONCEPT OF MUTUAL FUNDS

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus, a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

MUTUAL FUNDS
Mutual Fund Operation Flow Chart

Page 5

ORGANISATION OF A MUTUAL FUND There are many entities involved and the diagram below illustrates the organizational set up of a Mutual Fund:

Organization of a Mutual Fund

A LITTLE MORE ABOUT MUTUAL FUNDS A Mutual Fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The Mutual Fund will have a Fund Manager who is responsible for investing the pooled money into specific securities (usually stocks or bonds). When you invest in a Mutual Fund, you are buying units (or portions) of the Mutual Fund and become a unit holder of the fund.

Mutual Funds are one of the best investments ever created because they are very cost efficient and very easy to invest in (you don't have to figure out which stocks or bonds to buy). Though not FDIC insured like banks, Mutual Funds generally provide more return than the current one to two percent obtainable through banks while still being one of the safest ways to grow your

MUTUAL FUNDS

Page 6

money. There are an endless variety of Mutual Fund investment choices depending on the degree of risk one feels comfortable with.

Over the past 40 years, there has been no better way to experience financial growth than to have been a long-term investor in the stock market. Even though they have experienced some dramatic downturns, stocks have outperformed all other types of investments including bonds, CDs and Government securities and they have stayed ahead of inflation. Like the stock market, successful investing is never a sure thing, since you can't predict what the value of your investment or your rate of return will be at any point in time. Yet, despite this uncertainty, the stock market remains among the best choices for long-term investing. For the individual investor, Mutual Funds provide the benefit of having someone else manage your investments, take care of record keeping for your account, and diversify your money over many different securities that may not be available or affordable to you otherwise. Today, minimum investment requirements on many funds are low enough that even the smallest investor can get started in Mutual Funds.

THE BASICS OF MUTUAL FUNDS INVESTING Many people have only vague ideas of how they work. Here are some common questions and the answers to them. Question 1: Why bother with mutual funds? Funds offer easy access to professional money management. The funds pool investors' assets to buy a portfolio of securities managed by professional investors. In theory and often in practice those investors are skilled at choosing promising stocks, bonds or other securities.

MUTUAL FUNDS

Page 7

You don't need piles of cash. Minimum investments vary, but are generally between Rs. 1,000 and Rs. 5,000 or even lower if you set up systematic withdrawals from your paycheck or bank account. Your modest investment follows the ups and downs of the fund portfolio, which probably includes scores of different securities. That diversification is one of the chief benefits of mutual funds. True, you could create your own diversified portfolio of stocks or other securities. But you'd need to put up a much larger sum, and you'd also need the skill to find and manage the right mix of individual securities. The average investor would not be able to do the necessary research on all the individual stocks it takes to construct a portfolio. Mutual funds offer instant diversification. That's why mutual funds are the best instruments for the average investor. Question 2: Is my money safe? Funds typically must buy back your shares at their current market value. That means they can't promise that your shares will be worth the price you paid for them. Question 3: How do I buy fund shares? There are lots of different ways. You can purchase shares of many funds directly from the firms that administer them the likes of HSBC or Franklin Templeton or HDFC or Pru ICICI. All you have to do is call the company's number You can also choose to buy funds through a financial-services company like a bank or brokerage firm. Such companies sometimes sponsor their own funds; they also can act as middlemen between fund companies and individual investors. Question 4: What determines the price of a fund share? Fund administrators add up the market value of the fund's investments at the end of each business day. The fund company then subtracts the value of the fund's debts or other liabilities. The difference equals the fund's net asset value. The fund company next divides the net asset value by the number of shares the fund has issued to investors. The result equals the price of each share. Question 5: What about sales commissions, entry-exit loads?

MUTUAL FUNDS

Page 8

Brokers and financial planners who sell mutual funds often earn a sales commission, otherwise known as a load typically 0.25 percent to 2 percent of your investment. Many funds charge socalled exit loads when you sell your shares. Exit loads, which usually shrink over time, are meant to encourage investors to make a long-term commitment to a particular fund. Question 6: Any other costs I should know about? Yes, indeed. All funds carry annual operating expenses that cut into your returns. Such costs, usually a percentage of your assets in a fund, average around 1.6 percent for diversified stock funds and 1 percent for bond funds. Question 7: Which funds should I buy? Your first job is to decide on a balance of different asset categories. Your portfolio should include shares of small and large companies in the India and abroad, as well as fixed-income securities. That done, you can set about finding first-rate funds in each category. Depending on the period of investment, the risk factor and the expected returns, you need to have an investment strategy. Then you can go about looking for high-quality funds that suit your needs and risk tolerance.

MUTUAL FUND WHEEL OF FORTUNE Imagine you have two wheels in front of you, each with different possible outcomes kind of like the Wheel of Fortune Game Show only each pie piece represents a different return on your money. Your task is to choose which wheel you would like to spin and you will have to live with the randomly produced result listed on the wheel.

The first wheel represents purchasing a single stock. If you choose to spin it, there is basically a 5050 chance that you will either make money or lose money. It is like flipping a coin. And among the

MUTUAL FUNDS

Page 9

winning and losing wheel pieces there is a great range of possible outcomes - from a loss of 50% to a gain of 50%.

The second wheel represents purchasing a Mutual Fund that holds many stocks. This time there is a better chance that you will make money because there are only two pieces that represent a loss. The range is a bit smaller - from a loss of 11% to a gain of 35%. Take a close look at the wheels and think about which wheel you would rather spin. And remember, this is not a game. This is your hard earned cash that you are investing!

Choose between: Wheel 1: One StockNo Diversification

- Wheel 2: Many Stocks (Mutual Fund)- Diversification The second wheel should be the obvious choice. By purchasing many stocks you have reduced your risk and increased your chance of a winning spin. Mutual Fund Investing vs. Stock Investing It seems strange to compare Mutual Funds to stocks since Mutual Funds are primarily composed of stocks, but it is important to distinguish the two because there are some notable advantages to using Mutual Funds. Diversification There is no greater advantage to using Mutual Funds than diversification. Most wealthy investors purchase more than just a couple of stocks? If they are not using Mutual Funds (many do), than they are purchasing a large number of stocks.

MUTUAL FUNDS

Page 10

Smart investors diversify because it greatly reduces risk without sacrificing returns. Professional Management By purchasing Mutual Funds, you are essentially hiring a professional manager at an especially inexpensive price. These managers have been around the industry for a long time and have the academic credentials to back it up. Efficiency By pooling investors' money together, Mutual Fund companies can take advantage of economies of scale. With large sums of money to invest, they often trade commission-free and have personal contacts at the brokerage firms or financial institutions. Ease of Use Can you imagine keeping track of a portfolio consisting of hundreds of stocks? The bookkeeping duties involved with stocks are much more complicated than owning a Mutual Fund. It is easier to use because all the work your Fund Manager does and you get the returns on your money without doing much.

Liquidity If you find yourself in need of money in a short amount of time, Mutual Funds are highly liquid. Simply put in your order during the day and when the market closes a check will be sent to you or you can have it wired to a bank account. Stocks can be much more difficult depending on what kinds of stocks you have invested in. CD's offer no liquidity (not without a hefty fee) and bonds can be difficult, too. Some Mutual Funds also carry check-writing privileges, which means you can actually write checks from the account, similar to your checking account at the bank. Cost Mutual Funds are excellent for the new investors because you can invest small amounts of money and you can invest at regular intervals with no trading costs. Stock investing, however, carries high transaction fees making it difficult for the small investor to make money. Suppose, if an investor wanted to put in Rs. 100/- a month into stocks and the expenses including brokerage Rs. 15/- per transaction, their investment is automatically down 15 percent every time they invest. Wealthy stock investors get special treatment from brokers and wealthy bank account holders get special treatment from the banks, but Mutual Funds are non-discriminatory. It doesn't matter

MUTUAL FUNDS

Page 11

whether you have Rs. 500/- or Rs. 5,00,000/-, you are getting the exact same manager, the same account access and the same investment. Risk In general, Mutual Funds carry much lower risk than stocks. This is primarily due to diversification. Certain Mutual Funds can be riskier than individual stocks, but you have to go out of your way to find them. With stocks, one worry is that the company you are investing in goes bankrupt. With Mutual Funds, that chance is next to nil. Since Mutual Funds typically hold anywhere from 25-5000 companies, all of the companies that it holds would have to go bankrupt.

THE IDEAL VEHICLE FOR EQUITIES

Mutual Funds allow you to avail of the benefits of equity investments at a lower level of risk.

Once you decide to make regular investments towards your retirement plan, be sure to invest some of this money in equities. However, more often than not, equities are touted as a risky proposition. But with scores of Mutual Funds around, one needn't worry.

In developed markets, Mutual Funds have proved to be the ideal vehicle for retail investors to take advantage of the excellent long-term growth of stock markets. In fact, in terms of assets under management, the Mutual Fund industry in the US has overtaken the banking industry.

MUTUAL FUNDS

Page 12

In India, the Mutual Fund industry is relatively nascent, both as regards the number of players and products on offer. Still, given their performance over the past decade, it does make sense to park some of your retirement funds with them.

WHY INVEST IN MUTUAL FUNDS? Convenience As an investor, you have to keep track of your investments, which takes time and effort. When you invest in a Mutual Fund scheme, you pass on this function to a Fund Manager. Moreover, you are relieved of nagging problems associated with capital market investing, like bad deliveries, and nonreceipt of share certificates and dividend warrants. Expertise Mutual Funds employ experienced professionals to research investment options. As industry players, they have access to information that may not be available to you. Returns Over the medium and long-term, Mutual Funds have the potential to provide favorable returns within the same risk category. After a brief period in the doldrums, the Mutual Fund industry in India has performed credibly over the past year. According to a study conducted by the Association of Mutual Funds in India, of the 118 equity schemes in the market, 91 outperformed the benchmark Bombay Stock Exchange Sensex.

MUTUAL FUNDS

Page 13

Lower expenses You have to bear several costs if you invest directly in the market. These include brokerage, stamp duty and custodial charges, in addition to the expenses incurred in tracking your share portfolio. Mutual Funds too have to bear these costs, but economies of scale enable them to reduce procedural expenses like these. Reduced risk It's not possible for investors having a small capital outlay to maintain a diversified portfolio. However, Mutual Funds, with the advantage of pooling of resources, can. This reduces the risk, as not all stocks go through a downtrend at the same time. Variety Mutual Funds offer schemes to suit specific investment needs. For instance, there are growth schemes for investors who are willing to bear a greater risk, gilt schemes for investors who are riskaverse and retirement plans for those with an eye on the future. Flexibility Some Mutual Funds offer products such as systematic investment plans, regular withdrawal plans, monthly income plans and dividend reinvestment plans, which are appropriate for retirement planning. These allow you to invest and withdraw funds as per your needs. Liquidity In case of open-ended schemes, a majority of Mutual Funds provide investors easy entry and exit at prices related to the scheme's net asset value (NAV). They are also prompt in meeting redemption demands. In case of close-ended schemes, unit holders can sell their units on the stock exchange. Some Mutual Funds also repurchase units at NAV-linked prices during certain periods. Timely Decisions and Safety against Loss

MUTUAL FUNDS

Page 14

The Fund Managers, being experienced and armed with the market scenario, can take timely decisions about when to sell or buy the units. Timely buying or selling of units reduces the loss that could have been incurred. Transparency Mutual Funds send out periodic newsletters to unit holders, detailing the scheme's portfolio, performance, investment strategy, and the outlook of the scheme and the fund manager. You can also find information on websites and in newspapers or magazines. Regulation All Mutual Funds in India have to be registered with the Securities and Exchange Board of India (SEBI), and comply with its regulations.

DISCOVER THE VARIETY OF FLAVORS THAT MUTUAL FUNDS COME IN Being a collection of many stocks, you may have thought that picking a mutual fund might be easy. Not necessarily... there are over 60 mutual funds to choose from. It is easier to think of mutual funds in categories. A Mutual Fund, by its very nature, is diversified its assets are invested in many different securities. Beyond that, there are many different types of Mutual Funds with different objectives and levels of growth potential, furthering your chances to diversify. Mutual Funds invest in a number of investment options equity, call money, commercial paper, debentures, government securities, etc. You have a choice of deciding where you want your money to be invested by selecting specific schemes. MUTUAL FUNDS SCHEMES

MUTUAL FUNDS
EQUITY SCHEMES

Page 15

EQUITY DIVERSIFIED SCHEMES invest 90% or less of the funds collected, into equity. Selection of companies, whose equities are invested in, is left to the discretion of the Fund Manager of the scheme. EQUITY TAX-SAVING SCHEMES work on similar lines as diversified equity funds. The only difference between these funds & equity-diversified funds is that they demand a lock-in of 3 years to gain tax benefits. SECTOR SCHEMES invest in equity & related securities of companies specific to a particular sector such as IT, banking, etc. INDEX SCHEMES invest in shares forming part of an index such as BSE sensex, NSE, Nifty, etc., in the same proportion as the weightage these shares have in the index. Such schemes seek to provide returns that closely correspond to the return of the index being mirrored. EXCHANGE TRADED FUNDS (ETFs) are the same as index schemes with one crucial difference. An ETF is listed and traded on a stock exchange. In contrast, an index fund is bought and sold by the fund. DYNAMIC FUNDS alter their exposure to different asset classes based on the market scenario. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. This is suitable for investors who find it difficult to decide when to quit from equity. DEBT SCHEMES MEDIUM-TERM DEBT FUNDS have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio could be in the range of five to seven years. Such funds seek to optimize returns while maintaining a balance of safety, yield and liquidity. SHORT-TERM DEBT FUNDS have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio could be in the range of one to two years. Such funds seek to generate higher returns with greater stability. MONEY MARKET DEBT FUNDS: Enhancement of income with a high level of liquidity is the objective of these funds with a judicious portfolio mix of money market and debt instruments.

MUTUAL FUNDS

Page 16

Under normal circumstances, the fund will have a 50-90 per cent exposure to money market instruments while holding 10-50 per cent in debt instruments. MEDIUM-TERM GILT FUNDS aim to provide steady returns with low risk and highest possible safety by investing primarily in Government Securities. The average maturity of the securities in the portfolio would be over three years. SHORT-TERM GILT FUNDS are dedicated gilt schemes, which seek to generate reasonable returns with investments in Government Securities. The securities invested in are of short to medium term residual maturities. FLOATING RATE FUNDS invest in securities with floating interest rates, which are generally linked to some benchmark rate like Prime Landing Rate. Floating Rate Funds have a high relevance when the debt markets are volatile and investors can effectively make use of these funds to hedge their debt fund investments against the interest rate fluctuations. MONTHLY INCOME PLANS (MIPs) are basically debt schemes, which make marginal investments in the range of 10-25 % in equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly higher return than pure long-term debt schemes at marginally higher risk. BALANCED SCHEMES invest approximately half the funds in equities and the other half in debt. They seek to balance risk while aiming to offer better returns than pure debt schemes. OTHER SCHEMES REALTY FUNDS are expected to be introduced in the market in the near future. Such funds would invest in real estate. Thus even individuals with relatively small investments would get access to real estate investment, which has been the privilege of big investors over the years. FUND OF FUNDS invest in various schemes of that company with different asset allocation to suit investors with different risk profiles. The significant benefit of this scheme type is diversification, not only across investments, but also across Fund Managers. GLOBAL FUNDS invest in the International Equity markets. These types of funds allow the investor to diversify their portfolio across countries thus reducing country-specific risk. HEDGE FUNDS are expected to be launched in the near future. These funds will be allowed to invest in all kinds of instruments including derivatives, and their main objective will be to cash in on the arbitrage opportunities using advanced investment strategies.

MUTUAL FUNDS

Page 17

HOW TO SELECT A MUTUAL FUND SCHEME Although investing in a Mutual Fund is less risky than investing in the capital market directly, it is not risk-free. Therefore, it is necessary to check thoroughly before selecting a Mutual Fund scheme. One should assess the targeted Mutual Fund scheme on the following criteria: Fund's performance Evaluate the track record of the Mutual Fund. This is important as your retirement kitty could be with the Mutual Fund for as long as 30 years. There is an indication that there is significant investment expertise in the fund family. Players such as HSBC, Franklin Templeton, Alliance, Birla, ITC, HDFC and Prudential ICICI are examples of good Mutual Fund families. Sponsor credentials Sponsors can make a big difference to a Mutual Fund's performance. Find out how long have the sponsors been in business, and what is their financial health? Sponsors of public sector funds (such as LIC, SBI and Canara Bank) and foreign investment large funds have been around for a long time to allow you to judge their performance.

MUTUAL FUNDS
Scheme's performance

Page 18

The performance of schemes within the same fund family may vary, as they are managed by separate Fund Managers. Hence, take a close look at the targeted scheme's performance, its portfolio and the investment strategy followed. This will give you an idea of the scheme's prospects. Risk profile Choose a scheme that suits your risk profile. You can rank the various schemes on a risk-return scale. In descending order of risk, sector-specific schemes top the list. They are followed by growth schemes, balanced schemes, debt schemes and gilt schemes, respectively.The best way to reduce your risk is to diversify. Investment options It is advisable to park your money in an open-ended fund, as it gives you an exit option at a NAVlinked price. Most Mutual Fund schemes offer a choice between a growth option and a dividend option. If your objective is to accumulate wealth, choose the growth option. Even if you opt for a dividend plan, choose the re-investment facility, wherein the dividend is automatically re-invested in the scheme. Retirement schemes At present, only Unit Trust of India and Kothari Pioneer Mutual Fund offer retirement schemes. You can invest on a monthly basis, and get a pension after retirement. Unlike normal pension plans, these schemes do offer flexibility. Take the case of Kothari Pension Plan. At the time of retirement (in this case, 58 years), you have several repayment options to choose from. These include the pension plan (regular income, with your capital intact), flexible plan (a fixed amount per month, which includes a part of your capital) and a lump sum plan (withdraw the full amount). Tata Mutual Fund is also planning to launch a similar scheme. Investment mix The current SEBI guidelines do not make any distinction between pension schemes and normal Mutual Fund schemes. Consider the Kothari Pension Plan. For the first three years, the entire corpus will be invested in debt instruments. Subsequently, there will be an equity component, of up to 40 per cent of the corpus. UTI's Retirement Benefit Plan is similar to Kothari Pension Plan, with the equity component being capped at 40 percent. Before investing your money, make sure that you are comfortable with the investment mix proposed by the scheme.

MUTUAL FUNDS
Withdrawal charge

Page 19

Most Mutual Funds offering retirement plans levy a stiff charge on unit holders in case of an early withdrawal. While Kothari charges a nominal load of 3 per cent, UTI is charging a whopping 10 per cent. Tata Mutual too plans to peg the load amount on the higher side charging an exit load of 5-7 per cent." Investor servicing In recent times, most Mutual Funds have strived to improve investor servicing. In fact, some private sector players are even offering value-added services like cheque-writing and ATM cards. Transparency Choose a fund that discloses the scheme's portfolio and NAV on a regular basis. CREATE AN INVESTMENT PORTFOLIO USING MUTUAL FUNDS PARTS OF A WHOLE Most investors are searching for answers, explanations and reasons why their Mutual Fund portfolios are taking such a beating. Many have questioned how to build and manage a Mutual Fund portfolio. Putting together a group of funds is a matter of personal preference and personal goals. But there are some universals you should think about when choosing and combining funds. Many of us purchase Mutual Funds based solely on recent performance if a fund topped last years return charts, we buy it. The result? A hotchpotch of investments that make no sense as a whole. As with stocks, there is just no one-size-fits-all portfolio of Mutual Fund schemes. Building a winning portfolio is dependent on a number of factors, but what is important is to remember that your portfolio should be designed according to your needs and goals. For that reason, your ideal portfolio may not be the same as another investors. One needs to take a much more planned and systematic approach towards building a personal Mutual Fund portfolio taking into account factors such as asset allocation, risks involved and diversification. ASSET ALLOCATION

MUTUAL FUNDS

Page 20

One of the most important steps to building a successful portfolio is arriving at the ideal asset allocation (equity: debt ratio), which can then be plugged in with investments comprising of various suitable Mutual Fund schemes. Because these investments perform differently depending on economic conditions, a good balance can keep a portfolio strong in a wide range of economic situations. The asset classes carry varying amount of risks, meaning that the best allocation will depend on a range of factors related to an individuals investing profile such as his age, risk profile and financial goals, besides expected returns and time horizon of investments. Of course, all these factors are closely related. Essentially, they allow you to map out how much money you will need at certain points in your life and how much uncertainty you can tolerate in moving from one life stage to the next.

The younger you are, the farther away you are from many financial goals like retirement. For such goals, you have the opportunity to invest in growth schemes, like equity mutual funds. However, your risk profile plays an equally important role in determining the quantum of funds that you will dedicate towards equity. Proximity of financial goals is important too. For instance, for short-term goals, you are likely to shun high-risk investments to avoid capital erosion. Proximity to goals also determines the desired rate of return from investments and the tenure of instruments. If you have just started saving your eight-year-old daughters engineering studies, your desired rate of return will be more than that of your friend who started investing for his eight-year-old daughters higher studies seven years ago. Also, you wont be able to invest in instruments that have long tenures since your investments will need to mature faster. Your risk appetite is one of the most important factors that will determine the magnitude of your equity investments. There are several factors that will influence your risk appetite such as: Health: Chronic health problems in your family could limit your risk appetite, as you would need low-risk, low-return investments.

MUTUAL FUNDS

Page 21

Future Employment Prospects: The greater your job security, the greater the opportunity to invest in growth instruments. Number of Dependants: Risk taking ability also reduces with a higher number of dependants. Future Fund Requirement: If your future fund requirements are large, you might be forced to invest a portion of your money in higher risk options for higher returns. Lifestyle: If you have an expensive lifestyle, you might need to make your money grow fast to maintain it.

DEVELOP AN ASSET ALLOCATION STRATEGY Define your Goals To develop your own asset allocation strategy, define your short, medium and long-term goals. Short-term goals are those that are to be achieved within the next year, medium-term goals in the next five years, and long-term goals beyond five years. Identify your Constraints Next, identify the constraints that could check your portfolios progress. For instance, you might want to retire at 45 but you have to provide for your aged parents. After identifying goals and constraints, decide whether you prefer separate portfolios for specific goals like retirement or a single portfolio geared to meet your needs. You should always have three types of financial investments in your portfolio i.e. liquid investments such as money market mutual fund; regular income investments such as income schemes of mutual funds and growth investments like equity schemes of mutual funds. Balance your investments between the three categories in such a way that your wealth grows to meet your various requirements.

MUTUAL FUNDS

Page 22

Equities are ideal for long-term goals, debt-based instruments for medium-term goals, and liquid investments for short-term goals. Do you believe that the debt portion of your investment portfolio is risk-free and all risk is only in the equity portion? This is incorrect. Debt, too, has an investment risk. Risk essentially refers to the possibility of your investments declining in value. Obviously, this decline would result in a net loss, so risk can be considered as the potential for loss. Every investment carries with it some degree of risk. To get an accurate picture of the risk associated with a given investment or portfolio of investments, the various forms of risk need to be considered collectively. TYPES OF RISKS Here are some essential risk types you need to understand and assess to comprehend the overall risk level of your investment portfolio. Market Risk: Equity investments are subject to the risk associated with the capital market. They hence share direct relationship with the performance of the capital market. When the capital market is on the bull spree, equity will outperform all the other investment options, and vice-versa holds true when the stock prices plummet. Understand the quantum of equity in the portfolio of your mutual fund investment to be able to judge how much exposure you are taking to the capital markets and its inherent risks. Credit Risk: Debt investments carry this risk. This risk is the possibility of default in repayment and in payment of interest by the borrower. Higher the exposure of the mutual fund to debt investments, the higher this risk. For instance, Gilts (Government Securities) will carry no credit risk while a corporate bond will carry a significant risk (again, this will depend on the quality of the corporate whose debt is invested in). Interest Rate Risk:

MUTUAL FUNDS

Page 23

This is the risk that interest rate changes will lead to a change in the principal value of the debt investment. This risk arises as a result of the inverse relationship between interest rates and prices of debt securities. If the interest rates rise, prices of existing debt securities fall, which in turn brings down the NAV of a mutual fund scheme, which has invested in debt. On the other hand, if the interest rates fall, existing debt securities become more precious and rise in value, which in turn pushes up the NAV of a mutual fund, which has invested in debt. Inflation Risk: Inflation causes money to decrease in value. Inflation risk occurs whether you invest or not. Selecting investments that are able to outpace the inflation rate is the only way to build real wealth.

DIVERSIFICATION Diversification is one of the best ways to control risks. Market Risks can best be controlled by investing in a basket of equity representing different sectors, which are complementary to each other. In other words, if one sector is on a downturn, the other sector should move up helping your portfolio to maintain a balance. This means your portfolio will never experience all your equities losing value at the same time, which can result in significant capital erosion. Diversified equity mutual funds offer such a portfolio. Before investing, assess sectoral diversity of the portfolio. Credit Risk can be controlled by investing in good quality credit-rated debt paper. To assess whether the mutual fund has invested in such debt, check the credit rating of the debt investments in the mutual funds portfolio. Ensure that debt paper invested in carry at least an A rating.

MUTUAL FUNDS

Page 24

Interest Rate Risk is best controlled by opting for floating rate mutual funds when interest rates are on the rise. If you are expecting rates to fall, opt for medium-term debt funds to lock-in at the existing higher rates. The only way to mitigate inflation risk is to invest in securities that offer a higher return than the inflation rate. Equity is one such investment option that has consistently given returns higher than the inflation rate. If you prefer debt, opt for MIP schemes where a small portion is invested in equity to help you get higher returns than pure debt schemes.

SELECTING FUNDS FOR YOUR PORTFOLIO The chart below can be used to identify the types of funds best suited to your particular investment objectives. Refer to it as you begin to formulate your portfolio. If Basic Your You The Fund Type Common Maximum Capital Growth Aggressive Growth International Growth High Capital Specialty/ Growth Sector Common with stocks long-term High High to Very stocks High to with potential for very rapid growth. May certain strategies employ aggressive Very High Very Low Very High Want These In Funds Potential Appreciation Potential Current Income Potential Risk

Invest Primarily Capital

Objective Is Following

Very Low

High

growth potential

Current Income Capital Growth High Current Fixed & Growth Income &

Common

stocks Moderate Moderate to High

with potential for high dividends and Moderate capital

appreciation Income Both high- Very Low

High

to

Very Low

to

MUTUAL FUNDS
dividendIncome Current Income Principal Tax-Free Income Principal Current Income Maximum Safety Principal Municipal Bonds Tax-Exempt Income Double Triple Exempt TaxA broad range of municipal Low & bonds Moderate & Government & Tax-Exempt Protection of Money Market & General Money Money instruments market Protection of Market Funds None Moderate High to Equity Income paying stocks and bonds High

Page 25

Moderate

Very Low

Short-term municipal and bonds notes None

Moderate High

to

Low

Treasury and agency issues guaranteed by the None

Moderate to High

Low

of Money Market Government

to Moderate Low to High

to

Moderate

HOW TO TRACK YOUR INVESTMENT It is important that you don't forget about the scheme once you receive your unit certificate. A lot can go wrong at the Mutual Fund's end. Take the case of investors who put their money in the Taurus Starshare scheme in January 1994. Even after a holding period of five-and-a-half years, their return is still negative and the scheme's NAV is languishing at Rs 6.57.A periodic review not only keeps you updated on your scheme, but also with events in the Mutual Fund industry. Monitor performance

MUTUAL FUNDS

Page 26

Track your scheme's NAV on a monthly or quarterly basis. Look for changes in the portfolio. Compare the scheme's performance with that of the Sensex, or similar schemes of other Mutual Funds. Ensure that the fund is adhering to the objectives stated in the offer document. Keep track of various periodic statements like newsletters, and half-yearly and annual reports. Read them thoroughly and file them for future reference. If you have queries, contact the investor service centers or agents. Some Mutual Funds also maintain websites, which provide information on schemes, NAVs, the industry and the investment outlook. Changes in constituents Sponsors often change the composition of the asset management company, trustees or custodians, which can affect performance. Whenever such changes take place, review your comfort level. Warning signals If your scheme fares badly in two consecutive quarters, find out whether it is because of a depressed capital market, or due to reasons specific to your scheme. Don't get hassled if your scheme underperforms in a runaway market. But if it is under-performing in a falling market (the fall in the scheme's NAV is greater than the fall in the benchmark index), review your investment. Read the Fund Manager's comments in newsletters and the annual report. Continue with the scheme only if you are satisfied with the explanation. You don't have to be an investment expert to sense trouble; you just have to keep an ear to the ground. Be wary of funds that renege on promises. For instance, Canbank Mutual is refusing to pay up the indicated rate of return on its Cantriple scheme. One can conclude that if a fund can cheat one section of investors, it can do so to others as well.

READING THE NEWSPAPER LISTINGS Although they may look pretty cryptic, fund listings are very easy to read and can tell you a great deal about the fund in a small amount of space.

You can determine the value of your portfolio by multiplying the number of shares you own by the "NAV." Multiplying the number of shares you own by the Offer Price tells you how much you would pay to buy those same shares. Or you can directly compare your purchase price per unit.

MUTUAL FUNDS
1.

Page 27

Funds are listed alphabetically by Fund Company with specific funds listed under each company.

2. "NAV" means "Net Asset Value" and is the value of stocks being held in the portfolio divided by the number of the shares in the fund being held by the shareholders. "NAV" shows how much each share in the fund is worth. 3. "Offer Price" is the amount you would pay if you wanted to buy the shares and is the same as the "NAV," plus any sales charges. "NL" means it is a no-load fund and you would pay the same price per share to buy it as you would receive if you were to sell it. 4. This tells how much the net asset value of the fund has changed since the previous trading day. A plus (+) value means your shares have increased in value since the close of the last trading day by the amount indicated, and a minus (-) value means each of your shares has fallen by that amount. 5. Change shows the amount by which the net asset value of one share of the fund increased or decreased the day before. Mutual Fund newspaper listings are most useful for keeping track of what is happening to the funds you own. Some newspapers provide more detail than others and include investment objectives and total return data. If you are trying to make a decision about buying a fund, newspaper listings can give you some idea about fund families and provide some indication about fees and expenses. But they don't provide all of the information you need. As a long-term investor, you will probably not find it necessary to check on the daily value of your fund shares. However, whenever you want to check the progress of your fund, you can obtain performance data and daily share prices directly from the fund company by calling them, referring to current prices of Mutual Funds listed daily in most newspapers, or visit their website.

MARKET INSIGHT EQUITY The first six months of this year have been very volatile for equity markets. After the market peaked in mid-January it has been impacted by one reason or the other, as good news alternated with the not so good. Two nice trends have emerged and are noteworthy. The first is the manner in which the IPOs, coming too close to one another, received overwhelming support. Rs. 25,000 crore was

MUTUAL FUNDS

Page 28

offered in March, and most issues were substantially oversubscribed. Goes to show that investor interest is so much about the pull of what they perceive as a good investment opportunity. Also shows the potential of the Indian equity markets. The second one is the growing realization of the importance policy and politics has for the markets. Markets have always been sensitive to the political scenario, but the manner in which they swung up and down with the rapid changes in the political scenario and policy announcements, goes to show how close the economic and political agenda have come, and the big overlap between the two. The bigger story in the equity market is the manner in which corporate India has posted excellent results. Across a broad range of sectors, sales are up and net profits are also up. Costs have reduced most notably the interest cost and efficiency is high. Among the factors that are helping the Indian corporates are growing international markets for our products, higher demand for many of our traditional products, unutilized capacity that is being used by the companies, and the opportunity in India due to the growth rates in the economy. The growth in the economy is now coming out of a growing level of international participation, which is a new thing for a number of businesses that were earlier focused inward, on the local demand. Quality and customer service standards have now gone up, and this is good for the Indian consumer and investor as well. FUTURE OUTLOOK In the immediate term, markets are expected to be dull as they await the budget. Only strong demand, if it surfaces, can create change in direction. In the short-term, and the direction of the budgetary process and the implications of policy pronouncements for various sectors, hold the key. There is always the sentiment issue of how the budget is perceived and accepted, a factor that is tough to predict. The medium and long term would however continue to be driven by company fundamentals and the flow of funds in the markets. DEBT To an investor who looks at rates on interest, any news that says rates are increasing seems welcome. To an investor in Mutual Funds, it is a cause for worry, as increase in interest rates can have a negative impact on the NAV and return. Higher the average maturity of the fund, greater the negative impact. However, it is important to see if interest rates are being increased as a policy stance, or from demand for funds in the market, or fall in flow of funds into the market, or is it a case of players preparing for one or more of these events, likely to happen some time in the future. As of now, there is no event, there is only expectation.

MUTUAL FUNDS

Page 29

To an investor in debt funds, the nice thing is that the Fund Manager is in the market, to capture opportunities as they present themselves, and the portfolio will have a balance between risk and return. What has changed in the debt markets over the past few years, is that many of our macro economic indicators have become stable and better. We have high growth rate, low levels of inflation, a strong currency, and good flow of funds. Therefore, debt markets are now safe and a reliable source of income for investors. It is important to see that the best case return is the market return, and a debt fund that enables investors to earn these returns. One other thing that debt investors should appreciate is the impact of international developments on our markets. The American markets have also witnessed a major fall in interest rates until the end of last year, and now grounds are being prepared for an increase in interest rates in that country. Given the size of that economy, and the fact that they are the largest investors in many markets, including India. The interest rate in the UK have already been increased twice this year. Another nice development is that for the first time in many years, credit rating agencies have reported that this year, upgrades are more than downgrades. This means, companies are getting qualitatively better. An upgrade means, a company that had a lower rating (therefore higher risk) has become better and got upgraded to a higher rating (say from A to AA). Lower credit risk is a positive for all investments in MIPs and Income funds. One development to look out for is the new Governments approach to interest rates on RBI Bonds and saving schemes like the Post Office deposits, PPF and the like. It is well known that these rates are way above market rates. It remains to be seen if these will be left untouched, revised downward, or if there is some change in tax and other features. The Government has also announced its intention to create investment opportunities for small investors, and may announce new schemes or products. These are developments to look for.

FUTURE OUTLOOK Debt markets will continue to draw signals from the domestic environment political scenario, inflation numbers, monsoon forecasts, and demand for credit and the international environment exchange rates, international interest rates, and overseas capital flows. These signals are negative at this time, which has created price loss across bonds, in the month of June. Markets await policy decisions at this time. MUTUAL FUND VENDETTA?

MUTUAL FUNDS

Page 30

The government seems to have a thing against mutual funds, which is reflected in the vengeance with which the Finance Minister has dealt with taxability on them. Mutual Funds are universally considered the preferred investment route for the retail investor. This is the only way a retail investor can participate in equities and debt investments with small sums helping him hold quality investments selected and monitored at an affordable investment management fee. While Mutual Funds are a relatively new investment route in India, in the US, this is a mature segment where the number of Mutual Funds now exceeds the number of companies listed on their stock exchanges. This goes to showing the popularity of Mutual Funds abroad. The situation in India is the same. Since the advent of Mutual Funds, starting in 1964 with the launch of Unit Scheme64, Mutual Funds have been gaining popularity. Today, we have a bouquet of thirty-six Fund Houses and more than 400 schemes to choose from. Mutual Funds have been successful in understanding the retail investors needs and have been able to fulfill these needs effectively. There are a larger number of scheme types-equity diversified, debt, gilt, sectoral, index, Exchange Traded Funds, etc. on offer to the retail investor helping him participate in most investment options with different risk and return levels. This would not be possible for the retail investor without the existence of Mutual Funds. There are a number of new investment options now entering the markets such as commodity investments, derivatives, etc. Again, Mutual Funds are pioneering schemes to help the retail investor participate in these investment options. Direct equity investing is taboo for retail investors especially because of concentration of their small corpuses in just a few scrips resulting in a high investment risk. In case of debt investments, retail investors find it much easier to access the debt markets (call money, commercial paper, gilts, etc. which are mainly wholesale driven) through Mutual Funds. However, Mr. Finance Minister does not seem to understand or appreciate this. He has blatantly shown disrespect for this wonderful investment route by drastically reducing/exempting taxes on investments in direct equity. Up to now, long-term capital gains and short-term capital gains on investments in equity as well as Mutual Funds have been treated at par for tax purposes. In case of long-term capital gains, the investor has the option of paying tax at 10 per cent without indexation or 20 per cent with indexation. In case of short-term capital gains, the tax rate was dependent on the tax slab applicable to the individual (for instance, if the individual fell in the 30 per cent tax bracket, he had to pay 30 per cent tax on his short-term capital gains). Now the Finance Minister

MUTUAL FUNDS

Page 31

has made long-term capital gains on direct equity investment completely tax-free and drastically reduced tax rate on short-term capital gains to a flat rate of 10 per cent. However, mutual fund investments continue to attract tax rates at 10 per cent without indexation or 20 per cent with indexation for long-term capital gains and tax-slab based rate for short-term capital gains. Is Mr. Finance Minister encouraging the retail investors to play the market directly and take risks? Looks like Mr. Finance Minister may not have been in a congenial frame of mind while drafting this portion of the budget.

Strategic

Choices

In

Mutual

Fund

Business

If you were to name one industry which has undergone the most dramatic transformation in the post-liberalization era of the nineties, the financial services sector and in particular, the Mutual Fund industry would be a strong contender. There has been a paradigm change

MUTUAL FUNDS

Page 32

in the quality and quantity of product and service offerings. After being serviced by monopoly players for decades with hardly any choice in product offerings, the Indian consumer today is being wooed by virtually the Who's Who of global and Indian players with a choice that was unimaginable a decade back. In this backdrop, what strategic marketing choices do Mutual Fund companies have, to survive and thrive in this highly promising industry in the face of such cut-throat competition? Mutual Funds are companies that pool funds from a large number of investors and invest them on their behalf for a financial return by buying, holding and selling securities. Funds managed by institutional investors are huge and growing rapidly, particularly as part of the resolution of pension pressures in various parts of the world. Global Assets under Management (AUM) rose 6 per cent to US $ 38.2 trillion in the first half of 2003, according to Cerulli Associates' latest Global Update report. Cerulli predicts the global compound annual growth rate for the industry to be 8 per cent between 2002 and 2007.

INDIAN MUTUAL FUND INDUSTRY The history of Indian Mutual Fund Industry can be distinctly divided into two phases - the period before liberalization when only public sector players existed with one dominant player Unit Trust of India and the post-liberalization era where the industry was opened up to private players. Unit Trust of India (UTI) was established in 1963 and launched its legendary first scheme 'US-64' in 1964. UTI witnessed a slow and steady growth over seventies and eighties and by end of 1988 it had an AUM of Rs. 67,000 million. From 1987, non-UTI, public sector Mutual Funds were allowed and a series of Mutual Fund companies were set up by public sector banks and financial institutions. At the end of 1993, the overall AUM of mutual fund industry was Rs. 4,70,000 million. The Mutual Fund industry was opened up for private participation 1993 and a new era was ushered in, paving the way for an unprecedented choice of products and services to Indian investors. Detailed guidelines were established and the Mutual Fund industry (except UTI) came under the regulation of Securities Exchange Board of India (SEBI). Many reputed

MUTUAL FUNDS

Page 33

foreign Mutual Funds such as HSBC, Templeton, Alliance, HDFC, Prudential group etc. set up operations in India. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 12,18,050 million. In February 2003, the Unit Trust of India Act 1963 was repealed and UTI was broken into two separate entities. One is the Specified Undertaking of the Unit Trust of India, still under the control of Government of India with AUM of Rs. 298,350 million as at the end of January 2003. 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. As at the end of October 31, 2003, there were totally 31 funds in India, with assets under management of about Rs. 12,67,260 million. Today, about 36 fund houses operate in the country.

The graph indicates the growth of assets over the years. GROWTH IN ASSETS UNDER MANAGEMENT

MUTUAL FUNDS

Page 34

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards. TRENDS IN MARKETING OF MUTUAL FUNDS IN INDIA The changing marketing trends in the Mutual Fund industry in India can be easily linked and traced to its history of growth. The changes in marketing strategies can be characterized by 4 stages, which have evolved along with the growth and evolution of the industry.

Product Focus For the first three decades of the industry, from the setting up of UTI till the entry of private sector players, the only focus of the marketing strategy was different product offerings. UTI and various other public sector Mutual Funds focused on introducing an array of products falling in different categories. The categorization was primarily based on two factors: one was the way the schemes were traded and the other through different composition of debt and equity securities in the scheme. By the way Schemes were traded: Open-ended Close-ended Schemes In an open-ended scheme there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended scheme at any point of time at a price that is linked to the net asset value (NAV). Schemes

MUTUAL FUNDS

Page 35

In case of close-ended schemes, the total size of the corpus is limited by the size of the initial offer. The entry and exit of investors is possible by only trading on the stock exchanges. Due to liquidity constraints posed by close-ended funds, they were soon rendered obsolete and most of the prevailing schemes today are open-ended schemes. By Composition of Debt and Equity in the Scheme: >Income >Balanced >Money Market Schemes The products were also differentiated by the composition of equity and debt in various schemes. Growth schemes invest predominantly in equities whereas Income schemes invest mainly in fixed income debt securities. Balanced schemes try to derive the benefits of both equity and debt by investing in both. Money market schemes invest in short term liquid securities like money market instruments so that they serve as appropriate products for investing short-term funds. Growth Schemes Schemes Schemes

There were other niche schemes to fulfill specific needs, such as Tax Saving Schemes, Sector Specific Schemes, Index Schemes (which are passively invested in a benchmark Index) and so on. In the Product Focus stage, the aim of the Mutual Fund companies was to introduce a wide variety of products and due to oligopolistic competition; there was no dearth of subscribers. The only parameter on which the selling was based was the relative performance of the products. Distribution Focus Product focus continued for 2-3 years even after the entry of private sector players in 1993. Initially, the private sector companies introduced the same products available from the pubic sector players and promised superior performance. When they realized that they needed to differentiate on some other parameter as well, they focused on distribution. As it was difficult and time consuming to replicate the wide-spread distribution structure of Agents set up by UTI, they encouraged third-party distribution companies to distribute their products all over India. Specialist distribution companies emerged. Special focus was given to investor servicing so that investors could experience superior servicing standards

MUTUAL FUNDS

Page 36

from private players. Some groups such as Birla Mutual Fund even set up their own distribution companies (Birla Distribution). While the focus on improved distribution and investor servicing did help the private players establish themselves against large players like UTI, it had also resulted in a lot of problems. In the rush to gain volumes and thereby commission incomes, the distribution companies many a time sold the wrong product to the wrong customer. A growth product, which invests primarily in risky instruments like equities was sold to old, retired people looking for regular, steady income as pension. The ensuing dissatisfaction has thus paved the way at last for the most critical area for marketing, the Customer Ownership Focus. Customer Ownership Focus Mutual Fund companies began to segment their target customers and position their various products based on the target segment they proposed to address. The target segment was broadly divided into institutional segment and individual investor segment. The institutional segment consisted of treasury departments of Corporates, Trusts, etc. and suitable products such as Institutional Income schemes and Money Market schemes were targeted at them. The individual investor was in turn divided into various segments such as Young Families with small or no children, Middle-aged People saving for retirement and Retired People looking for steady income. Suitable products such as Growth and Balanced schemes for young families and Income schemes for retired people were marketed. By proper segmentation and by targeting the right product to the right customer, Mutual Fund companies hoped to win the confidence of their customers and 'own' them for a lifetime. Specialized Product & Service Focus If one observes the trends in the recent past, companies have been taking the above customer focus further by designing and launching specialized products and services. As awareness levels of individual investors go up, focus is on identifying one's investment needs depending on one's financial goals, risk taking ability and time horizon. Investors chose companies, which help them in the above through specialized products and services. For example, a common financial goal is to save and invest for meeting the education needs

MUTUAL FUNDS

Page 37

of children. A number of Mutual Funds such as Pru-ICICI Mutual Fund and UTI Mutual Fund have launched products that are designed to serve this specific need. A similar such need is planning for a comfortable retirement. In addition, there is a need for specialized services that help investors assess their risk taking ability and chose products accordingly. Some Mutual Fund companies are launching a new product called 'Fund of Funds' which is a Scheme that merely invests in a combination of other schemes (growth schemes, income schemes etc.), of that company based on the investment objective and risk profile of the investor.

DRIVERS SHAPING THE FUTURE OF THE INDUSTRY Some of the drivers that are shaping the industry, which are likely to have substantial influence on the marketing strategies of the future are as follows: Consider this. The average projected life span of an Indian after retirement (that is, after 60) is expected to go up from 15 years to 20 years. And the number of the elderly (those over 60) is expected to increase significantly from 6.8 per cent of the population in 1991 to 8.9 percent in 2016 and further to 13.3 per cent by 2026. One of the key recommendations of the expert committee of Project OASIS (Old Age Social and Income Security) constituted by the government on pension reforms in 1999 is the creation of a privately managed, individual choice based, voluntary Pension system. Pension reform is likely to be a big driver. The government is finalizing guidelines for specialized pension funds to operate in India. Advisory services are becoming more critical to investors and independent financial advisors and planners are gaining ground. The US accreditation body for Financial Planners was set up in Delhi in the name of Association of Financial Planners (AFP) and

MUTUAL FUNDS

Page 38

soon professional Certified Financial Planners (CFPs) will be available to investors to assist them in their financial planning needs. Banks are planning to enter into advisory services in a big way. An entirely new distribution channel will be created consisting professional advisors who will exert substantial influence on what products customers will buy. As investors turn more aware, either by themselves or with the help of financial planners, there will be demand for more specialized products; for example, based on different styles of fund management on the Value-Growth spectrum as well as on the Focused-Diversified Investing spectrum. In other words, two equity schemes will be distinguished based on the fund management style - either the value investing style or growth investing style. Digital marketing: E-commerce is gradually showing signs of gaining acceptance and electronic sale of financial products is especially gaining volumes. There is a likelihood of the volumes reaching a significant size, thereby spawning a new distribution paradigm. As Indian markets mature, regulatory restrictions are easing, paving the way for introduction of innumerable specialized products hitherto not introduced in India such as hedge funds and derivative-based products.

WHITHER FUTURE?

What strategic choices does the future hold for Mutual Fund companies? Enormous possibilities exist for Mutual Funds to differentiate themselves based on some of the drivers given above. Individual companies, based on their own objectives and strengths, can choose to position themselves to exploit these opportunities.

For example, the opportunity of pension reform can be exploited by some Mutual Funds by positioning themselves as the front-runners in the Pension Fund arena. Similarly, companies that pioneer distribution channels of Financial Planners and E-commerce will stand to benefit enormously if these trends gain significance.

MUTUAL FUNDS

Page 39

In the words of Morgan Stanley, "In the end, not all asset management (Mutual Fund) companies will survive, [but] for firms that have built a 'culture of excellence' over the years, have segmented their customers efficiently, built brand, and delivered performance, the ongoing opportunities to take market share have never been more significant."

ICICI Children's Growth Bond MARKETING STRATEGY

A Means To Secure Your Child's Future ICICI Children's Growth Bond is a financial instrument that allows parents to put aside a small sum of money today that will grow into a larger amount, to meet the future needs of their children. Typically such an instrument is used to cover huge expenses that parents may incur on the child's education or marriage. Where To Start? The target audience for this kind of a product were parents (primarily fathers) having a high investible surplus. A good indicator of such parents would be the ones having wards in reputed schools. Having said this, the problem was where could they find a list of parents? And even if they got one, it would surely have been subjected to mass mailing campaigns from various marketers. Another Mail In The Box? Though direct mail was an option, it was imperative that the communication be personalized to the parents. There was a need for an idea, so memorable and emotive, that it would stand out of the

MUTUAL FUNDS

Page 40

clutter of mail soliciting investments. The idea needed to create a strong connection and an emotional bond between the client's product, the kid and the parent. Getting To Know Parents And Kids To acquire a primary database of kids and their parents, they thought of a unique way to create a primary database. A painting competition was conducted across schools in Mumbai and Bangalore where over 20,000 kids participated. What you want to be when you grow up? was the topic of the painting competition. Each kid painted various dreams that he or she would like to turn into reality when they grow up. The entries were submitted on specific forms that captured, among other things, the kid's name, address, telephone number and father's name.

To The Heart Through The Mail Box A direct mail pack was then "personalized" and sent to every parent. The message was - someday your son/daughter will start turning his/her dream into reality. Will you have the financial resources at that point in time? This personalized pack included their Child's painting which had the dream career, a letter and call center number which could enable them fix up a 'no obligations', free financial counseling meeting by identifying themselves with the pre-printed code on the mailer. Heart Warming And Effective The element of surprise and creativity in the database sourcing and the personalized approach in the direct mail pack was a great catalyst to make it a success. It did wonders because creativity was not restricted to the creative elements alone like envelope and letter, but extended to the database selection too. The Success Metrics The response was overwhelming in the two cities of Mumbai & Bangalore. The total number of mailers mailed out were 21,008. The response was a tremendous 20.88% (4387 respondents). A total of 4387contacts were made, with 2896(Conversion - 66%.)

MUTUAL FUNDS

Page 41

TREND WATCH How Big is Big: comparisons between the US Mutual Fund Industry and the Indian Mutual Fund Industry

The Indian Mutual Fund industry has been growing, but is still not big enough to make its presence felt. What stops it from taking the giant leap?

They manage assets worth $6.7 trillion (Rs 308 lakh crore) and more than 8,000-odd schemes. And almost every second household owns some of them. No, Im not discussing Indian Mutual Funds I am talking about the US Mutual Fund industry, the most powerful force in the US investment landscape. Indian Mutual Funds would love to be in this league. Unfortunately, they are a long way off. Indian fund managers continue to wait for that "inflexion point" that's supposed to bring about a dramatic change in their fortunes.

American investors, meanwhile, continue to look upon Mutual Funds indulgently - despite the industry hitting a rough patch after the dotcom bust of 2000. US investors still swear by the riches bestowed upon them by their Mutual Fund industry in the last decade - this despite the phenomenal

MUTUAL FUNDS
losses some investors have made in the post-dotcom

Page 42
era.

The 1990s were a spectacular decade for American Mutual Funds: investors simply couldn't seem to get enough of them. Starting out in 1990 with $1.1 trillion in assets, American Mutual Funds ended the decade with over $7 trillion in assets under management. Even the number of funds on the menu tripled from 3,000-odd to 8,000 by the end of 2000. Over half of them are equity funds. Those heady numbers are prompting questions about whether India's fledgling Mutual Fund industry can ever hope to achieve that kind of triumph. On June 30, 2003, Indian Mutual Funds commanded assets of Rs 1,04,762 crore, 8 per cent of the retail deposits of scheduled commercial banks. In the US, Mutual Funds overtook bank deposits some years ago.

To be sure, private funds grew from nothing to Rs 77,591 crore in the decade (1993-2003) after private funds were allowed to be floated. During the period, UTI's assets dropped from Rs 51,709 crore in 1993-94 to less than Rs 30,000 crore at the end of June 2003. The corpus of public sector funds also fell significantly during the period. The domestic fund industry has only peddled faster to remain where it was many years ago. Though most fund professionals would dispute this, arguing that the investor base has changed, the fact remains that the investor base has not really expanded.

This is a critical difference. The bulk of investors in private funds today are not really those who switched from public sector funds. On the contrary, it is the corporate investors that are using funds as a strategic tool in their treasury operations. Retail investors, the type who should ideally be looking at Mutual Funds with a long-term investment objective, are simply nowhere in the picture. However, no one's complaining. The industry has been in existence for under a decade and most Fund Managers believe it is still early days for it. While we've had one Mutual Fund - the UTI - for over three and a half decades, private and foreign fund houses were only allowed to operate in India from 1993.

Today, about 36 fund houses - private, state and foreign-owned - operate in the country, but the Indian Mutual Fund industry's pace of growth can hardly be described as frenetic. In all fairness, however, there are reasons for that.

S Naganath, joint president and chief investment officer, DSP Merill Lynch Investment Managers, believes that even in the western world, the realization that there was big money to be made in Mutual Funds only sank in during the 1990s. One reason, he says, is: "Since 1992, the American equity markets have seen a secular bull run, and this has created an equity cult." Even the bond

MUTUAL FUNDS

Page 43

markets got a tremendous boost from lower interest rates, he adds, hinting that the allure spread to investors with a wide spectrum of risk appetite.

The evidence supports that: between 1990-2000, the Dow Jones Industrial Average (DJIA), the oldest and most well-known US stock benchmark, jumped from a little over 2,500 to 10,000 levels. On an average, the Dow added about 15 per cent every year. The meltdown in the equity markets after that has definitely meant that the value of equity funds has eroded. Even so, equity funds account for 44 per cent of the total assets American Mutual Funds manage.

Another important reason has been the emergence of the "401(k)" (pension) market. As Americans began to pay attention to their own retirement plans through company-sponsored retirement schemes, called "401(k)" plans, Mutual Funds started being looked upon as a smart option. Says Prakash Dalal, chief marketing officer, Kotak Mahindra Mutual Fund: "The introduction of a 401(k) type plan can make the domestic Mutual Fund industry really leapfrog." Other elements also played a part in revving up the economic environment - and in casting Mutual Funds in a favorable light. For one, emerging markets slowly started coming into their own, pushing the world to the realization that there were financial markets worth investing in other than their own local markets. With the idea of overseas investing gaining rapid currency, mutual funds latched on, taking with them scores of enthusiastic investors.

"Mutual Funds allowed investors a convenient way to take an exposure to these markets," points out Naganath. Customer offerings also turned more sophisticated, as financial markets invented more products: securitisation sprung up, as did asset-backed mortgages. Voracious Mutual Funds were only too eager to pounce on them as potential money-making opportunities. Indeed, US Mutual Funds today come in all forms: their investment choices are not limited to just stocks, bonds and money market instruments; they extend to physical assets such as gold, real estate, No and even such commodities. luck

Unfortunately, we haven't had the coming together of a similar set of favorable conditions in India. In fact, the seesawing stock markets have given equity funds here a bad name. A rash of scams, frequent political bickering and economic uncertainties have conspired to keep the Sensex, the nation's most widely tracked index, at around the 3000-level, approximately the same level it was in 1993. Overall, Indian investors have had a poor experience with public sector Mutual Funds, which till

MUTUAL FUNDS

Page 44

recently managed the bulk of retail Mutual Fund money. The failure of funds to honor their promises in assured return schemes was the first big blow.

But just when investors tried to test the waters once again at the height of the tech-driven euphoria, the meltdown in the markets, and therefore in technology funds, spoilt their party again. Today, the net asset values of most tech funds are only a third of their par value. Investors have little hope of getting back the initial capital.

It's understandable, then, why retail investors treat equities - and equity funds - with disdain. Less than two per cent of Indian households own equity assets. Even fewer own equity Mutual Funds.It's a typical trait - and one that has been often talked about. Indians - like many Asians - are still unwilling to experiment with investment vehicles that don't assure them of fixed returns. That's why, even in this high-tech, information-at-your-fingertips-age, a lot of Indians still channel their savings into bank deposits and old-style investments in gold bars and jewellery.

And then, higher yields on alternative debt products, especially the government's small saving schemes, have kept individual investors from giving Mutual Funds any serious thought. The relatively high level of assured returns (in small savings schemes) is one of the most important reasons for investor indifference to Mutual Funds. The existence of alternative investment options, which provide assured returns from sovereign class securities made a debt fund look comparatively unattractive. Currently, the public provident fund assures a return of 8 per cent. Popular small savings schemes such as National Savings Certificates, National Savings Scheme and Kisan Vikas Patra yield the same returns. For marginal taxpayers, these instruments form the core of their investment portfolio. There is little inclination on their part to risk their capital in Mutual Funds given that their experience with tax planning (equity linked savings schemes) funds like the UTI's Master Equity Plans, Canbank Mutual's Canpeps, and others launched in the early and mid 1990s has been bad. Most of these funds have returned less than the 12 per cent assured return on alternate instruments even at the end of their full 10-year tenure.

However, the recent performance of debt funds is creating some amount of pull. A large number of investors have made a lot of money in debt funds in the last three years and some of them have turned into die-hard fans of the Mutual Fund industry today.

MUTUAL FUNDS

Page 45

Still, as of now, only big business houses and companies have warmed up to the idea. This group of investors' money accounts for over 70 per cent of the local Mutual Fund industry's assets. And if despite the phenomenal success of debt funds retail investors are not coming in droves, the fund industry needs to do some serious introspection.

Most retail investors have backed away from Mutual Funds primarily because they don't understand the product. The institutional investor understands Mutual Funds and the benefits of investing through Mutual Funds. However, the retail investor is still evolving in the financial planning space. Once the retail investor has grasped the full scope of a Mutual Fund, the penetration jump will be almost instant.

Whose fault? Till now, the lack of understanding has been a key obstacle in pumping up growth. Even the army of agents and brokers pushing mutual fund units in street corner shops aren't of much help; in fact, they're quite ineffective. Often they're just ordinary salespersons, unaware themselves of the finer points of Mutual Funds. Without competent advice, it is all too easy for first-time investors to make the wrong choices. And one mistake may be all that is needed to make investors recoil from investing in Mutual Funds forever. Obviously, much of dissatisfaction among fund investors can be blamed on the mis-selling and the greed of Mutual Fund companies. Often, the best time to sell a Mutual Fund is not the best time to invest and vice versa, agree most fund professionals. However, to survive, Mutual Funds have to sell the flavor of the day. The ills of this opportunistic selling can be curbed only if there are educated professionals selling the product, which is not the case in India. It is only in recent times that the industry has invested in retail distribution and has seen serious distribution houses coming into the fray. Physical infrastructure in the fund industry is weak compared to banking infrastructure. Banks have got aggressive in fund distribution only in the last two years. Besides, it is only of late that banks have got over the fear of losing customers to Mutual Funds. On the contrary, banks have realized that they make more money by way of fee-based income by selling

MUTUAL FUNDS
Mutual Funds". All this does augur well.

Page 46

Yet ground level issues persist. For instance, the public sector banks which are well entrenched in the country do not have the right kind of people to advise investors about funds. Most public sectors banks are not well equipped to sell Mutual Funds. Besides, dealing in Mutual Funds is not as simple as investors would like. The transaction convenience associated with Mutual Funds is not very high." All this is a far cry from what happens in the US markets. There, qualified financial advisors recommend what funds and other assets you should be investing in, after studying your financial position and goals.

In India, a growing chorus of opinion wants Indian fund marketers to equip themselves with the same kind of expertise and qualifications while recommending fund units and other financial assets. The regulatory authorities have finally paid heed to these voices - mandatory certification of financial planners and mutual fund agents has been introduced - it has taken time to yield results. Penetration Branches Investor Base (Lakh) Birla MF Franklin Templeton Pru ICICI Standard Chartered HDFC MF 18 33 28 15 29 3.5 8.75 4.8 0.9 4.6

After all, fund companies are not running a charitable business. The sponsors want to see profits too. Indeed, because it's so difficult to break down the barriers of retail investor suspicion that, as many sales managers reluctantly acknowledge, funds find it far more rewarding to zero in on corporate clients.

With the lower transaction costs involved in dealing with large sums of corporate money, it is not surprising that the Indian fund industry isn't too perturbed about the lack of retail interest. The cost of client acquisition is prohibitively high for Mutual Funds to focus their efforts on retail customers.

MUTUAL FUNDS

Page 47

After all, they have to earn a decent return on their capital. The rapid pace of consolidation in the industry is only a manifestation of this. What they spent and what they earned (Rs Crore) Birla MF Franklin Templeton Prudential ICICI Standard Chartered HDFC MF * Expenses Net profit) 2.65 3.46 5.64 3.07 3.18 7.94 8.84 11.43 6.31 14.17 and other

Advertising,

marketing

business development expenditure Yet market sources say that the race to enhance asset size is actually spoiling the market. The Mutual Fund market has become extremely institutionalized. Read between the lines: big companies are actually gaining at the expense of distributors, fund companies and retail investors. Distributors are forced to pass on more commissions to companies, while fund companies are compelled to offer funds with wafer thin margins. Retail investors lose out in the sense that they continue to pay higher expenses.

Specially designed products for corporate investors like the Fixed Maturity Plans charge less than 0.5 per cent to the fund. The regular debt funds which are available for most retail investors still charge between 1-1.5 per cent. Some late entrants like Duetsche Bank Mutual Fund are actually working at near zero expenses to gather assets.

Some fund professionals do agree that Mutual Funds should redefine their role. Fund companies should actually be focus on fund management rather than treasury operations. Most fund companies are compromising on medium and long term money while chasing short term goals. The incremental benefit of investing in retail infrastructure outside the top 10 cities is a challenge to justify. The only way to look at it is that in the long term, it makes sense.

MUTUAL FUNDS
Hope

Page 48
survives

So can Mutual Funds make it big in India? The potential certainly exists. The numbers speak for themselves: the world's second-largest population comprising over one billion people, and a propensity to save that is considered one of the highest in the Asian region, outside of Japan. Savings are equivalent to about 22 per cent of India's GDP.

Yet, not everyone is pulling out the welcome mat for Mutual Funds, although a growing band of converts is starting to consider it a truly worthwhile investment option. Statistics show that nearly half of all Americans own shares or invest in equity Mutual Funds. In contrast, Indian equities - and equity funds - haven't acquired the power to captivate a significant swathe of investors yet. No doubt, it will take time for the Indian fund industry to come of age. Things are improving though. While retail investors continue to show a dull appetite, fund marketers are only hoping that other ingredients will help in powering growth in Indian funds. As in the case of the US industry, the answer may ultimately lie with the financial markets. And the time may be just ripe for that to happen. The Indian economy, in transition for over a decade, has introduced some deep-seated changes in the way Indians do business. Indian industry has struggled to work off its excesses.

But after painful but much-needed bouts of shedding excess staff and costs, Indian business is slowly picking itself off the floor.

All these efforts will have a salutary effect on future profits. This should help stocks acquire more allure; the hope is that some of it will rub off on equity funds as well. When stock market are good, mutual funds fly in formation.

So if stock market do oblige, Mutual Funds can make it big.

Influential Investors Biggest investors in short term and liquid mutual funds last year.

Rs crore Reliance 21,798.35

MUTUAL FUNDS
Hero Honda Hindalco ITC Grasim ACC Tata Steel Indo Gulf Tata Engg Raymond 6,068.00 2,971.06 1,789.92 1,292.15 1,203.37 1,091.34 573.50 528.50 280.55

Page 49

Debt benefit Cost in% Returns on liquid funds Tax on dividend income Distribution tax Effective returns Cost of five-year loan funds Tax saving on interest costs Effective cost of debt Arbitage 5.60 0.00 12.81 4.88 6.00 36.75 3.80 1.08 benefit for top corporates

...And The Games Funds Play Steer clear of falling in the MF trap by adopting timely and proactive strategies Investors are made to believe through pink papers and high decibel advertising by fund houses that Mutual Funds are a superior alternative investment vehicle for the Indian middle-class. However, events in the recent past indicate that the industry focus has been on increasing assets

MUTUAL FUNDS

Page 50

under management (AUM) in the short term, sometimes even at the cost of the interest of smaller investors. In spite of the industry at large agreeing on the need to expand the market by addressing new customer segments, the players repeatedly keep reaching out to the same clientele in bigger metros. It is becoming more and more evident that Mutual Funds are getting commoditised as a product category and the decision-making process of recommending one fund from the other is becoming a function of relative commission being received by the distributor. This process of recommending a scheme on the basis of higher brokerage received may not be in line with the financial goals of the investors. The incessant effort of the private sector Mutual Fund industry to bloat their AUMs seems to be taking dangerous proportions now. Prudential ICICI Asset Management Company, which has been recently dethroned to the third place among private sector Mutual Funds, has troubles galore for switching assets of a Kanpur-based PF trust back and forth from gilt to equity. The market regulator Securities and Exchange Board of India (SEBI) already having clamped down on the Mutual Fund industry on various other issues like late trading and minimum number of retail investors in each scheme, not so very long ago, is now scrutinizing the MF industry about the latest switching scam, unearthed in an internal audit of the Kanpur branch of Pru-ICICI AMC. SEBI is known to have sent out letters to all Mutual Funds asking them to check for any such irregularities at their end and revert to it. The regulator is also believed to be carrying out a special inspection of Pru-ICICI to find out for itself the extent of the problem. According to top sources in the Mutual Fund industry, the entire switching scam took place in the wake of more and more corporates and even PF trusts making a beeline for assured returns from investments in gilt schemes. This being an improbability, Fund Managers, in a desperate attempt to hold on to their clientele, did so. Having garnered initial investments they switched to equity with the stock markets booming in the last fiscal, in a gross violation of PF norms, industry sources informed. But can the AMC headquarters steer clear of all the blame making just the branch manager the scapegoat? Though there is some software in place for detecting inflows and outflows for every Mutual Fund scheme, it is difficult for the headquarters to detect irregularities if account statements have been engineered by the local officials earlier. However, rival funds of Prudential ICICI AMC are quick to point out that such lapses cannot occur in their own fund houses.

MUTUAL FUNDS

Page 51

They seem to be confident, that such irregularities are not common as both internal and external audits are carried out rigorously to keep either local officials or intermediaries from tampering with the clients money. But switching of assets might just be a standalone case, as is being opiniated by AMCs at large. There are a lot of other issues that are plaguing the decade-old Mutual Fund industry. Who is being victimized in the process? Who is being made the scapegoat for the overwhelming need of Mutual Funds to grow their assets? Undoubtedly, it is the small investor. It is to be noted that in the last fiscal, Mutual Fund scams tarnished some of the biggest names in the $7 trillion US Mutual Fund industry as well. At least, 20 big names were being investigated for various trading abuses. In February 2003, members of a senate governmental affairs sub-committee proposed a legislation that would drastically alter the economics of the US Mutual Fund industry by repealing some fees and sales practices while giving independent directors more power to hold down investor costs. Back home, the Indian market regulator SEBI seems to be quick in clamping down malpractices as well as taking proactive measures to prevent in the Indian Mutual Fund industry.

THE YEAR THAT WAS: FUND PEOPLE THE together The last year saw Mutual Funds capture a greater mind space in the investment horizon of big corporate houses. About 70 per cent of the total investments in funds currently comes from corporates. And for most corporate investors, the road to fund investments passes through Mumbai-based Mata Securities. FUND KINGPIN

This man routes more corporate money into Mutual Funds than all banks taken

Last year, Mata Securities handled about 10 per cent of the total institutional investments flowing

MUTUAL FUNDS

Page 52

into the Mutual Fund industry, making them the largest individual player and definitely, a player to reckon with.

Set up in 1999, when Mutual Funds weren't the most favored investment options for big-ticket funds, Mata Securities targeted a trading volume of Rs 50 crore but clocked a whopping Rs 1,300 crore. It hasn't looked back since. In the last one year alone, Mata Securities mobilized as much money as the likes of ICICI Bank, Standard Chartered Grindlays, JM Morgan Stanley, Kotak and DSP Merrill Lynch put together.

So what's the secret of this success story? A very good understanding of the fixed income and money markets, knowledge of the prevailing and potential interest rate scenarios, of government securities and the corporate bond market. Indeed, of all the components that go into the portfolios of debt based mutual funds.

The 30-year Sameer Kamdar, national head, Mutual Funds, Mata Securities, says, "Besides following the routine procedures of fund investments, we aim primarily at understanding the client's requirements. Then come the additional services like getting the redemption cheeses on time, sharing market intelligence, and general advisory."

It is these small items of additional assistance that make the difference between a good fund mobiliser and a great one, Kamdar feels.

Kamdar joined a Mumbai-based firm as an equity analyst in 1999 after finishing his MBA from ITM, Mumbai and has since travelled along the roller coaster rides of the mutual funds sector. But as far as Mata Securities is concerned, the journeys have been fairly even.

Kamdar believes in what he calls the second-mover advantage. "Being the second broker to approach a client has worked more effectively for me. I generally do not like to make the first move. The strategy is to analyse the client's requirements and then raise the standards of facilities and assistance much higher than what the first broker has offered," Kamdar says.

He feels that clients are more convinced if they meet fund managers personally, and therefore, it is vital to have a one-to one dialogue. "Firstly, the investor has to be comfortable with the idea of investing in funds and it is the responsibility of the broker to ward off any inhibitions that the former may have about investing his precious money in the mutual funds sector," Kamdar says. Another golden rule is that brokers must not raise the investor's levels of expectations to irrational levels.

MUTUAL FUNDS

Page 53

"A client will always remember what you have predicted and whether the outcome has been in line, therefore it is crucial to explain the complete scenario to the client and not have him expect irrational returns," Kamdar expounds.

According to him, there are three important issues that should concern the guidance given to investors: safety, liquidity, returns. "If you want your money to be absolutely safe, you can't expect higher returns." The risk-return trade parameters are essentially consequential and the investor must be made aware of this.

"Explain to the client the upside and the downside of an investment project and in a manner that is best understood by him. This becomes a pre-requisite of our job because we are dealing with corporates and therefore the size of the corpus is substantial," Kamdar holds.

"The client is always concerned about how fast he can get his money back. Also sometimes, different types of income funds from the same fund house perform differently. Even within the same asset management company, while an income fund could do well, a liquid fund may not. With our experience, we recommend allocations into various funds so as to gain the maximum benefits of a diversified portfolio. But ultimately it is the client who takes the final call, after all it is their money," remarks Kamdar.

In his four-year career, Kamdar has come across clients who are brand chasers and some who are comfortable investing in funds with bigger corpuses, some go purely by returns. But he follows a more logical route to guiding investors. If you have Rs 10 crore in a fund with a corpus of Rs 1000 crore, you are relatively immune to volatile movements, but if you've invested Rs 10 crore in a fund with Rs 100 crore, you may be subject to a higher volatility, he explains. But he says, "The client's attitudes have changed over the years. The level of service and professionalism demanded has risen substantially. Once the client is comfortable with your way of handling his funds, he likes to stay with you, but you have to offer value propositions consistently. The question is always, tell me what you can do better than the others."

In the last three consecutive years, Mata Securities has won the PruWorld award, which in the mutual fund distribution industry is akin to the Oscars. That does not propel Kamdar to relax in his seat, "Given that competition is intensifying and distribution commissions are getting thinner by the day, we need to pull up our socks at all times." Corporate houses are hoping to make the most of this situation, because they are aware of their favorable positions. On the other hand, fund companies are in a relentless pursuit of size, as asset accumulation is the key in this business. As a consequence, distributors are getting marginalized.

MUTUAL FUNDS

Page 54

Abreast of all these developments and more, which he is reluctant to divulge under cover of "company policies", Kamdar has already charted out the future of Mata Securities. There are plans to enter the insurance distribution business, and if at all the mutual distribution does not provide the required stimulus for the company's growth, he's sure that Mata Securities is best placed to make in big in insurance. "With the kind of corporate-client relationships that we have cultivated and maintained, selling insurance to corporates may not be too difficult," claims Kamdar.

DEBT

Dynamo

With assets of Rs 9,500 crore in 17 schemes under his management, Nilesh Shah, director and chief investment officer (fixed income) at Franklin Templeton has a creditable track record. Two of his schemes rank in the top five debt funds Saath pagala aakaashma. Translated into English, its means seven steps into the sky. That's the title of the book Nilesh Shah, director and chief investment officer (fixed income), Franklin Templeton Investment Managers is reading these days.

It has got nothing to do with investing. But it is the one book that has made him a wiser man, says Shah. A Gujarati novel by Kundanika Kapadia, the book talks about equality of men and women. "It's a must read for all the married couples and soon to be married couples", says Shah, 35, married

MUTUAL FUNDS

Page 55

and father of two. That's one free advise you can get from him. For the rest, especially when it comes to investments, you better pay. After all, he calls the shots for the Rs 9,500 crore portfolio in debt schemes managed by Franklin Templeton Mutual Fund. Nilesh Shah is the Business Standard joint Fund Manager of the year, 2003.

Shah is brilliant with numbers. But that's no big deal if you know that he is a gold medalist chartered accountant. For all that and more, Shah comes across as a perfect blend of confidence and humility. Investment management is one area where no one can make it big without making mistakes. Shah's biggest success factor: he made enough and more big mistakes right in the beginning, only to make him so much wiser in such a short span!

Shah had his first brush with corporate finance at his first job with ICICI Securities. That was the place where he learnt the first crucial lessons about capital markets. "At that time, promoters could price issues at any price they wanted and every single issue that we managed at ICICI Securities failed to make any money for investors. It was a complete track record of failures," admits Shah. From that emerges a deep-rooted sense of realization that it is important to look at things from the investor's point of view. But he's waited for the swell after every ebb and ridden the tide improving his own record every time.

In the world of debt, where it is ever so difficult to earn that little extra, what makes Shah the best? "Hard work and diligence" is Shah's answer.

"In equities if you missed Infosys, you can always find another one, which will fetch you blockbuster returns. However in debt, each day is critical because even if you lose a day's interest, it's gone forever and you cannot retrieve it." Shah and his team work Monday through Saturday to make sure every rupee earns the maximum mileage possible.

Not just that, Shah believes it is critical to get a feel of the market. So apart from regular information sharing and trend analysis that he has his team of three fund managers do anyway, Shah has a simple trick. "Brokers do not keep you informed if you don't trade. So we trade in small lots, sometimes only to gauge the market mood and see the flow," Shah says. Thanks to Shah's proactive strategy, Franklin Templeton Gilt Fund Liquid Plan ranked at number

MUTUAL FUNDS

Page 56

three for the last one-year period, on a risk-adjusted matrix, while the plain vanilla income fund Templeton India Income fund ranked among the top-5 risk adjusted performers in the category.

Equity

whiz

kid

R Sukumar, senior vice president & chief investment officer (equity) at Franklin Templeton manages Rs 2,200 crore equity assets spread over 21 schemes. Three of his schemes rank among the top five in the equity funds category

R Sukumar keeps an unusually low profile for a fund manager who has the distinction of beating the market over all market moods. That's understandable: for one, he is located in Chennai, far away from financial capital of the country. But staying away from the activity zone does have its advantages. "Being slightly detached from the market is actually good because you are not carried away by sentiments," says Sukumar.

MUTUAL FUNDS

Page 57

This engineer from Roorkie University in UP, and a post graduate diploma in management holder from the Indian Institute of Management, Bangalore, Sukumar (39), entered the fund management industry in 1994 when he joined ITI Pioneer. ITI Pioneer was taken over by Franklin Templeton last year. This year, three out of the top five performing equity funds on a risk-adjusted basis were from the Franklin Templeton house. Two of these were Franklin Templeton's Asset Allocation Funds - the inflation hedge fund and the conservative growth fund - and the Prima Fund. What makes Sukumar tick? The answer lies in a quote by Thomas Carlyle "Conviction is worthless unless it is converted into conduct." That's one thing Sukumar genuinely believes in, whether it be his personal or professional life. "When it comes to investing, a level head and the ability to step back from the market to be able to take rational decisions is the key to successful investing," says Sukumar. Sukumar believes in the traditional school of value investing. One Up On Wall Street by Peter Lynch and The Warren Buffett Way by Robert G Hagstrom are the best investment books he has ever read. Learning how to pick stocks is one thing, and actually picking them up is another. Indeed, it's not the approach, but the execution that is critical. After all, companies do not come with a tag saying whether or not they meet the many parameters laid out by the stock picker. To be able to distinguish between companies based on these characteristics, one requires an indepth understanding of businesses, something Sukumar and his team have really mastered over the years. His most profitable pick this year has been Indo Gulf Fertilisers. Sukumar first bought the stock before the company announced plans to demerge its copper business, essentially because the stock looked undervalued. And after the demerger was announced, Sukumar decided to add to his holdings because there was a clear cut arbitrage opportunity.

But Sukumar's affair with Indo Gulf didn't quite end there. He bought more shares when the demerged company was listed as the stock and trading at around Rs 20 while the company was sitting on cash of Rs 50 (per share). And when the company announced an open-offer at Rs 75 per share, Sukumar made a killing.

Sukumar's worst deal during the year was picking up Digital GlobalSoft. "We had misjudged the merger implications which turned out to be very unfavourable to minority shareholders" says

MUTUAL FUNDS
Sukumar.

Page 58

Thanks to the splendid performance of his funds, Sukumar is among the best paid domestic fund managers. And as he gets richer, he is taking to rich boys games too. He has now graduated from playing billiards and snooker to Golf!

The their own

New

Breed

They are young, and immensely successful. And they handle your money as if it was

Meet the young breed of fund managers, who've made their mark and briskly too, in an atmosphere where competition has cut more throats than can be counted. Times are a-changing and gone are the days when the salt & pepper look was mandatory for the guy investing your hard earned money. Trust is no longer synonymous with age and careers are made on the basis of performance alone.

It takes more than just dedication, though. Perhaps a strong disposition to climb the ladder rather quickly, and may be taking the 'right calls' in investments lead these fund managers to where they currently stand managing assets worth thousands of crore.

MUTUAL FUNDS

Page 59

Their average age would belie their accomplishments: most of them are in their early thirties, some much younger. We've attempted to track their journey up to their current standing and it only leaves us hoping that more of their ilk join the bandwagon.

With the bourses looking up, investment portfolios are only growing bigger, and mutual funds seem to be grounding themselves well. With investor expectations soaring high, the role of a fund manager has become more critical. Bekxy Age: Fund Assets Under house: Management: About 25 SBI Rs 700 Kuriakose years MF crore

The youngest candidate in our chronicle, Kuriakose believes that it's not always possible to be the number 1, but a consistent track record of posting good returns in the long term is a rational objective. "I take calculated risks, so that my schemes yield above average returns," she acknowledges. With a post-graduate diploma in management from the Indian Institute of Management, Bangalore, Kuriakose set foot in the securities sector three years ago, when she joined SBI Mutual Funds as a dealer in government securities and research analyst.

Currently, she manages three debt funds, of which the Magnum Gilt Fund is the principal scheme. She feels though training has its own significance, experience definitely augments one's skills. Suited more to the fixed-income framework, she is quite settled in her present job and hopes to handle Manoj Age: Fund Assets house: Under Management: a larger corpus in Kumar 28 Standard About Chartered Rs 1700 the none-too-distant future. Swain years MF crore

Swain manages the Grindlays Super Saver Income Fund, both the short- and medium-term plans at Standard Chartered Mutual Fund. In the last one year, the fund has grown more than four times. With a career spanning about six years with various financial institutions such as Times Guaranty, UTI Bank and ICICI Bank, Swain garnered substantial experience in the debt sector. "The most important thing in fund management is to sell the scheme in the right manner. Every fund has its own objectives, and one must be courageous enough to take risks within the predetermined parameters," he says. His trek hitherto has been fairly smooth, and that in itself is very unusual. "Here performance is measured on a day-to-day basis; the accountability, therefore, is much greater. It is not possible to track minute movements in the market and therefore there is always

MUTUAL FUNDS
room for improvement."

Page 60

A cricket enthusiast, he travels from Andheri to Churchgate to play a match on those Sundays when he finds time off his newly married life. Badrish Age: Fund Assets Under house: Management: 31 Alliance Rs 85 Kulhalli years MF crore

People always remember a slip-up more than a good deal," remarks Kulhalli, part of the investment team managing the debt schemes at Alliance Capital Mutual Fund. It was the attraction towards interest rates and derivatives markets that propelled this mechanical engineer from Pune to consider a career in finance. He says, "A market is a collection of people and just theoretical knowledge is not enough to take your decisions. This is where experience clarifies your perspective." He hopes to imbibe his father's patience in dealing with people. He does not believe in promising the moon but more importantly, communicating the risk-reward trade-off to the investor. The Alliance Government Securities Fund, managed by Kulhalli, won the CNBC - BNP Paribas Mutual Fund of the Year, 2003 award for the best open-ended gilt fund in the one-year category. He is inclined towards managing fixed income funds with a bigger corpus in future.

Jyoti Age: Fund Assets Under house: Management: 33 JM Rs 30

Vaswani years Mutual crore

Vaswani recalls her investment in Divi's Labs, which yielded a return of about 200 per cent since its initial public offering, and calls it as one of the best deals she's made in her career spanning over eight years. After obtaining a chartered financial analyst degree, she joined Prabhudas Lilladher, a Mumbai-based brokerage, as a part of their equity research team.

Managing three schemes in the JM Mutual Fund stable, her investment philosophy is based on the concept of a 'blend' fund, which attempts to integrate growth and value. She believes that it is critical to have an understanding of the market and a gut feel of movements. She admires her chief executive officer Krishnamurthy Vijayan's "never say die" approach and endeavours to imbibe his

MUTUAL FUNDS
attitude Ramanathan Age: Fund Assets Under house: Management: 30 Birla About Sunlife Rs 4700 towards

Page 61
work. K years MF crore

In the mutual fund industry, you want to buy more when the market is down, but the investor's psyche does not always permit this. They may get jittery and may want to redeem the investments immediately, which does not leave us with enough liquid assets for purchase," explains Ramanathan, joint fund manager of fixed income funds at Birla Sunlife Mutual Funds. He believes in taking a conservative approach toward fund management as it is a prerequisite for this asset class. "Capital preservation is very important in the fixed income funds," he says. Having done his graduation from the S P Jain Institute of Management & Research, Ramanathan believes good analytical skills and the ability to think online are vital for a fund manager. "There are a lot of areas in securities, like hedge funds and high-yield funds, which are as yet unexplored and the future for this market is very good. I hope to handle some of these in the coming years."