INTRODUCTION

A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Respective Asset Management Company (AMC) manages each Mutual Fund with different type of schemes. An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. Fund manager in different types of suitable stock and securities, bonds and money market instruments then invests the invested money in a particular scheme of a Mutual Fund. Each Mutual Fund is managed by qualified professional men, who use this money to create a portfolio which includes stock and shares, bonds, gilt, money-market instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money. A security that gives small investors access to a well diversified portfolio of equities, bonds, and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed. The fund's net asset value (NAV) is determined each day. Each mutual fund portfolio is invested to match the objective stated in the prospectus.

Respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms manages Mutual Funds schemes. The biggest Indian AMC is UTI while Alliance, Franklin Templeton etc are international AMC's. 1

Mutual Fund offers several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund.

A draft offer document id to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the board rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approvals from a regulator, SEBI (securities Exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations.

A sponsor then hires an Asset Management Company to invest the funds according to the investment objectives. It also hires another entity to be the custodian of the asset of the fund and perhaps a third one to handle registry work for thew unit holder (subscriber) of the fund, in the Indian context, the sponsor promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC).

A mutual fund is like a big pizza cut into slices. Each slice is called a share. The share price is called the Net Asset Value (NAV). Unlike a stock price that will fluctuate all day long, the mutual fund price changes only once a day, at the close of the stock market Each Mutual Fund has a specific stated objective

The funds objective is laid out in the funds prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.Some popular objectives of a mutual fund are-

FUND OBJECTIVE
Equity(growth) Debt(income) Money Market(including Gilt) Balanced

WHAT THE FUND WILL INVEST IN

only in stocks only in fixed-income securities in short-term money market instrument(including government securities) partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in return and risk

Managed by an Asset Management Company (AMC)

The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.

The AMC hires a professional money manager, who buys and sells securities in line with the funds stated objective. All AMCs regulated by SEBI, funds governed by board of directors

The securities and exchange Board of India (SEBI) mutual fund regulations require that the funds objectives are clearly spelt out in the prospectus.

In addition, every mutual fund has a board of directors that is supposed to represent the shareholders interest, rather than the AMCs.

CONCEPT
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 invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an investible surplus of as little as a

few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.

The flow chart below describes broadly the working of a mutual fund :

ORGANISATION OF A MUTUAL FUND

ORGANISATION OF A MUTUAL FUND

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

The mutual fund industry in India began with the setting up of the Unit Trust In India (UTI) in 1964 by the Government of India. During the last 36 years, UTI has grown to be a dominant player in the industry with assets of over Rs. 76,547 Crores as of March 31, 2008. The UTI is governed by a special legislation, the Unit Trust of India Act, 1963. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987, 6 public sector banks have set up mutual funds. Also the two

Insurance companies LIC and GIC established mutual funds. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of the Unit Trust Of India, at the initiative of the government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases, which are as follows:

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PHASE I (MONOPOLY OF UTI) 1964-87:

This period was marked by the operational of a single institution, UTI, which prepared ground for the future mutual fund industry. The first and still most popular, product launched by UTI was unit64. Due to the immense popularity of unit64, UTI launched was unit64. Another popular scheme, Unit Linked Insurance Plan (ULIP), was launched in 1971. By the end of June 1974 there were 6-lakh unitholder with UTI. An act of parliament established Unit Trust of India (UTI) in 1963. It was set up by the Reserve Bank of India and functioned under the regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was delinked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs 6700 crores of assets management.

PHASE II (PUBLIC SECTOR COMPETITION) 1987-1993:

This period was marked by the entry of non-UTI public Sector mutual funds in the market, bringing in competition. With the opening up of the economy many public sector financial institutions established mutual funds in India. However, the mutual funds industry remained the exclusive domain of public sector in this period. 1987 marked the entry of nonUTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance corporation of India (GIC). SBI mutual fund was the first

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non-UTI mutual fund established in June 1987 followed by Canbank Mutual fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jan 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs 4700 crores

PHASE III (ENTRY OF PRIVATE SECTOR FUND) 1993-2008:

A new era in the mutual fund industry began with entry of private sector funds in 1993, posing a serious competition to the existing public sector funds.The first private sector mutual fund to launch a scheme was the Madras based Kothari pioneer Mutual fund. It launched the open-ended prima fund in November 1993. With the entry of private funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also,1993 was the year in which

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the first mutual fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari pioneer (now merged with Franklin templton) was the private sector mutual fund registered in July 1993. The 1993 SEBI (mutual Fund) Regulations were substituted by a more comprehensive and revised mutual fund regulations in 1996. The industry now functions under the SEBI (Mutual Fund) regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry was witnessed several mergers and acquisitions. As at the end of January 2008, there were 33 mutual funds with total asset of Rs 1,21,805 crores.

PHASE IV (SINCE FEBRUARY 2003):

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the specified undertaking of the Unit Trust of India with assets under management of Rs 29,835 crores as at the end of January 2008.

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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. At the end of March 31,2008, there were 31 funds, which manage asset of Rs 126726 crores under 386 scheme.

SOME FACTS FOR THE GROWTH OF MUTUAL FUNDS IN INDIA:

100% growth in the last 6 years. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

Mutual fund can penetrate rurals like the Indian insurance industry with simple and limited products.

SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices.

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Introduction of Financial Planners who can provide need based advice.

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PERFORMANCE AND REGULATION OF MUTUAL FUNDS IN THE PAST

PERFORMANCE AND REGULATION OF MUTUAL FUNDS IN THE PAST

The first close ended mutual fund was floated in the Indian capital market just over seven years ago in September 1986. Today, there are more than 130 schemes in the market and

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the last few months have witnessed the entry of private sector in this fledgling industry. Given the brief history, it is hardly surprising that there is paucity of research on Mutual Funds. One of the earliest empirical research in the area was done by Barua and Varma (1990). They examined the performance of Mastershares, the first close end Mutual Fund, both in terms of NAV and market prices. They found that though interms of NAV the risk adjusted performance of Mastershares was superior to the market, in terms of market prices the performance was inferior to the market. The initial work was refined in the subsequent paper by the same authors (1991b) which concluded that the performance of Mastershares from the point of view of a small investor (whose equity investment would primarily be in terms of holding of Mastershares) was poor while from the point of view of a large investor (for whom Mastershares would be one of the securities in the portfolio) the performance was excellent. The research raised an interesting issue about the purpose of mutual funds: if they are meant primarily for small investors, then Mastershares have failed to serve the purpose. In another paper Barua and Varma (1993b) have examined the relationship between the NAV and the market price on Mastershares. They conclude that market prices are far more volatile than what can be justified by volatility of NAVs. The prices also show a mean reverting behaviour, thus perhaps providing an opportunity for discovering a trading rule to make abnormal profits in the market. Such a rule would basically imply buying Mastershares whenever the discount from NAV was quite high and selling Mastershares whenever the discount was low. The earliest work on evolving a regulatory framework for the fledgling industry was done by Barua, Varma and Venkiteswaran (1991). Drawing heavily on the regulatory framework for operation of mutual funds in the U.S.A. (Investment Company Act of 1940), the authors proposed detailed guidelines that could be adopted for mutual funds operating in the Indian capital markets. 17

MUTUAL FUNDS IN INDIA

MUTUAL FUNDS IN INDIA

Mutual funds have been a significant source of investment in both government and corporate securities. It has been for decades the monopoly of the state with UTI being the key player, with invested funds exceeding Rs.300bn. (US$ 10bn.). The state-owned insurance companies also hold a portfolio of stocks. Presently, numerous mutual funds exist, including private and foreign companies. Banks--- mainly state-owned too have established Mutual

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Funds (MFs). Foreign participation in mutual funds and asset management companies is permitted on a case by case basis. UTI, the largest mutual fund in the country was set up by the government in 1964, to encourage small investors in the equity market. UTI has an extensive marketing network of over 35, 000 agents spread over the country. The UTI scrips have performed relatively well in the market, as compared to the Sensex trend. However, the same cannot be said of all mutual funds. All MFs are allowed to apply for firm allotment in public issues. SEBI regulates the functioning of mutual funds, and it requires that all MFs should be established as trusts under the Indian Trusts Act. The actual fund management activity shall be conducted from a separate asset management company (AMC). The minimum net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any other fund. MFs can be penalized for defaults including non-registration and failure to observe rules set by their AMCs. MFs dealing exclusively with money market instruments have to be registered with RBI. All other schemes floated by MFs are required to be registered with SEBI.

In 1995, the RBI permitted private sector institutions to set up Money Market Mutual Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated government securities having unexpired maturity upto one year. Before investing in a Mutual Fund an investor must identify his needs and preferences. While selecting a Mutual Fund's schemes he should consider the effect of inflation rate, diversification of investment, the time period of investment and the risk factors. There are various type of risk factors as: 19

A.Market Risk B. Credit Risk C. Interest Rate Risk D. Inflation Risk E. Political Environment CRISIL's composite performance ranking (CPR) measures the performance for each of the open-ended scheme of Mutual Fund. There are four parameters considered to measure the performance of a mutual fund such as Risk-adjusted returns of the scheme's NAV, Diversification of Portfolio, Liquidity and Asset Size. By December 2007, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.

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MUTUAL FUND AND ITS CLASSIFICATION

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MUTUAL FUND AND ITS CLASSIFICATION

Mutual Fund scheme may be classified on the basis of its structure and its investment objective. The classification is described as follows.

By structure
Open-Ended Funds Close-Ended Funds Interval Funds

By investment Objective
Growth Funds Income Funds Balanced Funds Money Market Funds

Other Scheme
Tax Saving Scheme Special Scheme Industry Specific Index Scheme Sectoral Index Scheme

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INCOME FUNDS
These are also known as debt funds since they invest in debt instruments issued by the government, private companies banks and financial institutions. By investing in debt, these funds target low risk and stable income to the investors. While returns in these funds may be regular, their scale may fluctuate depending on the prevailing interest rates and the credit quality of the debt securities.

LIQUID FUNDS
Also know as Money market funds as they invest in securities of short term nature, typically securities of less than one-year maturity like Treasury Bills issued by the government, Certificate of Deposits issued by banks and Commercial Paper issued by companies as well as in the inter- bank call money market. These funds are considered to be at the lowest rung in the hierarchy of risks.

EQUITY FUNDS
As the name suggests these funds invest in stock market securities. They are exposed to the equity price fluctuation risk at the market level, industry level and also the specific company level. These price movements are caused by external factors, political and social as well as economic factors. Thus the Net Asset values of these funds fluctuate with all price movements. Equity investments are for a longer time horizon and a well managed equity fund can get you higher returns but also carries higher risks.

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GILT FUNDS
These funds invest in government paper called dated securities. As the investments are in government paper these funds have little risk of default and hence offer better protection of principal. However, one must recognize the potential changes in values of debt securities held by the funds that are caused by changes in the market price of these securities as a result of change in the market price of these debt securities.

BALANCED FUNDS
These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both equities and fixed income securities in line with pre-defined investment objectives. The aim at providing a balanced mix of capital appreciation through investments in equities coupled with investments in stable instruments like bonds etc.

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TYPES OF MUTUAL FUNDS

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TYPES OF MUTUAL FUNDS

A Mutual Fund may float several schemes, which may be classified on the basis of its structure, its investment objectives and other objectives.

MUTUAL FUND SCHEME BY STRUCTURE:

1. Open-Ended Funds: Open-Ended fund scheme is open for subscription all through year. An investor can buy or sell the units at "NAV" (Net Asset Value) related price at any time. 2. Close-Ended Funds: A Close-Ended fund is open for subscription only during a specified period, generally at the time of initial public issue. The Close-Ended fund scheme is listed on the some stock exchanges where an investor can buy or sell the units of this type of scheme. 3. Interval Funds: Interval Funds combines both the features of Open-Ended funds and Close-Ended funds.

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MUTUAL FUND SCHEME BY INVESTMENT OBJECTIVES:

1. Growth Funds: The objective of Growth Fund scheme is to provide capital appreciation over the medium to long term. This type of scheme is an ideal scheme for the investors seeking capital appreciation for a long period.

2. Income Funds: The Income Fund schemes objective is to provide regular and steady income to investors.

3. Balanced Funds: The objective of Balanced Fund schemes is to provide both growth and regular income to investors.

4. Money Market Funds : The objective of Money market funds is to provide easy liquidity, regular income and preservation of income. 5. Load Funds: A load fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission is payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

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6. No Load Funds: A No Load Fund is one that does not charge a commission for the entry or exit. That is , no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

OTHER FUNDS:

1. Tax Saving Schemes: The objective of Tax Saving schemes is to offer tax rebates to the investors under specific provisions of the Indian Income Tax Laws. Investment made under some schemes are allowed as deduction u/s 88 of the Income Tax Act.

3. Industry specific Schemes: Industry specific schemes invest only in the industries specified in the offer document of the schemes.

4. Sectorial Schemes: The schemes invest particularly in a specified industries or initial public offering.

7. Index schemes: Such schemes link with the performance of BSE sensex or NSE.

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FREQUENTLY USED TERMS

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FREQUENTLY USED TERMS

Active Portfolio Management Annualized Return Asset Management Company (AMC) Asset Allocation Back-end Load Balanced fund Bottom-up Investing Closed-ended fund Contingent deferred sales charge (CDSC) Continuous Offer Period Corpus Credit Risk Dated Security Debt fund Dematerialization Depository Participant Discount/Premium to (Net Asset Value) Diversification Dollar Cost Averaging Efficient Portfolio

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 Factor Fund Financial Pyramid Fixed Income Security Front-End Load Gilt-edged Security Gilt fund Go-Go Fund Equity/Growth fund Fund Manager Fundamental Analysis Income Fund Index Fund Initial Offer Period Interest Rate Risk Interim Dividend Liquid Fund Liquidity Risk Load Market Capitalization Market Instrument Market Lot Net Asset Value (NAV) 31

 No-Load Fund Offer Price Offshore Fund Pari Passu Passive portfolio management Rating Record Date Reinvestment Plan Reinvestment Risk Sector fund Securities Sinking Fund Sponsor Switching SWOT Analysis Systematic Risk Tax saving fund Technical Analysis Top-Down Investment Transfer Agents Treasury Bills Trustee 32

 Unsystematic Risk Value Investment Vulture Fund Venture Capital Fund Zero Coupon Bond

Current Scenario of Mutual Fund

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Current Scenario of Mutual Fund

India is at the first stage of a revolution that has already peaked in the U.S. the U.S. boasts if an asset base that are much higher than its deposits. In India, mutual fund assets are not even 10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in the first quarter of the current fiscal year mutual fund asset went up by 115% whereas bank deposit rose up only 17%. This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets. This improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not completely. Their role closes down as intermediaries cannot be ignored. It is just mutual Funds are going to change the way banks do business in the future.

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BANKS V/S MUTUAL FUNDS:

Banks v/s Mutual Funds BANKS Returns Low Administrative High exp. Risk Investment options Network Liquidity Quality of assets Interest calculation Guarantee Low Less High Penetration At a cost Not Transparent Min. bal. between 10th & 30th of every month Max. Rs. 1Lakh on deposit

MUTUAL FUNDS Better Low Moderate More Low put improving Better Transparent Everyday None

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SHARES V/S MUTUAL FUNDS:

SHARES Know-how is needed High cost involved Time needed

MUTUAL FUNDS Superficial know. Is sufficient Low Cost one can sleep over Professional Management.

INSURANCE VS MUTUAL FUNDS:

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Both these instruments are designed to serve different purposes and are not comparable. A unit-linked plan from an insurance company is an insurance policy designed to pay a lump sum on maturity or on death if earlier. Premium paid under these plans is eligible for tax deduction under Section 88 of the Income Tax Act. On the other hand, mutual funds are investment avenues to participate in the growth of financial markets and do not provide any tax deduction (except ELSS and pension funds).

For a unit-linked insurance plan, providing life cover is the most important function; returns are just an added benefit, which gets magnified, given the tax rebates. Though unitlinked plans offer transparency in returns in terms of net asset value and flexibility in investment options in debt, equity or mixes of both, these advantages remain secondary. Where as for a mutual fund, the main objective is to provide returns.

Moreover, unit-linked plans are not as liquid as mutual funds. There is a lock-in of three years. Even if one redeems after three years, you would be at a loss because of higher initial administrative charges. For example, the upfront charges for the first two premium amounts are as high as 20-27 per cent. Then there is an annual management fee of 0.8-1.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is a deduction for risk cover. This goes towards contribution to the sum assured or the life insurance cover, which is based on mortality rates as calculated by actuaries. Though mutual funds too have entry and exit loads (maximum 2 per cent) and expenses (maximum 2.5 per cent), these costs are lower than unit-linked plans.

CURRENT MUTUAL FUND SCHEMES:

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One can select specific Investment Avenue from among the products offered by the following fund houses: Alliance Capital Mutual Fund Benchmark Mutual Fund Birla Sun Life Mutual Fund BOB Mutual Fund Canbank Mutual Fund Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund GIC Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ING Vysya Mutual Fund J M Mutual Fund Kotak Mahindra Mutual Fund LIC Mutual Fund Morgan Stanley Mutual Fund PRINCIPAL Mutual Fund Prudential ICICI Mutual Fund

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Reliance Mutual Fund Sahara Mutual Fund SBI Mutual Fund Standard Chartered Mutual Fund Sundaram Mutual Fund Tata Mutual Fund Taurus Mutual Fund Templeton Mutual Fund UTI Mutual Fund, etc.

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Regulatory Aspect
1) Investment in debt instrument should be only in rated debt instrument not below investment grade rated by a credit rating agency authorized to carry such activity under the act.

2) No mutual fund under all its scheme should own more than 10 % of any companys paid up capital carrying voting rights.

3) Transfers of investment from one scheme to another in the same mutual fund shall be allowed only if a) Such transfers are done at the prevailing market price for quoted instrument

on spot basis. b) The securities so transfers shall be in conformity with the investment

objective of the scheme to which such transfer has been made.

4) A scheme may invest in another scheme under the same AMC or any other mutual fund without charging any fees, provided that aggregate interscheme investment made by all scheme under the same management or in scheme under the management of any other AMC shall not exceed five per cent of the NAV of the mutual fund.

5) The initial issue expenses in respect of any scheme may not exceed six per cent of the funds raised under the scheme.

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6) Every mutual fund shall get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme, wherever investment are intended to be of long-term nature.

7) Pending deployment of funds of a scheme in securities in terms of investment objectives of the scheme, a mutual fund can invest the funds of the scheme in short term deposits of scheduled commercial banks.

8) Every mutual fund shall be buy and sell securities on the basis of deliveries, and shall in all cases of purchases take delivery of relative securities, and in all cases of sale deliver the securities, and shall in no case put itself in a position whereby it has to make short sale or carry forward transaction or engage in badla finance.

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