INTRODUCTION TO MUTUAL FUND INDUSTRY

The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry in the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets under Management (AUM) were Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004; it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under.

First Phase - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management. Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov

89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

Mutual Fund Operation Flow Chart

ORGANISATION OF A MUTUAL FUND:

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

 Mutual funds in INDIA have a 3-tier structure of Sponsor Trustee AMC. Sponsor is the promoter of the fund. Sponsor creates the AMC and the trustee company and appoints the Boards of both these companies, with SEBI approval. A mutual fund is constituted as a Trust A trust deed is signed by trustees and registered under the Indian Trust Act. The mutual fund is formed as trust in INDIA, and supervised by the Board of Trustees. The trustees appoint the asset management company (AMC) to actually manage the investors money. The AMCs capital is contributed by the sponsor. The AMC is the business face of the mutual fund. Investors money is held in the Trust (the mutual fund). The AMC gets a fee for managing the funds, according to the mandate of the investors.

 Sponsor should have at-least 5-year track record in the financial services business and should have made profit in at-least 3 out of the 5 years. Sponsor should contribute at-least 40% of the capital of the AMC. Trustees are appointed by the sponsor with SEBI approval. At-least 2/3 of trustees should be independent. At-least of the AMCs Board should be independent members. An AMC of one fund cannot be Trustee of another fund. AMC should have a net worth of at least Rs. 10 crore at all times. AMC should be registered with SEBI. AMC signs an investment management agreement with the trustees. Trustee Company and AMC are usually private limited companies. Trustees oversee the AMC and seek regular reports and information from them. Trustees are required to meet at least 4 times a year to review the AMC. The investors funds and the investments are held by the custodian. Sponsor and the custodian cannot be the same entity. R&T agents manage the sale and repurchase of units and keep the unit holder accounts. If the schemes of one fund are taken over by another fund, it is called as scheme take over. This requires SEBI and trustee approval. If two AMCs merge, the stakes of sponsors changes and the schemes of both funds come together. High court, SEBI and Trustee approval needed.

 If one AMC or sponsor buys out the entire stake of another sponsor in an AMC, there is a takeover of AMC. The sponsor, who has sold out, exits the AMC. This needs high court approval as well as SEBI and Trustee approval. Investors can choose to exit at NAV if they do not approve of the transfer. They have a right to be informed. No approval is required, in the case of open ended funds. For close ended funds investor approvals is required for all cases of merger and take over.

GROWTH IN ASSETS UNDER MANAGEMENT

REGULATORY STRUCTURE OF MUTUAL FUNDS IN INDIA

The regulation of mutual funds in India is governed by the SEBI vide the SEBI (Mutual Fund) Regulation, Act 1996 (here in after referred to as SEBI Regulations). These regulations make it mandatory for mutual funds to have a three-tier structure of sponsor Trustee Asset Management Company (AMC). The sponsor is the promoter of the mutual fund and appoints the trustees. The Trustees are responsible to the investors in the mutual fund and appoint the AMC for managing the investment portfolio.SEBI regulations also provide for who can be a sponsor, trustee and AMC, specifying the format of agreement between these entities. These agreements provide for the rights, duties and obligations of these three entities. The UTI is also structured as a trust. The important difference through is that UTI does not have sponsors or a separate AMC. Financial intuitions and banks that contributed to the initial capital of the UTI have their representatives on UTIs Board of Trustees, which oversees the operation of UTI Mutual Fund. The Association of Mutual Funds in India (AMFI) is a self-regulatory body formed by the various MF Companies to address the practices and policies of various aspects like new scheme launches, payments to intermediaries comparisons and other ethical systems. Likewise, different companies have their own Compliance and Audit offices, which are mandated to control and report adherence to and deviations if any on the regulations and policies issued by SEBI. ADVANTAGES OF MUTUAL FUNDS

Professional Management Diversification Convenient Administration Return Potential

 Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits well regulated

MUTUAL FUNDS STRUCTURE /COMPANY STRUCTURE.

Sponsor Company

Establishes the mutual fund as a trust and registers with SEBI

Managed by the board of trustees.

Mutual fund (For e.g. Reliance AMC)

Hold unit holders funds in mutual fund. Enters into an agreement with SEBI.

Asset Management Company.

Floats mutual funds as per the regulations of SEBI regulations.

Provides custodial services. Custodian

Distributors Registrar

Provides the registrar network and for transfer services. distribution of schemes to the investors.

Market Share of the mutual fund industry. Assets Under Management (AUM) as at the end of Jan-2008

Sl.no. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Mutual Fund Name ABN AMRO Mutual Fund AIG Global Investment Group Mutual Fund Benchmark Mutual Fund Birla Sun Life Mutual Fund BOB Mutual Fund Can bank Mutual Fund DBS Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Franklin Templeton Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund ING Vysya Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund Kotak Mahindra Mutual Fund

% Market share 1.66 0.00 1.55 5.73 0.02 0.70 0.60 1.76 2.86 0.03 2.13 6.34 8.73 3.52 12.24 1.38 0.91 0.00 4.04

20 21 22 23 24 25 26 27 28 29 30 31 32

LIC Mutual Fund Lotus India Mutual Fund Morgan Stanley Mutual Fund PRINCIPAL Mutual Fund Quantum Mutual Fund Reliance Mutual Fund Sahara Mutual Fund SBI Mutual Fund Standard Chartered Mutual Fund Sundaram BNP Paribas Mutual Fund Tata Mutual Fund Taurus Mutual Fund UTI Mutual Fund Grand Total

2.39 0.87 0.77 3.17 0.01 14.28 0.04 4.75 3.90 2.45 3.40 0.07 9.67 100.00