INDRODUCTION

Establishing realistic financial goals is an essential first step towards investing.

Most Indians invest to meet long term goals, such as ensuring a secure
retirement or paying for a child’s college education, but many also have more
immediate goals, like making a down document on a home or automobile loans.
Mutual funds can fit well into either long or short term investment strategy, but the
success of investor’s plan depends in the type of fund he chooses. Because all
funds invest in securities market, it is crucial to maintain realistic expectations
about the performance of those markets and choose funds best suited to one’s
need. Investors can either invest directly in securities or can invest through on
Investment Company. An investment company is a financial intermediary that
collects money from investors and invests in various securities on their behalf.
The returns from these investments are passed on the investors either
periodically, or at the end of a specified time period. The investment company
charges fees for its services, referred to as management fees. Investment
companies are of two kinds:
Close-end and open-end. Close-end investment companies are those which
have a limited investment horizon. The investors invest in the investment
company for a specified time period and the investment company manages the
investment for the said duration. At the end of the duration, the investment is
liquidated and investor’s funds returned along with returns. On the other hand,
open-end investment companies are those, which have an unlimited investment
horizon. They sell and buy back their shares at regular intervals throughout their
existence. Hence their funds size keeps on changing. In India both closed-end
and open-end investment companies are called mutual funds. Except the unit
trust of India, all mutual funds in India are organized and set up under the Indian
trust act as trusts. Their role is to accept saving from the investors and invest the
same as per the objective incorporated in the text of the trust deed to manage

1
diversified portfolio for the investors. Hence a mutual fund can be defined as a
trust that pools the savings of a number of investors who share a common
financial goal. The money thus collected is then invested by the fund manager on
behalf of the investors in different types of securities. The income earned through
this investment and the capital appreciated in proportion to the number of units
owned by them

Getting started
Before the definition 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, Coca Cola, Reliance, TATA Motors,
Bajaj auto and General Mills. Stocks are the most common ownership investment
traded on the market.

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.

2
 There are many other types of investment other than stocks and bonds (including
annuities, real estate and precious metals), but the majority of mutual fund invest
in stocks and/ or bonds.

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 is
shared by its unit holders in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the common man as it
offers an opportunity to invest in a diversified, professionally managed basket of
securities at a relatively low cost. The flow chart below describes broadly the
working of a mutual fund:

Mutual Fund Flow Chart

Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing fund in securities in accordance with objectives as
disclosed in offer document. Investments in securities are spread across a wide
cross section of industries and sectors and thus the risk is reduced.

Diversification reduces the risk because all stocks may not move in the same

3
direction to the investors in accordance with quantum of money invested by them.
Investors of mutual fund are know as unit holders
The investors in proportion to their investments share the profits or losses. The
mutual fund normally comes out with a number of schemes with different
investment objectives, which are launched from time to time. A mutual fund is
required to be registered with securities and exchange board of India (SEBI)
which regulates securities markets before it can collect funds from the public.
Mutual fund are one of the best investment ever created because they are very
cost efficient and very easy to invest in
By pooling money together in a mutual fund, investors can purchase stocks
and bonds with much lower trading cost than if they tried to do it on their own. But
the biggest advantage to mutual fund is diversification.

Diversification :
Diversification is the idea of spreading out your money across many different
types of investment. When one investment is down another might be up.
Choosing to diversify your investment holdings reduces your risk tremendously.
The most basic level of diversification is to buy multiple stocks rather than just
one stock. Mutual fund is set up to buy many stocks (even hundred or thousand).
Beyond that, you can diversify even more by purchasing different kinds of stocks,
then adding bonds, then international and so on. It could take you weeks to buy
all these investments, but if you purchased a few mutual funds you could be done
in a few hours because mutual funds automatically diversify in a predetermined
category of investments (i.e. growth companies, low-grade corporate bonds,
international small companies).

4
HISTORY OF INDIAN MUTUAL FUND INDUSTRY

5
The mutual fund industry in India started in 1963 with the formation of Unit Trust
of India, at the initiative of the Government of India and Reserve Bank . The
history of mutual funds in India can be broadly divided into four distinct phases
First Phase – 1964-87

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

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

1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General
Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI
Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec
87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov
89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in
December 1990. At the end of 1993, the mutual fund industry had assets under
management of Rs.47, 004 cores.

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

6
 STRUCTURE OF INDIAN MUTUAL FUND
In India, the mutual fund industry is highly regulated with a view to imparting
operational transparency and protecting the investor’s interest. In India the
structure of a mutual fund is determined by Security Exchange Board of India
(SEBI) regulation. These regulations require a fund to be established in the form
of a trust under the Indian Trust Act 1882. A mutual fund is typically externally
managed it is now an operating company with employees in the traditional sense.
Instead a fund relies upon third parties either affiliated organizations or
independent contractors to carry out its business activities such as investing in
securities. A mutual fund operates through a four-tier structure. The four parties
that are required to be involved are sponsor, board of trustees, Asset
Management company.

 Sponsor:
A sponsor is a body corporate who establishes a mutual fund. It may be one
person acting alone or together with another body corporate. Additionally, the
sponsor should contribute at least 40% to the net worth of the AMC. However if
any person holds 40% or more of the net worth of an AMC shall be deemed to be
a sponsor and will be required to fulfill the eligibility criteria specified in the Mutual
Find Regulation.

 Board of Trustee:
Mutual fund requires to have an independent board of Trustee, where two third
of the trustees should be independent person who are not associated with the
sponsor in any manner. The board of trustees of the trustee company holds the

7
property of the mutual fund in trust for the benefit of the unit holders. The board of
trustees is responsible for protecting the unit holder’s interest.

 Asset Management Company:

The role of asset management company is highly significant in the mutual fund
operation. They are the fund managers i.e. they invest the investors money in
various securities ( equity, debt and money market instruments) after proper
research of market conditions and the financial performance of individual
companies and specific securities in the efforts to meet or beat average market
return and analysis. Mutual funds provide an economical way for the average
investor to obtain professional money management and diversification of
investments much like large institution and wealthy investors receive. They also
look after the administrative functions of a mutual fund for which they charge
management fee.

 Custodian:
Mutual fund is required by law to protect their portfolio securities by placing them
with a custodian. Nearly all mutual funds use qualified bank custodians. Only a
registered custodian under the SEBI regulation can act as a custodian to a
mutual fund.

8
ORGANIZATION 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

9
 TYPES OF MUTUAL FUND SCHEMES

 Schemes according to maturity period:

A mutual fund scheme can be classified into open-ended scheme or close ended
scheme depending on its maturity period.

• Open ended fund/scheme:

An open-ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes not have a fixed maturity period.
Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices
which are on a daily basis. The key feature of open-end schemes is liquidity.

• Close ended Fund/scheme:

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The
fund is open for subscription only during a specified period at the time of launch of the
scheme. Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges where
the units are listed. In order to provide an exit route to the investors some close
ended funds give an option of selling back the units to the mutual fund through
periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least
one of the two exit routes is provided to the investors i.e. either repurchase facility or
through listing on stock exchanges. These mutual funds schemes disclose NAV
generally a weekly basis.

10
 Schemes according to investment objective:

A scheme can also be classified as growth scheme, income scheme, or balance

scheme considering its investment objective. Such schemes may be open-ended or
close-ended scheme as described earlier. Such schemes may be classified mainly as
follows:
• Growth/ Equity oriented scheme:
The aim of growth funds is to provide capital appreciation over the medium to long-
term. Such schemes normally invest a major part of their corpus in equities. Such
funds have comparatively high risks. These schemes provide different options to the
investors like dividend option, capital appreciation, etc. and the investors may choose
an option depending on their preferences. The investors must indicate the option in
the application form. The mutual funds also allow the investors to change the options
at a later date. Growth schemes are good for investors having a long-term outlook
seeking appreciation over a period of time.

• Income/Debt oriented scheme:

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate
debentures, government securities and money market instruments. Such funds are
less risky compared to equity schemes. These funds are not affected because of
fluctuations in equity markets. However opportunities to capital appreciation are also
limited in such funds. The NAVs of such funds are affected because of change in
interest rates in the country. If the interest rates fall, NAVs of such funds are likely to
increase in the short run and vice versa. However, long-term investors may not bother
about these fluctuations.

11
 • Balanced Fund:
The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents. These are appropriate for investors looking for
moderate growth. They generally invest 40-60% in equity and debt instruments.
These funds are also affected because of fluctuations in shares prices in the stock
markets. However, NAVs of such funds are likely to be less volatile compared to pure
equity funds.

• Money Market or Liquid Fund:

These funds are also income and their aim is to provide easy liquidity, preservation of
capital and moderate income. These schemes invest exclusively in safer short-term
instruments such as treasure bills, certificates of deposits, commercial paper and
inter- bank call money, government securities, etc. returns on these schemes
fluctuate much less compared to other funds. These funds are appropriate and
individual investors as a mean to park their surplus funds for short periods.

• Gilt Fund:
These funds invest exclusively in government securities have no default risk. NAVs of
these schemes also fluctuate due to change in interest rates and other economic
factor as is the case with income or debt oriented schemes.

• Index Funds:
Index fund replicate the portfolio of a particular index such as the BSE sensitive
index’s NSE 50 index (nifty_, etc these schemes invest in the securities in the same
weight age comprising of an index. NAVs of such schemes would rise or fall in

12
accordance with the rise or fall in the index, though not exactly by the same
percentage due to some factors known as “tracking error” in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme

There are also exchange traded index funds launched by the mutual funds which are
traded on the stock exchanges

Mutual Fund Options :

Mutual fund offer various investment plans catering to the varying needs of investors.
a basic understanding of these plans helps in selecting a suitable plan for oneself.

• Growth plan:
In a growth plan, investors realize the capital appreciation on the investment by an
increase in NAV. This option is suitable for those who are interested in compounding
the income generated.

• Dividend plan:
In this plan dividends are paid from time to time and the NAV falls to the extent of
dividend payout

• Dividend Re-investment Plan:

Under this plan dividends are re invested in purchasing additional units of that
scheme itself. This would help the investors to gain more units and at the same time,
they will be able to reduce their short term capital gain tax.

13
 • Dividend Sweep Plan:
Under the sweep plan dividend distributed under one scheme can be invested in
some other schemes of the same mutual fund. This will best suit investor who seeks
to diversify their portfolio in the same fund house.

• Systematic Investment plan (SIP):

In this option an investor contributes a fixed amount every month at the prevailing
NAV. This plan caters to the unpredictable market scenarios and helps in cost
averaging.

• Systematic Transfer Plan (STP):

This is a variation of STP the only difference being that instead of debiting the bank
account units from other scheme. Then this fixed amount available from such
redemption is invested in an equity fund.

14
 ADVANTAGES OF MUTUAL FUND
Advantages of Mutual Fund Investments in stocks, bonds and other financial
instruments require considerable expertise and constant supervision, to enable an
investor to take informed decisions. Small investors usually do not have the
necessary expertise and the time to undertake any study that can facilitate informed
decisions. While this is the predominant reason for the popularity of mutual funds,
there are many other benefits that can accrue to small investors. Some of the
advantages are listed below.
• Diversification Benefits:
Diversified investment improves the risk return profile of the portfolio. Small investors
may not have the amount of capital that would allow optimal diversification. Since the
corpus of a mutual fund is subsequently big as compared to individual investments
optimal diversification becomes possible. As the individual investors’ capital gets
pooled into a mutual fund all of them are able to derive the benefits of diversification.
• Low Transaction Costs:
The transactions of a mutual fund are generally very large. These large volumes
attract lower brokerage commissions and other costs as compare to the smaller
volumes of the transactions entered into by individual investors. The brokers quote a
lower rate of commission due to two reasons. The first is competition for the
institutional investors business. The second reason is that the overhead cost for
executing a trade do not differs much for large and small orders. Hence for a large
order these costs spread over a large volume enabling the broker to quote a lower
commission rate.
• Availability of various schemes:
These are four basic types of mutual funds: equity, bond, hybrid, and money market.
Equity fund concentrate their investment in stocks. Similarly bond funds primarily
invest in bonds and other securities. Equity, bond, and hybrid funds are called long-
term funds. Money market funds are referred to as short-term funds because they

15
invest in securities that generally mature in about one year or less. Mutual funds
generally offer a number of schemes to suit the requirement of the investors.
• Professional Management
Management of a portfolio involves continuous monitoring of various securities and
the innumerable economic and economic variables that may affect the portfolio’s
performance. This requires a lot of time and effort on the part of the investors along
with in dept knowledge of the functioning of the financial markets. Mutual funds are
generally managed by knowledgeable experienced professionals whose time is solely
devoted to tracking and updating the portfolio. Thus investment in a mutual fund not
only saves times and efforts for the investor it is also likely to produce better results.
• Liquidity:
Liquidating a portfolio is not always easy. There may not be a liquid market for all the
securities held. In case only a part of the portfolio is required to be liquidated it may
not be possible to see all the securities forming part of the portfolio in the same
proportion as they are represented in the portfolio investing in a mutual fund can
solve these problems. A mutual fund generally stands ready to buy and sell its units in
a regular basis. Thus it is easier to liquidate holdings in a mutual fund as compared to
direct investment in securities.
• Returns:
In India dividend received in the hands of the investors is tax free. This enhances the
yield on mutual funds marginally as compared to income from other investment
options. Also in case of long-term capital gains, the investor gets the benefits of
indexation and lower capital gain tax
• Flexibility:
Mutual fund possesses features such as regular investment plan, regular withdrawal
plans and dividend reinvestment plan. Because of these features one can
systematically invest or withdraw funds according to one’s needs and convenience.

16
 • Well Regulated:
All mutual funds are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interest of investors. The operations of
mutual funds are regularly monitored by SEBI.

Disadvantages of Mutual Funds

• Costs Despite Negative Returns:
Investors must pay sales charges, annual fees and other expenses regardless of how
the fund performs. And depending on the timing of their investment, investors may
also have to pay taxes on any capital gains distribution they receive------- even if the
fund went on to perform poorly after bought shares.
• Lack of Control:
Investors typically cannot ascertain the exact make up of a funds portfolio at any
given time, nor can they directly influence which securities the fund manager buys
and sells or the timing of those trades.
• Price Uncertainty:
With an individual stock you can obtain real time pricing information with relative ease
by checking financial websites or by calling your broker. You can also monitor how a
stock price changes from hour to hour------or even second to second. By contrast with
a mutual fund the price at which you purchase or redeem shares wile typically
depend on the funds NAV which the fund might not calculate until many hours after
you have placed your order. In general mutual funds calculate their NAV at least once
every business day typically after the major U.S. exchange close.

FUTURE OUTLOOK

17
Mutual Fund in India has emerged as a critical institutional linkage among various
financial segments like savings, capital markets and the corporate sector. As various
taxes the government offers incentives and benefits on mutual funds investment, their
role in the mobilization of savings and the development of the economy will assume
more significance. They provide much needed impetus to direct and indirect support
to the corporate sector. Above all, mutual funds having given a new direction to the
flow of personal savings and enables small medium investors in remote rural and
semi rural area to reap the benefits of stock markets investments. Indian mutual fund
are thus playing a very crucial development role in allocating resources in the
emerging market economy. A perceptible change is sweeping across the mutual fund
landscape in India. Factors such as changing investors need and their appetite for
risk , emergence of internet as a powerful servicing platform and above all the
growing commoditization of mutual fund products are acting as major catalysts
putting pressure on industry players to formulate strategies to stay the course. In the
changed scenario today product innovation is increasingly becoming one of the key
determinants of success. Building and sustaining a powerful brand is also becoming
an issue of paramount importance. Increased deregulation of the financial markets in
the country coupled with the introduction of derivative products offer tremendous
scope for the industry to design and sell innovative schemes to suit individual
customer needs. Distribution has taken a whole new mode like banks, post offices
and co-branded credit cards are bound meaning with the introduction of automated
trading clearing and settlement system. Factors such as cross selling through modes
like banks, post offices and co-branded credit cards are bounds to play decisive role
in the success of the industry players.
Globally it has seen that the top ten players account for a greater pie of the market
hare. With competition getting intense in the domestic industry churning in the
industry looks imminent.

RISK MANAGEMENT AND MUTUAL FUNDS

18
The basic objective of a mutual fund is to provide a diversified portfolio so as to
reduce the risk in investments at a lower cost. The mutual fund industry worldwide is
based on this premise. Investors who take up mutual fund route for investments
believe that their risk is minimized at lowest costs, and they get an optimum portfolio
of securities that match their risk appetite. They are ignorant about the diverse
techniques and hedging products that can be used for minimizing the market volatility
and hence take the help of the fund managers. It is very daunting to note that the
drop in the NAV of some of the schemes is higher than the erosion of value in some
of the ICE stocks. The recent survey conducted by price water house coopers
(PWC) on risk management by mutual funds has posted interesting as well as
worrying results. According to the survey as many as 50 percent of the respondent
mutual funds are not managing risk properly. If this is not all 50 percent of the
respondents did not even have documented risk procedures or dedicated risk
managers. The respondents included among others some of the heavyweights of the
Indian Mutual Fund industry Viz. Templeton, Alliance, Prudential and IDBI Principal
Mutual Fund.
Worrisome news it is for the investors who still believe Mutual Funds are a route to
manage one’s money in a better and safe manner. The recent wild movements in the
NAVs of several equity funds have belied all expectation of a diversified portfolio from
the fund manager when the basic tenet behind portfolio management is risk
management Mr. Shyam Bhatt Fund manager-TATA asset Management Ltd said
Indian mutual fund industry is not using statical techniques of risk management but is
using diversification effectively with in the market limitation. As far as use of
derivatives is concerned, they are not presently used because of the low volumes low
liquidity and absence of sufficient hedging products in the market. Aggression has
been the key word followed by the AMCs when it comes to taking positions in stocks.
With investment in volatile ICE sectors being the driver of growth last season almost
everybody had taken big exposures to them. Brila mutual fund maintained its
exposures in infosys to almost 25 percent in all of its equity schemes throughout last

19
year. The same is true of ING saving trust that has Rs 60 crores invested in wipro and
infosys out of the total fund size of 135 crores in its growth fund. The result of these
exposures is that the fund witnesses a movement of almost 9 percent in a single day
on budget when the market saw as appreciation of around 4.36 percent. In their
quest for growth many funds have seen very volatile movements in NAVs. The
investor confidence may not be lost but such volatility sure dents it. The point is not
whether AMCs should be chastised or not but just to question the practices as the
fate of many investors is linked to it. An ordinary investor considers mutual fund funds
as the experts in investment decisions and so naturally expects the decisions of
investing in mutual fund to bear fruit. However, AMCs often leave a lot to be desired
as they falter on important fronts like NAV and portfolio disclosure besides posting
high fluctuations and poor returns.
The beta of some of the favorite stocks is shown below. The table contains the beta
of some of the ICE scrips that constitute the top 10 holdings across various equity
funds.

DSQ software Ltd. (2.09%)

Taurus Libra Leap (5.68%), DSP ML Tech (6.06%)
Satyam Computer Services Ltd (2.00%)
ING Growth Port (11.2%), Alliance Equity Fund (9.7%) Chola freedom Tech (11.51%)
As can be seen some of the stocks are stocks are too volatile and can cause wild
movements in the NAVs of funds that have taken exposures in them. The standard
deviation of the returns in some of these funds points to it. While alliance equity fund
has a standard deviation of 2.53 Birla advantage has its standard deviation at 2.57.
ING growth has a standard deviation of 3.3 which is relatively high due to its
exposure to two volatile ICE scrips. Brila advantage has reduced its exposures to
Infosys drastically in the last two months and taken steps to contain volatility. Similar
steps are being planned by SBI Mutual fund that is recasting its equity portfolio to
reduce risks as they can scare investors.

20
It is fortunate that the fund manager are not taking due care for minimizing the risk
and are in a race to post higher and higher returns during the phase of bull run They
should understand that the investors forget the high returns posted in any specific
period very soon but they hell lot of time to forget the burns they get during periods of
losses. Hence for maintaining the confidence of the retail investors it is very important
to control wild fluctuations in the NAVs. The basic technique of portfolio management
thrusts on diversification which preaches inclusion of negative beta stocks in the
portfolio so as to minimize the impact of fluctuation in the market. Diversification
always has a cost and investors are willing to pay for it if it properly done. The fund
manager should disclose what they doing at the hedging front. They should come up
and tell their investors as to what they do at times of high fluctuations. Normally it ha
been seen that they outperform the board market indices during the bull runs and
under perform the indices during the bear phases. The industry needs to revise their
attitude and try to streamline their actions with their objectives. Some mutual fund
houses are quite disciplined but every body should embrace the same spirit. There
are some infrastructural problems but fund managers need to be more vigilant on the
market movements. Mr. Bhupinder Sethi fund manager Dundee Mutual fund said We
are actively monitoring the market movements and taking calls accordingly. Though
we are presently not using derivatives for hedging of risk because of lack of depth in
the market for the product but we go into cash when we see the expectations of huge
corrections coming in Poor Performance poor servicing to clients and failure of third
party service providers are the three major risk factors identified in the survey by
PWC. These are also going to be crucial in a rapidly growing scenario. Under this
setting it is not just growth that should be the focus area but also better management
of all risks and hence AMCs would do well to keep the investor and his interest in
mind before taking any decision.

FREQUENTLY USED TERMS:

21
  Net Asset Value (NAV):
Net Asset Value is the market value of the assets of the scheme minus its liabilities.
The per unit NAV is the net asset value of the scheme divided by the number of units
outstanding on the Valuation Date.

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

 Repurchase Price :
Is the price at which a close-ended scheme repurchases its units and it may include a
back-end load? This is also called Bid Price.

 Redemption Price:
Is the price at which open-ended schemes repurchase their units and close-ended
schemes redeem their units on maturity. Such prices are NAV related.

 Repurchase or ‘Back-end’ Load:

Is a charge collected by a scheme when it buys back the units from the unit holders?

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

SUCCESS FACTORS

22
  Product Innovation:
Product innovation is an important part of mutual fund industry. Over the years mutual
fund have been reshaping the financial landscape of investors, drawing in monies
from various segments and providing a whole new range of products with easy
access to financial products. Considering the fact that the current regulations provide
ample freedom in terms of product designing and the mutual fund schemes have
distinct objectives that characterize them there is a room for product innovation. While
the focus of the industry will remain on the plain vanilla products with add-ons to
tackle the changes in the economic environment the specialty products will help
players in creating a niche for themselves.
 Customer Focus:
Mutual funds especially in the private sectors have set new standards in providing
prompt and efficient service to investors by taking advantages of technology. In fact
they have redefined the concept of service in the Indian context by helping investors
in understanding economic trends and their impact on mutual funds disclosure of
portfolio evaluating fund performance answering questions on specifics of mutual
fund investing and offering information /advice through a newsletter etc. Moreover
healthy competition among mutual funds will ensure that the industry continues to
innovate to satisfy the needs of mutual funds investors better than even before.
 Market Innovation:
Over a period of time the mutual fund industry has made progress in reaching a
situation where investors are encouraged in making informed decision and the seller
has to cater to this need. The fact realizing these banks and some of the distributors
have started offering tailor made asset allocation service bundled up with other
services such as tax advice and a wide range of research services etc. In other words
they provide supermarkets that allow investor to select from a variety of schemes run
by various mutual fund
 Brand Building:

23
As the mutual fund industry continues its effort to achieve consistent growth funds
with a strong brand will be in a better position to market their products compared to
the competition. Corporate image would really matter when prospects star looking at
the products rank them on the basis of image performance services and costs. While
there is no short cut for establishing track record both in term of fund management as
well as customer service a strong brand will ensure increased awareness among
investing public and that will encourage distributors to push the products. Moreover
will take them beyond traditional markets and enable them to expand geographical
operations. Therefore serious players will continue to do a focus and sustained brand
building exercise.
 Distribution strategy:
In a country as big as India geographically diversified and densely populated there is
a need to have a network of distribution sufficiently large and varied to tap investment
from all corners and segments. The mutual fund industry has already taken several
initiatives to sharpen the skills of intermediaries as also find new method of
harnessing people’s saving.
 Information Technology:
The mutual fund industry will have to use the technology to reach masses so that
services can be provided in a cost advantageous manner. The development of
independent distribution network will be an important element for mutual fund
industry. Never in the history of Indian mutual fund industry had the information flows
as freely
as it does today. The distributors who are not technology savvy will have to act
quickly and empower themselves with the growing power of internet. Information
technology has an important role to play in marketing of mutual fund products. In fact
IT enables much more sophisticated database marketing leading to better
relationship building. Net-based marketing has the potential to be highly relevant,
personalized and productive.

24
 PERFORMANCE MEASURES OF MUTUAL FUND

Mutual fund industry today 34 players and more than five hundred schemes is one of
the most preferred investment avenues in India. However with a plethora of schemes
to choose from the retail investors faces problems in selecting funds. Factors such as
investment strategy and management style are qualitative but the funds record is an
important indicator too. Though past performance alone can not be indicative of
future performance it is frankly the only quantitative way to judge how good a fund is
at present. Therefore there is a need to correctly assess the past performance of
different mutual funds.

Worldwide good mutual fund companies over are known by their AMCs and this fame
is directly linked to their superior stock selection skills. For mutual funds to grow
AMCs must held accountable for their selection of stocks. In other words there must
be some performance indicator that will reveal the quality of stock selection of various
AMCs.

Return alone should not be considered as the basis of measurement of the

performance of a mutual fund scheme it should also include the risk taken by the fund
manager because different funds will have different levels of risk attached to them.
Risk associated with a fund in a general can be defined as variability or fluctuations in
the returns generated by it. The higher the fluctuations in the returns of a fund during
a given period higher will be the risk associated with it. These fluctuations in the
returns generated by a fund are resultant of two guiding forces. First general market
fluctuations which affect all the securities present in the market called market risk or
systematic risk and second fluctuations due to specific securities present in the
portfolio of the fund called unsystematic risk. The total risk of a given fund is sum of

25
these two and is measured in terms of standard deviation of returns of the fund.
Systematic risk on the other hand is measured in terms of Beta which represents
Fluctuations in the NAV of the fund Vis-a-Vis market. The more responsive the NAV
of a mutual fund is to the changes in the market higher will be the returns in the
market . while unsystematic risk can be diversified through investments in a number
of instruments systematic risk can not. By using the risk return relationship we try to
assess the competitive strength of the mutual funds Vis-à-vis one another in a better
way.

26
27