PGPBM 08-

10
NJ INDIA INVEST
PVT. LTD.

By-
PRASHANT GUPTA

MUTUAL FUNDS
‘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’
 CERTIFICATION
This is to certify that this dissertation “Mutual Funds” is the work done by
PRASHANT GUPTA, student of PGPBM 08-10, ISB&M, NOIDA.

This dissertation has the requisite standard for the partial fulfillment of the Post
Graduate Program in Business Administration and has been done by under my
guidance and supervision during the period April 2009 to September 2009. This
dissertation report has not been submitted to any other institution or
organization for any kind of assessment or consideration, to the best of my
knowledge.

FACULTY MENTOR

Prof. HARI SRIVASTAVA

ISB&M, NOIDA

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Mutual Funds
 ACKNOWLEDGEMENT

This report is a synergetic product of many minds. I am grateful for the

inspiration and wisdom of all those who were with me in this journey. I am
sincerely thankful to ISB&M, Noida for providing me with the opportunity to
write a research paper in the form of a dissertation on the topic “Mutual
Funds”.

To begin with my faculty mentor Prof. Hari Srivastava, ISB&M, Noida who
encouraged me to do my best. Without his support it would have been very
difficult for me to prepare the paper so meaningful. I am also thankful to him
for his guidance that helped me improve a lot.

Besides this I would like to declare that this study would not have been possible
without the guidance of Mr. Lalu Gadhvi, Asst. Manager and my superiors at
NJ India Invest, Noida. I thank all the people whose support made it possible
for me to fulfill this study.

Through this research paper I have learnt a lot about the Mutual Funds as a
whole and hope that this research paper will help all those Investors which are
already or planning to start the process of Financial planning.

PRASHANT GUPTA
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Mutual Funds
 Abstract

Today's customers are living in an environment of uncertainties like changing

interest rates, making the investment decision more complex. The demographic
profile of customers is also rapidly changing with more ageing population being
added, giving rise to different financial needs. These have led to heightened
expectations from service providers and advisors. In this scenario, it is essential
for financial advisors and brokers to have a thorough understanding of the
different investment avenues and their benefits & risks.

Mutual funds are the next big investment opportunity. Any way you look at
them they are winners - be it performance, taxation or financial planning for
life's milestones. In developed markets investors have already seen the benefits
of investing in mutual funds. In India, it is only now that benefits are becoming
apparent.

After the failure of UTI investors lost their faith in the mutual funds but in the
current scenario due to boom in the Indian capital markets there has been an
upward trend in the popularity of the mutual funds. So to know as to how much
advisors prefer mutual funds as an investment option in comparison to other
investment avenues, how much knowledge do they have about mutual funds and
advisor’s knowledge regarding various other aspects of mutual funds, a primary
research was conducted to know the perception of advisors towards the mutual
funds.

The research was undertaken to impart information, knowledge and the

functioning of mutual funds among financial advisors which ultimately help the
investors in taking investments decision. Also it helped to know the awareness
about benefits of Mutual funds advisory business.
The study includes analysis of the investors on the basis of their
investment objectives, age, income etc. It also examined the position of Mutual
Funds (MF) among investment avenues available for the investors and the past
performances of various schemes from the active Asset Management Company
(AMC) in Indian market on the basis of Net Asset Value (NAV) & time. So that
it can help the advisors as well as investors to choose the correct portfolio. The
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study also covers the scenario of MF industry during the Entry Load and No
Entry Load applications.

Mutual Funds
 CONTENTS

1. Company overview: NJ India Invest Pvt. Ltd.

2. Introduction: Mutual Funds (MF)

3. Brief History

4. MF Structure

5. Advantages and Disadvantages of MF

6. Classification of MF

7. Risks associated with MF

8. Research Methodology

9. Objective of study

10.Data collection

11.Analysis on The Basis of Objective of Investor

12.Analysis on The Basis of Age of Investor

13.Position of MF among Various Investment Avenues

14.Entry Load: Wipe Off

15.Value Pack Procurement Process

16.Systematic Investment Plan (SIP): A companion for all times

17.Case Study: SIP

18.Findings & Suggestions: How to invest in MF

19.Bibliography
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Mutual Funds
 Welcome to NJ India Invest

Doing the 'right' thing is a virtue most desirable. The difference between success
and failure is often not dictated by knowledge or expertise but by its actual
application and perseverance. When it comes to successful wealth creation for
customers, it is something that we believe & practice. For us it is more than a
mission; it is what defines our lives and our actions at NJ IndiaInvest. With this
passion, we continue to evolve and make the right product accessions and
service innovations in our offerings. To the advisors, we offer a 360
comprehensive business platform with unmatched IT solutions, empowering
them to set the best practice standards and deliver real value to their customers.
Over the years, our passion has seen us grow from strength to strength and
expand rapidly, setting new benchmarks in the process. But to us, what really
matters most is the number of lives we have managed to transform and we still
have a long way to go..

NJ IndiaInvest Pvt. Ltd. is one of the leading advisors and distributors of

financial products and services in India. Established in year 1994, NJ has over a
decade of rich exposure in financial investments space and portfolio advisory
services. From a humble beginning, NJ over the years has evolved out to be a
professionally managed, quality conscious and customer focused financial /
investment advisory & distribution firm.

NJ prides in being a professionally managed, quality focused and customer

centric organization. The strength of NJ lies in the strong domain knowledge in
investment consultancy and the delivery of sustainable value to clients with
support from cutting-edge technology platform, developed in-house by NJ.
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Mutual Funds
At NJ we believe in ..

having single window, multiple solutions that are integrated for simplicity
and sapience
making innovations, accessions, value-additions, a constant process
providing customers with solutions for tomorrow which will keep them above
the curve, today

NJ had over INR 5,500* Crores of mutual fund assets under advice with a wide
presence in over 135 locations* in 22 states* in India. The numbers are
reflections of the trust, commitment and value that NJ shares with its clients. At
NJ, we continue to innovate, enrich our intellect, and ask critical questions. We
challenge our own processes and systems on constant basis to emerge more
convinced. At NJ, we continue to expand the scope and depth of our offerings,
making apt use of technological support.

Vision & Mission

Vision:
To be the leader in our field of business through,

Total Customer Satisfaction

Commitment to Excellence
Determination to Succeed with strict adherence to compliance
Successful Wealth Creation of our Customers

Mission:
Ensure creation of the desired value for our customers, employees and
associates, through constant improvement, innovation and commitment to
service & quality. To provide solutions which meet expectations and maintain
high professional & ethical standards along with the adherence to the service
commitments.
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Mutual Funds
Divisions

NJ Fundz Network is a unique, first time in India concept that offers such
comprehensive business platform to independent financial advisors.

NJ Fundz Network was established in year 2003 as a dedicated platform

offering comprehensive services and support to the independent financial
advisors. The services offered by NJ Fundz Network are increasingly
recognized as the best and most comprehensive in nature. The scope, depth, and
quality of the services and support is unmatched in the industry. NJ Fundz
Network is proud to be the pioneers in India in providing the 360° Advisory
platform to independent advisors. With this NJ has managed to successfully
transform the business of many independent financial advisors, bringing them
on equal footing or even better than the strongest competitors in the industry.

NJ has over 13000* NJ Fundz Network Partners and over 4,500* normal
advisors associated with us. NJ presently has over Rs. 5,500* Crores of assets
under advice. NJ has over 135* PSCs (Partner Service Centers) in 22* states
spread across India. The numbers are reflections of the trust, commitment and
value that NJ shares with its clients.

At NJ, our experience, knowledge and understanding enables us to provide you

with the expected value, in an enhanced way. As a leading player in the
industry, we continue to successfully meet the expectations of our clients,
through meaningful and comprehensive solutions offered by NJ Fundz
Network.

Products presently on offer …

At the basic product level NJ has a basket of the following-
• Mutual funds – covering all AMCs & schemes,
• Life Insurance (Prudential ICICI)
• Fixed deposits of companies,
• Government/RBI bonds,
• Infrastructure Bonds,
• Approved securities for charitable trusts, etc
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Mutual Funds
Established as a distinct entity, NJ Wealth Advisors Pvt. Ltd. seeks to offer
comprehensive financial planning and portfolio advisory services to premium
clients. With NJ Wealth Advisors, NJ seeks to leverage the strong financial
advisory and portfolio management skills gained in over a decade of experience
in the industry. NJ Wealth Advisors offers its clients with quality, unbiased,
need-based advisory services & investment solutions.

This sporadic growth in terms of need of performers in financial advisory

services has lead to the crunch of available performers. Though lots of
youngsters are getting into financial advisory services, but the greatest
challenge is of RIGHT SELLING, for which adequate Training is a
prerequisite. Advisory function demands updated knowledge, backed up by
honed skills to fetch effective business. Building long term relationship with
clients depends upon possessing clear edge over others in the field. Hence
continuous people development has an important role in building this fraternity.

At NJ IndiaRealty we understand the challenges in shaping reality from your

realty aspirations. With our fully integrated end-to-end service model we offer
solutions that would enable you to meet the challenges of development,
fortify your own transformation and exploit the opportunities available in the
Indian realty sector.
At NJ IndiaRealty we have made backward & forward integration of value-
added services to the core-realty services which lie at the heart of the
business. The services at NJ IndiaRealty enable continual partnership right
from idea to its reality, encompassing all functional & operational
undertakings. At NJ IndiaRealty we aim to provide you with substantive value
in
- Delivering core realty services
- Execution of the other value-added services
NJ IndiaRealty has a rich experience and a vast repertoire in project planning
& execution in the realty domain. The strong processes and systems in place
ensure the effective & timely execution of the projects. High-quality
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assurance forms the under-current in the entire value-chain of service

delivery.

Mutual Funds
NJ IndiaRealty brings with it professional management, total quality
consciousness, confidence and keenness to offer customers with high-quality
development at attractive value propositions. At NJ IndiaRealty we commit
ourselves to the continuous improvements, accessions in the value-chain and
the best practices adopted by the industry.

Technology has traditionally been NJ's key strength. Our offering on the
technological front is unmatched, vibrant, and comprehensive in nature. Our
focus & commitment on technology can be gauged from the fact that we have
set-up distinct entity with a very strong, talented work-force for the sole purpose
of providing the best to NJ in terms of technology and support. Finlogic
Technologies (India) Pvt. Ltd. does all the development & support work in-
house on a continuous basis. It has successfully developed & implemented a
powerful support system for the mutual fund distribution business at NJ with a
provision for integrating the same with other investment products as well as the
financial accounting system.

Products
NJ offers advisory and distribution services on the following products.

1. Mutual funds – covering all AMCs & all schemes,

2. Life insurance – Prudential ICICI
3. Fixed deposits of companies,
4. Government/RBI bonds,
5. Infrastructure Bonds,
6. Approved securities for charitable trusts, etc

NJ’s main focus is though on mutual funds advisory and distribution. At NJ, we
believe that mutual funds, as an asset class, can be looked at for almost all of the
financial needs.
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Mutual Funds
People & Culture
People:
Enthusiasm, Enterprise, Education and Ethics form the four pillars at NJ. At NJ
one can witness the vibrant energy, enthusiasm and the enterprising drive to
excel flowing freely throughout the organisation. At NJ can also experience the
creativity, one-to-one responsiveness, collaborative approach and passion for
delivering value.

At NJ people evolve to be more effective, efficient, and result oriented.

Knowledge is inherent due to the education-centric approach and the experience
in handling different clients groups across diverse product profiles.

NJ understands that the people are the most important assets of the company
and it is not the company that grows but the people. NJ hence undertakes
rigorous training and educational activities for enhancing the entire team at NJ.
NJ also believes in the ‘Learning through Responsibility’ concept for its
employees. For people at NJ success is not a new word, but is a regular
stepping-stone to realising the one vision that everyone shares.

Culture:
At NJ we believe in transforming the lives of our customers. We exist to create
a difference – a change towards a better life. The culture at NJ reflects this
responsibility, this dream of transforming lives. And we at NJ are always
excited and enthused in doing so.

We believe in keeping ‘You First’, providing you with products and services
that meet your stated and unstated needs. Client satisfaction and client service is
the Mantra we constantly recite. This service oriented philosophy runs
throughout the organization, from top to bottom.

Employees are given ample freedom in their work. The objective is to keep an
open, healthy environment with ample scope for enterprise, improvement,
innovations and out-of-the box solutions

Our efforts are constantly engaged in improving our existing services, offering
new and innovative solutions that go beyond your expectations. This focus has
made us one of the most respected and preferred service providers, especially in
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the mutual fund industry.

Mutual Funds
Service Standards
Service is the key to unlocking customer satisfaction, which again is key for
sustainability of any business. At NJ we understand this very well. NJ has set
strict processes in place to deliver quality services to customers. At NJ strict
quality service standards are set and a well-defined process is established and
followed religiously by our quality customer service teams. Performance is
evaluated on a frequent basis and glitches are ironed out.

But quality service also involves quality people in addition to processes. NJ

gives significant focus to the proper training and development of the people
involved in the service delivery chain.

Further we,

Have well-defined "Privacy Policy" to keep clients’ information confidential

& internal audits done on the same at regular intervals
Receive various statistics which are analysed on an ongoing basis to improve
the service standards

We are committed to improve and enhance our services and undertake new
service initiatives. Such and other services differentiate us with other service
providers in the industry.

Our Service Commitments …

The service commitments are to guide the actions of the people at NJ. Clearly
stated, customers can freely communicate any such actions/events wherein they
feel that any of the following commitments have been breached / compromised.
At NJ we desire to honour our commitments at all points of time and to all our
customers without any bias.

To provide customer-focussed need-based valued services

To provide reliable, accurate and timely information
To maintain all records in privacy
To optimise services/benefits at least justifiable cost
To develop and grow the customers ’ business
To provide constructive after sales service
To honour our service commitments
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Mutual Funds
Recognitions
Some of the awards & recognitions that we have received in past..

Year 2000:
For Outstanding Performance presented by Chairman, Prudential Plc. at London

Year 2002:
For Outstanding Performance presented by Group Chief Executive, Prudential
Plc. at London

Year 2003:
For Outstanding Performance presented by Group Chief Executive, Prudential
Plc. at London

Year 2004:
Among Most Valued Business Associates presented by HDFC Standard Life at
Edinburgh, Scotland

Year 2004:
For Outstanding Performance by Deputy CEO, Prudential Singapore at
Malaysia

Year 2006:
Award for mobilising the Highest Number of SIPs at National Level by Fidelity
Mutual Fund Plc at Mumbai

Year 2006:
Award – Vietnam

Comments from Industry Stalwarts:

The essence of investment consultancy lies in optimal asset allocation as against
security selection or timing the markets for clients. NJ understands this very
well and has added significant value to the clients through this approach. I am
sure with this new initiative; a much larger number of clients will be able to
benefit from this approach. I wish them all the best in this initiative - Prashat
Jain, CIO, HDFC AMC.
The success of any business lies in innovation ahead of times and NJ has proved
it time again - Rajan Krishnan, Principal Pnb AMC.
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Mutual Funds
 Mutual Funds
Mutual funds provide investment opportunities depending on investor’s risk and
Return expectations. Mutual funds are specialized investment vehicles that
allow one to pool savings and consolidate them into fairly large and diversified
portfolio of investment. The pooled funds are invested in securities or assets as
per the objective of the scheme in which it is collected and the returns/growth is
distributed to the investors. Mutual funds are managed by professionals and are
well regulated by SEBI now who keep track of industries /companies and
monitor their performance which an individual investor finds difficult.

In India, the assured return schemes have been quite successful due to their
fixed income nature and the obsessed mindset of the small investor with fixed
or assured returns. The opportunity to invest at fixed rates over a long period of
time is likely to reduce. Market related rate of interest is being experienced in
the banking sector. The returns become more market related and vary over time
and we can see a lot of variable rate products in the days to come.

What Is A Mutual Fund?

A mutual fund (MF) is a vehicle to pool money from investors, with a promise
that the money would be invested in a particular manner, by professional
managers who are expected to honor the promise.
The idea behind a MF is that investors lack time, inclination or skills to
manage their own investments. Professional managers, acting on behalf of the
MF, manage the investments for the benefit of investors in return for a
management fee. The organization that manages the investment is the Asset
Management Company (AMC). In India, the operations of the AMC are
supervised by a Board of Trustees/Trustee company.
Mutual Fund investments are Collective Investment Schemes, which
collect contribution from the subscribers and invest them in a variety of
transferable assets such as ordinary shares and bonds.

Operational flowchart of Mutual Fund

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Mutual Funds
 These Trusts are run by experienced Investment Managers who use their
knowledge and expertise to select individual securities, which are classified to
form portfolios that meet predetermined objectives and criteria. These portfolios
are then sold to the public.

Thus 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. 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.
The small savings of all the investors are put together to increase the buying
power and hire a professional manager to invest and monitor the money.
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.

Mutual Fund Framework

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Mutual Funds
 Brief History

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. The history of mutual funds in India can be broadly divided into four
distinct phases.

Phase 1 – ( 1964 – 1987)- Growth of UTI

UTI sole player in the industry, created by an Act of Parliament ,1963
The first product launched by UTI was Unit Scheme 1964
UTI creates products such as ULIP (1971), MIP's, Children Plans(1986)
,Offshore Funds etc
MASTERSHARE (1987) – 1st Diversified Equity Investment Scheme in India
INDIA Fund – 1st Indian offshore fund launched in August 1986

Phase 2 – ( 1987 – 1993)- Entry of Public Sector Funds

In 1987 Public Sector Banks and FI's got permission to set up MF.
SBI mutual fund was the first non -UTI mutual fund, set up in November 1987
This was followed by Canbank MF, LIC MF, Indian Bank MF, BOI MF, GIC
and PNB MF
In 1993, Mutual Fund Industry was open to private players
SEBI got its regulatory powers in 1992

Phase 3 – ( 1993-1996) – Emergence of Private Funds

In 1993, Mutual Fund Industry was open to private players.
SEBI's first set of regulations for the industry formulated in 1993
Significant innovations, mostly initiated by private players

Phase 4 – ( 1996-1999) – Growth and SEBI Regulation

Implementation of new SEBI regulations led to rapid growth
Bank mutual funds were recast as per SEBI guidelines
UTI came under voluntary SEBI supervision
Dividends made tax free in 1999
Mutual funds assets in mid-2002 were app. 1,00,000 crore
During this phase, both SEBI and AMFI launched investor awareness
programmes

Phase 5 – (1999-2004) – Emergence of a large and uniform industry

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UTI Act Repealed in February 2003

AUM by end of 2005 app. INR 1,50,000 crore

Mutual Funds
Rapid growth, significant increase in corpus of private players
Tax break offered created arbitrage opportunities
Bond funds and liquid funds registered highest growth

Phase 6 – From 2004 onwards: Consolidation and Growth

Mergers and Acquisitions witnessed
Alliance MF acquired by Birla Sunlife
Sun F&C by Principal PNB Mutual fund

The graph below illustrates the growth of assets over the years.

Diagram : Growth Graph of Mutual Funds

(AMFI Mutual Fund Test Workbook & Website)
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Mutual Funds
 Mutual Fund Industry

Global Mutual Fund Industry

The Emergence
It all started when three Boston securities executives pooled their money
together in 1924 to create the first mutual fund, they had no idea how popular
mutual funds would become.

The idea of pooling money together for investing purposes started in Europe in
the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the
faculty and staff of Harvard University. On March 21st, 1924 the first official
mutual fund was born. It was called the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from $50,000 in assets
in 1924 to $392,000 in assets (with around 200 shareholders). In contrast, there
are over 10,000 mutual funds in the U.S. today totaling around $7 trillion (with
approximately 83 million individual investors).

The Setback
The stock market crash of 1929 slowed the growth of mutual funds. In response
to the stock market crash, American Congress passed the Securities Act of 1933
and the Securities Exchange Act of 1934. These laws require that a fund be
registered with the SEC and provide prospective investors with a prospectus.
The SEC (U.S. Securities and Exchange Commission) helped create the
Investment Company Act of 1940 which provides the guidelines that all funds
must comply with today in United States of America.

The Development
With renewed confidence in the stock market, mutual funds began to blossom.
By the end of the 1960s there were around 270 funds with $48 billion in assets.
In 1976, John C. Bogle opened the first retail index fund called the First Index
Investment Trust. It is now called the Vanguard 500 Index fund and in
November of 2000 it became the largest mutual fund ever with $100 billion in
assets.

Present Scenario
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Over the years, structural changes in the global economic environment have led
to the emergence of a strong market economy and facilitated the growth of the

Mutual Funds
mutual funds industry. A market economy depends more on growth led by
financial market than by bank-finance. Since the mutual funds industry is a
strong pillar of the financial market, it got a boost with the emergence of a
strong market economy. Mutual funds found increasing acceptance also because
they have the capacity to absorb the instability and uncertainties that
characterize the financial market system.
The rise in inflation, reduction in real interest rates and growing complexities in
the market provided tremendous opportunities to mutual funds. For these
reasons, the mutual funds industry began to thrive well in not only the
developed countries but also the newly industrialized and developing country,
particularly during the 1990s.

Mutual fund asset growth was boosted by positive stock market returns in
almost all reporting countries and the ongoing net flow of new investments.

Mutual Fund Industry In India

The Origin and development of Mutual funds in India happened in a phased
manner.

The Emergence
The origin of the Indian mutual fund industry can be traced back to 1964 when
the Indian Government, with a view to augment small savings within the
country and to channelize these savings to the capital markets, set up the Unit
Trust of India (“UTI”). The UTI was setup under a specific statute, the Unit
Trust of India Act, 1963. The Unit Trust of India launched its first open-ended
equity scheme called Unit 64 in the year 1964, which turned out to be one of the
most popular mutual fund schemes in the country. This is the First phase in the
history of mutual funds in India.

• UTI Act repealed in 2003

• UTI now does not have a special status. (now under SEBI)
• Size of industry was 1,50,000 crore in 2005
• Merger and Acquisitions happening
• Fidelity, Largest MF has entered India
• At the end of March 2006, there were 29 Funds
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Mutual Funds
 The Development
The Second phase started in 1987, when the government permitted other public
sector banks and insurance companies to promote mutual fund schemes.
Pursuant to this relaxation, six public sector banks and two insurance
companies’ viz. Life Insurance Corporation of India and General Insurance
Corporation of India launched mutual fund schemes in the country.

A New Era…The Entrance of Private Players

Subsequently, in 1993, the Securities and Exchange Board of India ("SEBI")
introduced The Securities and Exchange Board of India (Mutual Funds)
Regulations, 1993, which paved way for the entry of private sector players in
the mutual fund industry. This third phase of the mutual fund industry, which
commenced in late 1993, witnessed exponential growth of the industry, with the
advent of private players therein. Private sector funds having distinct
operational advantages, posed serious competition to the existing public sector
funds.

Kothari Pioneer Mutual fund (now merged with Franklin Templeton) was the
first fund to be established by the private sector in association with a foreign
fund. It launched the open-ended Prima Fund in November 1993. During the
year 1993-94 another four private players launched their schemes: ICICI Mutual
Fund, 20th Century Mutual Fund, Morgan Stanley Mutual Fund and Taurus
Mutual Fund. In the first year of operation these five funds launched seven
schemes, and mobilized an amount of Rs1, 559.6 crores during 1993-94.

The Industry though has remained flat for the last couple of years (2001- 2003)
due to recession, but has bounced back strongly in 2003- 04 to post a record of
assets under management.

1993-98
1964-92
SEBI is the 1998 – Present
The UTI Era
regulator.
Private players
RBI and IDBI
Entry of Private become
were the
dominant.
players
regulators in
phases.
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Milestones in Indian Mutual Fund Industry

Mutual Funds
Structure of Mutual Funds In India

Like other countries, India has a legal framework within which mutual funds
must be constituted. In India, open and closed-end funds operate under the same
regulatory structure, i.e. in India, all mutual funds are constituted along one
unique structure-as unit trust. A mutual fund in India is allowed to issue open-
end and close end schemes under a common legal structure. Therefore, a mutual
fund may have different schemes (open and closed-end) under it i.e. under one
unit trust, at any point of time. The structure, which is required to be followed
by mutual funds in India, lay down under SEBI (Mutual Fund) Regulations,
1996.
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Mutual Funds
The Fund Sponsor
'Sponsor" is defined under SEBI regulations as any person who, acting Alone or
in combination with another body corporate, establishes a, mutual fund. The
sponsor of a fund is akin to the promoter of companies he gets the fund
registered with SEBI. The sponsor will form a Trust and appoint a board of
Trustees. The sponsor will also generally appoint 11 Asset management
Company (AMC) as fund managers. The sponsor ill also appoint a Custodian to
hold the fund assets. All these appointment are made in accordance with the
SEBI regulations. Per the existing SEBI regulations, for a person to qualify as a
sponsor, must contribute at least 40% of the net worth of the AMC and issues a
sound financial track over five years prior to registration.

Mutual Funds as Trusts

Mutual fund in India is constituted in the form of a Public Trust under the
Indian Trusts Act 1882.The fund invites investors. Contribute their money in
the common pool by subscribing to units Issued by various schemes established
by the trust as evidence of their beneficial interest in the fund.
The trust or fund has no legal capacity itself rather it is the Trustee(s) who have
legal capacity and therefore the trustees take all acts in relation to the trust on its
behalf.

Trustees
A board of trustees - a body of individuals, or a Trust company - a corporate
body, may manage the Trust. Board of Trustees manages most of the funds in
India.4, The Board or the Trustee Company (body of individuals, corporate
body, for managing the portfolio, appoints an Asset Management Company.
The Trust is created through a document called the Trust Deed that is executed
by the Fund Sponsor in favors of the trustees. They are the primary guardian of
the unit holder's funds and assets. They ensure that AMC's operations are along
professional lines.

Rights of Trustees
Appoint the AMC with the prior approval of SEBI.
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• Approve each of the schemes floated by the AMC.

• Have the right to request any necessary information from the AMC
concerning the operations of various schemes managed by the AMC as

Mutual Funds
 often as required, to ensure that the AMC is in compliance with the Trust
Deed and regulation.
• It may take remedial action if they believe that the conduct of the funds
business is not in accordance with SEBI regulations.
• Direction of the trustees. The AMC is required to be approved and
registered with SEBI as an AMC; The Trustees are empowered to
terminate the appointment of the AMC and may appoint new AMC with
the prior approval of the Board and holders.
• The AMC floats and then manages the different investment schemes.
• The AMC of a mutual Fund must have a net worth of at least 1O Crores
at all the times. The AMC cannot act as a trustee any other mutual fund.
The AMC must report to the trustees with respect to its activities.

Obligations of Trustees

• Must enter into an investment management agreement with the AMC in

accordance with the Fourth Schedule of SEBI (MF) Regulations,
1996.
• Must ensure that the funds transactions are in accordance with the Trust
Deed.
• Are responsible for ensuring that the AMC has proper systems and
procedures in place and has appointed key personnel including Fund
Managers and a Compliance Officer besides other constituents such as
the auditors and registrar.
• Must ensure due diligence on the part of the AMC for empanelment of
brokers
• Must ensure that the AMC is managing schemes independent of
other activities and that the interest of unit holders of one scheme
are not compromised with those of other schemes
• Must furnish to SEBI on a half-yearly basis, a report on the funds
activities and a certificate stating that the AMC has been managing the
schemes independently of other activities

Asset Management Company

• Acts as an invest manager of the Trust under the Board Supervision and
direction of the Trustees.
• Has to be approved and registered with SEBI.
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• Will float and manage the different investment schemes in the name of
Trust and in accordance with SEBI regulations.
• Acts in interest of the unit-holders and reports to the trustees.

Mutual Funds
 • At least 50% of directors on the board are independent of the sponsor or
the trustees.

Obligations of the AMC and its Directors

They must ensure that:

• Investment of funds is in accordance with SEBI Regulations and the

Trust Deed.
• Take responsibility for the act of its employees and others whose services
it has procured
• They are answerable to the trustees and must submit quarterly reports to
them on AMC activities and compliance with SEBI Regulations
• If the AMC uses the services of a sponsor, associate or employee, it must
take appropriate disclosure to unit holders, including the amount of
brokerage or commission paid.
• Do not undertake any other activity conflicting with managing the fund.
• Will float schemes only after obtaining disclosure to the investors in areas
such as calculation of NAV and repurchase price. Certain specific events,
the trustees have the right to dismiss the AMC with the approval of SEBI
in accordance with the regulations.
• Right to ensure that, based on their quarterly review of the AMC's net
worth, any shortfall is made up.

Agents
Transfer agents are responsible for issuing and redeeming units of the mutual
fund and provide other related services such as preparation of transfer
documents updating investors' records. A fund may choose to out this activity
in-house or by an outside transfer agent.

Distributors

AMC’s usually appoint Distributors or Brokers, who sell units on behalf bf the
fund. Some funds require that all transactions to be routed through such brokers.
In India, besides brokers, independent individuals are appointed as agents for
the purpose of selling the fund scheme to the investors. While individual
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constitute the largest segment in the category of mutual fund distributors, other
distributors include banks, NBFCs and corporate.

Mutual Funds
Bankers
A fund's activities involve dealing with the money on a continuous basis
primarily with respect to buying and selling units, paying for investment made,
receiving the proceeds on sale of investment and discharging its obligations
towards operating expenses. A funds banker therefore play a crucial role with
respect to its financial dealings by holding its bank account and providing it
with remittance services.

Custodian and Depository

The custodian is appointed by the Board of Trustees for safekeeping of

securities in terms of physical delivery and eventual safe keeping or
participating in the clearing system through approved depository
companies on behalf of the mutual fund and must fulfill its
responsibilities in accordance with its agreement with the mutual fund.
The Indian markets are moving away from having physical certificates for
securities, to ownership of these securities in dematerialized form with a
depository. Thus, a Depository Participant will hold a mutual fund’s
dematerialized securities holdings. A fund's physical securities will continue to
be held by a custodian.

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Mutual Funds
 Advantages Of Mutual Funds

To understand and appreciate the different techniques employed by Mutual

Funds to market and sell their units, it is imperative that we first understand the
objectives and aims that these funds have towards their customers. It is only in
this light that we would be able to completely comprehend their marketing
strategies. The following objectives can be said to be the major driving force for
investors to take the Mutual Funds route.

• Diversification of Risk: Mutual Funds are an extremely sound

investment for the purposes of diversification. By investing in many
companies the mutual funds can protect themselves from unexpected
drop in values of some shares. Small investors can achieve wide
diversification of their risks by investing in Mutual Funds, and hence do
not have the fear of “putting all their eggs in one basket”.

• Expertise Supervision and Control of Investments: When investors

buy mutual fund schemes, an essential benefit that they acquire is expert
Portfolio Management of their investments. The professional fund
managers who supervise fund’s portfolio take desirable decisions viz.,
what scrips are to be bought, what investments are to be sold and more
appropriate decision as to timings of such buy and sell.

• Lower Costs: Mutual funds have very large funds at their disposal, and
hence are in a position to reap the benefits of economies of scale. The
brokerage and transaction fees or trading commission is in most cases
reduced substantially.

• Safety of Investment: The legislation provides for the safety of

investments by regulating the Mutual Funds Industry.

• Small investments: Mutual funds help you to reap the benefit of returns
by a portfolio spread across a wide spectrum of companies with small
investments. Such a spread would not have been possible without their
assistance.

• Professional Fund Management: Professionals having considerable

expertise, experience and resources manage the pool of money collected
by a mutual fund. They thoroughly analyze the markets and economy to
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pick good investment opportunities.

Mutual Funds
• Spreading Risk: An investor with a limited amount of fund might be
able to invest in only one or two stocks / bonds, thus increasing his or her
risk. However, a mutual fund will spread its risk by investing a number of
sound stocks or bonds. A fund normally invests in companies across a
wide range of industries, so the risk is diversified at the same time taking
advantage of the position it holds. Also in cases of liquidity crisis where
stocks are sold at a distress, mutual funds have the advantage of the
redemption option at the NAVs.

• Transparency and interactivity: Mutual Funds regularly provide

investors with information on the value of their investments. Mutual
Funds also provide complete portfolio disclosure of the investments made
by various schemes and also the proportion invested in each asset type.
Mutual Funds clearly layout their investment strategy to the investor.

• Liquidity: Closed ended funds have their units listed at the stock
exchange, thus they can be bought and sold at their market value. Over
and above this the units can be directly redeemed to the Mutual Fund as
and when they announce the repurchase.

• Choice: The large amount of Mutual Funds offer the investor a wide
variety to choose from. An investor can pick up a scheme depending
upon his risk / return profile.

• Regulations: All the mutual funds are registered with SEBI and they
function within the provisions of strict regulation designed to protect the
interests of the investor.

• TAX BENEFITS: Dividend income from mutual fund units will be

exempt from income tax with effect from July 1, 1999. Further, investors
can get rebate from tax under section 88 of Income Tax Act, 1961 by
investing in Equity Linked Saving Schemes of mutual funds.

• Further benefits are also available under section 54EA and 54EB with
regard to relief from long term capital gains tax in certain specified
schemes

• Miscellaneous advantages: Investing in securities through mutual funds

has many other advantages like the option to reinvest in dividends, strong
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possibility of capital appreciation, regular returns, etc.( Jim Gard, 2002)

Mutual Funds
 Disadvantages Of Mutual Funds
• No control over the costs. Regulators limit the expenses of Mutual
Funds. Fees are paid as percentage of the value of investment

• No tailor made portfolios.

• Managing a portfolio of funds. ( Investor has to hold a portfolio for

funds for different objectives )

• One fund can have schemes of similar objectives so, selection becomes
difficult.

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Mutual Funds
 Classifications of Mutual Funds
(The Categorization of Mutual Funds based on different criteria)

Asset Classes:-

The two main asset classes are debt and equity. Popular perception is that equity
is risky, while debt is safe. However, it needs to be remembered that debt
securities are susceptible to daily change in values as equity securities. Further,
the real returns on debt may or may not be positive. Equity on the other hand,
can be an effective hedge against inflation, particularly in situations of normal
inflation.

Broadly mutual funds can be divided into two categories - equity-oriented and
debt-oriented. As the names suggest, equity-oriented mutual funds invest
predominantly in equities; diversified equity funds and balanced funds are the
popular variants.

Equity valuations, on the other hand, vary with corporate performance and
prospects, and the overall market sentiment.

Conversely, debt-oriented funds hold a significant portion of their portfolios in

fixed income instruments like government securities, corporate bonds, and
treasury bills among others. However this bifurcation fails to reveal the versatile
nature of mutual funds. Let's take this discussion a step further by discussing the
various choices available to investors in each of the aforementioned categories

Different Mutual Funds are positioned differently depending on the strategy

they adopt for making investments. Any mutual fund has the main objective of
earning income and high returns for its investors, i.e., getting increased value of
their investments. Most Mutual Fund companies offer different schemes of
investments depending on the requirements of the target groups. The most
efficient method of starting a classification or categorization of all schemes that
are offered in the Mutual Fund Investments Market would be to group these into
two broad classifications: Portfolio Classification and Operational
Classification.
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Mutual Funds
Load and No Load Funds
Load is the onetime fee payable by the investor to allow the fund to meet initial
issue expenses including brokers/agents’/distributors’ commissions, advertising
and marketing expenses
IF the investors’ objective is to get the benefit of compounding his initial
investment by reinvesting and holding his investment for a very long term,
then , a no front load fund is preferable

Operational Classification
Operational classification highlights the two main types of schemes, i.e., open-
ended and close-ended which are offered by the mutual funds.

(a) Open Ended Schemes: As the name implies the size of the scheme (Fund)
is open, and not specified or pre-determined. Entry to the fund is always open to
the investor who can subscribe at any time. Such fund stands ready to buy or
sell its securities at any time. The units are normally not traded on the stock
exchange but are repurchased by the fund at announced rates. Open-ended
schemes have comparatively better liquidity despite the fact that these are not
listed. No minute-to-minute fluctuations in rates haunt the investors.

(b) Close Ended Schemes: Such schemes have a definite period after which
their shares/ units are redeemed. Unlike open-ended funds, these funds have
fixed capitalization, i.e., their corpus normally does not change throughout its
life period. Their price is determined on the basis of demand and supply in the
market. A premium may exist only on account of speculative activities.

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Mutual Funds
Portfolio Classification of Funds:
The portfolio classification of funds can be divided into 4 kinds.

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Mutual Funds
(a) Return based classification: The investors of the
mutual fund schemes are made to enjoy a good return in form of regular
dividends or capital appreciation or a combination of these both.

1. Income Funds: Income funds are floated for the interest of investors who
want to maximize current income. These funds distribute periodically the
income earned by them, in the form of either a constant income at relatively low
risk or in the form of maximum income possible with higher risk by the use of
leverage.

2. Growth Funds: These Schemes have the objective to achieve an increase in

the value of the underlying investments through capital appreciation, and they
invest in growth oriented securities.

3. Conservative Funds: These funds offer a blend of good average returns and
reasonable capital appreciation. These funds are very popular and are ideal for
the investors who want both growth and income from their investment.

(b) Investment Based Classification: Mutual funds

may also be classified on the basis of the kind of securities that they invest in.

1. Equity Funds: Equities are a high risk-high return asset class; the same
risk profile spills over to equity funds as well. However investors must take note
of the fact that a large number of variations exist within the 'high risk' equity
funds segment. For example a sector fund would be on the relatively higher
scale in the risk-return paradigm when compared to an index fund, which
simply tracks the movements in a chosen benchmark index. The graph displays
how some of the variants from the equity funds segment rank in terms of the
risk-return trade-off. Instead of adopting a "text-book" method and placing all
equity funds on a common platform, investors should appreciate the nuances of
each category. These are intricacies investors must be aware of in order to make
an informed investment decision. These funds invest most of their investible
shares in equity shares of companies and undertake the risk associated with the
investment in equity shares. In a developed market, Equity funds can be of
different categories. For example, ‘blue chip’, FMCG, PSUs, etc.
Page74

Mutual Funds
The equity funds category can be further differentiated as follows:

Market capitalization-based funds

Market capitalization is defined as the number of shares issued by a company

multiplied by the price of each share. Companies are generally divided into the
large cap, mid cap and small cap segments respectively on the basis of their
market capitalization. Some diversified equity funds are launched with the
mandate to invest in stocks from one or more of the stated segments i.e. the
company's market capitalization becomes the governing force. For instance,
Franklin India Blue chip Fund represents a large cap diversified equity fund.
The sharp run up in stocks from the mid cap segment in the recent past can be
credited for the launch in funds of the mid cap and flexi cap (funds that invest in
stocks across market segments) varieties. Sundaram S.M.I.L.E. and HDFC
Premier Multi-Cap Fund are examples of flexi cap funds.

Opportunities funds

Fund managers handling opportunities funds have perhaps the most flexible
investment mandates. Opportunities funds can invest in stocks across market
segments, sectors and some are even permitted to invest a significant portion of
their corpus in debt. As the name suggests, the idea is to seek opportunities for
clocking gains from any sector/market segment. However the agile management
style also tends to enhance the risk profile of these funds vis-à-vis a
conventional diversified equity fund. DSP ML Opportunities Fund and HSBC
India Opportunities Fund fall under this category.

Theme-based funds

T h e m e - b a s e d funds are fairly similar to sector funds, however the

differentiating factor is the level of diversification they offer. Instead of
concentrating on stocks from a single sector/industry, their focus lies on a
specific theme like globally competitive Indian companies or multinational
corporations operating in India; for example Kotak Global India Fund and Birla
India Opportunities Fund. In terms of diversification and risk profiles, these
companies tread the path between a sector fund and a conventional diversified
equity fund. Some theme-based funds are positioned based on their stock-
picking strategy. Dividend yield funds are launched with the intention of
investing in stocks offering a dividend yield above a certain pre-determined
level. For example, Principal Dividend Yield Fund targets companies with a
Page74

dividend yield higher than 1.5 times that of the NSE Nifty on the earlier trading
day. Similarly value funds propagate the value style of investing i.e. picking

Mutual Funds
stocks that are fundamentally strong and inherently good buys but currently out
of favour (for example Templeton India Growth Fund).

Index funds

Index funds are launched with the mandate of tracking benchmark indices like
the BSE Sensex or S&P CNX Nifty. These funds invest in stocks from the
index in the same proportion as the benchmark, thereby offering investors the
opportunity to capture the growth in the chosen index. Index funds are generally
more popular in developed markets where actively managed funds find it
difficult to outperform the benchmark indices as markets are relatively better
researched; also their expenses (fees, charges) tend to be lower vis-à-vis
actively managed funds. An offshoot of index funds is the index- plus funds
category. Index-plus funds invest a predetermined proportion of their total
assets in index stocks and the balance in stocks outside the index. HDFC Top
200 Fund falls in this category of funds.

Fund of Funds

A regular mutual fund invests in equities, bonds and fixed income securities
depending on its objective. Fund of Funds (FoF) extend this concept by
investing in units of other mutual fund schemes. By investing in more than one
mutual fund they take diversification to a new level For example an FoF could
invest in five top performing equity funds and offer a highly diversified
portfolio to the investor. Similarly others could invest in equity and debt funds
simultaneously, thereby offering a portfolio that is diversified across asset
classes. On the flipside, FoF investors must be wary of higher expenses on
account of overlapping of costs. FT India Life Stage Fund is the example of an
FoF.

Conventional diversified equity funds

We have used the term "conventional" diversified equity funds at various places
during the course of this discussion. This is not a variant; instead these are
equity funds in their purest form and might seem rather lackluster in the present
scenario. Typically, a diversified equity fund invests in a number of equity/
equity related instruments from various sectors thereby enabling investors to
benefit from diversification. HDFC Equity Fund and Sundaram Growth Fund
can be classified as conventional diversified equity funds.
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Mutual Funds
2. Debt Funds: These Funds have their portfolio comprising of bonds and
debentures (Debt Instruments). These funds are considered to be very secure
with a steady income.

Long-term debt funds

Long-term debt funds are conventional debt/bond funds that have been in
existence for as long as equity funds. Investors prefer to invest in debt funds for
the same reasons they choose to invest in equity funds viz. they get benefits of
diversification across debt instruments and the services of a professional fund
manager. In fact, for retail investors, debt funds are one of the most important
avenues for investing in debt securities like corporate bonds and government
securities, chiefly because individual transactions in debt are of a very high
value (running in millions of rupees) and beyond most retail investors. This is
unlike equities for instance, where retail investors can invest on their own in
smaller lots.

Debt funds invest across a range of debt/fixed income securities. The corpus of
long-term debt funds comprises mainly of corporate bonds and government
securities (gilts/gsecs).
When these securities have a residual maturity of at least 12 months, they are
classified as long-term debt or longer-dated paper. Debt funds also invest in
shorter-dated paper like treasury bills, certificate of deposit (CDs) and
commercial paper to name a few. In addition to this, they also allocate a small
part of assets to cash. Sundaram Bond Saver is an example of a long-term debt
fund. Given that a large chunk of the fund's assets are in longer-dated paper,
these funds are exposed to what is called as 'interest rate risk'. This means that
in the event of volatility in debt markets, long-term debt funds will witness
above-average turbulence, as there is greater uncertainty associated with the
longer tenure. On the other hand, shorter-dated paper is relatively well insulated
from instability in debt markets. An analogy that investors can relate to is the
difference in rates on a fixed deposit for 1-Yr and 3-Yr. The 3- Yr fixed deposit
offers a higher return as there is more uncertainty associated with it as against a
fixed deposit for 1- Yr. So more uncertainty is rewarded with a higher rate to
'incentivise' investment. Likewise, longer-dated paper offer higher coupon rates
as compared to shorter-dated paper because investors take on more risk.
Investments in long-term debt funds should be made with a time frame of at
least 12 months.
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Mutual Funds
Short-term debt funds

If you have understood how longer dated paper is different from shorter dated
paper, then you have a fairly good idea about what short-term debt funds have
on offer for investors. There is a category of investors who have two critical
needs that short-term debt funds help achieve. One – they want to be invested
for the short-term - less than 6 months. Two - over this time frame, they are
looking at preserving capital with a return that is superior to that of a fixed
deposit of a comparable tenure. The reason why short-term debt funds can
preserve capital better than long term debt funds is because they are invested in
debt instruments of a shorter tenure. This category of debt instruments is not as
adversely affected by volatility in debt markets as longer dated paper. As a
result, prices of shorter-dated debt instruments are relatively stable and serve the
needs of risk-averse investors well. Templeton Income Short Term is an
example of a short-term debt fund. Investments in short-term debt funds should
be made with a time frame of 1-6 months.

Liquid funds

Liquid funds invest in very short-term debt instruments maturing in 30-45 days.
Typically this includes treasury bills and call money. Liquid funds serve needs
quite similar to that of short-term debt funds, only difference is that liquid fund
investors have an even shorter investment time frame, at times as short as one
day. If investors are looking at being invested for more than a month, they can
consider short-term debt funds for a marginally higher return. Grindlays Cash
Fund is an example of a liquid fund.

Long-term gilt funds

A long-term government securities und invests primarily in government paper

(gilt/gsec) with a residual maturity of over 12 months. This is unlike
conventional debt funds that invest primarily in corporate bonds with gilts
accounting for a smaller share of net assets. Given their 'investment bias' for a
particular segment of the debt market, gilt funds can be classified as 'sector
funds'. Gilt funds have a higher risk profile than conventional debt funds
because their investments are limited to a particular segment of the debt market
and they cannot diversify across other segments like corporate bonds for
instance, In times of turbulence. The risk associated with gilt funds is further
compounded by the fact that gilts due to the higher liquidity are more volatile
than corporate bonds. Due to the liquidity, gilt prices are more closely linked to
Page74

developments in the economy. So any pessimism in debt markets linked to

'news' like inflation, rising crude prices, global economic turbulence, is likely to
have a greater impact on gilt prices than corporate bond prices. This is mainly

Mutual Funds
why gilt funds are more volatile than conventional debt funds. Templeton Gsec
and Kotak Gilt are examples of long-term gilt funds. Investments in long-term
gilt funds should be made with a time frame of at least 12 months.

Short-term gilt funds

A short-term gilt fund invests primarily n gilts of a shorter tenure (less than 12
months). The rationale for investing in short-term gilt funds is similar o that of
short-term debt funds. Investors have a shorter investment time frame (less than
6 months) and want to clock a small gain with capital preservation being the
more important objective. The reason investors choose short-term gilt funds
over short-term debt funds is because gilts can provide a higher capital
appreciation vis-à-vis bonds. As explained earlier, this is because gilts, by virtue
of liquidity, are more closely linked to 'economy-related news' and the upside
and downside of investing in gilts is markedly higher vis-à-vis corporate bonds.
Templeton Gsec (Short Term) is an example of a short-term gilt fund.

Dynamic debt funds

Dynamic debt funds attempt to combine the benefits of debt funds and gilt
funds. They can invest across corporate bonds and gilts without any restrictions.
They are distinct from conventional debt funds that invest in gilts and corporate
bonds because these funds usually maintain a cap on their gilt investments.
Dynamic debt funds tend to increase their gilt investments in times of economic
stability as gilt prices tend to have a more lucrative spread (i.e. difference
between the buy and sell prices). Again spreads on gilt have an edge over
spreads on corporate bonds because of higher liquidity in the former. The fund
manager will invest in corporate bonds and/or gilts depending on the spread
between the yields of the two instruments. He will consider the comparative
yields and the credit risks associated with the instrument and invest accordingly.
In this way dynamic debt funds try to maximise returns for the investor at all
times. Grindlays Dynamic Bond Fund is an example of a dynamic debt fund.
Investments in dynamic debt funds should be made with a time frame of at least
12 months.

Long-term floating rate funds

Floating rate funds invest in debt instruments that have their coupon rates
adjusted at periodic intervals. These instruments are called 'floating rate
instruments'. The floating rate paper is benchmarked against a reference point
like the MIBOR (Mumbai Inter-bank Offered Rate) for instance. Changes in the
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MIBOR are a cue for the coupon rate on the floating rate paper to be reset
accordingly. As opposed to floating rate instruments, you have conventional

Mutual Funds
fixed rate instruments wherein the coupon rate is fixed till maturity. As the
coupon rate on floating rate paper is reset periodically, there is lower pressure
on its price during interest rate volatility. That is why floating rate paper is less
affected by turbulence in debt markets vis-à-vis fixed rate paper. Consequently
over the past two years, floating rate funds have held their own in investors'
portfolios, while conventional debt funds have been adversely impacted by the
instability in interest rates. Templeton Floating Rate Fund (Long Term) is an
example of a floating rate fund.

Short-term floating rate funds

Short-term floating rate funds work on the same lines as long-term floating rate
funds except that they invest in floating rate paper of shorter tenure (less than 12
months). If investors are looking to be invested across a shorter time frame of 1-
6 months, short-term floating rate funds should be preferred over their
longerterm counterparts. Templeton Floating Rate Fund (Short Term) is an
example of a short-term floating rate fund.

Fixed maturity plans

Fixed maturity plans (FMPs) are another 'invention' that became a 'necessity' to
counter interest rate instability, a problem that has become acute over the last
two years. Typically, FMPs are close-ended funds. They invest across debt
instruments to arrive at a pre-determined yield. Pre-determined because the
yield is announced beforehand to investors. So FMPs have defined investment
tenure. If the investor's investment time-frame matches that of the FMP, he can
consider investing in it. The benefit of investing in FMP is that the investor
knows in advance the return that he will generate on his investment. Knowing
the return on your debt fund has assumed significance now when conventional
debt funds are operating in an uncertain interest rate environment, when even
negative returns have become a way of life. To understand how this works –
take an FMP, which at the IPO stage (initial public offering) announces that it
will invest in paper maturing in May 2006 yielding 5.25% interest. The fund
will invest in freshly-launched debt paper. This is because investing in an
existing paper will disturb the yield c a l c u l a t i o n s (5.25% in this case) if
the bond is not priced favorably. Investors with a definite 1-Year horizon can
consider investing in the FMP to yield an interest of 5.25%. From the investor's
perspective, he knows what his investment will yield over the next 12 months,
so intermittent volatility in bond prices does not disturb him. Some fund houses
like Birla Mutual Fund and JM Mutual Fund launch FMPs at regular intervals.
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Even Franklin Templeton Mutual Fund which has avoided FMPs in the past has
launched its maiden FMP offering to tap investor interest in this product. FMPs
have investment tenures ranging from less than a year to more than 10 years.

Mutual Funds
Monthly Income Plans (MIPs)

As a mutual fund category, monthly income plans (MIPs) are a relatively recent
phenomenon. MIPs are hybrid funds that invest predominantly in debt
instruments with a small portion of assets invested in equities. The equity
component is expected to act as a 'kicker' that will make the MIP outperform a
conventional debt fund. The rationale for a hybrid product like an MIP came to
the fore because debt funds weren't adding a lot of value to the risk-averse
investor's portfolio. As a matter of fact, they were eroding value. This is
something that investor's had never seen before. Fund houses introduced MIPs
to encourage investors to take on a little bit of risk so as to earn a slightly higher
return than conventional debt funds. So we had MIPs being launched that gave
the fund manager a mandate to invest 5-30% of assets in equities. Conventional
MIPs invest about 5- 15% of assets in equities with their aggressive
counterparts investing as high as 20-30% in equities. Several fund houses have
two distinct MIPs catering to different investor groups. For instance HDFC
Mutual Fund has one MIP with a maximum permissible 15% equity component
and another one with a maximum permissible 25% equity component. Likewise
DSP ML has three funds in its Savings Plus series with the equity component
capped at 10%, 20% and 30%. In our view investors should consider investing
in MIPs with a time frame of at least 18-24 months. Investors opting for the
dividend option should consider longer-interval dividend options like the
quarterly or half-yearly dividend option. This is because when equity markets
are volatile, the fund manager may not be able to declare monthly dividends. A
3-6 month breathing space gives him that much more chance to declare a
dividend.

Diagram : Expected Return of Debt Funds

Page74

Mutual Funds
3. Balanced Fund: These funds have their portfolio consisting of a balanced
mix of equity and bonds. The composition of these funds may vary depending
upon the outlook of the market. Balanced funds invest their corpus in both
equity and debt instruments in a pre-determined ratio, say 60:40. The
underlying philosophy is to provide high degree of diversification by investing
across asset classes. Balanced funds have been touted as investment avenues
that can offer the best of both worlds i.e. growth from equity holdings and
stability from debt holdings; pitches, that good fund manager are capable of
fulfilling. An aggressive balanced fund would typically hold a higher portion of
its assets in equities maybe as high as 70% of the total assets. On the other hand,
a 'disciplined' balanced fund would maintain a conservative equity allocation
during most times. HDFC Prudence, DSP ML Balanced and Magnum Balanced
are examples of balanced funds.

(c) Sector Based Funds: There are funds that invest in a

specified sector of economy and they specialize in the said sector. However,
they run the risk of not being able to diversify. Sector based funds are
aggressive growth funds which make investments on the basis of assessed
bright future for a particular sector. The specialty of sector funds rather oddly
lies in the fact that they go against the very grain of mutual fund investing i.e.
holding a diversified portfolio. That is why you will find some Asset
Management Companies that swear against sector funds! Sector funds are
launched with the intention of capitalizing on opportunities in a single sector,
for example the pharmaceutical industry, the software industry among others.
The fund invests in various stocks from the same industry thereby making it a
high risk-high return investment proposition. Unlike a conventional diversified
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equity fund, a sector fund doesn't have the safety net of diversification (it is
diversified, but only within a sector) to fall back on if there is a change in
fortunes of its chosen area of operations. However, sectors funds can hold a lot

Mutual Funds
of appeal for informed investors who understand the intricacies of the sector and
can time the entry and exit of their investments. Franklin Infotech Fund and
Magnum Pharma Fund are examples of sector funds.

Commodity Funds
It will invest directly in commodities or through shares of the commodity
companies or through commodity futures contract .Most common example of
such fund is precious-metal fund, Gold funds invest in Gold, Gold futures or
shares of gold mines

Exchange Traded Funds

It combines the best features of open end and closed structure. It tracks a market
index and trades like a stock on the stock market. ETFs are not the index funds

Real Estate Funds

It can :Invest in real estate, Fund real estate developers, Buy shares of housing
finance companies, Buy securitized assets.

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Mutual Funds
TAX BENEFITS OF MF
• ELSS ( Equity linked saving scheme )
• 3 year lock in period
• Minimum investment of 90% in equity markets at all times
• So ELSS investment automatically leads to investment in equity shares
• Open or closed ended
• Eligible under Section 80 C up to Rs.1 lakh allowed
• Dividends are tax free
• Benefit of Long term Capital gain taxation
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Mutual Funds
 RISKS ASSOCIATED WITH MUTUAL FUNDS

• RISK –RETURN TRADE OFF

The most important relationship to understand is the risk-return trade-off.

Higher the risk greater the returns/loss and lower the risk lesser the returns/loss.
Hence it is up to you, the investor to decide how much risk you are willing to

take. In order to do this you must first be aware of the different types of risks
involved with your investment decision.

• MARKET RISK

Sometimes prices and yields of all securities rise and fall. Broad outside
influences affecting the market in general lead to this. This is true, may it be big
corporations or smaller mid-sized companies. This is known as Market Risk. A
Systematic Investment Plan (“SIP”) that works on the concept of Rupee Cost
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Averaging (“RCA”) might help mitigate this risk.

Mutual Funds
 • CREDIT RISK

The debt servicing ability (may it be interest payments or repayment of

principal) of a company through its cash flows determines the Credit Risk faced
by you. This credit risk is measured by independent rating agencies like CRISIL
who rate companies and their paper. A ‘AAA’ rating is considered the safest
whereas a ‘D’ rating is considered poor credit quality. A well-diversified
portfolio might help mitigate this risk.

• INFLATION RISK

Things you hear people talk about:

“Rs. 100 today is worth more than Rs. 100 tomorrow.”
“Remember the time when a bus ride costed 50 paise?”
“Mehangai Ka Jamana Hai.”
The root cause, Inflation. Inflation is the loss of purchasing power over time. A
lot of times people make conservative investment decisions to protect their
capital but end up with a sum of money that can buy less than what the principal
could at the time of the investment. This happens when inflation grows faster
than the return on your investment. A well-diversified portfolio with some
investment in equities might help mitigate this risk.

• INTEREST RATE RISK

In a free market economy interest rates are difficult if not impossible to predict.
Changes in interest rates affect the prices of bonds as well as equities. If interest
rates rise the prices of bonds fall and vice versa. Equity might be negatively
affected as well in a rising interest rate environment. A well-diversified
portfolio might help mitigate this risk.

• POLITICAL RISK

Changes in government policy and political decision can change the investment
environment. They can create a favorable environment for investment or vice
versa.

• LIQUIDITY RISK

Liquidity risk arises when it becomes difficult to sell the securities that one has
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purchased. Liquidity Risk can be partly mitigated by diversification, staggering

of maturities as well as internal risk controls that lean towards purchase of
liquid securities. You have been reading about diversification above, but what is

Mutual Funds
it? Diversification the nuclear weapon in your arsenal for your fight against
Risk. It simply means that you must spread your investment across different
securities (stocks, bonds, money market instruments, real estate, fixed deposits
etc.) and different sectors (auto, textile, information technology etc.). This kind
of a diversification may add to the stability of your returns, for example during
one period of time equities might underperform but bonds and money market
instruments might do well enough to offset the effect of a slump in the equity
markets. Similarly the information technology sector might be faring poorly but
the auto and textile sectors might do well and may protect you principal
investment as well as help you meet your return objectives.

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Mutual Funds
 Research Methodology

In the last decade we have seen enormous growth in the size of mutual fund
industry in India. Especially the private sector has shown tremendous growth.
With unmatched advances on the information technology, increased role of the
institutional investors in the stock market and the SEBI still in its infancy, the
mutual fund industry players gained unparalleled and unchecked power. To
ensure the safety of investment of small investors against whims and fancies of
professional fund managers have become the need of the hour.

The study includes analysis of the investors on the basis of their investment
objectives, age etc. It also examined the position of MF among investment
avenues available for the investors and the past performances of various
schemes from the active AMCs in Indian market on the basis of NAV & time.
So that it can help the advisors as well as investors to choose the correct
portfolio. The study also covers the scenario of MF industry during the Entry
Load and No Entry Load applications.

Objectives of the study

The major objective of the study was to determine the awareness about benefits
of Mutual funds advisory business and to impart information, knowledge and
the functioning of mutual funds among financial advisors.

Following are the specific objectives:

1. To analyze the investors on the basis of their investment objectives, age etc.

2. To examine the position of MF among investment avenues available for the

investors in Indian market.

3. To examine the past performances of various schemes from the active

AMCs in Indian market on the basis of NAV & time.

4. The study also covers the scenario of MF industry during the Entry Load
and No Entry Load applications.

Research Design
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For studying perceptions of financial advisors, a primary survey was undertaken

so as to know as to how much they prefer mutual funds as a product option in

Mutual Funds
comparison to other investment instruments, how much knowledge do they
have about mutual funds. For this purpose, a questionnaire was designed and
analyzed on the basis of the responses given by the advisors of Noida. Further,
to complete the other objectives data was provided by NJ in form of personal
portfolios of various investors of Noida and their advisors. And the NAVs are
taken from the website of Association of Mutual Funds in India (AMFI).

Sample Design

During the research the responses of about 450 advisors were taken and
analyzed to know the awareness of MF.

For analysis of investors on basis of their age, they were grouped with interval
of 10 years.

Research Technique

Performance of MF schemes

Percentage increase = (new NAV – old NAV) * 100

Old NAV

Scope of the study

The present study was been undertaken to impart awareness of the functioning
of mutual funds and also to provide information , knowledge and insight for
taking investments decision pragmatically and also simultaneously ward off the
impending risk in taking investments decision. The study also helped the
advisors in segmenting and focusing on a certain investor group.

Limitations Of The Study

Lack of time on the part of advisors for filling up the questionnaire

The study focuses only on the investors associated with NJ.

For the purpose of evaluating the performance of various schemes on the basis
of NAV has been done, and the biggest disadvantage of such method is it can’t
be taken as final coz NAVs are subject to change on daily basis.
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Mutual Funds
 Data collection

For the purpose of the research, data has been collected from following 2
sources:

Primary Data: For studying perceptions of financial advisors, a primary

survey was undertaken so as to know as to how much they prefer mutual funds
as a product option in comparison to other investment instruments, how much
knowledge do they have about mutual funds. For this purpose ,a questionnaire
was designed and analyzed on the basis of the responses given by about 450
advisors of Noida. A detailed discussion about the primary research done and
data collected has been done under the heading “Value Pack Procurement”.

Secondary Data: The secondary data was collected from the various
books, magazines, Yellow pages and various financial websites. The secondary
data was collected to know the theoretical aspect of the mutual funds and also
for the performance evaluation of various mutual fund schemes.

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Mutual Funds
 Analysis On The Basis Of Objective Of
Investor
Investment protection leads to safer interest generating asset allocations where
as Investment Growth leads to higher volatility assets that may tend to grow
over a period of time.

Investment Protection Vs. Investment Growth

Investor Characteristic Investment Investment
Growth Protection
Time Horizon Short-term Long-term
Future Income Requirements Steady / High Variable / Low
Risk Averseness Low High
Inflation Protection Low Protection High Protection
Needed Needed

If you are a person who broadly falls into the Investment Growth category you
might be interested in looking at an Aggressive portfolio. On the other hand if
you are leaning towards an interest income with minimal risk investments you
might look at a Conservative asset allocation. Someone who wants a bit of
steady income as well as asset growth might go in for a moderate or a balanced
asset allocation.

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Mutual Funds
AGGRESSIVE PORFOLIO

MODERATE POTFOLIO

CONSERVATIVE PORTFOLIO
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Mutual Funds
The chart below can be used to identify the types of funds best suited to our
particular investment objectives.

Basic Fund Type These Funds Potential Potential Potential

Objective Invest Primarily Capital Current Risk
In Appreciation Income
Common stocks
Maximum -Aggressive with potential High to
Capital Growth for very rapid Very High Very Very
Growth growth. May Low High
-International employ certain
aggressive
strategies
High -Growth Common stocks
Capital -Specialty/ with long-term High to Very High
Growth Sector growth potential Very High Low
-International
Common stocks
Current -Growth & with potential
Income & Income for high Moderate Moderat Moderate
Capital dividends and e to High
Growth capital
appreciation
-Fixed
High Income Both high- High to Low to
Current dividend- Very Low Very Moderate
Income -Equity paying stocks High
Income and bonds
Current -General
Income & Money Money market Moderat
Protection Market instruments None e to High Very
of Funds Low
Principal
Tax-Free -Tax-Exempt
Income & Short-term Moderat
Protection -Money municipal notes None e to High Low
of Market and bonds
Principal
Tax- -Double & A broad range Low to Moderat Low to
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Exempt Triple Tax- of municipal Moderate e to High Moderate

Income Exempt bonds
Investment Objective & Mutual Fund Mapping

Mutual Funds
 Analysis On The Basis Of Age Of
Investor
Another way to ascertain the right asset allocation is by looking at your life
cycle. The basis of this theory lies in the simple maxim that younger people
with secure jobs will normally opt for higher returns and take higher risks
compared to older retired people. One must remember that these are only
indicative strategies and will probably have to be fine-tuned to meet your
individual needs.

Age Main Objectives Portfolio Strategy

20-29 Aggressive Growth – Sow the 50-55% - Growth Funds
seeds, plan for housing and create 30-35% - Balanced Funds
a safety cushion 15-20% - Money Markets / Cash

30-39 Growth – Save for housing, 45-50% - Growth Funds

children’s expenses (present and
future – education etc.) and
safety cushion
40-49 Growth – Children’s expenses
(present and future – education
etc.) and safety cushion
50-59 Retirement – Save for retirement
and build on safety cushion
60-69 Safety – Preserve investments/
savings and opt for minimal
growth
70 + Safety – Preserve investments/
savings
25-30% - Balanced Funds
05-10% - Blue Chip Stocks
15-20% - Money Markets / Cash
40-45% - Growth Funds
25-30% - Balanced Funds
10-15% - Blue Chip Stocks
15-20% - Money Markets / Cash
25-30% - Growth Funds
40-45% - Balanced Funds
05-10% - Blue Chip Stocks
20-25% - Money Markets / Cash
10-15% - Balanced Funds
15-20% - Income Funds
05-10% - Blue Chip Stocks
20-25% - Dividend Stocks
25-30% - Certificates of Deposits
(Shorter-term)
10-15% - Money Markets / Cash
30-35% - Income Funds
20-25% - Dividend Stocks
35-40% - Certificates of Deposits
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(Shorter-term)
05-10% - Money Markets / Cash

Mutual Funds
 Position Of MF Among Various
Investment Avenues

Apart from illiquid avenues like real estate, jewellery. There are four major
investment avenues available to you, namely:

• Debt Instruments
• Equity
• Money Market Instruments
• Mutual Funds

1. Debt Instruments

Traditionally debt instruments are known for generating a predetermined

income for a given period of time, other than in cases of default. Hence they are
also known as fixed income instruments. Some examples include:
• NBFC Deposits
• Company Deposits
• Bonds
• Debentures
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• Bank Deposits (FDs and savings accounts)

• Government Small Savings Schemes (E.g. PPF)

Mutual Funds
The introduction of Floating Rate securities moves away from the concept of
receiving a fixed rate of interest but suggests a variable rate of interest based on
an underlying factor such as London Interbank Offer Rate (“LIBOR”) or
Mumbai Interbank Offer Rate (“MIBOR”). An example of such a security is a
Floating Rate Bond whose interest rate is MIBOR plus 50 basis points, where
MIBOR is variable.
A preference share is a hybrid instrument, which can be categorized as a fixed
income instrument since the investors receive a fixed dividend before the
regular equity holders receive their dividend.

2. Equity
Is a share in the ownership of a company’s assets and earnings. Companies
usually issue equity when they require addition capital to fund their existing
business or expand. At this point of time the company sells part of the
ownership of the company to the public. Listed equities are generally highly
liquid since they are traded in the stock exchange.

An investor makes money from equity through dividends paid out by the
company (from its profits) on a periodic basis as well as capital appreciation as
reflected in the stock price, which fluctuates in the market. Hence an investors
returns are directly related to the performance of the company’s business.
Equities do not offer any assured returns, but historically promise the highest
return in the long run.

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Mutual Funds
3. Money Market Instruments
These are the short-term version of debt instruments, which typically have a
maturity of less than one year. Yields are slightly above that of the savings
account rate in the Banks. These usually tend to preserve the investor’s initial
investment and are usually the least risky asset class from the four described
here.

4. Mutual Funds

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Mutual Funds
 Entry Load Wipe off
A Premature step?

Investors at large, particularly the retail ones have to be grateful to the SEBI for
installing several stringent regulations designed to protect them against
fraudulent characters and scamsters.

Yes, there was a time when such measures were an absolute necessity. The
industry had become sick, and strong medication was required to ensure that it
does not die. The cost of the medicine is not important when it is a question of
life and death. But after the patient recovers and becomes healthy, a good doctor
has necessarily to withdraw the medicines, which are no more required.

Otherwise the patient would suffer side effects, which, many a times are worse
than the disease.

Granted, majority of the decisions of SEBI are laudable and SEBI has been
throughout the years doing an excellent job of regulating the Indian mutual fund
industry and making it adopt international best practices as far as is possible.

No load on direct entrants

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Mutual Funds
For instance, some time ago SEBI had decided that AMCs shall not charge
entry as well as exit load on bonus units and of units allotted on reinvestment of
dividend.
Similarly, there would be no entry load on direct investments. Very good
decisions indeed in view of the fact that the entry loads mainly take care of the
commission to distributors. Where there is no distributor, it does not make sense
to charge an entry load.

Now, no load on every entrant

Perhaps, as a misconstrued extension of the same idea, SEBI has issued a

circular stipulating that for the purposes of empowering investors through
transparency in payment of commission and load structure, there should be no
entry load for mutual fund schemes, existing or new.
The upfront commission to distributors shall be paid by the investor to the
distributor directly. Moreover, the distributors shall disclose the commission,
trail or otherwise, received by them for different schemes/mutual funds which
they are distributing or advising the investors.
Let us view this proposal pragmatically.

Analysis

MFs have twin objectives in mobilising savings of the masses - i) channelise

them into productive corporate investments and ii) provide facilities to persons
of even modest means of owning indirectly, equity shares, bonds, debentures
and government securities. An MF is a financial intermediary between the
investors and markets (stock and debt).

It protects the investor against capital risk by giving him the benefit of not only
diversification but also its professional expertise in investment management.
The MF's constant supervision of the portfolio, which it holds on behalf of the
investor and the diversification of large funds over a large portfolio throughout
a spectrum of industries, is of great value to the investor.
Therefore, the AMC has a right to charge a fee based on the total size of the
portfolio it handles. This charge is collected by the AMC directly from the
corpus and not from the investors. Surely, the investors should not mind this
charge.

The role of a distributor is to keep continuous track of the various needs,

objectives and risk appetite of his clients and suggest to each one of them a
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scheme best suited to his profile. This is indeed an onerous task requiring
quality time and resources.

Mutual Funds
This is the reason why MFs, SEBI and the Government provide for sizable
funds on investor education programmes. The role of a distributor as a 'preacher'
is important to the client because investment is a specialised field. The
distributor also plays the part of a 'secretary' in providing after-purchase service.
In short, the distributor has become an indispensable factor without whom the
MF industry will languish. Yes, an informed investor has the capacity to go
direct but would not mind paying commission to the distributor if he desires to
save the time to take informed decisions.

Unfortunately, the uninformed investors are large in comparison and their

mindset would certainly prompt them to go direct in order to save the
commission. This will hurt such investors in the long run. When the event does
occur, he would blame the fund manager for his losses and not himself (or
SEBI) and move away from the MF industry.

It is only in a perfect world that the uninformed investor will pay separately for
the advice and service he is getting. More often than not, the uniformed investor
is uninformed about the fact that he is uninformed
Incidentally, the approach of an honest distributor should be totalistic in nature,
optimising the income and needs of the entire family. He should not be dealing
only in MFs, but handle all other financial products such as RBI Savings Bonds,
Post office Small Savings Schemes, PPF, Co-FDs, etc, and most importantly
high paying life insurance products.

One can't help but wonder whether this SEBI diktat may prompt an otherwise
honest distributor into moving towards products such as ULIPs, which are for
all practical purposes mutual funds with high commission structures.
ULIPs are nothing but mutual funds that charge far higher loads (from 15%) Of
course, the charges come down over the tenure of the investment. The point is
that those charges clearly exist.

Moreover, of late, the way ULIPs are advertised and promoted, it is difficult for
even an informed investor to differentiate and tell apart a mutual fund scheme
from an ULIP. Then there are structured products issued by portfolio managers
and large broking houses, which too are nothing but mutual funds that offer
substantially higher fees to distributors.
Now, in such an environment where products with similar functions co-exist,
however, with a vastly dissimilar incentive structure, clearly, there would be a
wholesale shepherding and forced migration of not only uninformed investors
but also informed ones to such products. Even honest portfolio managers will be
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induced to become understandably a little wavered.

Mutual Funds
That being said, we cannot emphasise enough that it doesn't mean that a
knowledgeable investor is forced to pay someone for services that he doesn't
need. For such a person, the system of bypassing the distributor and investing
directly is, thanks to SEBI itself, already in place.
The only submission is that imputing the investor with the responsibility of
compensating the distributor will confuse and corrupt the market place. A
scheme should be either with a load with a distributor or without a load without
a distributor.

Since huge monetary and human resources are employed in the mutual fund
sector, the level of efficiency obtained therein is increasingly conditioning the
performance of the nation's economy. The currently suggested measures, if
accepted, would not only strangle a nascent mutual fund industry but would also
be extremely detrimental for the growth of our capital markets. Ultimately not
only mutual funds and distributors but investors too would be losers.

Points of the circular from SEBI

1. SEBI has been taking various steps to empower the investors in mutual funds
by way of more transparency in the loads borne by the investor so that the
investor can take informed investment decisions. Towards this end, SEBI had
earlier abolished initial issue expenses and mutual fund schemes were allowed
to recover expenses connected with sales and distribution through entry load
only.
Further, investors making direct applications to the mutual funds were
exempted from entry load.

2. In terms of existing arrangement, though the investor pays for the services
rendered by the mutual fund distributors, distributors are remunerated by Asset
Management Companies (AMCs) from loads deducted from the invested
amounts or the redemption proceeds. SEBI (Mutual Funds) Regulations, 1996
also permit AMCs to charge the scheme (under the annual recurring expense)
for marketing and selling expenses including distributor’s commission.

3. Further, all loads including Contingent Deferred Sales Charge (CDSC) for
the scheme are maintained in a separate account and this amount is used by the
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AMCs to pay commissions to the distributors and to take care of other

marketing and selling expenses. It has been left to the AMCs to credit any
surplus in this account to the scheme, whenever felt appropriate. In order to

Mutual Funds
incentivise long term investors it is considered necessary that exit loads/CDSCs
which are beyond reasonable levels are credited to the scheme immediately.

4. In order to empower the investors in deciding the commission paid to

distributors in accordance with the level of service received, to bring about
more transparency in payment of commissions and to incentivise long term
investment, it has been decided that:

a) There shall be no entry load for all mutual fund schemes.

b) The scheme application forms shall carry a suitable disclosure to the effect
that the upfront commission to distributors will be paid by the investor directly
to the distributor, based on his assessment of various factors including the
service rendered by the distributor.

c) Of the exit load or CDSC charged to the investor, a maximum of 1% of the

redemption proceeds shall be maintained in a separate account which can be
used by the AMC to pay commissions to the distributor and to take care of other
marketing and selling expenses. Any balance shall be credited to the scheme
immediately.

d) The distributors should disclose all the commissions (in the form of trail
commission or any other mode) payable to them for the different competing
schemes of various mutual funds from amongst which the scheme is being
recommended to the investor.

Applicability

5. This circular shall be applicable for

a. Investments in mutual fund schemes (including additional purchases and

switch-in to a scheme from other schemes) with effect from August 1,
2009 ;

b. Redemptions from mutual fund schemes (including switch-out from other

schemes) with effect from August 1, 2009 ;

c. New mutual fund schemes launched on and after August 1, 2009; and

d. Systematic Investment Plans (SIP) registered on or after August 1, 2009.

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6. AMCs shall follow the provisions pertaining in clause 5(2)(b) of SEBI

Circular SEBI/IMD/CIR No. 5/126096/08 dated May 23, 2008 regarding

Mutual Funds
updation of Scheme Information Document (SID) and Key Information
Memorandum (KIM) in this respect.

7. The AMCs shall bring the contents of this circular to the notice of their
distributors immediately and monitor compliance.

8. This circular is issued in exercise of powers conferred under Section 11 (1) of

the Securities and Exchange Board of India Act, 1992, read with the provisions
of Regulation 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the
interests of investors in securities and to promote the development of, and to
regulate the securities market.

Effect on NJ

NJ India Invest Pvt. Ltd. One of the major distribution house for Mutual Funds
is also affected by this decision of SEBI.
Their business decreased by about 40% of their previous business volume
in last two months. To overcome it NJ planned to introduce new products and
services. They are:

1. Portfolio Management Services (PMS)

2. Reality
3. Insurance
4. Wealth account
5. E-account

These are a few new objects added to NJ’s product list which help it to
overcome the pressure of no entry load and will help to create turnover and
ultimately to meet the needs to run the organization.
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Mutual Funds
 Value Pack Procurement

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Mutual Funds
 Page74

Mutual Funds
MUTUAL FUND ADVISOR
There exists a great potential & opportunity to establish your own
mutual fund advisory practice in India. If you are an existing
provider of other investment or insurance solutions then you can
add mutual funds to your basket and move towards being a
'complete financial advisor'.

NJ FUNDZ PARTNER
NJ Fundz Network is a dedicated platform offering
comprehensive and unique products and services for the
growth & development of independent financial advisors. NJ's
360° Advisory Platform, offers advisors with cutting edge
solutions and effective support to create business brand and
offer quality value-added services to clients.

NJ offers you with a unique, comprehensive business platform to help you grow
& develop your advisory practice in a powerful, effective way. The platform
delivers much more to you, keeping you above curve - both on your business
front and on client services.

Opportunities for you

If you are a 'Fresher' - Being an AMFI Certified Mutual Fund Advisor
We would provide you with complete Training and educational material to
appear and successfully clear the AMFI Mutual Funds Advisors Module, which
is a prerequisite for advising and distribution of Mutual Fundz. On successful
completion on the same you become a Certified Mutual Fund Advisor. The
AMFI training programmes are conducted throughout the year to the various NJ
centers across India.

If you are already a Mutual Fund Advisor - Being an NJ Fundz Network

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Partner

Mutual Funds
NJ offers you with all the products, services and support that you may need to
become a truly sought after professional advisors. At the very basic level, we
would help you with the following…
1) Enrich your service offerings
2) Offer Technological Solutions
3) Provide Business Planning, Development and Sales Support

360° – Advisory Platform

NJ believes in “360° – Advisory Platform” philosophy …

With this philosophy, we try to offer all possible products, services and support
which an Advisor would need in his business.

The support functions are generally in the following areas …

• Business Planning and Strategy

• Training and Development – Self and of employees
• Products and Service Offerings
• Business Branding
• Marketing
• Sales and Development
• Technology
• Advisors Resources - Tools, Calculators, etc..
• Research
• Communications

With this comprehensive supporting platform, the NJ Fundz Partners stays

ahead of the curve in each respect compared to other Advisors/competitors in
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the market.

Needless to say, the complete NJ Fundz offering is hard to resist

Mutual Funds
 Systematic Investment Plan (SIP)

Periodic investments is referred to as a SIP.

That means that, every month, you commit to investing, say, Rs 1,000 in your
fund. At the end of a year, you would have invested Rs 12,000 in your fund.
Let's say the NAV on the day you invest in the first month is Rs 20; you will get
50 units.

The next month, the NAV is Rs 25. You will get 40 units.
The following month, the NAV is Rs 18. You will get 55.56 units.

So, after three months, you would have 145.56 units. On an average, you would
have paid around Rs 21 per unit. This is because, when the NAV is high, you
get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs
1,000.

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Mutual Funds
 SIP – The best way for investment
Case Study

• Market hit a high of 5450 in Mar 2000.

• Market crashed to lows of 2600.
• It took almost 4.5 years for the market to scale back the level of 5400 in
Sep 2004.
• Let’s see how the SIP investors fared in that scenario.

Investor 1 – Panic Investors

These investors had started their SIP of Rs. 2000 in Mar 2000 peak. With the
decline in the market they panicked & stopped their SIP in a span of 13 months
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SIP Start Date Mar-00

Mutual Funds
SIP End Date Mar-01
No. of installments 13

Scheme Name Investment Value in Mar 01 Returns

Reliance Growth 26,000 18,846 -46.1%
HDFC Equity Fund 26,000 20,870 -33.9%
ICICI Technology Fund 26,000 14,944 -67.3%
Birla New Millennium 26,000 14,596 -69.0%

These investors actually made a loss on their SIPs by stopping it in the

downturn…

Investor 2 – Smart Investors

These investors had started their SIP of Rs. 2000 in Mar 2000 peak. They
continued their SIP and kept on investing in the SIPs.

SIP Start Date Mar-00

No. of installments 55

Scheme Name Investment Value in Sep 04 Returns

Reliance Growth 1,10,000 3,25,736 50.5%
HDFC Equity Fund 1,10,000 2,53,337 38.1%
ICICI Technology Fund 1,10,000 1,74,300 20.5%
Birla New Millennium 1,10,000 1,64,224 17.8%

These investors have made phenomenal returns even though market has
delivered no return (From 5400 level in Mar 00 to 5400 level in Sep 04)

Investor 3 – New Investor

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These investors started their SIP of Rs. 2000 in Mar 2001, 1 year after the fall in
the market

Mutual Funds
SIP Start Date Mar-01
No. of installments 43

Scheme Name Investment Value in Sep 04 Returns

Reliance Growth 86,000 2,48,528 66.8%
HDFC Equity Fund 86,000 1,90,341 48.3%
ICICI Technology Fund 86,000 1,50,844 33.2%
Birla New Millennium 86,000 1,43,954 30.3%

Investors who have started SIP in lean period have made fantastic returns

• Investments of Rs.10000/- becomes Rs.276947/- even after several falls

in the NAV during the period of 13 Years.
• And finally, with the current correction, its NAV has fallen by 50% 3
times over the period of past 14 years.
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• Even after the current fall, the fund is still delivering a CAGR of 29%
widely beating the index which has given 8.3% returns.

Mutual Funds
• The Absolute returns from the fund even after the current fall are
staggering 3529.72%.
• Equity investments through Mutual Funds deliver 15-20% of returns
over Long term.
• Bull and bear market cycles are nature of Equity markets and are going
to continue in future also.

Findings
• Financial advisors know very less about benefits of MF and its business.
They have a perception that there is no potential earning in MF business.

• Investors of younger age invest generally in equity funds whereas older

age investors invest in debt funds.

• Investing through MF is best way for capital appreciation within

protection in comparison to investing directly in equity market and other
investment avenues.

• Some schemes of each AMC perform well which have a good Fund
Manager and well designed Portfolio.

• Wiping off the entry load affected the industry badly in initial stage. It
affected NJ, other distribution houses as well as AMCs.
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 Suggestions

How To Invest In Mutual Fund

Mutual funds normally come out with an advertisement in newspapers

publishing the date of launch of the new schemes. Investors can also contact the
agents and distributors of mutual funds who are spread all over the country for
necessary information and application forms. Forms can be deposited with
mutual funds through the agents and distributors who provide such services.
Now a days, the post offices and banks also distribute the units of mutual funds.
However, the investors may please note that the mutual funds schemes being
marketed by banks and post offices should not be taken as their own schemes
and no assurance of returns is given by them. The only role of banks and post
offices is to help in distribution of mutual funds schemes to the investors.
Investors should not be carried away by commission/gifts given by
agents/distributors for investing in a particular scheme. On the other hand they
must consider the track record of the mutual fund and should take objective
decisions.

There are three major asset classes that you can put your money into, namely
equities, fixed income and money market instruments. In order to decide how
much of your money goes into which investment class you must first consider a
few important factors (most of these will be tackled by you during your goal
definition phase):
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• Return expected on your investment

• Amount you will be able to save (present as well as future)

Mutual Funds
 • Cash outflows you might have at certain points of time in the future
• Risk appetite
• Amount you will require for your retirement
• Liquidity
• Age
Hence due to the variable nature of the investor’s finances and requirements
there are no set strategies used by financial consultants. But we can provide you
with broad strategies that you can adapt to meet you own needs.

Some suggestions for investors

• Try to save as much as your budget allows, as more saving leads to more
investment that will grow into bigger capital base.

• Plan your investment over a longer period of time, keeping in mind your
age, your financial targets, your level of risk aversion your saving pattern
and your investment objectives.

• Invest more in stock funds but do keep a reasonable part of your

investment in liquid securities as money market funds, short term bonds
etc so as to meet any contingent situation.

• Do not invest in highly volatile funds.

• Think before you invest. Do collect and analyze enough information

about the funds you plan to invest in.

• Do not confuse yourself by spreading your investment too wide but

reasonable diversification of investment is a must also.

• Periodically keep reviewing objectives of your investment and try to keep

your assets in balance.

• Lastly, maintain proper record of your transactions.

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Some suggestions for NJ

As reported in the study, NJ try to improve upon their weak areas regarding the
factors that influence advisors decision making as regards choice of working for
mutual fund industry, the facilities or options they expect from an AMC or
distribution house, the criteria they generally believe to be the best is amount of
brokerage passed to them. NJ should extend full support to the advisors in terms
of:

• Investment advisory service

• Giving them the best amount of brokerage and gifts for motivation.
• Ensuring full disclosure of relevant and correct information.
• To introduce new products for their customers n partners.
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Mutual Funds
 Bibliography
Book by AMFI

Magazines

• Outlook Money
• Business Today
• Capital Market
• Mutual Fund Insight

Newspapers

• Economic Times
• Business Line

Websites

• www.njindiainvest.com
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• www.tatamutualfund.com
• www.valueresearchonline.com

Mutual Funds
• www.amfiindia.com
• www.hdfcfund.com
• www.mutualfundsindia.com
• www.investopedia.com
• www.navindia.com
• www.capitalmarkets.com
• www.myiris.com
• www.indiainfoline.com
• www.google.com

Annexure

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