A RESEARCH REPORT ON

"GOVERNANCE PATTERN OF MUTUAL FUND IN INDIA ISSUES AND CHALLENGES"

Kurukshetra University, Kurukshetra
In partial fulfillment of the requirement for the Degree of Submitted to

Master of Business Economics

(Session 2005-2006)

Under the guidance of Nihar Ranjan Karmee H.O.D.

Submitted by: Parul Goel MBE (Final) Roll No. 4206

D.A.V. College for Girls

Yamuna Nagar

CONTENTS

OBJECTIVES OF THE STUDY RESEARCH METHODOLOGY INTRODUCTION TO MUTUAL FUNDS Mutual Funds Mutual Funds Schemes in India Benefits of Mutual Funds History of Mutual Funds Industry Present Scenario Performance of Mutual Funds Recent trends in Mutual Funds Industry INVESTORS PREFERENCE ON MUTUAL FUNDS SCHEMES

UNIT TRUST OF INDIA MUTUAL FUNDS REVIVAL : AFTER CRISIS

Crisis of UTI Revival : Government's efforts MUTUAL FUNDS NEED A BIG CONCERN Reasons for concern toward Mutual Funds Governance Malpractices in Mutual Funds

STRUCTURE OF MUTUAL FUNDS Structure of Mutual Funds. Structure of Mutual Funds in India GOVERNANCE CHALLENGES IN INDIA. MUTUAL FUNDS GOVERNANCE IN USA AT A GLANCE EVOLVING BEST PRACTICES FOR MUTUAL FUNDS GOVERNANCE IN INDIA

FINDINGS CONCLUSION SUGGESTIONS LIMITATIONS ANNEXURE BIBLIOGRAPHY

ACKNOWLEDGEMENT
Project is like a bridge between the theoretical and practical working. With this feeling I choose this particular project. Its a matter of great pleasure for me to submit a Project report on Governance Pattern of Mutual Funds in India Issues and Challenges" No matter how much enterprising and entrepreneurial ones thinking is, yet nobody can do everything all by himself without help and guidance, its inhumane if the concerned person assistance goes without appreciation and thanks. There is always a feeling of gratitude which everyone express to others for help and Services they render during difficult phases of life and assist and supervise to achieve the goals. I feel it an occasion of pride to express my deep gratitude to all who had been the guiding spirits behind me in preparation of this project report owe my regard and heartiest thanks to Ms. Sushma Arya, Principal for her deep appreciation also express my deep sense of gratefulness to Mrs. Suman Lecturer for her immense support, supervision and direction. I am also thankful to all the authors and publishers of books, newspapers, journals and magazines whose scripts benefited me to analyze the facts.

Parul Goel M.B.E. (Final)

PREFACE
Project provides zeal of working to do the job practically. It skillfully blends the theoretical aspects with practical business situations, thus preparing an MBE in a better manner for the future responsibilities and challenges that one likely to face when one enter the business world to start ones carrier. This project provides me an opportunity to utilize my ability to analyze the available facts and figures. Infect, I have experienced a drastic change in my ability to grasp the available facts after completing this dissertation. The study begins with the genesis of Mutual Funds then the rationale of Mutual Funds is discussed. In the section II, need of paying attention towards Governance patterns of Mutual Funds in India Issue and Challenges, their resource structure, malpractices is covered. An attempt is made in the section III to describe the Governance challenges in India, the view of Governance of Mutual Funds in USA and evolving best practices for Mutual Funds Governance in India. Section IV explains possible ways out are outlined in section V. Main conclusions are given in section VI.

INTRODUCTION TO MUTUAL FUNDS

Indians are essentially a saving counting by tradition. The proportion of household savings is in the region of 20-22% of the GDP. The disposable fundraisers. The country has as many as 50 million stock market investors, a figure that is exceeded only by the U.S. with over 8000 companies listed in 24 stock exchanges, the capital market in India has come to age. The ever increasing complexities of stock market in India has make it virtually impossible for the very so many small investors to keep track of daily developments in the market. On one hand, small retail investors are often burning their fingers playing in the stock market. On the other hand, hundreds of thousands of small scattered investors are on drag on the companies in terms of services related paper works. As companies prefer large and institutional investors. burgeoning income, middle offers class community, market which for is the

estimated at 200-300 millions, with its significantly increasing act irascible

The twin problem can be solved to large extent it small investors take Mutual fund route. All over the world the Mutual Fund has emerged as the most preferred investment vehicle. The equity wet is being gradually transformed into mutual fund cult. The funds will soon become the mainstay of the capital market.

MUTUAL FUNDS
A mutual fund is an ideal investment vehicle where a no,. of investors come together to pool their money with the common investment goal. Each mutual fund with different type of schemes is managed by respective "Assets management company" (AMC). An investor can invest his money in one or more schemes of mutual fund according to his choices and becomes the unit holder of the scheme. Investors Passed back to Pool their money with Fund Manager Returns

Generates Securities

Invest in

Flow chart above describes broadly the working of a MF: The invested money in particular scheme of a mutual fund is then invested by fund Manager in diff. types of suitable stock and securities, bonds and money market instruments.

Each mutual fund is managed by qualified professional man, who use this money to create a portfolio which includes stock and shares, bonds, gift, money market instruments or combination of all. This Mutual Fund will diversified your portfolio over variety of investment vehicles, Mutual Fund offers an investor to invest even a small amount of money.

MUTUAL FUND SCHEMES IN INDIA

Mutual fund schemes are managed by respective asset management companies sponsored by financial institutions, banks, pvt. companies or international firms e.g. UTI, biggest Indian AMC (Asset Management Company) while alliance and Franklin Templeton etc, are international AMC's. VARIOUS SCHEMES: A mutual fund may float several schemes which may be classified on the basis of its structure, it investment objectives and other objectives. A) 1) MUTUAL FUND SCHEMES BY STRUCTURE: Open Ended Funds: Open Ended fund scheme is open for subscription all though year. An investor can buy or sell the units at "NAV" (Net Asset Value) related price at any time. 2) Close-Ended Funds: A Close Ended fund is open for subscription only during a specified period, generally at the time of initial public issue. The close ended fund schemes is listed on the some stock exchanges where an investor can buy or sell the units of this type of scheme.

3)

Interval Funds: An interval fund combines both the features of open ended funds and close ended funds.

B) 1)

MUTUAL

FUND

SCHEMES

BY

INVESTMENT

OBJECTIVES: Growth Funds: The objective of Growth Fund scheme is to provide capital appreciation over the medium to long term. This type of scheme is an ideal scheme for the investors seeking capital appreciation for a long period. 2) Income Funds: The income fund schemes objective is to provide regular and steady income to investors. 3) Balanced Funds: The objective of Balanced Fund schemes is to provide both growth and regular income to investors. 4) Money Market Funds: The objective of Money market funds is to provide easy liquidity, regular income and preservation of income.

(C) 1.

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

2.

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

3.

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

4.

Index Schemes: Such schemes links with the performance of BSE sensex or NSE.

5.

Load Funds: Load Funds charges a commission each time when you buy or sale units in the fund.

6.

No-Load Funds; No-Load Funds does not charge a commission on purchase or sale or the units in the fund.

BENEFITS
While selecting Mutual Fund's schemes he should consider the effect of inflation rate, diversification of investment, the time period of investment, because some risk factors which effect it are:A) B) C) D) E) Market Risk Credit Rist Interest Rate Risk Inflation Rate Political Environment

CRISIL'S : Composite performance ranking (CPR) measures the performance of for each of scheme of MUTUAL FUND. Despite the fact of risk factors schemes preuide following benefits to investors. PROFESSIONAL MANAGEMENT: Mutual Funds employ the services of experienced and skilled professionals and dedicated investment research team. The whole team analysis the performance and balance sheet of companies and selects them to achieve the objectives of the scheme.

Potential Return: - Mutual Funds have the potential to provide higher return to investor than any other option over a reasonable period of time. DIVERSIFICATION: - Mutual Fund in a manner of companies across a wide cross section of industries and sectors. Liquidity: - Investor can get money promptly at NAV (Net Assets Value) related prices from MUTUAL FUND open ended scheme and units can be sold at previously market price in stock exchange of close ended scheme. Low Cost: - Investment in MUTUAL FUND is less expensive way in comparison to a direct investment in capital market. Transparency: MUTUAL FUND have to disclose their

holdings, investment pattern and the necessary information before all invertors under a regulation framework. Flexibility: - A lot of flexibility with features plan, regular withdrawal plans and dividend reinvestment plans enabling systematic investment or withdrawal of funds. Affordability: Small investors with low investment fund

are unable to high-grade or blue chip stocks and can be possible through Mutual Fund.

Well Regulated: - All Mutual Fund's are registered with SEBI, and SEBI act as watchdog, so the Mutual Fund's are well regulated.

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases. First Phase 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase 1987-93 (Entry of Public Sector Funds): 1987 marked the entry of non-UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of

Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores. Third Phase 1993-2003 (Entry of Private Sector Funds): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year, in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothar Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual funds Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulation 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs.1.21,805 crores. The Unit

Trust

of

India

with

Rs.44,541

crores

of

assets

under

management was way ahead of other mutual funds. Fourth Phase Since February 2003: In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd. sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of October 31, 2003, there were 31 funds, which manage assets of Rs.126726 crores under 386 schemes. The graph indicates the growth of assets over the years.

THE PRESENT SCENARIO

At present a total of 26 mutual funds (including UTI) are operational in the market. Of these 10 are in the public sector and 16 in thee private sector. Within the public sector apart from the hybrid UTI, 6 funds are bank-sponsored and 3 are financial institution-sponsored. In the private sector, 13 are Indian funds and 3 are foreign. Further, 9 private sector funds participation in their Asset Management Company. Incidentally, all the 6 bank-sponsored mutual funds are from the public sector commercial banks and of a single private sector commercial bank has so far ventured to sponsor and mutual fund. Thus, the nascent Indian mutual fund industry is fourdimensional in composition. All the 26 mutual funds, operational at present, together have launched a total of 205 schemes raising a corpus of Rs.76,671 crores so far (as at the end of 1995). The average size per schemes for the industry as a whole works out to be Rs. 330.6 crores. Of the total schemes , 43 schemes (21%) are open-ended and 162 schemes (79%) are close-ended. As for the bank-sponsored fund, a total of 61 schemes (as at the end of the 1995) have been floated and these have gamered about Rs. 7722 crores as corpus fund. The chronologically order of performance can be

considered in terms of pre-1987 era or competition-free era and post-1987 era. Upto 1987 (when banks were allowed foray

into mutual fund industry) UTI has floated as many as 19 schemes and raised Rs.2840 cr. Even after 1987, UTI's market share continues to be a consistently dominant one in terms of both the parameters number and amount. The industry has successfully experimented product

innovation. Objectivewise, growth schemes, income schemes, balanced, and other also. waiting in the wings. Still a plethora of new types Eg. Mixed fund, internal fund, fund of funds, venture funds are

PERFORMANCE OF MUTUAL FUNDS

In terms of market share, bank-sponsored funds own 30 percent of the total number of schemes so far launched by the industry but only 10 percent of the total corpus fund. However, if the big-bull fund is excluded, the storey will be different one. This is why the because UTI has been ruling the fund market for more than 30 years from 1964. Among the six bank-sponsored mutual funds, Canbank mutual fund ranks first with over Rs. 175 crores as average size of the scheme followed by SBI mutual fund. Among the bank funds, SBI mutual fund has floated the maximum number (20) of schemes but canbank mutual fund has raised the maximum corpus (Rs. 3166 crores). BOB mutual fund is the youngest and hence, it ranks last in the race among the bank fund both in terms number and amount. Since 1992, bank funds are facing hectic competition from the private sector funds which have already taken away a large slice of the market through their aggressive marketing strategies and improved customer services.

Presently, the 16 private sector funds are controlling a significant share of the market with 14 percent schemes and 4 percent corpus of the total mutual fund industry. In the non-UTI market, private sector enjoys 23 percent schemes and 22 percent corpus. Many more private sector funds are in the pipeline and the bank funds are to guard themselves not to be lost in the crowd.

RECENT TRENDS IN MUTUAL FUND INDUSTRY

The most important trend is the Mutual Fund industry is the aggressive expansion of the foreign owned Mutual Fund Companies and the decline of the companies floated by nationalized banks and smaller private sector players. The foreign owned companies have deep pockets and hence come in here with the expectation of long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. Healthy Competition: Foreign owned companies have forced the industry to upgrade itself and service levels of organization like UTI have improved dramatically in the last few years in response to the competition provided by these. In the area of Investor education the advanced training program for agents in several cities is conducted, recommendation by AMFI to government, like is Calcutta, Delhi, Mumbai, Nashik and Chennai.

Mutual Fund Performance according to owner category 1997-02 (Rs. Crores)

Years UTI Banks Other Financial 1997-98 1998-99 1999-00 2000-01 2001-02 Total Percent 3668 -1685 3873 323 -7284 -1105 -2.9 -990 -352 84 -1944 913 -2289 -5.9 Institution -235 800 347 864 821 2597 6.7 392 103 970 2325 2453 6243 16.1 Indian Jt. Ven. Predom Indian 490 729 4907 2443 5157 13726 35.5 Jt. Ven. Predom Foreign 149 750 8363 5117 5115 19494 50.4 Total Pvt. Sector 1031 1582 14240 9885 12725 34963 102.1 Total All 3474 345 18544 9128 7175 38666 100.0

INVESTOR'S PREFERENCE ON MUTUAL FUNDS SCHEMES

There are funds meant exclusively for young old small and large investors with such a diverse spectrum of schemes available to the investors, Mutual Funds are continuously innovating and attempting to be one step ahead of competition especially by employing a technique called assets allocation. The popularity of Mutual Funds has soared so have their diversity and complexity. Despite their many advantages, the entry of new players into the Industry specially as from early 1990's has encouraged competition among the various mutual funds, thus the existing are expected to perform better not only terms of better return but also better services. Thus in view of the increasing significance of mutual funds in the context of Indian economy, it is becoming much necessary to infer the perception of household savers of Indian and the innovative products.
Type of fund 1. Public sector sponsored 2. Private sector mutual No. of Respondents Percentage of Total 20 65

Nature of ownership
16 52

funds 3. Foreign sponsored 12 15 Total 80 100 Factors considered in selecting a scheme / funds 1. Safety of capital invested 10 12.5

2. 3. 4. 5. 6. 1. 2. 3. 4. 5. 6. 1. 2. 3. 4. 1. 2.

Capital appreciation 30 37.5 Regular & stable income 15 18.75 Income + capital appreciation 15 18.75 Liquidity 7 8.75 Future financial appreciation 3 3.75 Total 80 100.00 Factor influencing investing in particular scheme/ funds Objectives 21 26.25 Past performance 15 18.75 Suitable gains 18 22.50 Type of products 15 18.75 Brand image 3 3.75 Investor service 8 10.00 Total 80 100.00 Type of investors most served by mutual funds Rich individuals (urban) 23 28.75 Middle class (urban/rural) 9 11.25 Giant business corporations 37 46.25 All above 11 13.75 Total 80 100.00 Type of funds preferred by investors Close ended 8 10 Open ended 72 90 Total 80 100

Unlike some years back when UTI (government sponsored) fund dominated the market, from Table 1, we can notice a drastic shift of interest to private sector mutual funds as 65 percent of respondents preferred them for public sector (20%) and foreign sponsored (15%). While most respondents indicated to like open ended schemes (90%) the remaining preferred close ended schemes with most investors influenced by a number of factors, the schemes proposed objectives attract most of them while pat performance and the nature of products offered hold same influencing effect upon respondents. In Europe brand name in financial service has a turn a round effect yuet in India if counted less as per the reason indication suitable return of a

scheme too influence many investors as the second after objectives at 22.5%. Why mutual funds haven't been everybody's favorites is indicated by respondents claim that the class of society must served by mutual funds are giant business with (46%) while they are closely followed by rich individuals residing in cities. While 14% of respondents indicated that all classes (rich, business houses and middle class throughout country) get benefits of mutual funds only 11% opined that the middle class staying in both urban/rural India benefit from mutual funds. Therefore from the above priority analysis we can identify a few areas that need improvement as well as notice the trend towards which this industry is riding. It should be noted that while such information is important it will not count to progress if it is treated like an old wine in a new bottle. Implementation is crucial for a rational future growth.

UNIT TRUST OF INDIA MF'S REVIVAL; AFTER CRISIS

Unit Trust of India MF was carved out of Unit Trust of India (UTI) as a SEBI registered mutual fund from 1st Feb. 2003. CRISIS OF UTI-64: In 1998, on account of depression in the share market, value of the investment of UTI fell sharply. As a result of steep fall in the investment value of unit scheme-64, its reserves turned negative. It gave a severe jolt to the confidence of the depositors, and this happened because of following reasons: Professional Management: Due to its large holdings, the skills of fund managers have not been allowed to develop, as they are prisoners of inter-scheme transfers. Nature of fund: UTI became aggressive while dealing in the share market. It's management lost sight of the fact that it is not equity oriented fund but income fund. Management of UTI failed to notice that the MF industry was getting diversified, that its own role in the market has been slowly declining.

The biggest blunder in regard to US-64 was to run it as a money market fund for corporate assuming them above market incomes. Since investing in fixed return securities would not have yielded these high returns. UTI increasingly converted US64 from income oriented funds into equity oriented fund. This resulted in huge losses due to investment in loss making shares. Another, UTI's refusal to disclosed net asset value of US64. The announced purchased and repurchased prices bore no relationship to its NAV, the investors were shocked when it was disclosed that NAV has declined from Rs.14 to Rs.6 by end of Dec. 2001. Another reason for the crisis was the blunder of started a series of assured monthly/ annually cumulative income schemes year after year. All these schemes incurred huge losses. Moreover the limited exit window of up to 3,000 units offers no solace to investors with sizeable holdings. They are well and truly stuck.

REVIVAL; GOVERNMENT EFFORTS

UTI was split in two parts as follow by government: (a) (b) Old Protected UTI (UTI-I) comprising US-64, whose repurchase value has already been announced. New UTI and UTI (UTI-II) comprising of all net asset value based schemes. Government shall meet its obligations annually to cover any deficit in UTI-I. UTI-I will be managed by a team of government appointed administrator and his team advisors. For a limited time period, UTI-II will be managed by a professional chairman and board of trustees. After that period, UTI-II will be disinvested. UTI-I & UTI-II will be regulated under SEBI. The rules and regulations regarding distribution of assets and liabilities and the functioning of these two institutions will be the responsibility of ministry of finance.

MUTUAL FUNDS NEED A BIG BROOM

When we look at the stock market, the normal impression we carry is of wily stockholders on the one side sitting in small cubicles out to trap the unwary investor while on the other side there are respectable professionals working in large mutual fund offices to protect the small investors. Recent practices reveal that there is a lot happening in the mutual fund industry which is not healthy and needs the big broom. This is even more important when at the cost of either the small investor the exchequer. (A) REASONS FOR CONCERN TOWARD MUTUAL FUNDS GOVERNANCE: First, they have surely emerged as the biggest repository of middle class savings and any scam in this sector shall have a mind-boggling effect on stock markets, money markets, government borrowing and the entire economy. Just a s war is too serious a matter to be left to generals, the fund industry is too big a piece of the economy to be left to fund managers. Second, the government has dished out so many goodies to the sector that one could say that only the IT sector is more pampered.

Dividends in India have been made tax-free and the biggest outflow of dividends come from Mutual Funds. So the government is losing an enoriuous amount of money by not charging any income tax on Mutual Fund dividends. Moreover, Mutual Funds do not pay any tax on their projects. They can buy a stock for Rs.100 today and sell it for Rs.105 tomorrow but they won't pay tax.

MALPRACTICES IN MUTUAL FUNDS

Increasingly, Firstly: It is imperative that the authorities immediately put an end to the practice of previous day NAV. Return should be given to the investors (small or large) only the money has been realized and invested. The second malpractice: It is giving different load to small and large investors . When you buy a mutual fund, you will be told that you have to pay an exit or entry load or both, but when "Big Daddy" enters, all such loads are waived and he has no loads. Thirdly, other malpractice: It is the so called fixed term plans and this is the mother of all malpractices. A mutual fund wants to give a fixed rate of return to its valued "Big Daddy"; so it gives out a special scheme just for him! May large corporate have been enjoying the privilege, but thankfully there has been so much of media publicity that this has been stopped and the fund can take one year to phase out such plan. there are unhealthy practices in this

pampered industry enumerated as follows:

STRUCTURE OF MUTUAL FUND

A)
Sponsoring Institution

B) C)

Board of Trustees

Asset Management Company

A. B.

Sponsoring Institution: Which ultimately calls the tune. Board of trustees: Oversees the operations and provides the required checks and balances.

C.

Asset Management Company: Which acts as the manger of day-to-day affairs of the fund. An arms-length relationship is envisaged among the three constituents. The SEBI (Securities and Exchange Board of India) is the statutory watch dog providing the regulatory framework. Recently, the Association of Mutual Funds in India (AMFI) has been formed as a self regulatory body. All the funds, except the UTI, are members of this voluntary association.

STRUCTURE OF MUTUAL FUND IN INDIA

The Indian mutual fund industry is dominated by the UTI which has a total corpus of Rs700bn collected from more than 20 million investors. The UTI has many funds/ schemes in all categories i.e. equity, balanced, income etc with some being open-ended and some being closed-ended. The UTI Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs.200bn. UTI was floated by financial institutions and is governed by a special act of Parliament. Most of its investors for all practical purposes. The second largest category of mutual funds are the ones floated by nationalized banks. Canbank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of funds managed by this category of AMC's is in excess of Rs.250bn.

Name of the AMC

Alliance Capital Asset Management (I) Pvt. Ltd.

Nature of Ownership
Private

Foreign Birla Sun Life Asset Management Company Ltd. Private Indian Bank of Baroda Asset Management Company Ltd. Banks Bank of India Asset Management Company Ltd. Banks Canbank Investment Management Services Ltd. Banks Cholamandalam Cazenove Asset Management Private Company Ltd. Dundee Asset Management Company Ltd. DSP Merrill Lynch Asset Management Company Ltd. Escorts Asset Management Company Ltd. First India Asset Management Company Ltd. GIC Asset Management Company Ltd. IDBI Investment Management Company Ltd. Indfund Management Company Ltd. ING Investment Asset Management Company Ltd. Foreign Private Foreign Private foreign Private Indian Private Indian Institutions Institutions Banks Private

Foreign J M Capital Management Limited Private Indian Jardine Fleming (I) Asset Management Company Ltd. Private Foreign Kotak Mahindra Asset Management Company Ltd. Private Indian Jeevan Bima Sahayog Asset Management Company Institutions Ltd. Morgan Stanley Asset Management Company Ltd. Private

Foreign Punjab National Bank Asset Management Company Banks Ltd. Reliance Capital Asset Management Company Ltd. State Bank of India Funds Management Limited. Shriram Asset Management Company Ltd. Sun F & C Asset Management Company Ltd. Private Indian Banks Private Indian Private Foreign

GOVERNANCE CHALLENGES IN INDIA

All of us are now familiar with the ''Corporate Governance Problem'' economists call this ''Agency Problem''. Here we have a principal (shareholder) who hires the agent (the manager of the firm) and the principal needs to worry about the actions of the agent are in his best interest. Whenever principalagent problems surface, the

principal can choose between two strategies for controlling the agent; monitoring inputs or monitoring outputs. Monitoring Inputs:This is micro-management: it involves closely watching the agent and ensuring that every action of the agent is indeed consistent with the goals of the principal. Monitoring Results:We can treat the firm as a black box not taking interest in the details of how it is run, and focusing on clearly defined goals for the outcomes. The shareholders could set targets for profit growth, relatively to other firms in the industry.

The implicit assumption in monitoring the results is that:(a) (b) The "best" agent will be selected based on the likelihood of obtaining results, and If an agent fails to obtain results, he will be sacked. Fund Management is a complex process, in which agency problems could surface at many levels. There are many decisions where the fund managers could choose to act in ways which are not in the best interests of the investors. Some examples are offered here:1) The fund manager could be sloppy and not work hard in thinking about stocks to buy. 2) The fund manager could choose to buy stocks for reasons other than the future expected returns. 3) The fund manager could, "Front-run'' against the fund;

buying stocks on his personal account immediately before doing so on behalf of the fund. 4) The fund manager could choose trading mechanism which yield "rents" instead of choosing the trading mechanism which yields the lowest transaction costs. It is widely believed that brokerage firms often reward individual in fund management companies with "commission", or induce the individuals to use the resources of the fund in ways that help a manipulative cartel.

5)

The fund manager faces choices about custodial and administrative services, which might not be made in a cost minimizing fashion. So it is not feasible for investor making sure that fund manager has taken decision in his best interests. the best way is to monitor the performance. The investor can choose that fund manager who have exhibited the highest returns in the past, and fire fund manager who fail to perform. Since

6)

A nave comparison of returns across alternative funds, which is often done in India, is incorrect when there are differences in the levels of risk adopted by different funds. Scientific performance evaluation efforts could be the answer.

7)

Fund performance evaluation, as yet, suffers from many conceptual difficulties. Given the large extent of market fluctuations, it is difficult to discern ability by looking at the NAV time series. What all means is that hiring and appropriately motivating an active manager is extremely hard. As you can not hire a fund manager who produced good returns in last two or three years; he might just be lucky, and vice versa.

8)

A simple "result orientation" is

misplaced when dealing

with degree of volatility of financial markets. The volatility serves as a cover for managers to hide many activities which are inimical to the interests of investors. 9) Back to Back Investment: Yet another scam is the so called back to back investment. The cash rich companies put money with the mutual fund and in turn the mutual fund invests an equal amount in the share of the company very simple indeed. Seeing a big fund manager buying the share, other investors get excited little knowing that it is only the company money that is being used.

MUTUAL FUND GOVERNANCE IN USA AT A GLANCE

With the continued growth in the number of mutual funds and the anticipated retirement of many mutual fund directors, the issue of mutual fund board composition keeps cropping up. Whether the purpose is to select a new director or to evaluate the match of needs and characteristics of a well-established board, the need for criteria is omnipresent. Naturally each board has to consider its own needs, gaps in existing skills and objectives. Nevertheless, current composition of mutual fund boards and some comments about the skills or experiences which may be in short supply are useful starting points for an evaluation of mutual fund board composition. COMPOSITION OF MUTUAL FUND BOARDS
Characteristi c Age Application to Fund Boards Average age is 62, down from 63 one year ago. Average age of newly appointed director is 52 with typical retirement at age 72. Independent directors are older than interested directors; of the 2,500 independent directors about 30% have or will reach age 72 in next three years. MPI estimates 750 new directors may be elected Comment The average mutual fund investor is 44 years old, is married and employed according to a 1996 ICI report. 60% say that retirement is their top investment aim. Older people own most of the money invested in funds; younger people own most of the new money. MPI's experience is that boards are beginning to discuss term limits for directors as well as age as a

by the year 2001. Sex Only 9% of mutual fund directors are women and the majority of these are interested directors who are employed by the manager. Less than 1% of the mutual fund directors are from minority groups.

Ethnicity

Relationship to Management Company

Primary Profession

Director's fees as a percent of total income and/or wealth

About 30% of mutual fund directors are not independent because they currently work for the management company. 17% of directors used to work for the same management company but have since retired; about 10% of the independent directors retired from the management company more than 2 years ago. About 60% of all mutual fund board members have an investment background 20% are past or present attorney's; 10% are academics and 2% are former political or public figures; about 20% are former executives with a general business background. Fund directors tend to be accomplished professionals or investment executives who have enjoyed successful careers. They

basis for mandatory retirement. According to a 1996 ICI investor profile women make 32% of mutual fund investment decisions and participate in another 21% of decisions. According to the demographic research of the Stanford Research Institute 14% of all mutual fund balances are minority owned. A survey done for Ariel funds indicates that 57% of all AfroAmerican households with annual income over $50,000 own mutual funds. Historically retiring executives of the management company were thought to be logical candidates for the mutual fund board; as were directors from the Management Company's own board and occasionally directors retiring from the Management Company's parent board.

The status quo is more likely to be preserved by those who prospered under the current system of governance. Academics tend to be analytical; business executives tend to be intuitive. Executives from other industries tend to insist on explanations in plain English rather than jargon. Much has been written about the purported lack of independence of mutual fund directors who serve as directors of multiple funds. We have not found this to be

typically have substantial incomes if still employed in their primary profession; if retired, they often have accumulated substantial wealthy. As a rule of thumb, their mutual fund director fees comprise no more than 20% of their total income if still working in their primary profession and no more than 10% of their accumulated net worth if retired. Investment in 50% of the independent mutual funds directors own shares in governed the funds within the complex or fund family. Only rarely do they own shares in every fund they govern because of he great number and variety of funds within a complex. Where ownership is absent, investors may voice frustrations at potentially misaligned interests.

the case because their primary motivation as accomplished professionals is to represent the interest of the shareholders. Furthermore, director fees, while meaningful, do not have an overbearing effect on their overall lifestyle.

When the problem of director not owning shares in public corporations became evident in the 1970s and 1980s, they were awarded stock options or, in some cases, granted outright awards of corporate shares. Since this is impractical in mutual funds, the alternative of allowing directors to defer part of their current compensation into shares of the funds is evolving as a way to get shares in their portfolios.

PRINCIPAL MUTUAL FUND GOVERNANCE PROBLEMS AND POSSIBLE SOLUTIONS

Governance Problem Lack of public and investor knowledge about the role and benefits of mutual funds directors. Primary Solution Implement awareness program and publicity about benefits of mutual fund directors. Comment ICI is capable and has resources to advocate the benefits of independent directors, particularly as part of a program of individually managed privatized Social Security. Varies widely by fund type and period, but clearly focuses investors attention on comparative and valuable aspects of portfolio trading. Bank funds already have a 100% independent director requirement and all funds have a 75% safeharbor requirement following a merger. Provides directors with much greater ability to prevail in a dispute with current management Provides greater comfort to interim managers to accept the appointment.

Investor indifference to Disclose (1) expenses fee and expense levels as percent of gross fund return in periodic bar charts and (2) and after tax performance return assuming a standard individual rank profile. Insufficient director Increase the independence percentage of outside directors to 75% of a fund's board.

Directors inability to Require 67% of enforce their decisions stockholders of record in a proxy battle. to prevent a change of manager or to remove a subsequent interim manager.

EVOLVING BEST PRACTICES FOR MUTUAL FUNDS GOVERNANCE IN INDIA

Undoubtedly, the mutual fund industry is set to grow rapidly in the coming years. The acceptance of my funds has to increase because of the inevitability of market risks and the need to manage those professionally. The stage is being set for this to happen by the Ministry of Finance (through taxincentive) by SEBI ( through comprehensive regulation) and Mutual Funds themselves (through nurturing best practices). Best practices must evolve learning from experience and the desire to excel at corporate governance in industry. For evolving best practices one should identify the basic principles based on which such best practices should evolve. And these principles can be described in one word viz. "RESTFUL". Each letter of this word represents a principle where the funds need to focus to receive guidance for evolving and benchmarking best practice. R: The letter R stands for risk/reward relationship in any kind of a portfolio. The relationship gets confuse because we forget to add the third dimension i.e. "time" to this relationship. Both risks and rewards must be viewed in terms of time for which one is contemplating to assume a certain risk or the time one is prepare to wait for getting a certain reward for the risk assumed. Mutual funds will

have to be extremely succinctly communicating this relationship to existing or prospective investors. Equities are a high risk product. High risk does not necessarily lead to a high return if one waits for a "long period. The word long here means," you may have to wait a longer period to get a commensurate high return. Such return could become available in a short time. In that case, it is better to extinguish the risk take time to think afresh. E: The letter E stands for ease of doing business with a fund. The delivery and transactions should be simple and therefore easy for customers. S: The letter S stands for service. The service should be accurate and fast as it must be courteous. T: The letter T stands for trust. The fund should conduct its affairs in a manner, which generates trust. It takes a long time to build that trust but only a short time to destroy it. T also stands for transparency. Trust full comes and from timely transparency. Transparence means

disclosures about all the information related to investors. It also comes from presenting such disclosures in easy to understand formats.

F: The letter F stands for fairness to all investors, Fairness can be ensured only by exercising a great deal of caution, diligence and control in valuation used for NAV computation. There are three classes of investors in any open ended mutual fund. These three classes are: (a) (b) (c) Those who are coming in, Those who are staying and Those who are exiting. Any attempt to overvalue a portfolio NAV will be

unfair to those who are coming in but favorable to those who are exiting: Funds are tempted to "overvalue" to show a superior performance. By the same logic, if a portfolio is under-valued, it is unfair to investors who are exiting another favorable for those who are entering. U: The letter U stands for utility. The schemes of a fund should serve a useful purpose to meet a specific requirement of an investor. The funds should endeavor to guide investors into appropriate schemes, which are best suited to meet their purpose. L: The letter L stands for liquidity, the funds must deliver the liquidity they promise. Not only investments in illiquid

assets should be controlled, it must be recognized that the so-called liquid assets have only a line liquidity. SEBI regulation does govern all these areas. But all situations cannot be covered to the last detail. This where best practice heops, Best practice is a result of ''good governance''. special stakeholders Both the AMC's and their trust must pay to a evolving mutual best practices. the The in fund viz, investors attention

themselves, the distributors and advisers as also the new breed of analysts or rating agencies must contribute to this process. Such contribution easily comes by insisting on best practices engendered by the seven factors listed above. It is only then an investor would ''restful'' after parting with his money for investment in a fund scheme.

FINDINGS
One can go on and go on. It is important that a good big broom is used to clean the sector before mutual fund becomes the scan of the bull makes. SEBI has done an excellent job in making the market transparent and players disciplined. Findings are as follows: Indian Mutual Funds are similar to unit trusts in the UK and not to mutual funds in the USA. Mutual Funds, they are surely emerged as the biggest repository of middle class savings and any scam in this sector will have a mind- boggling effect on stock markets. Moneymarket, government borrowing and the entire economy. Malpractices in of Mutual Funds: (a) (b) It is imperative that the authorities immediately put an end to the practice of the previous day NAV. The second malpractice is giving different load to small and large investors and all these loads both entry or exit are waived when Big Daddy enters. (c) Fixed term plans and this is the mother of all other malpractices Mutual Funds do not pay tax on their profits. Like they can buy a stock for Rs.100/- today and sell it for Rs.105/tomorrow what they do is they convert this taxable in

come into tax free income for investors by declaring dividends. If we go through the investors preference on the mutual fund scheme, then we realize that unlike some year back when UTI (govt. sponsored) fund denominated the market, but from table drastic shift of interest to private sector mutual funds as 65% percent of respondents preferred them for public sector (20%) and foreign sponsored (15%). On February 1, 2003 when UTI Act 1963 was repealed paving the way for the bifurcation of UTI into: UTI I or specified undertaking of Unit Trust of India and UTI-II or UTI Mutual Fund (UTIMF). To begin with, UTIMF commenced making optional use of state of act Technology in each of its key operational areas for delivering consistently. UTI- Mutual Fund new adopted fund management practices are: (a) (b) (c) Higher empowerment to the fund managers for greater efficiency and accountability. Creation of Risk Management Department Vigorous and regular investment monitoring

A nave comparison of returns across alternative funds, which is often done in India, is incorrect under there are differences in the levels of risk adopted by different funds. Scientific performance evaluation efforts are the answer.

AS there is lack of awareness about the role and benefits of mutual fund, so, for this awareness program and publicity about benefits of mutual funds. Best practices "RESTFUL" should be implemented in order to provide fair and accurate services to mutual fund investors. Foreign owned mutual fund companies should be allowed to enter in the market which leads to the healthy competition among Mutual Fund companies working already. Investors prefer making investment in foreign owned or private owned mutual funds rather than investing in public mutual funds and in case of UTI; after its arises investment had been declined to a large extent but after reviving its policies it had gained its place again in mind of investors. In case of USA, there are no trustees in governing Boards of Mutual Funds but they are having "Board of Directors." Mobilization of savings by mutual funds. Saving mobilized by Mutual Fund since Inception (Rs.crore)

(a) 23 years UTI 4094 Total 4094

% 100 100

(b) 6 years UTI 35793 Bank 7154 MFs Fin. 2106 Inst. MFs Total 45053

% 79.4 15.9 4.7 100.0 0

(c) 8 years UTI 15980 Bank 1686 MFs Fin. 3569 Inst. MFs Pvt. 31303 Sect. Total 52538

% 30.4 3.2 6.8 59.6 100.0 0

Government place a major role in encouraging and attracting investors confidence towards new highs. The future of mutual funds industry is virtually in extricable from the growth of Indian economy, investment patterns and government policy and the development in the capital market.

SUGGESTIONS
As best practices are the result of " Good Governance" so some practices must be there like: Setting up of a standing committee on best practices to promote healthy and fair practice in all areas of operation of mutual funds. Finalization of policy in respect of recognition, provisioning and disclosure of non-performing assets of mutual funds. The malpractice is giving different load to small and large investors. When you buy a mutual fund, you will be told that you have to pay an exit or entry load or both, but when Big Daddy enters, all such loads are waived and he has no loads. The authorities should immediately stop malpractices regarding "load" practices and stipulate that no discrimination should be make on charging of loads on value of investment. It is imperative that the authorities immediately put an end to the practice of previous day NAV. Returns should be given to investors (large or small only where the money has been realised and invested. An audit of all fund transactions of above Rs. 5 crore should be conducted by SEBI to find out if any money has been passed on this way to large companies. If so, they should be asked to return the money and then be given to small investors.

One other malpractice is the so called fixed term plans and this, is the mother of all malpractices. A mutual fund want to give a fixed rate of return to its valued Bid Daddy; so it gives out a special scheme just for him! Many large corporate have been enjoying the privilege, but thankfully there has been so much of media publicity that this has been stopped and the funds can take one year to phase out such plan. Now no single investor can have more than 25 percent in a scheme; also in a single scheme there should be at least 10 investors. It should be stipulated that for a scheme to enjoy all tax goodies, it must have at least 100 investors and no single investor can have more than 10 percent, otherwise no tax benefit can be arisen. Best practices must evolve learning from experience and the desire to excel at corporate governance in industry. But its not the case in India person by UTI scam the biggest Mutual Fund of India. SEBI regulation does govern all these areas. But all situations cannot be covered to the last detail. This is where best practice help. Best practice is a result of "good governance". A nave comparison of returns across alternative funds, which is often done in India, is incorrect when there all differences in the levels of risk adopted by different funds.

As there are trustees in Indian Mutual Funds is as per U.K. model there must be some criteria on basis of what trustees should be appointed like basic qualification Investment pattern of Mutual Funds should be revised in which the investment objectives & investment fund should be imposed by limits in order to protect the investors. As the government plays a major role in encouraging & attracting investors confidence towards new highs. So it indicates that if mutual funds do not wanna loss their sight from Indian economy governments role should be enlarged , it can be done like by government sponsorship. As the entry of foreign mutual funds jeopardizing the present status of Indian Mutual Funds, there should be some restrictions imposed on them by government in order to protect the Indian Mutual Funds.

BIBLOGRAPHY
Mathew James, "The changing profile of India Mutual Funds Industry," Southern Economist, Oct. 15,2002. Rajeshwari T.R. and Ramamoorthy V.F., "Mutuals know Thy Investors," Southern Economist, April 1 & 15, 2001. Singh Gurucharan ,"Mutual Fund Performance

Evaluation," The Indian Journal of commerce. Oct., Dec. 2003. Van Singh V.P. & Vanita, "Mutual Fund Investors

Performance & Perception A Survey, " Indian Journal of Commerce. July Sep. 2002. Saga Parekh Ketan, "UTI MF Completes First Year of Operations 2/2/2004" Source: Asian CERC. Mutual Fund Centre: Personal Finance "Fund of Funds; The New Funda" Saga K.P., "Structure of Mutual Funds in India" Personal Finance. Gupta M.C. Director, IIPA New Delhi, "Governance in India: Vision 2020".

Seth Shekhar, CEO Kotak Mahindra AMC Ltd., "Evolving Best Practices for Mutual Funds". Nov. 13, 2001. "Mutual Funds Need a Big Broom," Financial Express, India Infoline. "SEBI Corporate Governance Norms Soon", Business Standard, Weekend 13/14, March2004. Harisaran S., Indian MF The Present Scenario, Southern Economist. Jatana Renu & Koeon Josephat, Mutual Funds &

Development Pricking the Babbles with MF priorities" Indian Journal of Commerce, Dec. 2003. Nathan Narendra, "Junk UTI" Intelligent Investor, August 15, 2001. Pendharkar N.G., Evolution & Progress of Mutual Funds in India." Problems & Prospects, Bank Quest, The Journal of the Indian Institute of Banks. AMFI update vol.1 issue XI.1 & issue XV P.1 Mathew James, "Mutual Funds in India A study" , Southern Economist, August 1, 2000.

Selvaraj V., " The Lucrative Impact of Mutual Funds", Southern Economist, June 1, 2000. Singh Pritpal, "Evaluation of Performance of MF in India," The Indian Journal of Commerce, July-Sep. 2000. Sites: i) ii) iii) iv) v) vi) vii) ix) mfregulations.com sebi.com amfi.com etivest.com www.sec.gov. google.com www.businessworld.com www.businessindia.com

viii) www.businesstoday.com

ANNEXURE
Mutual Fund is an investment vehicle which pulls the funds of investors and invest in securities permitted by regulations. SEBI GUIDELINES: In 1996, SEBI has given its guidelines for regulating mutual fund. In 1998 amended. Not applicable to Money Market Mutual Funds (MMMF) and offshore MF which are regulated by RBI. Registration of Mutual Fund: (a) up. (b) funds. (c) (d) (e) Sponsor may be acting alone or in combination with other corporate body. Track record and general reputation on of fairness and integrity. He should carry business of financial services which should not be less than 5 years and net worth should be positive in all immediately proceeding 5 years and net worth of proceeding year should be more than capital contribution by the sponsor. Application has to be filed by sponsor of mutual After getting a certificate from SEBI, they can be set

In case of existing mutual fund such should be in the form of trust and trust deed approved by SEBI. (f) (g) Sponsor should contribute atleast 40% of net assets. Any person associated with Mutual Fund or trust should not have guilty of fraud or convicted to any offence involving economic consequences. TRUSTEES: (a) (b) (c) (d) Mutual Fund should be constituted in form by trusts. Trust should be duly registered under Indian Registration Act. 1908. Any person is eligible for appointment of trustee. Integrity, ability and credit worthiness. Initially 50% of the trustees were required to be independent persons but now this % has been raised to 75% of total members. (e) (f) (g) Trustee should not have any subsidiary or not associated with sponsor in any manner. Appointment of trustee should be with prior approval of SEBI. Trustee and AMC will enter into the contract to conduct various business transactions for Mutual Fund. (h) Trustee have wide powers to overviews various activities of AMC and if necessary, it can suggest various remedial steps to AMC. ASSEST MANAGEMENT COMPANY;

(a) (b)

They can be appointed with the prior approval from sponsor or if authorized by trustee deed. AMC should be appointed by BOD and it can be terminated by majority of trustees or 75% of the unit holders agrees to do so.

(c) (d) (e) (f) (g) (h)

An existing AMC should have a round track record of general representation and fairness. The director of AMC should have especial professional qualification as laid down by SEBI. They should not be fraud, criminal and any violation of security law. Atleast 50% of the directors of AMC should not involve with any sponsor or any of its subsidiaries. AMC should have atleast net worth trustee of same mutual fund. It shall not undertake any kind of further business off shore funds, provident fund, venture capital fund pension, fund and insurance company funds. any other financial consultancy.

(i)

AMC may itself or through its subsidiaries undertakes such activities if it specify to the board that the key personnel, back office staff, bank and security accounts separated activity wise and there exists a system of not providing insider information to each other of various securities.

CUSTODIAN: (a) Mutual Fund will appoint custodian to carry on custodian services of various schemes of Mutual Fund send intimation to the board. (b) (c) Agreement with a custodian should be approved by sponsor/ trustee. A custodian shall not be appointed if in case sponsor or its associates hold 50% or more of the voting rights of share capital of custodian. (d) If 50% or more of the director of the custodian represents interest sponsor or its associates. SCHEMES: (a) (b) (c) AMC can float any kind of scheme with a prior approval of trustees. A copy of offer of document scheme should be sent to board for its approval or launching of scheme. The document should contain disclosure, which are adequate to enable investor to make investment decision. (d) (e) If required board may suggest various suggestions in offer documents as it may deemed fit. Advertisements for any scheme shall be in conformity with the advertising code laid down by SEBI and the advertising should disclose investment objectives, periodicity and valuation of investments and method for sale and repurchase of the unit.

LISTING OF CLOSE ENDED SCHEMES: Every close-ended scheme should be listed on any recognized stock exchange within 6 months of closure of subscription. But listing is not required in following cases: (a) (b) (c) (d) If the schemes provides periodic repurchase facility to all unit holder. If it provide monthly income or cater to special need of various persons like senior citizen, widows etc. If the details of such repurchase facility is clearly mentioned in the offer document and If the scheme opens for repurchase within a period of 6 months from the closure of subscription. REPURCHASE OF CLOSE-ENDED SCHEMES: (a) (b) An AMC may at its option repurchase or reissue the repurchased unit of close-ended schemes. The units of close-ended schemes mentioned above may be open for sale to the general public if maximum and minimum amount of sale or redemption of unit is disclosed in offer documents CONVERSION INTO OPEN-ENDED SCHEMES: (a) Units of close-ended scheme may be converted into open-ended if the offer document of such schemes discloses disclosure. (b) Upto 1998, prior approval of majority of unit holders was required but now it is not required in case unit the option and the period of such

holder does not express their written consent to the other. ROLLOVER (EXTEND): A close ended scheme shall be fully redeemed at the end of maturity period unless the majority of unit holders (b) decides for its rollover by passing a resolution in the annual general meeting. If remaining unit holders who does not opt for rollover will redeem their holdings in the schemes at NAV based pricing. OFFERING PERIOD: Any scheme of Mutual Fund will be open for a period not more than 45 days except "equity linked saving scheme". (b) The offer document should contain minimum subscription amount it seeks to raise under the scheme. (c) In case of oversubscribes, the amount of subscription that it can retain. In this case all the applicants applying for more than 5000 units will be given full allotment. (d) In case of over subscribed the remaining amount of unit holders who have not been allocated, their money should be refunded with 6 weeks from the date of closure of offer and after that 15% interest

(a)

(a)

rate will be paid which will be jointly shared by directors of AMC. TRANSFER OF UNITS: Unless otherwise restricted or prohibited, any unitholders can transfer its units by the acts of operations of law. (b) If the units are with depositories such units will be transferred account to rules and regulations of SEBI depository and participants regulation 1996. GUARANTEED RETURN: Such returns are guaranteed by AMC sponsors. If a statement indicating that name of a person who will provide the guarantee return is made in offer document. (c) The manner in which guarantee is to be met has been stated in the offer document. INVESTMENT OBJECTIVES: All Investments should be made in transferable securities or in money market or capital market or privately placed deb. or securitised debts. (b) Mutual Funds are not allowed to give loans to any party.

(a)

(a) (b)

Any unit may provide guarantee return only if

(a)

(c)

Money collected through schemes should be invested only in money market instruments as specified by RBI guidelines.

(d) (e) (i) (ii)

AMF can not own not more than 10% of paid up capital under all its schemes. Mutual Fund is not allowed to transfer investments form one scheme to another except in the cases: Such transfer is done at prevailing market price for quoted investment on spot prices. Such transfer must be in conformity with investment objectives of the schemes.

OBJECTIVES OF THE STUDY

As in India, public as well as private Mutual Funds are working also. But whether these Mutual Funds are working in tune with the norms of governance or not: To study the model of mutual fund and find what

model is there in India. Whether UK or USA. To know how many mutual funds are there in India

and how many schemes they are offering? To know what is the structure of mutual funds

followed by Indian mutual funds. To know the reason behind the UTI's crisis and how it

has been revived? To examine guidelines laid down by SEBI (Securities

Exchange Board of India) are followed by Indian mutual funds or not. To evaluate the performance of mutual funds

working in India. To make comparison Indian and Foreign owned

Mutual Funds performance evaluation.

To know what are the recent trends in mutual fund

Industry and how much funds are mobilized by mutual funds? To have a very little study of mutual fund

Governance of USA and problems and there probable solutions. To find out what could be best governance practices

for mutual funds performance? To find out what are investor's performance and

perceptions regarding difference schemes of mutual funds of both public as well as private mutual funds.

RESEARCH METHODOLOGY

Research may be defined as the specialized body of knowledge. The success of the research depends on the methods that are employed for preceding it. So, research methodology plays very important role in carrying out whole research process. The most important parts are covered under it are: 1) Research Design Data Collection Sample Size

RESEARCH DESIGN : It is termed as the framework of the research process. It varies according to the type of research. Our research study is Exploratory. As four exploratory technique emerge with wide applicability for the management researcher :- (1) Secondary Data Analysis, (2) Experience Surveys, (3) Focus Groups, and (4) Two stage Designs. In the preparation of this project report, "Secondary Data Analysis" is used. First step in an exploratory study is a search of the secondary literature. Studies made by others for their own purposes represent secondary data. Within Secondary data exploration, I have started first with collecting data

regarding Mutual Funds from various sites like google.com and mfregulation.com Second Source of secondary data used by me is the published documents prepared by others outside No. of periodicals, journals & many books have been referred for the preparation of this report. From various sources of information like annual reports of Mutual Funds. Then challenges they are required to face in the future. 2) DATA COLLECTION: There are two methods of data collection .It may be carried out through primary or secondary sources. As the project work is on Mutual Funds, so data collection is mainly done through "Secondary Sources". 3) SCOPE OF THE STUDY: Scope signifies the extent of the study. As this project report is prepared in order to know what are the problems and what can be the best practices for Mutual Funds Governance in India. To know what the structure is prevailing in India Mutual Funds Industry. Then a brief review has been made on their probable solutions is done.

CONSTRAINTS OF THE STUDY

Being

based

on

the

recorded

facts,

the

following

limitations should be kept into account so that correct decisions can be taken. 1). Scarcity of data: Scarcity of data in some areas is a problem in the preparation of this report like data regarding composition of Mutual Funds Board in India could not be found out. 2). Paucity of funds: Movement has been restricted by paucity of funds, as most of the data for this project is taken from the various sites on the net. Still relevant material has been taken & not left due to this limitation. 3). Time span: This report is prepared in a time span of two months, which was not sufficient. As for complete dissection of a topic, one requires ample time. (4). Subjectivity element: Element of subjectivity cannot be ruled out while

preparing the report.

5)

Scope of study: Within a framework of time & size (of report), one has to prepare project. Otherwise the study could be extended to other Mutual Funds Companies working in India. For the sake of convenience, some worthwhile references related to these little touched topics has also been mentioned at the end.

CONCLUSION
In India, is case of "Governance of Mutual Funds" it can be said that Governance is not " Panacea" for all problems while dealing with this matter. But is can lessen that complexities & problems to possible extent. Moreover, in India mostly scams are done with the help of members of top level even, so how can one expect best Governance practices in order to get safety. And also in India investors are also inclined toward Mutual Funds as the investment vehicle so and Govt. plays major role for encouraging the investor toward high investments. Also on the basis of the findings it may be said that find managers don't take interest in order to provide good return to investors, so by tightening the role of fund managers the problem of investors can be solved upto some extent.