Mutual Fund

In Depth Study of Mutual Fund Industry
Section: 1 Introduction to Mutual Fund

Introduction Definition of Mutual Fund History and Background
S.V. Institute of Management, Kadi
INTRODUCTION
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 appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by the (pro rata). Thus a Mutual fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. Anybody with an inventible surplus of as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. A mutual fund is the ideal investment vehicle for today's complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it
Difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual fund gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. A draft offer document is to be prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations.
A sponsor then hires an asset management company to invest the funds according to the investment objective. It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund. In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes. A mutual fund is a collective investment fund formed with the objective of raising money from a large number of investors and investing it in accordance with a specified objective to provide returns that accrue pro rata to all the investors in proportion to their investment. The units held by an investor represent the stake of the investors in the fund. A professionally qualified and experienced team manages the investments and all other functions. With the large pool of money, a mutual fund is able to exploit economies of scale in the areas of research, investing, shuffling the investments and transaction processing - it is able to hire professionals in these functions at a very low cost per investor.
As per SEBI regulations, mutual funds can offer guaranteed returns for a maximum period of one year. In case returns are guaranteed, the name of the guarantor and how the guarantee would be honored is required to be disclosed in the offer document.
Definition of Mutual Fund:

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund. The Situation could vary as per age groups, mindsets and risk taking ability, but the solution, in each case wants money to grow. Most of the investors dont have sufficient knowledge about different investment options, financial instruments nature, market information, analytical skills and therefore their funds are lacking proper management and diversification to
get market-linked return with flexibility as well as liquidity. These kinds of investors should prefer mutual funds to channels their funds properly. A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed. Mutual Funds are the unique instrument that offers an individual professional management, diversification, flexibility, liquidity and a chance to get market-linked returns. Mutual funds are indeed the best tool for wealth creation. Whatever other instruments can do, mutual funds can do too and more efficiently.
HISTORY & BACKGROUND:
Four Phases Of Mutual Fund In India :The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase - 1964-87 An Act of Parliament established Unit Trust of India (UTI) on 1963. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was 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 crore of assets under management. Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by 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 in 1989 and GIC in 1990. The end of 1993 marked Rs.47, 004 as assets under management.
Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crore. The Unit Trust of India with Rs.44, 541 crore of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29, 835 crore (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crore of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.1,53,108 crore under 421 schemes.
(Source: www.amfiindia.com.)
Analysis:
During the year 1965 there was only one player UTI. With the entry of public sector banks in mutual fund like PNB, SBI, LIC, BOB from 198793, it leads to grow AUM up to 47000 crore. From 1993 private sector banks were entered in mutual fund industry, which offers diversified schemes along with tax benefits and also including insurance benefits to investors which fulfill the objectives of investors regarding regular income. So in this graph from the year 1993 Mutual Fund industry has grown with the AUM of Rs. 21,805 crore up to the January 2003. After that AUM declines in the March 2003 at Rs. 79.464 crore because of UTI was bifurcated in two separate entities. From March 2004 regulations were helping private sector Mutual Funds to merge with foreign companies and stock market was also started to cross its limits which helps AUM to grow up to Rs.2,31,862 crore, in March 2006. 1,
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A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Each Mutual Fund with different type of schemes is managed by respective Asset Management Company (AMC). An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the unit holder of the scheme. The invested money in a particular scheme of a Mutual Fund is then invested by fund manager in different types of suitable stock and securities, bonds and money market instruments. Each Mutual Fund is managed by qualified professional man, who uses this money to create a portfolio which includes stock and shares, bonds, gilt, moneymarket instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money.
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Mutual Funds schemes are managed by respective Asset Management Companies sponsored by financial institutions, banks, private companies or international firms. The biggest Indian AMC is UTI while Alliance, Franklin Templeton etc are international AMC's. Mutual Funds offer several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund. CRISIL's composite performance ranking (CPR) measures the performance for each of the open-ended scheme of Mutual Fund. There are four parameters considered to measure the performance of a mutual fund such as Risk-adjusted returns of the scheme's NAV, Diversification of Portfolio, Liquidity and Asset Size.
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Section: 2 Organization of Mutual Fund

Legal Structure of MF Role of AMC
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Process of MF
Legal Structure of Mutual Fund
Who Promotes the MF :-
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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 promote of a company as 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 an Asset Management Company as fund managers. The sponsor, either directly or acting through the Trustees, will also appoint a Custodian to hold the fund assets. All these appointments are made in accordance with SEBI Regulations.
As per the existing SEBI regulations, for a person to qualify as a sponsor, he must contribute as least 40% of the net worth of the AMC and possess a sound financial track record over five year prior to registration. Mutual Funds as Trusts: A mutual fund is India is constituted in the form of a Public Trust created under the Indian Trusts Act, 1882. The Fund Sponsor acts as the Settler of the Trust, contributing to its initial capital and appoints a Trustee to hold the assets of the Trust for the benefit of the unit-holders, who are the beneficiaries of the Trust. The fund then invites investors to 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. Trustees:
S.V. Institute of Management, Kadi 15
A Board of Trustees a body of individuals or a Trust Company - a corporate body, may manage the Trust -the mutual fund. Board of Trustees manages most of the funds in India. While the provisions of the Indian Trusts Act, will govern the Board of Trustees where the Trustee is a corporate body, it would also be required to comply with the provisions of the Companies Act, 1956. The Board of the Trustees does not directly manage the portfolio of securities. For this specialist function, they appoint an Asset Management Company. They ensure that the fund is managed by the AMC as per the defined objectives and in accordance with the Trust Deed and SEBI Regulations.
The Asset Management Company (AMC): The role of an Asset Management Company (AMC) is to act as the investment manager of the Trust under the Board supervision and 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 a new AMC with the prior approval of the Board and unit-holders. The sponsor, or Board of Trustees, if so authorized, appoints the Asset Management Company (AMC) which would, in the name of the Trust, float and then manage the different investment scheme as per SEBI Regulations and as per the AMC Agreement it signs with the Trustees. The AMC of a mutual fund must have a net worth of at least of Rs. 10 crore at all times. The AMC cannot act as a trustee of any other mutual fund.
Registrar and Transfer Agent:

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.
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Role of AMC (Asset Management Company) Behind a Mutual Fund :

AMC controls the operations and functioning of a Mutual Fund. It is very critical to the performance of a Mutual Fund as it decides on the style of functioning, people who are going to manage the funds, the commitment to service quality and overall supervision. The financial strength and the commitment of the AMC sponsors to the business are very key issues. This is because most AMCs lose money in the first few years of operations. In most cases, these losses are much more than the capital requirements stipulated by SEBI. Hence, a sponsor which is financially weak or which cannot capital to the business either because of its inability or unwillingness will result in an unhealthy operation. There will be a tendency to cut corners and unwillingness to spend money to expand operations. This is the last place where high quality persons would want to remain and work. The AMC then remains stunted and the sponsors lose interest. The worst affected are the investors. This is exactly what has happened with some AMCs promoted by Indian business houses. This is also a problem that has afflicted some of the AMCs floated by nationalized banks. In these organizations, the traditional thinking is prevalent which can be summarized, as "money is power". Since Mutual Fund business did not have access to too much money, a posting in the
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AMC became punishment postings for some personnel who were not doing well in the parent organization or who lost out in the organizational politics. The management of the banks also did not allow these AMCs to become independent viable businesses. The CEOs of the AMCs did not have any clue of the Mutual Fund business and neither were they interested in it the entire effort was spent in getting a posting back in the parent. The fund managers had no experience in the activity making a mockery of "professional management". The sad results are there to see. Some of the parents had to provide funds to bridge the gap in "assured return schemes". It looks extremely likely that some of these AMCs will no longer exist in a few years.
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Process of Mutual Fund
Explanation: In the above graph shows how Mutual Fund works and how investor earns money by investing in the Mutual Fund. Investors put their saving as an investment in Mutual Fund. The Fund Manager is a person who takes the decisions where the money should be invested in securities according to the schemes objective. Securities include Equities, Debentures, Govt. Securities, Bonds, and Commercial Paper etc. These Securities generates returns to the Fund Manager. The Fund Manager passes back return to the investors.
Section: 3 Investment Options or Tools
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Investment Tools Or Substitutes Of Mutual Fund :

Saving form an important part of the economy of any nation. With the saving invested in various options available to the people, the money acts as the drive for growth of the country. There are basically two kinds of investments. One that will give returns at fixed rate and one were the rate of returns depending upon the certain factors of the economy. Shares RBI taxable bonds Post Office Monthly Income Schemes Fixed Deposit Public provident fund Life Insurance Government securities or guilt Real Estate Commodities
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Shares:
Investment in shares of different companies is one of the investment options. Today, many people invest in shares such as Equity shares, Debentures etc. Because they are providing higher returns which maximize the objective of investors but such investments depends on their own risk.
RBI Bond:
RBI Bonds are tax saving bonds that have a special provision that allows the investor to save on tax. These Bonds are instruments that are issued by the RBI, and currently have two options one carrying an 8% rate of interest p.a., which is taxable and the other one carries a 6.5% (tax-free) interest p.a. The interest is compounded half-yearly and there is no maximum limit for investment in these bonds. The maturity period of the 8% (taxable) bond is 6 years and that of the 6.5 %( tax-free) bond is 5 years. Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank of India, designated branches of the SBI, and designated branches of nationalized banks across the country. Investment: The minimum investment on RBI Savings Bonds is Rs. 1,000.
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Post Office Monthly Income Scheme:

The post-office monthly income scheme (MIS) provides for monthly payment of interest income to investors. It is meant for investors who want to invest a sum amount initially and earn interest on a monthly basis for their livelihood. The MIS is not suitable for an increase in your investment. It is meant to provide a source of regular income on a long term basis. The scheme is, therefore, more beneficial for retired persons. Features: Only one deposit is available in an account. Only individuals can open the account; either single or joint. (Two or three). Interest rounded off to nearest rupee i.e., 50 paise and above will be rounded off to next rupee. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts. The maximum investment for a single account is Rs 3 lakh and Rs 6 lakh for a joint account. The duration of MIS is six years. Returns: The post-office MIS gives a return of 8% on maturity. The minimum investment in a Post-Office MIS is Rs 1,000 for both single and joint accounts.
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Fixed Deposit:
A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (Loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India. Features: Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate. The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-.
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Returns: The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the amount invested. Interest rate also varies between each bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest. The Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, and 1.5 years to 10 years.
Public Provident Fund:

A PPF is a long-term savings plan with attractive tax benefits. Interest is given at the rate 8 % per annum. It is suitable for those who are not looking for short-term liquidity or regular income. Normal maturity period is 15 years from the close of the financial year in which the initial subscription was made. The Maturity values for PPF account would depend on what we invest each year .To illustrate, look at the following table: Who should invest? PPF is mainly suitable for long-term saving and for availing of tax incentives. The lump-sum amount that you receive on maturity (at the end of 15 years) is completely tax-free. PPF does not provide any avenues for
regular income. It provides for accumulation of interest income over a 15year period, and the lump-sum amount (principal + interest) is payable on maturity. However the interest amount would depend upon the prevailing rate of interest on your PPF at any given time. These rates are notified by the GOI in the Official Gazette from time to time, and are calculated in such manner as is specified in the scheme. Minimum Investment: The minimum investment in a PPF account is Rs 100 per annum for each year of the Scheme. The maximum prescribed contribution is Rs 70,000 per annum. The highlight of the scheme is that you can vary your investments between Rs 100 and Rs 70,000 every year in multiples of Rs 5. The maximum number of installments in a year is 12. No fixed investment in required. A PPF Account passbook is issued to the depositor by the bank where the account is held, which can be updated from time to time.
Life Insurance:
Life Insurance cover is essential for it provided the following benefits: A lump sum payment to the nominees at the time of the death of the policyholder; A regular payment to the nominees in the event of the death of the policyholder; Tax benefits, as premiums paid reduce the liability of tax; Relieves economic hardships in the family on the uneventful death of the sole income holder;
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Government Security:
Government security and Gilts are totally secured. Government of India Periodically issues government Bonds. This is now available in secondary market through satellite dealers and banks. They are known to yield 5% to 6% per anunum.
Real Estate:
Investment in Real Estate is a good long-term investment for well-heeled investor with a huge amount of money. Depending upon the total resources at your disposal, you can invest a part of it in property.
Commodities:
Commodity Investment includes gold, silver, food grains, vegetables etc. Such type of investment is done by big traders for large quantity. Current market gives the results that investment in gold and silver provide high returns within short time to the investors.
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Comparison of Mutual Funds with other options of Investments:

An investor has various options to invest his funds such as Mutual funds, life insurance, shares etc. Following table shows features associated with various investment options in comparison with other options of investments.
Income Capital appreciat ion Tax benefits Safety Liqui dity Collateral for loans Credit rating Inflation protection
Mutual funds (openended) Mutual funds (closeended) Shares
X X
X Bank Fixed Deposit Life Insuranc e Public Provide nt Fund
= Means that the feature is associated with investment X = means that the feature is not associated with investment
Ideal Investment Pattern:

Investors of all categories could choose to invest on their own in multiple options but the best option can stand to be investment in mutual funds for the sole reason that all benefits come in a package. An investor normally prioritizes his investment needs before undertaking an investment. So different goals will be allocated different proportions of the total disposable amount. Investments for specific goals normally find their way into the debt market as risk reduction is of prime importance. This is the area for the riskaverse investors and here, mutual funds are generally the best option. The reasons are not difficult to see. One can avail of the benefits of better returns with added benefits of anytime liquidity by investing in open-ended debt funds at lower risk. Many people have burnt their fingers by investing in fixed deposits of companies who were assuring high returns but have gone bust in course of time leading to distraught investors as well as pending cases in the Company Law Board. This risk of default by any company that one has chosen to invest in, can be minimized by investing in mutual funds as the fund managers analyze the companies financials more minutely than an individual can do as they have the expertise to do so. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. Since there is no penalty on pre-mature withdrawal, as in the cases of fixed deposits, debt funds provide enough liquidity. Moreover, mutual funds are better placed to absorb the fluctuations in the prices of the
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securities as a result of interest rate variation and one can benefits from any such price movement.
Apart from liquidity, these funds have also provided very good post-tax returns on year-to-year basis. Even historically, we find that some of the debt funds have generated superior returns at relatively low level of risks. On an average debt funds have posted returns over 10 percent over one-year horizon. The best performing funds have given returns of around 14 percent in the last one-year period. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Though they are charged with a dividend distribution tax on dividend payout at 10 percent (plus a surcharge of 10 percent), the net income received is still tax free in the hands of investor and is generally much more than all other avenues, on a post tax basis. Moving up in the risk spectrum, we have people who would like to take some risk and invest in equity funds/capital market. However, since their appetite for risk is also limited, they would rather have some exposure to debt as well. For these investors, balanced funds provide an easy route of investment. Armed with the expertise of investment techniques, they can invest in equity as well as good quality debt thereby reducing risks and providing the investor with better returns than he could otherwise manage. Since they can reshuffle their portfolio as per market conditions, they are likely to generate moderate returns even in pessimistic market conditions.
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Next come the risk takers. Risk takers by their very nature, would not be averse to investing in high-risk avenues. Capital markets find their fancy more often than not, because they have historically generated better returns than any other avenue, provided, the money was judiciously invested.
Though the risk associated is generally on the higher side of the spectrum, the return-potential compensates for the risk attached. Capital markets interest people, albeit not all for there are several problems associated. First issue is that of expertise. While investing directly into capital market one has to be analytical enough to judge the valuation of the stock and understand the complex undertones of the stock. One needs to judge the right valuation for exiting the stock too. It is very difficult for a small investor to keep track of the movements of the market. Entrusting the job to experts, who watch the trends of the market and analyze the valuations of the stocks will solve this problem for an investor. Mutual funds specialize in identification of stocks through dedicated experts in the field and this enables them to pick stocks at the right moment. Sector funds provide an edge and generate good returns if the particular sector is doing well. Next problem is that of funds/money. A single person cant invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. This limits him from diversifying his portfolio as well as benefiting from multiple investments. Here again, investing through Mutual Fund route enables an investor to invest in many good stocks and reap benefits even through a small investment. This not only diversifies the portfolio and helps in
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generating returns from a number of sectors but reduces the risk as well. Though identification of the right fund might not be an easy task, availability of good investment consultants and counselors will help investors take informed decision.
Section: 4 Mutual Fund Industry

Mutual Fund in India Market Trend Risk under MF Risk Return chart Types of MF Benefits and Drawback of MF AMC Companies in India
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Calculation of NAV
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Mutual Fund in India:

Mutual Fund operation in India is governed by number of regulation and guidelines various agencies, viz. Guidelines issued by RBIs n July 7, 1989, Ministry of Finance guidelines dated June 28, 1990 and its revised version dated February 14, 1992, SEBI (Mutual Fund) regulations January 20, 1993, UTI Act 1963 and UTI guidelines, The Indian Trust Act 1882 and Relevant provision of the companies Act, 1956 and Income Tax Act 1961. Since Banks are under the direct control of RBI, Mutual Funds sponsored by commercial banks were governed by guidelines issued by RBI. Since LIC and GIC do not fall under purview of RBI, Mutual Funds sponsored by them were governed by guideline issued by Ministry of Finance. The Indian Mutual Funds are diverse the way they are constituted, while the UTI, dominant player is constituted as a trust under the special Act (UTI Act, 1963) by the parliament, rest of funds are set up as Trust under Indian Trust Act, 1882. As per the UTI Act 1963, UTI combines the activity of trustee, AMC and Custodian as against SEBI (Mutual Funds) regulation 1993, which defines the structure of Mutual Funds that are to be set up as trust governed by board of trustees or trustee companies and are to be managed by a separate AMC. The custody of asset is to be with a custodian who is independent of the sponsors and AMCs.
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However, prior to 1993, most of the mutual funds operated as the subsidiaries and trusts of the promoting organization. In order to protect precious savings of small investors, it had become imperative to frame and implement strict guidelines and disclosure standards.
Aspects which need to be looked into by Mutual Fund regulatory agencies:Investment Decisions: For effective and efficient fund management we need qualified and experienced Fund Managers. Quality of a fund manager is much more important. The mutual fund should be forced to set up full-fledged investment research departments with an exclusive focus on macro and micro analysis of the market and recommending investment or disinvestments decision based on this analysis. Net worth: SEBI has imposed capital adequacy for AMC. As per revised guidelines, net worth of AMC is expected to be minimum Rs.10 crore. Indeed, net worth needs to be linked to the size of funds under management. Often, fund sponsors commit themselves that they would bear all the promotional expenses of a fund. The ceiling limit on the promotional expenses is 6%. Further, SEBI has stipulated that net worth need not be in liquid assets.
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Transparency: Transparency with respect to investments in each company or industry is desirable. Transparency with regard to broader dealing and various payments made to intermediaries who also help mutual fund industry in the long run. Therefore regulator and The Association of Mutual Fund Industry in India (AMFI) need to formulate policy framework as far as investment policies are concerned. Investment Restrictions: Currently, there are two different sets of restrictions on investments. One set of restrictions, prescribed by UTI Act, 1963 and UTI General Regulation, is applicable only to its investments. As per the UTI Act, it can invest up to 10 to 15% of the outstanding equity capital of any company, while SEBI prescribed only 5%. Though it is with a good intention to ensuring a diversified fund that SEBI restricted al the funds of mutual funds from taking up more than 5% of the outstanding equity of any company, it does not appear to be a logical especially in a market where liquid scrip are comparatively less. A mutual fund with one fund and total investible amount of Rs. 100 crore and another mutual fund with 10 different funds and aggregate investible funds of Rs. 10,000 crore should not be treated alike with uniform investment limit. There has to be separate guidelines for ensuring bigger mutual funds to hold correspondingly more in a specific company or industry, which can improve, yield on investments.
Assured returns: Presently, SEBI allows only those mutual funds having a track record of 5 years to launch guaranteed return funds that too with return guaranteed one year at a time with post-dated cheques. This restriction makes the investor manager to close his eyes on the demand for guaranteed returns funds from various sections of investors especially retired persons, handicapped persons, widows etc. SEBI may ask AMCs to have sufficient capital adequacy and give freedom to mutual funds to assure returns for longer than one year. This would enable mutual funds to compete with banks and non-banking financial companies in mobilizing the resources by way of floating income funds. Voting rights: Since the mutual funds are constituted as trust, voting rights are presently vested with a public trustee. In order to protect the interest of the ultimate investors and to prevail shareholders democracy, the savings pooling vehicles such as Unit Trusts and mutual funds should be given to voting rights. The Union Budget 1996-97 proposed to give voting rights to mutual funds and venture funds.
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Market Trends:
A lone UTI with just one scheme in 1964 now competes with as many as 400 odd products and 34 players in the market. In spite of the stiff competition and losing market share, UTI still remains a formidable force to reckon with. Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now pass with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible. The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generations of private funds which have gained substantial mass are now seen flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry. By rewarding honest and transparent management with higher valuations, a system of risk-reward has been created where the corporate sector is more transparent then before.
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Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are improving. Funds collection, which averaged at less than Rs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 199899. In the current year mobilization till now have exceeded Rs300bn. Total collection for the current financial year ending March 2000 is expected to reach Rs450bn. What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs. 7819.34 crore during the first nine months of the year as against a net inflow of Rs.604.40 crore in the case of public sector funds. Mutual funds are now also competing with commercial banks in the race for retail investors savings and corporate float money. The power shift towards mutual funds has become obvious. The coming few years will show that the traditional saving avenues are losing out in the current scenario. Many investors are realizing that investments in savings accounts are as good as locking up their deposits in a closet. The fund mobilization trend by mutual funds in the current year indicates that money is going to mutual funds in a big way. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-99.
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India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund assets are not even 10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in the first quarter of the current fiscal year mutual fund assets went up by 115% whereas bank deposits rose by only 17%. (Source: The Financial Express September, 99) This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not close down completely. Their role as intermediaries cannot be ignored. It is just that Mutual Funds are going to change the way banks do business in the future
Banks v/s Mutual Funds:

BANKS Returns Administrative exp. Risk Investment options Network Liquidity Quality of assets Guarantee Low High Low Less High penetration At a cost Not transparent Maximum Rs.1 lakh on deposits MUTUAL FUNDS Better Low Moderate More Low but improving Better Transparent Everyday None
Interest calculation Minimum balance between 10th. & 30th. Of every month
Risks in Mutual Fund Industry:

Different Mutual Fund categories as previously defined have inherently different risk characteristics and should not be compared side by side. A bond fund with below-average risk, for example, should not be compared to a stock fund with below average risk. Even though both funds have low risk for their respective categories, stock funds overall have a higher risk/return potential than bond funds. Of all the asset classes, cash investments (i.e. money markets) offer the greatest price stability but have yielded the lowest long-term returns. Bonds typically experience more short-term price swings, and in turn have generated higher long-term returns. However, stocks historically have been subject to the greatest short-term price fluctuationsand have provided the highest long-term returns. Investors looking for a fund which incorporates all asset classes may consider a balanced or hybrid Mutual Fund. These funds can be very conservative or very aggressive. Asset allocation portfolios are Mutual Funds that invest in other Mutual Funds with different asset classes. At the discretion of the manager(s), securities are bought, sold, and shifted between funds with different asset classes according to market conditions. Mutual Funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall
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and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund. Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk. Following is a glossary of some risks to consider when investing in Mutual Funds: Call Risk: The possibility that falling interest rates will cause a bond issuer to redeemor callits high-yielding bond before the bond's maturity date. Country Risk: The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline. Credit Risk: The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. Currency Risk: The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk.
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Income Risk: The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates. Industry Risk: The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Inflation Risk: The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk: The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk: The possibility that an actively managed Mutual Fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives. Market Risk: The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall. Principal Risk: The possibility that an investment will go down in value, or "lose money," from the original or invested amount.
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RISK-RETURN CHART:
Risk Tolerance/ Return Expected Low Medium
Focus
Suitable Products
Benefits MFs
offered
by
Debt Partially Debt, Partially Equity
Bank/ Company FD, Debt Liquidity, Better Postbased Funds Balanced Funds, Tax returns Some Liquidity, Better Postreturns, Better
Diversified Equity Funds Tax of shares and
and some debt Funds, Mix Management, Fixed Diversification Equity Diversification, in stock picking, Liquidity, Tax free dividends Deposits Capital Market, as Sector)
High
Equity
Funds (Diversified as well Expertise
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Risk Return Graph
Hedge Funds Potential For Return Sectoral Funds Growth Funds Aggressive, Value, Growth
Balanced Funds Ratio of Debt: Equity Debt Funds Gilt Funds, Bond Funds, High Yield Funds Liquid Funds
Risk
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Types of mutual funds:

Many people tend to wrongly equate mutual fund investing with equity investing. Fact is, equity is just one of the various asset classes mutual funds invest in. They also invest in debt instruments such as bonds, debentures, commercial paper and government securities. Every scheme is bound by the investment objectives outlined by it in its prospectus, which determine the class of securities it can invest in. Based on the asset classes, broadly speaking, the following types of mutual funds currently operate in the country. Equity funds: - The highest rung on the mutual fund risk ladder, such funds invest only in stocks. Most equity funds are general in nature, and can invest in the entire basket of stocks available in the market. There are also specialized equity funds, such as index funds and sector funds, which invest only in specific categories of stocks.
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Balanced funds: - Lastly, there are balanced funds, whose investment portfolio includes both debt and equity. As a result, on the risk ladder, they fall somewhere between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments.
Lets now take a closer look at the working of each of these three categories of funds, the investment options they offer, and how best you can make money from them. Hedge funds:- Hedge funds in the United States are pooled investment funds with loose SEC regulation, and should not be confused with mutual funds. Certain hedge funds are required to register with SEC as investment advisers under the Investment Advisers Act. The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a fee greater than 1%, plus performance fee of 20% of a hedge funds profits. There may be a "lock-up" period, during which an investor cannot cash in shares.
On the basis of objectives:-Equity Funds:
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As explained earlier, such funds invest only in stocks, the riskiest of asset classes. With share prices fluctuating daily, such funds show volatile performance, even losses. However, these funds can yield great capital appreciation as, historically, equities have outperformed all asset classes. At present, there are four types of equity funds available in the market. In the increasing order of risk, these are:
Index funds: These funds track a key stock market index, like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. Hence, their portfolio mirrors the index they track, both in terms of composition and the individual stock weight ages. For instance, an index fund that tracks the Sensex will invest only in the Sensex stocks. The idea is to replicate the performance of the benchmarked index to near accuracy. Index funds dont need fund managers, as there is no stock selection involved. Investing through index funds is a passive investment strategy, as a funds performance will invariably mimic the index concerned, barring a minor "tracking error". Usually, theres a difference between the total returns given by a stock index and those given by index funds benchmarked to it. Termed as tracking error, it arises because the index fund charges management fees, marketing expenses and transaction costs (impact cost and brokerage) to its unit holders. So, if the Sensex appreciates 10 per cent during a particular
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period while an index fund mirroring the Sensex rises 9 per cent, the fund is said to have a tracking error of 1 per cent. To illustrate with an example, assume you invested Rs 1,000 in an index fund based on the Sensex on 1 April 1978, when the index was launched (base: 100). In August, when the Sensex was at 3.457, your investment would be worth Rs 34,570, which works out to an annualized return of 17.2 per cent. A tracking error of 1 per cent would bring down your annualized return to 16.2 per cent. Obviously, the lower the tracking error, the better the index funds. Diversified funds: Such funds have the mandate to invest in the entire universe of stocks. Although by definition, such funds are meant to have a diversified portfolio (spread across industries and companies), the stock selection is entirely the prerogative of the fund manager. This discretionary power in the hands of the fund manager can work both ways for an equity fund. On the one hand, astute stock-picking by a fund manager can enable the fund to deliver market-beating returns; on the other hand, if the fund managers picks languish, the returns will be far lower. The crux of the matter is that your returns from a diversified fund depend a lot on the fund managers capabilities to make the right investment decisions. On your part, watch out for the extent of diversification prescribed and practiced by your fund manager. Understand that a portfolio
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concentrated in a few sectors or companies is a high risk, high return proposition. If you dont want to take on a high degree of risk, stick to funds that are diversified not just in name but also in appearance.
Tax-saving funds : Also known as ELSS or equity-linked savings schemes, these funds offer benefits under Section 88 of the Income-Tax Act. So, on an investment of up to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per cent from your taxable income. You can invest more than Rs 10,000, but you wont get the Section 88 benefits for the amount in excess of Rs 10,000. The only drawback to ELSS is that you are locked into the scheme for three years. In terms of investment profile, tax-saving funds are like diversified funds. The one difference is that because of the three year lock-in clause, taxsaving funds get more time to reap the benefits from their stock picks, unlike plain diversified funds, whose portfolios sometimes tend to get dictated by redemption compulsions. Sectoral funds:
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The riskiest among equity funds, sector funds invest only in stocks of a specific industry, say IT or FMCG. A sector funds NAV will zoom if the sector performs well; however, if the sector languishes, the schemes NAV too will stay depressed. Barring a few defensive, evergreen sectors like FMCG and pharma, most other industries alternate between periods of strong growth and bouts of slowdowns. The way to make money from sector funds is to catch these cyclesget in when the sector is poised for an upswing and exit before it slips back. Therefore, unless you understand a sector well enough to make such calls, and get them right, avoid sector funds. Debt Funds : Such funds attempt to generate a steady income while preserving investors capital. Therefore, they invest exclusively in fixed-income instruments securities like bonds, debentures, Government of India securities, and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. There are basically three types of debt funds. Income funds: By definition, such funds can invest in the entire gamut of debt instruments. Most income funds park a major part of their corpus in corporate bonds and debentures, as the returns there are the higher than those available on government-backed paper. But there is also the risk of defaulta company could fail to service its debt obligations.
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Gilt funds: They invest only in government securities and T-billsinstruments on which repayment of principal and periodic payment of interest is assured by the government. So, unlike income funds, they dont face the spectrum of default on their investments. This element of safety is why, in normal market conditions, gilt funds tend to give marginally lower returns than income funds.
Liquid funds: They invest in money market instruments (duration of up to one year) such as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds are the least volatile. They are ideal for investors seeking low-risk investment avenues to park their short-term surpluses.
The Risk in Debt funds:

Although debt funds invest in fixed-income instruments, it doesnt follow that they are risk-free. Sure, debt funds are insulated from the vagaries of the stock market, and so dont show the same degree of volatility in their performance as equity funds. Still, they face some inherent risk, namely credit risk, interest rate risk and liquidity risk. Interest rate risk: This is common to all three types of debt funds, and is the prime reason why the NAVs of debt funds dont show a steady,
consistent rise. Interest rate risk arises as a result of the inverse relationship between interest rates and prices of debt securities. Prices of debt securities react to changes in investor perceptions on interest rates in the economy and on the prevalent demand and supply for debt paper. If interest rates rise, prices of existing debt securities fall to realign themselves with the new market yield. This, in turn, brings down the NAV of a debt fund. On the other hand, if interest rates fall, existing debt securities become more precious, and rise in value, in line with the new market yield. This pushes up the NAVs of debt funds.
Credit risk: This throws light on the quality of debt instruments a fund holds. In the case of debt instruments, safety of principal and timely payment of interest is paramount. There is no credit risk attached with government paper, but that is not the case with debt securities issued by companies. The ability of a company to meet its obligations on the debt securities issued by it is determined by the credit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much more liquid than lower-rated paper. Credit risk is not an issue with gilt funds and liquid funds. Gilt funds invest only in government paper, which are safe. Liquid funds too make a bulk of their investments in avenues that promise a high degree of safety. For income funds, however, credit risk is real, as they invest primarily in corporate paper.
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Liquidity risk: This refers to the ease with which a security can be sold in the market. While there is brisk trading in government securities and money market instruments, corporate securities arent actively traded. More so, when you go down the rating scalethere is little demand for low-rated debt paper. As with credit risk, gilt funds and liquid risk dont face any liquidity risk. Thats not the case with income funds, though. An income fund that has a big exposure to low-rated debt instruments could find it difficult to raise money when faced with large redemptions.
Balanced funds : As the name suggests, balanced funds have an exposure to both equity and debt instruments. They invest in a pre-determined proportion in equity and debtnormally 60:40 in favor of equity. On the risk ladder, they fall somewhere between equity and debt funds, depending on the funds debtequity spiltthe higher the equity holding, the higher the risk. Therefore, they are a good option for investors who would like greater returns than from pure debt, and are willing to take on a little more risk in the process. Real Estate Fund: Real Estate MF as a scheme of Mutual Fund, which has investment objective to invest directly or indirectly in the real estate property. The REMF can invest in real estate properties within India, mortgaged backed by securities, Equity Shares/ Bond/ Debentures which deal in real estate and also undertake property development in other securities. As per the SEBI, the
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REMFs should invest at least 35% of it in property and 40% of it can be invested in shares and securities of realty companies. On the basis of Flexibility : Open-ended Funds These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are
much more liquid than closed-ended funds. Investors are permitted to join or withdraw from the fund after an initial lock-in period. Close-ended Funds These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market. Interval funds
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These funds combine the features of both openended and close-ended funds wherein the fund is close-ended for the first couple of years and open-ended thereafter. Some funds allow fresh subscriptions and redemption at fixed times every year (say every six months) in order to reduce the administrative aspects of daily entry or exit, yet providing reasonable liquidity.
On the basis of geographic location :
Domestic funds These funds mobilize the savings of nationals within the country. Offshore Funds These funds facilitate cross border fund flow. They invest in securities of foreign companies. They attract foreign capital for investment.
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BENEFITS OF MUTUAL FUND
Mutual funds serve as a link between the saving public and the capital markets. They mobilize savings from the investors and bring them to borrowers in the capital markets. Today mutual funds are fast emerging as
the favorite investment vehicle because of the many advantages they have over other forms and avenues of investing. The major advantages offered by mutual funds to all investors are: Professional Management: Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.
Diversification: Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Variety: Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly it offers an opportunity to investors to invest sums across a variety of schemes, both debt and equity. For example, an Investor can invest his money in a Growth Fund (equity scheme) and Income Fund (Debt scheme) depending on his risk appetite and thus creates balanced portfolio easily or simply just buy a balanced scheme.
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Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient. Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.
Low Cost: Mutual Finds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors. Liquidity: In open-end schemes, the investor gets the money back promptly at net asset value related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion
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invested in each class of assets and the fund manager's investment strategy and outlook. Flexibility: Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.
Affordability: Investors individually may lack sufficient funds to invest in high-grade stock. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. Choice of schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. Regulations: All Mutual Funds are registered with SEBI and they function within the provision of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
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Tax Benefits: Any income distributed after March 31, 2002 will be subject to tax in assessment of all unit holders. However, as a measure of concession to unit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of Individuals and Hindu Undivided Families a deduction up to Rs 9000 from the Total income will be admissible in respect of income from investments specified in Section 80L, including income from units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and GiftTax.
Limitations of Mutual Fund:

No control over cost:Investors do not directly monitor the funds operations; they cannot control the costs effectively. Regulators therefore usually limit the expenses of mutual funds. No tailor-made portfolio:Mutual fund portfolios are created and marketed by AMCs, into which investors invest. They can not made tailor made portfolio. Managing a portfolio of funds:-
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As the number of funds increases, in order to tailor a portfolio for himself, an investor may be holding portfolio funds, with the costs of monitoring them and using them, being incurred by him. No Guarantees: No investment is risk free. If the entire stock market declines in value, the value if mutual fund will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.
Fees and Commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or loads to compensate brokers, financial consultants, or financial planners. Even if you dont use a broker or other financial adviser, you will pay a sales commission if you buy shares in a load fund. Management risk:When you invest in mutual fund, you depend on the funds manager to make the right decisions regarding the funds portfolio. If the manger does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index funds,
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you have forgotten management risk, because these funds do not employ managers.
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Some of the AMCs operating currently are:

Name of the AMC Nature of ownership Alliance Capital Asset Management (I) Private Private foreign Limited Birla Sun Life Asset Management Company Limited Private Indian Bank of Baroda Asset Management Company Limited Banks Bank of India Asset Management Company Limited Banks Canbank Investment Management Services Limited Banks Cholamandalam Cazenove Asset Management Private foreign Company Limited Dundee Asset Management Company Limited Private foreign DSP Merrill Lynch Asset Management Company Private foreign Limited Escorts Asset Management Limited Private Indian First India Asset Management Limited Private Indian GIC Asset Management Company Limited Institutions IDBI Investment Management Company Limited Institutions Indfund Management Limited Banks ING Investment Asset Management Company Private Private foreign Limited J M Capital Management Limited Private Indian Jar dine Fleming (I) Asset Management Limited Private foreign Kotak Mahindra Asset Management Company Private Indian Limited Kothari Pioneer Asset Management Company Private Indian Limited Jeevan Bima Sahayog Asset Management Company Institutions Limited Morgan Stanley Asset Management Company Private Private foreign Limited
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Punjab National Bank Asset Management Company Banks Limited Reliance Capital Asset Management Company Private Indian Limited State Bank of India Funds Management Limited Banks Shriram Asset Management Company Limited Private Indian Sun F and C Asset Management (I) Private Limited Private foreign Sundaram Newton Asset Management Company Private foreign Limited Tata Asset Management Company Limited Private Indian Credit Capital Asset Management Company Limited Private Indian Templeton Asset Management (India) Private Limited Private foreign Unit Trust of India Institutions Zurich Asset Management Company (I) Limited Private foreign
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Net Asset Value (NAV):

The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention. Calculation of NAV: The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Asset value is equal to Sum of market value of shares/debentures + Liquid assets/cash held, if any + Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid
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Details on the above items For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the principal exchange where the security is traded For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. For shares, this could be the book value per share or an estimated market price if suitable benchmarks are available. For debentures and bonds, value is estimated on the basis of yields of comparable liquid securities after adjusting for illiquidity. The value of fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of this and adopt flexible valuation policies depending on the situation. Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the periodic interest payment with the number of days in each period. Thus, accrued interest on a particular day is equal to the daily interest rate multiplied by the number of days since the last interest payment date. Usually, dividends are proposed at the time of the Annual General meeting and become due on the record date. There is a gap between the dates on which it becomes due and the actual payment date. In the intermediate period, it is deemed to be "accrued".
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Expenses including management fees, custody charges etc. are calculated on a daily basis.
Section: 5 Global Scenario
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Global Scenario:
The global mutual funds market reached a value of $13.43 trillion in 2003, having grown with a compound annual growth rate (CAGR) of 2.3% in the 1999-2003 periods. Some basic facts:
The money market mutual fund segment has a total corpus of $ 1.48 trillion in the U.S. against a corpus of $ 100 million in India.
Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only Fidelity and Capital are non-bank mutual funds in this group.
In the U.S. the total number of schemes is higher than that of the listed companies while in India we have just 277 schemes
Internationally, mutual funds are allowed to go short. In India fund managers do not have such leeway.
In the U.S. about 9.7 million households will manage their assets online by the year 2003, such a facility is not yet of avail in India.
On- line trading is a great idea to reduce management expenses from the current 2 % of total assets to about 0.75 % of the total assets.
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72% of the core customer bases of mutual funds in the top 50-broking firms in the U.S. are expected to trade on-line by 2003. (Source: The Financial Express September, 05)
Internationally, on-line investing continues its meteoric rise. Many have debated about the success of e- commerce and its breakthroughs, but it is true that this aspect of technology could and will change the way financial sectors function. However, mutual funds cannot be left far behind. They have realized the potential of the Internet and are equipping themselves to perform better. In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have already begun on the net, while in India the Net is used as a source of Information. Such changes could facilitate easy access, lower intermediation costs and better services for all. A research agency that specializes in internet technology estimates that over the next four years Mutual Fund Assets traded online will grow ten folds from $ 128 billion to $ 1,227 billion; whereas equity assets traded on-line will increase during the period from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from 34% to 40% during the period. (Source: The Financial Express September, 05)
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Worldwide Assets Of Equity, Bond, Money Market, And Balanced/Mixed Funds : (billions of U.S. dollars, end of quarter)
Net cash flow to mutual funds worldwide was $305 billion in the third quarter of 2005, with long-term funds and money market funds experiencing aggregate net inflows worldwide. Equity fund flows worldwide increased to $87 billion in the third quarter, compared with $65 billion in the second quarter. Equity fund inflows were particularly strong in Europe, which reported net inflows of $48 billion, more than half of the worldwide total. The Americas reported net inflows to equity funds of $28 billion, while the Asia/Pacific and African regions accounted for $12 billion. Balanced fund
flows also picked up in the third quarter, rising to $37 billion, compared with $26 billion in the second quarter.
Net cash flow to bond funds in the third quarter were $89 billion, nearly double the second-quarter pace. Net inflows in Europe increased, with France and Luxembourg reporting strong inflows; net bond inflows in the Americas increased, lead by large inflows in the United States. Net outflows in the Asia/Pacific region slowed, as inflows to bond funds in Japan helped to offset outflows in Korea and Taiwan in the third quarter. In the third quarter of 2005, money market funds garnered an inflow of $59 billion worldwide, primarily as a result of inflows in the United States, which accounted for $42 billion, or 71 percent of the total. Money fund flows picked up in Europe in the third quarter, registering $19 billion, compared with $10 billion in the second quarter. On net, the Asia/Pacific and African regions reported very minor outflows in money funds in the third quarter.
Indian MFs give highest returns globally: In the medium to long term, Indian mutual funds have rewarded their investors better than any other fund in the world. Whether we look at a time period of 10 years, five years or three years, a majority of the ten years, a
majority of the ten best performing equity-oriented funds in the world are from India.
Over a 10 years period, Indian funds have grabbed eight of the top 10 ranks. Over the last five years, they account for the seven of the top 10 and over a 3-year period, six of the best performing mutual fund from India. Over 3year period Russian funds give up the positions to funds from Korea and Norway. In we consider a short-term view; there is no Indian fund among the top 10 global performers over last year (November 1, 2005 to October 31, 2006). This is despite the fact that the last 12 months have been among the best periods the Sensex rising by 64.2%. The best performer over the five and ten-year period is Reliance Growth Fund, which has given a compounded annual return of 71.38% and 35.21% respectively against the sensexs improvement of 34.10% and 15.14% respectively. All returns have been calculated in dollar terms. The other top seven Indian funds in 10 years have also given compounded annual returns of over 30%. In the 5-year period, return remained in the range of 55-70%. In the back drop of around 34% and 15% returns from sensex during the 5 and 10 years period, the returns given by Indian mutual fund could be seen as very good.
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According to the index prepared by Morgan Stanly Capital International (MSCI), over the 10-year period, the Russian market has performed better than Indian. While MSCI index of Russia improved by 22.29% in the last 10 years, the Indian market index went up by 18.65% per annum compounded annually.
Similarly, there are many markets like Brazil, Argentina, Mexico and Turkey, where returns according to MSCI are better than those for India. Yet, Indian mutual funds have performed much better their counterparts in other countries. Table: Shows Indian MFs on the top of the World:Name Reliance Growth Fund HDFC Equity Fund Franklin India Blue Chip Principal Personal Tax Saver India Advantage(Birla Sun life) Franklin India Prima Plus Russia Prosperity HSBC GIF Indian Equity(Luxemburg) Reliance Vision Fund Growth Hermitage (HSBC Management Ltd). Country India India India India India India Russia & CIS India India Russia & CIS Returns (%) 35.21 34.29 32.18 32.1 31.88 31.8 31.8 31.42 30.46 28.2 (Source: Times of India ) in 10 yrs
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Section: 6 Future Scenario
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Future Scenario:
The asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as investors shift their assets from banks and other traditional avenues. Some of the older public and private sector players will either close shop or be taken over. Out of ten public sector players five will sell out, close down or merge with stronger players in three to four years. In the private sector this trend has already started with two mergers and one takeover. Here too some of them will down their shutters in the near future to come. But this does not mean there is no room for other players. The market will witness a flurry of new players entering the arena. There will be a large number of offers from various asset management companies in the time to come. Some big names like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One important reason for it is that most major players already have presence here and hence these big names would hardly like to get left behind.
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In the U.S. most mutual funds concentrate only on financial funds like equity and debt. Some like real estate funds and commodity funds also take an exposure to physical assets. The latter type of funds are preferred by corporate who want to hedge their exposure to the commodities they deal with. For instance, a cable manufacturer who needs 100 tons of Copper in the month of January could buy an equivalent amount of copper by investing in a copper fund. For Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on various bourses around the world, short term and long-term U.S. treasuries etc. In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real estate funds (investing in real estate and other related assets as well.).In India, the Canada based Dundee mutual fund is planning to launch gold and a real estate fund before the year-end. In developed countries like the U.S.A there are funds to satisfy everybodys requirement, but in India only the tip of the iceberg has been explored. In the near future India too will concentrate on financial as well as physical funds. The mutual fund industry is awaiting the introduction of DERIVATIVES in the country as this would enable it to hedge its risk and this in turn would be reflected in its Net Asset Value (NAV).
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SEBI is working out the norms for enabling the existing mutual fund schemes to trade in Derivatives. Importantly, many market players have called on the Regulator to initiate the process immediately, so that the mutual funds can implement the changes that are required to trade in Derivatives.
Future of Mutual Funds is boom in India:-
Mutual funds are soaring as the top investment choice in India, whose economy is ranked as having the world's second-fastest-growing gross domestic product. Year-on-year assets under management ballooned by a whopping 57%, from US$42.8 billion to $67.1 billion, in 2004-05 according to published market figures. The RBI released in September surprised investment watchers, with the percentage of household savings pumped into shares and debentures in 2006 up from 1.1% to 4.9%, a 3.8-percentage-point growth the highest since 1999. Tellingly from RBI figures, the market share of mutual funds apart from the state-owned mutual-funds pioneer Unit Trust of India (UTI) increased by a record high of 3.2 points. Household savings flowing into equities, including through mutual funds, dramatically increased from $1 billion last fiscal year to $6.3 billion this year. Investor confidence is significant, considering that local behemoths such as the UTI and State Bank of India (SBI) Mutual Fund have re-emerged from being
part of the 2001 securities scam. In the March 2001 stock-market crash, currently banished stockbroker Ketan Parekh was found guilty of rigging the market with about $1 billion of funds illegally diverted from many banks and companies, Indian and foreign. India's mutual-fund industry began in 1963 with the state-owned Unit Trust of India, now the single largest mutual fund in the country, with assets under management of more than $5.5 billion, with 6.77 million accounts in its 55 domestic schemes.
Current tax records too reflect the new wealth pattern, which after 2005 was put under a scanner with a governmental order that required banks, mutual funds, credit-card companies, and the registrar of properties to report high-value transactions by August 31 through an "annual information return". The information-technology data appropriately too showed a big jump in collections, from $293.1 billion in 2004-05 to $508.8 billion this fiscal year. India's mutual funds, now reaching out to real estate, gold and commodities, are diversifying but still have some distance to go to match the US, where even faith-based investment funds are raking in $16.03 billion annually, according to Chicago-based investment researcher Morningstar Inc. By December 2004, Indian mutual fund industry reached Rs 1, 50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40, 90,000 crore.
The annual composite rate of growth is expected 13.4% during the rest of the
decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.
Let us discuss with the following table: Aggregate deposits of Scheduled Com Banks in India (Rs.Crore)
Month/Year Mar-98 Mar-00 851593 15 Mar-01 989141 14 Mar-02 1131188 13 Mar-03 1280853 12 Mar -04 Sep-04 1567251 18 Dec-04 1622579 3
Deposits 605410 Change in % over last yr
(Source RBI)
Mutual Fund AUMs Growth Month/Year Mar98 MF AUM's Change in % over last yr 68984 Mar00 93717 26 Mar01 83131 13 Mar02 94017 12 Mar03 75306 25 13762 6 45 15114 1 9 149300 1 Mar-04 Sep-04 Dec-04
(Source
-AMFI)
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Some facts for the growth of mutual funds in India

100% growth in the last 6 years. Number of foreign AMC's are in the que to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.
Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.
We have approximately 29 mutual funds which is much less than US having more than 800. There is a big scope for expansion.
'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products.
SEBI allowing the MF's to launch commodity mutual funds. Emphasis on better corporate governance. Trying to curb the late trading practices.
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Introduction of Financial Planners who can provide need based advice.
Section: 7 A Statistical Profile

Types and growth pattern Investment Pyramid Risk pattern in Equity & Debt fund Eligibility for investing in MF Comparison of different schemes Growth of AUM Product Life Cycle
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Types and Growth pattern of Mutual Funds:

Investors preference for financial assets is diverse and varied. This give rise to a dynamic financial asset market with an array of instruments having different characteristics and risk-return trade off. Mutual Fund is a distinctly different financial product, which is designed to offer investors higher return with comparatively less risk. In India, mutual funds, in their attempt to offer variety of products to suit to the growing investors demand, have introduced various innovative products. There are various types of funds along with growth pattern of income, growth, income-cum-growth and tax savings funds. The first growth fund was launched in 1986 by UTI. The success of growth fund gave further impetus to float more and more growth oriented funds. Consequently, the new entrant to the industry, viz. Canbank Mutual Fund joined the race. In the beginning, it was tough task to market the concept of growth fund as investors use to obtain high returns by investing directly in primary as well as secondary market. Initial successful performance of Can share and Can stock promoted for the growth funds. Consequently, other mutual funds such as SBI mutual fund, LIC mutual fund, UTI, Indbank mutual fund offer growth oriented fund. The year 1989 witness further product innovations. Venture capital funds for the first time started operating. Tax saving fund
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Also made their present in the market. SBI mutual fund was the first to offer first tax saving fund, while UTI offer venture capital funds. Assured return funds started functioning from 1990, with the launch of Candouble. In this year, major innovations take place and the essence of these innovations was to make diverse needs of the investors. The size of mutual funds and the number of funds under management have shown tremendous growth especially after 1990. The income-cum-growth funds are to be found least preferred since 1992-93. They are hybrid funds aimed to meet the requirement of regular income as well as capital appreciation. When total numbers of funds increased from 100 to 153 during the three-year period from 1992-93 to 1994-95, the number of income-cum-growth funds has increased only from 25 to 28%. The pure income funds are found to be most offered by UTI. Out of 37 funds, at the year of 1994-95, 18 are sponsored by UTI. Though number of income funds is lesser compared to growth funds, their average size is much bigger than any other types of funds. It is also noticed that more than 50% of the funds are bigger funds with more than 100 crore unit capital. Presently, the fate of income funds is hanging on balance due to certain unhealthy policies initiatives. As per the latest SEBI guidelines, mutual funds do not qualify assured returns unless they have track record of performance. With track record, they are permitted to assure returns only for one year at a time. Adding fuel to fire, the Union Budget and RBI have given NBFCs the freedom to fix interest rates on fixed deposits and removed the ceiling on total borrowing. Since credit rating made compulsory for NBFCs, investors made out to be more comfortable with NBFCs than
mutual funds. This partial treatment is removed and mutual funds are given necessarily freedom and flexibility, the survival of the industry in general and income fund in particular will be at stake.
Interpretation: The above investment pyramid shoes the period for investment and the risk associated with the same. The Equity or Growth fund shows medium to high risk and its year of investment is for more than 5 years, in order to earn good return. In Balanced Funds, a thing which is included is stock, bonds, and debentures. Risk under this fund is medium to high and its investment period is for 3 to 5 years. Income Funds include Bonds and Debentures. Here risk is medium to low because it provide regular or can say fixed type of income on regular basis. Money market or liquid or Liquid Funds,
includes investment in government securities/papers and short-term deposit and call money market. And risk under this fund is low to medium while year of investment is also very short i.e. less than 1 year.
Risk pattern in Equity Fund :

1) Index Fund, Exchange, Traded Fund :Risk Objective Time Horizon High Long Term Growth 5 years & more
2) Equity Linked Saving Schemes (ELSS) :Risk Objective Time Horizon High Long Term Growth with tax saving 3 years & more
3) Diversified Equity Fund:Risk Objective Time Horizon 4) Sector Funds: Risk Objective Time Horizon 5) Specialty Funds: S.V. Institute of Management, Kadi 87
High High Growth 3 years & more
Very High High Growth 3 years & more
Risk Objective Time Horizon
Very High High Growth 3 years & more
Risk pattern in Debt Funds :

1) Income Fund: Risk Objective Time Horizon 2) Gilt Fund:Risk Objective Time Horizon 3) Liquid Fund: Risk Objective Time Horizon Low Earn more than Bank Deposit 6 months to 1 year Medium Steady and regular return 1 year & more Medium Maximizing steady and regular return 1 year & more
4) Short Term Fund: Risk Objective Time Horizon 5) Flexible Fund: Low Earn more than Bank Deposit 6 months and more
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Risk Objective Time Horizon
High Maximizing returns for debts instruments 1 year & more
Eligibility for investing Mutual Fund in India:

Mutual Funds have been emerging as a big financial intermediary in India. In a vast country like India it is a challenge to market these funds. Fund distributors are a very important link between the fund management industry and the investors. However, it is equally essential to know who can invest in Mutual Funds in India. Mutual Funds in India are open to investment for: A) Residents Including: Resident Indian Individuals Indian Companies Indian Trusts / Charitable Institutions Banks Non-Banking Finance Companies Insurance Companies Provident Funds B) Non Residents including: Non-Resident Indians Other Corporate Bodies (OCBs)
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C) Foreign Entities:Foreign Institutional Investors (FIIs) registered with SEBI. Foreign citizens and other foreign entities are not allowed to invest in Mutual Funds in India.
Comparison of Different Schemes:

Open Ended Equity Diversified One Year Return Fund Sundaram BNP Paribas Select Mid cap Tata infrastructure Pru ICICI infrastructure UTI infrastructure Mangum Global Franklin India Opportunities DSPMLT.I.G.E.R. Pru ICICI Dynamic NAV 90.05 23.61 18.09 27.05 42.66 26.53 Returns (%) 75.96 72.45 71.47 68.71 67.89 66.96
32.14 64.24 61.94 63.18 (Source: www.valueresearchonline.com.)
Equity Diversified - one year return

100 80 60 40 20 0 DSPMLT.I.G. E.R. Tata infrastructure Pru ICICI infrastructure UTI infrastructure Franklin India Opportunities Sundaram BNP Paribas Select Mid cap Pru ICICI Dynamic Mangum Global Funds NAV Returns Returns (%)
Interpretation:
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When we compare all Funds, we find that Sundaram Mid Cap is giving high return to the investors in Equity Diversified Scheme. But when we compare both NAV and Return, we find that Pru ICICI Infrastructure Scheme is providing good return with less NAV, therefore it is creating more wealth objective for the investor with less NAV. 1. Open Ended Equity Index Fund: One year return Fund Pru ICICI Spice UTI Master Index LICMF Index Sensex Tata Index Sensex A HDFC Index Sensex Tata Index Nifty A Franklin India Index BSE Sensex Pru ICICI Index Mangum Index NAV 140.46 43.01 29.23 34.76 127.19 24.50 38.14 Returns (%) 57.89 57.29 55.78 55.11 54.96 54.64 53.53
35.08 52.47 36.32 51.59 (Source: www.valueresearchonline.com.)

Equity Index - One year return
160 140 120 100 80 60 40 20 0 Pru ICICI Spice UTI Master Index LICMF Index Sensex Tata Index Sensex A HDFC Index Sensex Funds NAV Returns Tata Index Nifty A Franklin India Index BSE Sensex Pru ICICI Index Mangum Index
Interpretation:
Returns (%)
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From the above data, we find that in the Equity Index fund Prudential ICICI Spice fund is giving the high returns to the investors. But when we compare both NAV and returns, we find that Tata Index Nifty A is providing a good return with less NAV and also LIC MF Index Sensex provides good return almost near to the Pru ICICI with low NAV. Index fund scheme is beneficial to those investors who want to invest in the stocks with low risk objective. 2. Open Ended Equity Tax Planning One Year Return Fund Principal Tax Savings Magnum Tax gain Birla Sun life Tax Relief 96 Principal Personal Tax saver Franklin India Index Tax Sundaram BNP Paribas Tax saver Escorts Tax plan Birla Equity Plan HDFC Tax saver ING Vysya Tax savings NAV 78.81 54.28 192.34 121.19 30.77 26.76 Returns (%) 54.02 51.76 50.33 49.97 49.39 47.26
43.20 47.00 56.20 43.97 144.82 41.05 25.57 40.03 (Source: www.valueresearchonline.com.)
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E qu ity Tax P lan ning - One year return

250 200 150 100 50 0 Principal Personal Tax saver HDFC Tax saver Magnum Tax gain Escorts Tax plan Birla Sun life Tax Relief 96 Franklin India Index Tax Principal Tax Savings Sundaram BNP Paribas ING Vysya Tax Birla Equity Plan
Returns (%)
Funds NAV Re turns (%)
Interpretation: From the above chart and table, we can say that Principal Tax Saving scheme is providing higher return in Equity Tax planning. Whereas, Franklin India Index Tax and Sundaram BNP Paribas Tax saver gives better returns with less NAV. Now-a-day, investors are looking for tax benefits, so they should go for ING Vysya Tax Savings fund which provides good return in the comparison of the other funds. 3. Open Ended Debt: Medium-term One Year Return Fund Birla Sun life Income Kotak Flexi Debt Principal Income Kotak Bond Regular Grindlays SSI Medium NAV 25.56 11.33 17.36 19.35 11.65 Returns (%) 7.38 6.87 6.62 6.45 6.38
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term Pru ICICI Long term 15.28 6.26 Pru ICICI Income 21.61 6.21 Pru ICICI Advisor 11.64 6.08 Reliance NRI Income 11.08 6.07 (Source: www.valueresearchonline.com.)
Debt: Mediun term - One year return
30 25 20 15 10 5 0 Birla Sun Kotak life Income Flexi Debt Principal Income Kotak Bond Regular Grindlays Pru ICICI SSI Long term Medium term Funds NAV Returns (%) Pru ICICI Income Pru ICICI Advisor Reliance NRI Income Returns (%)
Interpretation: The return in a debt market is comparatively low as equity market, but it is also a less risky as compare to the equity market. Chart shows that Birla Sun Life Income scheme is giving higher return i.e. 7.38%. But Reliance NRI Income and Kotak Flexi Debt are giving return around 6% with NAV around 11 Rs. that comes after Birla Sun Life Income Scheme. 4. Open Ended Debt: Short-term One Year Return Fund UTI Liquid short-term regular Birla Bond plus retail Reliance Short- term ING Vysya income NAV 12.06 13.61 12.73 12.96 Returns (%) 6.83 6.65 6.63 6.58
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short-term Kotak Bond short-term Sundaram BNP Paribas Short-term Principal income shortterm Pru ICICI short-term Birla Sun life shortterm HDFC HI short-term
13.20 12.75 13.22 13.91 12.97
6.56 6.51 6.50 6.41 6.36
13.33 6.23 (Source: www.valueresearchonline.com.)
Debt: Short-term - One year return

16 14 12 10 8 6 4 2 0 UTI Liquid Birla Bond Reliance ING Vysya Kotak Sundaram Principal Pru ICICI Birla Sun HDFC HI short-term plus retail Shortincome Bond BNP income short-term life short- short-term regular term short-term short-term Paribas short-term term Short-term Funds NAV Returns (%)
Interpretation: The investors who prefer less risk, they would invest in Debt Short Term Scheme which is having time period of 6month to 1 year. Such Scheme
Returns (%)
offers less return to those investors who are having conservative mindset and want to be in market for less time period. However, by analysis we can find that UTI Liquid Short-term Regular fund occupies the first position with return of 6.83%, which is higher than all other funds. Investors should prefer funds like Reliance Short term and ING Vysya Income fund.
5. Open Ended Gilt: Medium & Long-term One Year Return Fund Pru ICICI Gilt invt. PF Pru ICICI Gilt invt. Grindlays GSF PF regular Grindlays GSF PF Inst Birla Gilt plus regular Grindlays GSF invt. Principal GSF Inv Templeton IGSF longterm Reliance Gilt long-term PF NAV 11.95 22.48 11.13 11.17 23.46 13.76 16.33 16.59 12.74 Returns (%) 10.59 8.09 7.96 7.85 7.85 7.70 6.64 6.74 6.50 (Source: www.valueresearchonline.com.)
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Gilt; Medium & long term - One year return

25 Returns (%) 20 15 10 5 0 Pru ICICI Gilt invt. PF Pru ICICI Gilt invt. Grindlays GSF PF regular Grindlays GSF PF Inst Birla Gilt plus regular Funds NAV Returns (%) Grindlays GSF invt. Principal Templeton Reliance GSF Inv IGSF long- Gilt longterm term PF
Interpretation: The main objective of investor to invest their money in Gilt Scheme is to get steady and steady return for the time period of 1 year and more. From chart, when we see the returns we find that Pru ICICI Gilt Investment PF is giving more return with less NAV than other funds. But, Birla Gilt Plus Regular fund gives return of 7.85% and with NAV of Rs. 23.46 is higher than Pru ICICI fund. So we would like to suggest to investor to remain stable in market for more than 1 year in order to earn good return. 6. Open Ended Gilt: Short-term One Year Return Fund DSPML GSF Shorter Duration Principal GSF Saving Birla Sun life GSF short-term Birla Gilt plus liquid UTI G-Sec short-term Pru ICICI Gilt Treasury PF Kotak Gilt Saving Tata GSF Short maturity Templeton India GSF NAV 16.74 13.88 15.63 17.85 11.49 11.33 17.92 11.89 13.74 Returns (%) 6.41 6.27 6.22 6.14 5.62 5.58 5.39 4.68 4.64
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Treasury (Source: www.valueresearchonline.com.)

Gilt: Short-term - One year return
20 15 10 5 0 DSPML GSF Shorter Duration Principal Birla Sun Birla Gilt UTI G-Sec Pru ICICI Kotak Gilt Tata GSF Templeton GSF life GSF plus liquid short-term Gilt Saving Short India GSF Saving short-term Treasury maturity Treasury PF Funds NAV Returns (%)
Interpretation: As per returns we can see that from the chart, Gilt short-term scheme is for short time i.e. almost less than 6 months which provides to the risk aversion investors who always looking for good returns with aim to very less risk. DSPML GSF Shorter Duration fund has NAV of Rs. 16.74 and return of 6.41% that is higher among all other funds. 7. Open Ended Hybrid: Debt One Year Return Fund UTI Mahila unit scheme-gift Tata Young Citizens Unit scheme 2002 Escorts Income bond Can balance Templeton India pension Cancigo UTI CCP balanced Escorts opportunities NAV 27.02 21.89 13.81 19.85 28.03 43.15 19.05 14.85 25.02 Returns (%) 28.73 26.89 26.47 24.17 22.72 21.03 20.27 20.04 19.55 (Source: www.valueresearchonline.com.)
Returns (%)
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H y b rid : D e b t - O n e y e a r re tu rn
50 40 30 20 10 0 Cancigo Tata Young Citizens Escorts Income bond Templeton India pension Unit scheme 2002 UTI Mahila unit schemegift Can balance UTI CCP balanced Escorts opportunities
Returns (%)
Funds NA V Re tu rn s (%)
Interpretation: The objective of this scheme is to generate positive return over medium time frame with low risk of capital loss. Therefore, UTI Mahila Unit Scheme-Gift and Tata Young Citizens Scheme are best for investor who prefers to have low risk of capital loss. 8. Open Ended Hybrid: Equity One Year Return Fund JM Balanced Can balance II Principal Child benefit Tata balanced DSPML balanced Magnum balanced LICMF ULIS Pru ICICI Advisoraggressive Kotak balance FT India balanced NAV 22.96 37.29 52.40 48.59 37.83 35.30 12.65 20.54 23.15 32.04 Returns (%) 46.99 45.15 43.21 40.86 39.83 39.20 39.05 39.02 38.38 38.17 (Source: www.valueresearchonline.com.)
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Hybrid: Equity - One year return

60 50 40 30 20 10 0 Pru ICICI Advisoraggressive Can balance II DSPML balanced JM Balanced Magnum balanced Tata balanced LICMF ULIS Kotak balance FT India balanced Principal Child benefit
Returns (%)
Funds NAV Returns (%)
Interpretation: Hybrid Equity Oriented Scheme provides periodic return and capital appreciation over long period of time from judicious mix of equity and debt investment with an aim to minimize any capital erosion. JM Balanced gives good return with less NAV. LICMF ULIS fund has return of 39.05% that is better as they have less NAV in Hybrid Equity Schemes. 9. Open Ended Hybrid: Monthly Income Plan One Year Return Fund Reliance MIP DSPML saving plus aggressive HDFC MIP long-term UTI MIS Birla MIP II wealth 25 LICMF MIP LIC MF Floater Pru ICICI MIP Birla Sun life MIP HSBC MIP Savings NAV 13.68 13.57 14.54 13.96 13.48 23.97 12.48 18.81 25.17 13.13 Returns (%) 15.70 14.96 14.56 14.46 13.77 13.57 13.27 13.26 13.18 12.81 (Source: www.valueresearchonline.com.)
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H y b rid : M IP - O n e y e a r re tu rn
30 25 20 15 10 5 0 UTI MIS LIC MF Floater Birla MIP II wealth 25 Pru ICICI MIP Reliance MIP LICMF MIP DSPML saving plus aggressive HDFC MIP long-term Birla Sun life MIP HSBC MIP Savings
Returns (%)
Funds N A V Re tu rn s (%)
Interpretation: In this scheme, investors get monthly income and Fund Manager invests in Equity and Debts both. It generates regular returns to investment primarily in Debt and Money market instruments. From the table and chart, we can say that Reliance MIP and HDFC MIP Long term perform well.
GROWTH OF ASSET UNDER MANAGEMENT:Steady transformation of investments from conventional sources to MFs leads to growth of Assets under Management (AUM) of MF companies, which is a good sign to the economy, as it indicates that the investors are aware of the choice of investment opportunities available to them. AUM of the Mf industry in India, which was just Rs. 25 cr in 1987 and got multiplied in ten times in March 1993.
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As on May 31, 2006, the total AUM was at Rs. 2,76,000 cr excluding Fund of Fund (FoF) which was approximately 11% of bank deposits, indicating that there was still a huge potential for this industry. Among the 29 market which is ousted UTI from the top slot for the first time since its inception. Domestic mutual fund have witnessed a wind flow of asset worth about Rs. 20,000 crore over the past month on the back of the investors responding faith in the market which has resumed its record breaking northward journey after gap of over 5 months. The total assets under management of the countrys 30 MF house have soared past Rs.3, 00,000 crore level following increased of about Rs.20,000 crore in the month of October., driven by the sustained up trend in equities and renewed inflow in to short-term debt schemes. From September, AUMs have risen by Rs. 18,629 crore to Rs. 3, 09,829 crore in October. AUMs in September had fallen by Rs.15,791 crore from Rs. 3,06,991 crore to Rs.2,91,199.81 crore triggered by redemption from banks and companies in liquid schemes to meet their advanced tax needs and to boost balance sheets ahead of the July- September earnings. Liquid funds AUMs has doubled in the past four months as rising interest rates make this class of debt funds attractive for corporates and banks to park their short-term money. Its assets are currently at Rs. 1, 24,463 crore, as per AMFI data. Its saw a net inflow of Rs.15, 517 crore in July itself. Such outflows from liquid schemes at the end of every quarter are normal and a big chuck of the same money flow back into these schemes in the ensuing
month. So, if AUMs addition from August is considered, the figure is around Rs. 3,000 crore higher. The strong rise in equity markets, coupled with large inflows into liquid and fixed income plan schemes (22 FMPs) due to their attractive rates vis--vis bank deposit s, resulted in a strong jump in AUM. FMPs area debt-based funds, which invest in fixed income instrument like bonds, government securities, money market instruments. Eld to maturity, these funds are relatively less susceptible to interest rate risk. The sharp jump in launch of FMPs schemes in the last few months is mainly due to higher return in eh shorter term. FMPs are 6.95-7.25%, 3 months FMPs are 7.2% and 1 year FMPs are 7.8-8.0%.
In contrast, Guilt funds AUMs shrank 26% during the four months period to Rs. 2323 crore. Liquid funds today constitute 43% overall AUM of the industry. Interest rates as measured by 10 years G-sec yields rose sharply (up to 1.2%) in the last month. This in turn increased attractiveness for shorter end debt instruments like liquid funds. According to past data available with the association of mutual funds in India, the total AUM for October stands at Rs. 3.09 lakh crore as against Rs. 2.09 lakh crore in the previous month. Table shows AUM of Different Mutual Fund Companies: Mutual Fund Asset Under Management (Rs. Crore)
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January-05 UTI Mutual Fund Prudential ICICI Mutual Fund Reliance Capital Mutual Fund HDFC Mutual Fund Franklin Templeton Mutual Fund Birla Sun Life Mutual Fund SBI Mutual Fund Standard Chartered Mutual Fund Tata Mutual Fund Kotak Mahindra Mutual Fund 20,707 16,589 8,160 14,490 15,409 9,944 6,253 8,124 7,361 5,949
October06 37,790 32,664 31,572 27,553 23,920 16,822 15,496 12,542 12,474 10,938
Change 17,083 16,075 23,412 13,063 8,511 6,878 9,243 4,418 5,113 4,989
% Change 82.50 96.90 286.92 90.15 55.24 69.16 147.82 54.38 69.47 83.87
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UTI MF Prudential ICICI MF 10,938 12,474 12,542 15,496 16,822 23,920 27,553 31,572 32,664 37,790 Reliance MF HDFC MF Franklin Templeton MF Birla Sun Life MF SBI MF Standard Chartered MF TATA MF Kotak Mahindra MF
AUM
Interpretation: UTI mutual fund has retained its top position Rs. 37,790 crore, with an increase of about of Rs. 3000 crore from last months Rs. 34,755 crore. ICICI Prudential Mutual Fund has also maintain its second position with an AUM of Rs. 32,664 crore, while excluding the assets held under Funds of Funds (FoF) schemes.
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Reliance mutual fund continues to hold the third position with AUM of Rs.31, 572 crore, followed by HDFC mutual fund at forth position with AUM of Rs. 27,553 crore. Franklin Templeton Mutual Fund has grabbed the fifth position with assets worth Rs.23920 crore in October.
All the top 5 MFs witnessed an increase in their respective AUMs in October, while as many as 9 MFs clocked a fall during the month, the AMFI data shows. Funds witnessing a fall in their AUMs are BoB MF, DBS Chola MF, Deutsche MF, ING Vyasa MF, Kotak Mahindra MF, Principal MF, Sahara MF, Tata MF and Taurus MF.
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PRODUCT LIFE CYCLE
250,000
Explanation :Mutual fund in India has tremendous potential. Firstly, there is a possibility of a shift in saving pattern of household from bank deposits to Mutual fund. Currently 29% of financial savings of household is with mutual fund against 45% of it in bank deposits. With increased awareness among the people, mutual fund is emerging as close competitors to the bank deposit.
200,000
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Secondly, increased in GDS combined with a shift in saving pattern in favors of mutual funds will make the industry to grow at a rapid pace. The sluggish growth in mutual fund during the last 2 years may be attributed, among others to decline in saving rate from 22.8% in 1991-92, to 21.2% and 21.4% respectively during 92-93 and 93-94. Though savings rate has moved up to 24.4% during 1994-95, due to unfavorable market situation, mutual funds filed to make any gain out of it. Thirdly, the growth of mutual funds to a certain extent depends on the proportion of financialisation of house hold savings. The trend of household saving during the last few years savings shows that there has been a significant shift in saving held in financial and physical assets. The Percentage of household savings held in financial assets has increased from 43.6% in 1990-91 to 50% in 1992-93, and further to 59% in 1994-95. With the possibility of increased number of players in the market including provident fund, pension fund etc., and introduction of more and more financial products like liquid funds, money market funds, Sectoral funds, pension fund and commodity fund, matching investor risk-return and liquidity perceptions, the financialisation of savings is expected to share 75% of household savings by the turn of the century. Finally, the introduction of convertibility on capital account, which is in the agenda of the economic reforms, will provide mutual funds the opportunity to tap oversees markets and enlarge their fund base, and over and above all these developments, the emerging trend of the institutionalization of the
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capital markets can impart more dynamism in fund management activities in India. In 1964 UTI was the only main player in Mutual Fund and consider being trend-setter. After that many public and private players enter in this industry, which shows result to increase growth in this industry. In chart we can say that from july-98 to Dec-99 there is a growth again that growth reduces because of many market scams take place which makes market to come near 4000 points. From September 2002 we can see good increase in mutual fund industry that is because on many investment is made by FIIs and FDIs and due to which it brings inflow to capital market and results to growth in industry performance which increase return obtain from that industry. Such growth remains stable from Jan-04 to May-05 and it again increase from that period till now. One of the reasons for such increase in mutual fund industry is awareness among customers regarding Mutual fund and its schemes with accepts of liquidity, safety, returns and diversity. Product life cycle chart shows that mutual fund industry is introduction to growth stage.
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Section: 8 OT Analysis
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OT Analysis
Opportunities:
1. Market Risk: Now a days investment is being riskier. Private Banks and company went in to scam or bankruptcy, so the investment market is very risky. Investor has to be very careful at the time of choosing right investment media. This fact has been one of the opportunities for the Mutual Fund Industries. The objective of Mutual Fund is to minimize risk and increase the mutual benefit lead it to the way of success. 2. Interest Rate: Govt. has let the interest rate down. Before some years the rate was around 13% so investor were preferred to invest in the bank deposit for getting higher return in the past. Now a days economic condition is strong which has let the interest rate down to 5 to 6%. This is an Opportunities for the Mutual Fund that it can give the more return on diversify portfolio management. Investor can get return more then he can anticipate.
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3. Investment Pattern: In present scenario, Investors investment pattern is getting higher return with a less risk. Before 5 to 6 year investor were more trustworthy with Govt. and Post Office. While now a days they have diversify their investment pattern. This can led to success of Mutual Fund. Mutual Fund is only investment media where one can have all types of investment pattern. So it can be stated for investors attractiveness to the industry. 4. Investors Profile: The literacy level in India is growing. Investors are being educated, so they consider all facts and have good investment opportunity. Mutual Fund concept can be well explained to the qualified investors. It is opportunity for the industry. 5. Bull Equity Market: Currently equity market is in the boom period. The indexes are rapidly increasing. Sensex has crossed the level of 5000. The equity holders are getting more return or gains. Mutual Fund industry has good potential in the equity market. Investors can be pulled to the market with having investment in the equity scheme. Mutual Fund provides several types of equity Scheme that can easily track the equity investors perspective. It provides long-term capital appreciation and as well as dividend.
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6. Rapid growth in economy and saving: Indian economy is currently in growing level. In the past the country was in underdeveloped country while now it is a developing country. The GDP growth is round about 6 to 7%. Economy has got success in reducing the inflation rate which is 4.4%. The effect of this kind of economy is that the people have more income, while low inflation rate tends to increase in saving. This is good opportunity for the Mutual Fund industry. It can attract the investors by showing them the emergence of fund or diversification. 7. Commodities Fund: With approval for the Real Estate Funds in place, there is a huge opportunity for Mutual Funds to explore values through investment in commodities, bullion, metal etc.
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Threats:
1. Rules & Regulation: Mutual Fund has to work under rules and Regulation guided by SEBI, AMFI and RBI. It has some limitation under the law. Law board has given protection to the investor this is the threats for the industry. 2. Investors Awareness: Still investors are not aware of the Mutual Fund and its scheme. Investors have lower awareness regarding the companies concerning with Mutual Fund. Some investors fill difficulty in understanding Mutual Fund concept and its scheme objectives. This unawareness has proved to be failure aspect for the industry. Industry cannot cover potential market. 3. Reachness: Mutual Fund has failed to reach to the interior of the country. Currently major players have their market from metro and big cities. Still the way to the small towns and villages is open. Industry is in lack of Reachness.
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Section: 9 Five Force Analysis
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Porters Five-Force Analysis
Threat of new entrants
Rivalry Among competitor s
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitutes
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1. Rivalry among competitors:
Weapons
Better product services Better performance Strong Brand image High level of Advertising Product innovation Better customer services
Rivalry is stronger when:
Rivalry Among competing sellers
Types of schemes Better services Switching cost Demand of product
Types of scheme:
All the company provides type of schemes which are best suited to the investors objectives like Risk and Return, tax benefits, etc. Many companies are coming with new schemes like Tata Hedge fund, Franklins capital protection fund to suit the investors objective of risk and expected return. Therefore rivalry among competitors is high because investors have many choices to select schemes according their objectives.
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Better services:
In industry companies are trying to provide better services to the investors. Competitors are providing better communication facilities as well as guidelines. They are providing facilities like daily NAV through their websites, monthly statements, and also the prospectus to investors who want to invest in Mutual fund. Therefore rivalry among competitors is high as they fight to provide better services in this financial product of service industry.
Switching cost:
Rivalry is strong because switching cost is low. The investors can easily switch over to another company or schemes. When investors feel better return and security than he will switch over to the other company or schemes.
Demand of product:
As awareness of the Mutual fund increases in the mind of customers they are demanding more diversified schemes. So we can say that in mutual fund industry buyers demand growing slowly which leads high competition among competing sellers.
Returns:
In this industry, more importance is given to returns. Investors are investing by considering returns of particular company. Therefore, to attract customers companies coming with various combinations of schemes which gives higher returns as well as fixed income. So, competition is high among companies.
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2. The Potential Entry of New Competitors:

Until 1987, UTI was sole Mutual Fund in India. Then Banks, LIC & GIC floated MF. In the past 1992, public &private financial Institution with foreign collaboration came in market. Thus we can see that the entry of new competitors is moderate to high. Moderate entry is for well established companies and banks. High is for newly competitors. Capital requirement: - To enter in Mutual Fund Industry, the total net worth required is 40% i.e. Rs. 10 crore investment. So, any company cannot enter easily in market & operate as a Mutual Fund Company even fund management by companies is difficult. Therefore, threats form new entrants are low. Entry barriers: - In Mutual Fund Industry, competition is high because any one can enter in the market such as banks, NBFCs, FIIs, etc. Here, companies are entering into Mutual Fund industry due to diversification portfolio available and investments are in growing sectors such as infrastructure, FMCG, technological and pharmaceuticals etc. So, entry barriers are low. Therefore, a threat form new entrant is high.
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Regulatory Framework: - From 1991, Indian Economy become liberalized, such liberalization shows privatization which allows private players to enter in this industry. Therefore, many companies including foreign companies are allowed to invest in India with some regulatory aspects. SEBI has specified regulation for investment in Mutual Fund and that is feasible to most of companies because rules and regulations are strict. So, threat from new entrant is low, when we considered regulatory aspect.
Switching Cost: - In Mutual Fund Industry, investors loyalty level is very low because Mutual Fund Investments are subject to market risk. Therefore, investors will switch over to other company with different schemes such as ICICI Equity & Derivative close-ended scheme, which provide good aspects in diversified sectors to investors, and investors may switch over into different schemes, which give good returns. So, switching cost is less and therefore, a threat form new entrants is high. Buyer demand: - Now-a-days, buyers demand is increasing because of today stock market is on increase level and many companies provide good returns along with tax benefits in Mutual Funds. Investors have knowledge about various investment schemes, risk etc. so they want to invest in various investment funds for the future. They demanded products which well suit to their objectives. Therefore, a threat from new entrants is high.
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3. Threat from substitute product:

Availability of various substitutes: - there are many substitute of Mutual fund like Equity share; bank deposits, insurance etc. are readily available from many suppliers. Currently there is boom period in the stock market as investor prefers to invest directly to the stock market. FIIs movement towards stock market, which lead to boom in the stock market. Risk aversion people prefer the insurance, bank deposits, post office schemes. New insurance company gives the better product and security for the long-term plan. Therefore, threat from substitute is high.
Switching cost: In mutual fund industry, switching cost is low. Because

investors can switch from one scheme to another scheme. In banks, they are selling many mutual fund companys products in their premises, so investors have many choices for investment. Such switching cost is less because in all schemes having lock-in-period of 3 years which makes investors to shift after 3 years to another scheme or other investment tools. Even some of the companies charging exit load if investors want to exit before such lock-in-period as what company decided. Therefore, threat from substitute is high.
Market Orientation: when we consider different substitute for

investment such as government securities and other fixed return tools, it is good when market is highly volatile and return is highly fluctuated. So, investor can convert their investment to other securities which gives regular and fixed income. So, threat is depend upon changing stock market situation, whether there is recession or boom period going on in market.
4. Suppliers
(Investor) Bargaining Power:
We can consider the investor investing in Mutual Funds is the supplier of the company. Bargaining power to suppliers provide different scheme to the investor, which is reach, the investor objective like High Liquidity, High Return, Low Risk, Safety against investment. Investors prefer that security, which fulfill their investment objective. There are so many companies in the market, which give different kinds of schemes. Investor can choose the best scheme according to his objective and bargain for the same. Companies are facing threats from the bargain power of investors. Investor can easily switchover the scheme and cost of switching is also low. Investor fully utilizes their bargain skill while choosing the fund. So, by considering all objective of investor which they prefer at the time of investment, we can say that bargaining power from investor is high.
5. Bargaining Power of Customer (Listed Companies): We can consider the Listed Companies in Indian Stock market, Stock Market, Govt. Security, and Money Market etc. are the customers of the Mutual Fund. Blue chip companies attract the Mutual Fund companies to invest in their securities. Companies are more concentrate on Mutual Fund companies because of there is wide scope of investment in Mutual Fund. As such investment through mutual fund companies provide growth to companies even for further expansion such fund is useful. So, bargaining from listed companies is low.
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Section: 10 PEST Analysis
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PEST Analysis
Political & Legal Factor:
Regulation: The Govt. of India constituted SEBI, by an act of Parliament in 1992, as the apex regulator of all entities that either raise funds in the capital markets or invest in capital market securities such as shares and debentures listed on stock exchanges. Mutual Funds have emerged as an important institutional investor in capital market securities. The India Trust Act, 1882, governs Mutual Funds, being Public Trusts. The Board of Trustees or the Trustee Company is accountable to the Office of the Public Trustee, which in turn reports to the Charity Commissioner. These Regulators enforce provisions of the Indian Trusts Act, to be complied with by the fund trustees. Mutual fund industry is regulated by SEBI which has positive impact on mutual fund co. and investors. Because of liberalization and entry of private players, mutual fund industry has grown with the economy, and low barriers affecting to this industry attracts FIIs and Foreign Institutions. Tax Benefits: Under Sec 54 EB if the capital gain portion (after indexation) of the sale proceeds are invested in Mutual Fund units and locked-in for a period of 7 years.
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The benefit under this section has been withdrawn by the finance bill 2000 and there for, the capital gains made up to the 31st march 2000 can only be invested under this scheme before the 30th September 2000, then after this benefit will no more be available. Exemption on dividends 10(33) The investor in a Mutual Fund is exempt from paying any tax on the dividend received by him from the Mutual Fund, irrespective of the type of the Mutual Fund. Exemption for (SIP) ELSS: - 10(35) 30% tax saving plus tax free dividends and capital gain while considering investment in SIPs offered by mutual fund, it would be even more worthwhile to look at SIPs of equity linked saving schemes (ELSS). Apart from the benefit of deduction u/s 80( C ), which can offer a straight return of up to 30% right away in the form of income tax saving in the year of investment dividends declare on ELSS units are tax free u/s 10 ( 35 ) during the period of holding and the long term capital gain earned on the sale of units at the time of exit are further tax exempt u/s 10 (38 ). Exemption on dividends/interest/capital gains (Section 10 (23D)) Mutual fund industry has positive effect due to tax benefits. The Mutual Fund is completely exempt from paying taxes on dividends/interest/capital gains earned by it. As mutual funds investment is tax-free, only service tax levied which is 12.5%. Therefore, it is beneficial to investors as well as companies.
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News Flow: Merger announcements, takeover possibilities, bonus/dividend expectations, top management changes and such other news flows about the company also move the stocks, sometimes quite appreciably. Such events may or may eventually happen or they may not have any significant impact on the operations per se going forward. But, in the interim, they do create a lot of activity in the market. Fund of Fund: SEBI has allowed investing in fund of fund. Now the companies concern in the Mutual Fund business it can invest its fund in the other Mutual Funds company fund or its own other fund. Commodities: SEBI has allowed funds to invest in commodities like Gold, Silver and Real Estate etc. Now companies have funds like Gold Fund, Silver Fund etc. In the domestic economy, there are signs of demand pressures in addition to supply constrains in respect of commodities, so it has positive impact as mutual funds allowed to invest in commodity market. Now a days commodity prices increasing, therefore mutual fund companies good returns to investors. FDI and FII: Mutual fund industry has positive impact due to more FII inflows in the stock market. Overseas investment liberalized and flexibility allowed to overseas investor for flow of FDI Changes in overseas investment by Mutual
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Funds. At present Mutual Funds are allowed to invest in ADRs/GDRs of Indian companies and rated foreign debt instruments/equity within an overall capital of US $ 1.0 billion with permission of SEBI and RBI. In order to simplify the procedure and to facilitate expeditious processing of investment proposals general permission within the capital. Once SEBI approval has been obtained. This general permission will be available until further notice. FIIs who pumped in a record $10 billion in Indian Equities in 2005. Net FII investment into the country between January 2006 and May 2006 aggregated $3.13 billion, while according to the figures put out by Sebi, foreign portfolio investors have invested a total of only $1.07 billion in equity and debt combined during the same period. Advertisement Standards: Rules, which all mutual fund companies are required to be, consider as advertisement standards during advertisement in television and prospectus Mutual fund investment is subject document before investment. to market risk please read the offer
Economic Factors: GDP: Mutual fund industry has positive impact because of GDP growth rate. GDP growth projection for 2006-07 retained at 7.5-8.0 per cent. Real GDP growth during January-March 2006 is placed at 8.9 per cent as against 8.6 per cent in the corresponding quarter a year ago and real GDP growth for the year 2005-06 is revised to 8.4 per cent from 8.1 per cent.
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It has indeed come a long way from being a single player, single scheme (US 64) industry to having 30 players currently offering 460 schemes as on May 31, 2005. Mutual Fund Industry accounts for just 6% of GDP, while it is 87% in Australia and 72% in US.
MF Industry's share in GDP

Japan India South Korea UK Brazil USA Australia 0% 20% 40% 60% 5% 6% 21% 23% 30%
MF Industry's share in GDP
72% 87% 80% 100%
Interest rates: Low interest rate is considered to be good for those investors who are investing their amount with that objective to get good return with security and liquidity. Because of that investment in mutual fund as well as other investment tool automatically reduces investment to stock market related return. As investors can obtain return with safety and also that much amount of return which they accept from stock market through investment in Mutual Fund or in Share. So there is always threat arise for Mutual fund industry due to changes in interest rate.
Equity fund performs better during economic up trend as there is strong demand for bank fund from corporate wanting to expand, which pushes up the interest rates. This is what which makes the whole thing highly volatile. Every investor views the company from his perspective, resulting in huge price movements in the short-term. However, if seen from the long-term perspective, the overall trend of these price movements will either be upwards or downwards, depending on how the companys business is performing.
Growth Trend: As fund manager manages investors investment in diversified schemes of different sectors such as Infrastructure, pharmaceuticals which now a days booming sectors, so it is beneficial to investors as it has positive effect on mutual fund industry. Bank deposits are still on rise, but not at the pace of increasing demand for credit, as the retail investors savings are converted to mutual fund. Further MF companies continue to grow by floating new funds to attract more retail investors. This year till March 2006, 12 new fund offers have collected Rs. 16,287 crore which is nearly by 65% of the total collection by equity funds during this period. Inflation: The inflation target for FY07 is unchanged at 5.0-5.5%. Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, raised from 4.1 per cent at end-March 2006 to 5.3 per cent as on October 14, 2006.
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The average international price of the Indian crude basket increased from US $ 60.1 per barrel in January-March, 2006 to US $ 67.3 per barrel in AprilJune, 2006 and further to US $ 71.4 per barrel in July 2006 (up to July 21). During 2006-07 so far, there has been a reversal of the phenomenon of consumer prices lagging wholesale prices, indicative of the increase in food prices, which constitute a relatively larger share in the consumer price basket. There are indications of growing demand pressures and potential risk from rapid credit growth which leads credit quality, high levels of monetary expansion and liquidity situations which is monitored by SEBI and RBI so mutual fund industry has positive effect. Money Supply: On a year-on-year basis, money supply (M3) growth at 18.8 per cent by July 7, 2006 was higher than 13.8 per cent, net of conversion, a year ago and above the projected trajectory of 15.0 per cent indicated in the Annual Policy Statement for 2006-07. The year-on-year increase in aggregate deposits at 20.7 per cent (Rs.3, 72,977 crores) was significantly higher than 14.9 per cent (Rs.2, 34,020 crores), net of conversion, a year ago Money supply, deposit and credit growth above the indicative projections, warranting caution. Fiscal Deficit: Efforts at improving the fiscal health of the States are continuing. The consolidated fiscal deficit of the center and the states is budgeted to come down from 9.4% of GDP in 2003-04 (RE) to 7.9% in 2004-05, which is heartening. At the same time, the survey highlights the fact that the fiscal
and revenue deficit have risen faster in 9mFY05, which the government hopes to make up by increased tax collections and lowering government expenditure in the last quarter. However, we would have an upward bias to the fiscal deficit in light of continued firmness in crude prices in the global markets. After having looked at the key areas of interest to retail investors, lets start with Issues and Priorities that the current Economic Survey has stated and how does that compare with the previous years economic survey. Savings: In the year 2001-2002, gross and net domestic savings at current prices grew by 11.8% and 13.3% respectively to increase their share in GDP at market prices. Gross domestic savings, as a proportion of GDP at market price is improved to 24% in 2001-02, from 23.4% in 2000-2001. The household sectors were once again the best performer, with the increase in its gross savings exceeding the total increase in gross domestic savings. Households increased the share of financial savings in their total savings from 48.0 percent in 2000-01 to 49.8 percent in 2001-02. Private corporate savings increased roughly at half the rate of increase of household savings. The public sector not only continued to be a net dis-saver, but it increased its dissavings by nearly Rs 10,000 crore. The departmental enterprises became net dis-savers in 2001-02. The increased net dissavings of government administration more than neutralized the increased savings by nondepartmental enterprises. Currently in India saving ratio is 28%, the thing is MF companies should channelise these savings into Mutual Fund sector .
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Mutual fund industry has positive effect because of more savings by individuals.
Social Factors:
Sentiment of Investors: Circumstances such as uncertain political scenario, war-like situation, natural calamities etc. could affect the investor sentiment. They would form a rather pessimistic view of the future and hence will tend to stay away from risky assets like equity. On the contrary, positive events may create an upbeat mood in the market. Many scams take place in capital market which affect sentiment of investors and also changes investors mind related to stock market and return related to stock market. Such scams like UTI Scam, Harshad Mehta, and Ketan Parekh. Fashion of the season: The best example of people chasing stocks, which seem to be in fashion, was the year 2004-05, when every one was desperate to buy stocks. So much so that the valuations reached stratospheric heights, which were not even remotely supported by the fundamentals. When some sector catches fancy of the market, then stock prices of even the poorly performing companies in the sector tend to appreciate therefore, it creates positive results for mutual fund industry. Culture: As in India, people have habit of savings. Now a day with boom of Indian stock market, majority of the people wants to invest in stock market but they are also looking for the safety of their investment and returns
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therefore, they invest in mutual fund as a option for investing in the stock market and people are also becoming risk takers. Taste and preferences: Nearly, 70% of the Indians populations are under 30 years old. Largely the younger generation with the higher disposable income and more risk taking appetite, who are investing in Equity directly and through Equity mutual fund schemes. Today, people between the age of 25-45 invest more in the stock market because of the knowledge about investments in mutual fund.
Technological Environment: Online Trading: In Mutual Fund unit are traded in the stock market and present time the stock market become online i.e. on a terminal of the stock market any body can trade their units easily and very fast. Online trading and T+1 settlement become unit holders are becomes highly liquidate. Online Price Formation: In Mutual Fund online trading is available so that by demand and supply rules the price of the units are changes respectively and load and no-load of particular fund are also consider in the price formation. NAV Fluctuation: In Mutual Fund unit price known by the NAV and it is allowed trading in the stock market. So daily fluctuation done in the NAV of the Mutual Fund unit.
In newspaper they show the NAV of the fund, Purchase price and sell price is given.
Section: 11 Regulatory Aspects

Union Budget 2006-07 & impact on MF industry. Association of Mutual Fund in India (AMFI). Comparison with Capital Market Regulation of MF.
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Union Budget 2006-07 - Impact on Mutual Funds Industry

1) Ceiling on aggregate investments by mutual funds in overseas instruments to be raised from $ 1 billion to $ 2 billion with removal of requirement of 10% reciprocal shareholding. 2) Limited number of qualified Indian mutual funds to be allowed to invest, cumulatively up to $ 1 billion, in overseas exchange traded funds. 3) An investor protection fund to be setup under the aegis of SEBI. 4) RBIs anonymous electronic order matching trading module (NDS-OM) on its Negotiated Dealing System to be extended to qualified mutual funds, provident funds and pension funds. 5) Steps to be taken to create a single, unified, exchange-traded market for corporate bonds. 6) Increase of 25 per cent, across the board, on all rates of STT. 7) Investments in fixed deposits in scheduled banks for a term of not less than five years included in section 80C of the Income tax Act.
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8) Limit of Rs.10, 000 in respect of contribution to certain pension funds removed in section 80CCC subject to overall ceiling of Rs.100, 000. 9) Definition of open-ended equity-oriented schemes of mutual funds in the Income tax Act aligned with the definition adopted by SEBI. 10) Open-ended equity-oriented schemes and close-ended equity oriented schemes to be treated on par for exemption from dividend distribution tax.
Implications For Mutual Fund Industry

The Union Budget 06 moved on predictable and there were some sops for the mutual fund industry as well. The dividends from MF units continue to be tax-free for its investors. Debt-oriented Mutual Funds schemes continue to pay distribution tax amounting to 12.5 percent on the dividends declared, while equity-oriented mutual funds schemes will not be required to pay distribution tax. Long-term capital gains tax on equity funds remains nil while for debt funds it would be taxed at the prevailing rates- 10% without indexation or 20% with indexation.
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The limit on FII investment in corporate debt would be raised from $0.5bn to $1.5bn, which is expected to encourage the investments in debt market. Open-ended equity-oriented schemes and close-ended equity oriented schemes would now be treated on par for exemption from dividend distribution tax. The ceiling on aggregate investment by mutual funds in overseas instruments would be raised from $1billion to $2billion and the requirement of 10% reciprocal share holding would be removed and a limited number of qualified Indian mutual funds to invest, cumulatively up to $1 billion, in overseas exchange traded funds would be allowed. Mutual Fund investment abroad is currently restricted in companies that have a holding of at least 10% in a listed Indian company. This will enable Indian investors to invest in global equity markets with a wider choice of stocks to permit greater diversification and the convenience of dealing with an Indian mutual fund.
However, now, investors would have to bear the brunt of increased rate of securities transaction tax. The Investments in fixed deposits in scheduled banks for a term of not less than five years has been included in section 80C of the Income tax Act, thereby making them more attractive to the general public, which may affect debt-oriented mutual fund schemes.
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Association of Mutual Fund in India :

With the increase in Mutual Fund players in India, a need for Mutual Fund Association in India was generated to function as a non profit organization. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management Companies which has been registered with SEBI. Till date all the AMCs are that have launched Mutual Fund Schemes are its member. It functions under supervision and guidelines of its Board of Director. Association of Mutual Fund in India has brought down Indian Mutual Fund Industry to a professional and a healthy market with ethical lines enhancing and maintaining standards. It follows principle of both protecting their unit holders. The Objective of Association of Mutual Funds in India: AMFI works with 30 registered AMCs of the country. The Objective is as follows This Mutual Fund Association of India maintains a high professional and ethical standard in all areas of operation of the industry. It also recommends and promotes the top class business practices and code of conduct which is followed my members and related people
and promoting the interest of Mutual Funds as well as
engaged in activities of Mutual Fund and Asset Management. The agencies who are by any means connected or involved in the field of capital market and financial services also involved in this code of conduct of association. AMFI interacts with SEBI and works according to SEBIs guidelines in the Mutual Fund Industry. Association of Mutual Fund of India do represent the government of India, the RBI and other related bodies on matter relating to Mutual Fund Industry. It develops a team of well qualified and trained agent distributors. It implements a programme of training and certification for all intermediaries and other engage in Mutual Fund industry.
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Capital market comparison with Equity fund:

The over three years old rally in the stock market has led to huge increase in the equity schemes of mutual funds. The asset under management (AUM) of growth (equity) funds has shot up by a whopping 782% from Rs. 10,000 crore as of April 30, 2003 to Rsa.88, 198 crore as of July 31 2006. The share of equity schemes in the total asset of MFs has trebled to 31% in July 2006 from 11% in April 2003. This increase has taken place even as the total AUM of MFs in India has gone up by 222% from Rs. 89,238 crore to Rs. 2, 87,159 crore during the same period. Over the last 20 years, the stock market has delivered a return of 17% on an annualize basis. Equity linked saving Schemes, which are basically tax planning schemes, carry a lock-in period of three years. These schemes tend to out perform the open-ended equity diversified schemes. Mutual Fund watches feel one of the reasons for this is that fund managers in tax planning schemes get to manage a stable pool of money. In the close-ended fund categories in the last 5 years, equity tax planning schemes have delivered an average return of 39.3% compared to 35.6% delivered by diversified funds. The sensex has delivered a compounded return of 28.5% in the last 5 years. Equity tax planning category has outscored by delivering 47% return as
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compare to a 43.5% posted by an open ended diversified equity fund in the last 3 years.
The AUM of growth schemes more than double to Rs.24, 579crore as of April 30, 2004 and than posted a lower growth to increase to Rs. 37,309 crore in April 2005 and than again more than doubled to Rs.88, 198 crore in July 2006. The second highest growth took place in the liquid or money market schemes whose AUM jumped up by 538% to a huge Rs. 124463 crore in 2006 from Rs. 19497 crore in April 2003. Compare to this, the income (Debt) funds assets grew meagre 15% to Rs. 59007 crore from Rs.51407 crore during this period. (Source: Economic times)
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Explanation: As can be seen, in the last one-year, equity funds have lost almost 18 percent of the wealth they had started the year with. Yet, surprisingly, they have managed to stay above the market that lost almost 26 percent in the same duration. So despite the fact that people have lost money in this year at a rate greater than the rate of depreciation of market capitalization of the index, the funds have received some fresh inflows. The industry on the whole saw a cumulative inflow of Rs. 5962 crore through new issues and Rs. 81210 crore through existing schemes in the year but also saw redemption of Rs. 68514 crore in the same period.
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The same trends can be observed if we dissect the industry across different categories of fund houses. Assets under management of different categories of fund houses have moved diversely. The industry finished with lower assets under management as it lost almost 2 percent in the year while the industry giant UTI lost about 4.5 percent followed by Indian Joint Ventures at 4.1 percent. However, the category to have lost maximum in the year was that of Bank sponsored mutual funds that lost almost 56 percent. The poor performance in this category was not just due to the ICE bust as many would like to believe but also due to redemption of many schemes in the sector. However, the industry saw shifting patterns in the investors preferences. The private sector mutual funds and foreign joint ventures struck big time this year and have emerged as the biggest gainers despite the market crash. Both the categories gained in excess of 30 percent and defied the general trend in the industry. This stresses the point that returns as well as quality of services matter to the investor. This had hitherto been not too significant till now but has become apparent now. This is indeed reflective of maturing investors, though only just. Investors have been known to follow the herd mentality and sell off when the principal amount is under pressure. Although people have redeemed money from their investments in equity, by and large, more money has also flown in to the industry. With the markets looking to revive, the industry can still hope for better days, as investors seem to gradually understand that despite the correlation between the market and mutual funds, they are better placed with their risks reduced in mutual funds. (Source: Mutualfundsindia Research Team)
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Mutual Fund Regulation:

The securities and exchange board of India (SEBI) is the statutory legal body that issues the authorization to mutual fund to do business. All mutual fund needs to accept the guidelines set by SEBI and defiance of the rules attracts penalties by SEBI. Basic guidelines for Mutual Funds: The guidelines are applicable to all mutual funds that invest primarily in the capital market and partly in money market instruments. The reserve Bank of India (RBI) regulates the money market mutual und that invest solely in money market instruments but SEBI regulates in money market schemes of added mutual funds. The Department of economic affairs, Ministry of finance and directives from RBI /Government manage the mutual fund that deal with offshore fund having the component of non-resident investors. Guidelines to Mutual Fund under SEBI (mutual funds) regulation, 1996: Sebi has taken several measures to develop a comprehensive regulatory framework for mutual fund in association with Association of Mutual Funds of India (AMFI). Fundamentally, mutual funds are meant for the retail investors. To achieve this objective SEBI plans for restrain the trend of
Asset Management Companies (AMCs) launching schemes catering to corporate and institutional investors. The combined efforts of Sebi and AMFI in regulating mutual fund is bound to help the industry to cross important milestones in terms of the size of the funds, number of funds and investor base. Under regulation 77 of the SEBI (mutual funds) Regulations, 1996 the following guidelines are issued for investment restrictions: All investment restriction shall be applicable at the time of making investment. With reference to the proviso to clause 10 of Seventh schedule to the Sebi (mutual fund) Regulation, 1996. The investment by index fund shall be in accordance with the weight age of the scrips in the specific index as disclose in the offer document. In the case of sector/ industry specific schemes, the upper ceiling on investment may be in accordance with the weight age of the scrips in the representative Sectoral index/sub index as dis-close in the offer document of 10% of the NAV of the scheme, which ever is higher. All Mutual Fund schemes are expected to reveal their entire portfolio on a half yearly basis. For the benefit of investors, mutual fund should give important information on the deployment in a specific common format.
The untaken redemption and dividend amount could be organized buy
the mutual fund either in the call market or money market instruments. The AMC should not charge the investment fees more than 50 basis point for handling unclaimed amounts.
Mutual fund should display on the website the annual report and the account of the AMCs. If the unit holders wish to have the annual report of the AMC, they can request for the same. According to regulation 44(1A), a mutual fund that possesses security worth Rs.10 crore or more is require to resolve its transactions only through dematerialized securities. The Trustee companies, AMCs and their employees and their director should abide meticulously by the Sebi (Insider trading) (amendment) Regulation, 2002. SEBI also allow to mutual fund companies to launch Capital protection Oriented Schemes. Under this scheme, investors are guaranteed their capital invested even if the scheme performs below expectations.
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Section: 12 Guidelines for Investing In Mutual Fund

Choosing of Fund Expenses Searching of Schemes
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Choosing a Fund:
Choosing a fund is similar to choosing a stock. As with a stock, you need to do research and decide which fund is best for your investment goals. If you have a short time horizon and are reasonably risk adverse you may want to consider growth and income funds. If you are investing for the longer-term and feel like you can take a risk, you may want to look at aggressive growth funds. After choosing a fund category, you will need to look for specific funds. The Ameritrade site, like others on the Web, will allow you to look up funds by family. A fund family is the group of funds run by one company. At some sites, you can also view a Mutual Fund screen. In a fund screen, you can enter criteria that you would like to find in a fund. For example, you can search for no-load growth and income funds having investment returns greater than 5%. This Fund Fact screen will provide much of the information you need to make an informed decision. The information you should look for is outlined below.
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Basics - This section provides basic information on the fund such as the fund family, its categories, its NAV, and how much it has invested in the market. Minimums - Some funds have minimum initial and subsequent investments of $1000 or more. Note that these minimums may vary for regular investments and IRAs. Fees - This section lists all the fees involved with buying into, carrying and/or selling your shares in the fund. The list should include the loads, the 12b-1 fee, the management fee and the expense ratio. Fundamental Statistics -This section provides some important statistics that are described below: Portfolio Turnover - This tells you how much a fund trades in its stock. If its turnover is 100% or greater it means that it changes its entire portfolio at least once a year. A fund having higher turnover will have more expenses. Again, this can be positive or negative, but it is up to you to research the reasons and decide whether or not you want to invest. Alpha - Measures the performance of a fund, given its risk. In other words, it takes the returns of the fund and compares them to the returns that would be predicted given the market's performance and the fund's beta. If Alpha is positive, it means the fund outperformed expectations. If it is negative, then the fund under performed against expectations.
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Beta - Represents the risk of the fund in relation to the stock market as a whole as represented by the S&P 500 Index. The S&P 500 Index has a beta of 1.00. If a Mutual Fund has a beta of 1.25 it means that its portfolio is 25% riskier than the market as a whole. If it has a beta of 0.75 then the fund carries 25% less risk than the market as a whole. If two funds with the same investment objective have the same returns you may want to compare their betas. Standard Deviation - Measures the range of performance by a Mutual Fund. It shows how volatile the returns of a fund are over a 3-year (generally) period of time. Ninety-five percent of the time, a fund will perform within 2 standard deviations of its mean or average. This means that if a fund has a 10% return and a Standard Deviation of 5%, it has exhibited returns between 0% and 20%, ninety-five percent of the time. If you have to choose between two funds with the same average returns and you are more risk averse, you may want to consider the fund with the lower standard deviation. R-squared - Is the correlation (between 1 and 100) of the fund to the stock market as measured by an index, normally the S&P 500. For example, if a fund has an R-Squared of 90, 90 percent of the movement was due to the market; not to the actions of the fund manager. This number can help you decide whether or not the beta is relevant to the fund's performance. If the number is high, then the beta is a more relevant measure of fund risk compared to the R-squared correlation. If it is low, then the fund's beta is not as important a measure of its risk.
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Operations - Provides the basic information about the fund such as the address, phone number and Web site. Most importantly, it provides you with a profile of the fund manager. This is important because managers have individual styles and different track records. If a fund has a new manager, their investment pattern and track record could diverge dramatically from the past performance of the fund. Investment Objective and Graph - This is a description of how the fund views its investments. It tells you the categories of stocks it invests in and might tell you one of the rankings from a rating agency. It can also tell you the top holdings of the fund, which will give a clearer picture of the manager's philosophy. Historical Data - Shows the history of the fund, including total returns, which are the returns of the fund including all expenses incurred during the year. It also shows the best and worst returns for a period. There is a caveat in looking at historical data; one year will not necessarily be reflective of the next year. Conditions will vary from year to year, as will returns. Allocations - This table will allow you to evaluate a fund's risk and investment philosophy by looking at the types of assets in the portfolio, the sectors they invest in and their top 10 holdings. Over time, you can compare these numbers to get a feel for how long a fund holds investments or assets. This can be valuable information in deciding whether the fund's philosophy and risk matches your own.
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Expense Related to Mutual Fund:
A FUND'S track record may be the single most important factor that an investor checks before opting for a mutual fund product. But it is becoming increasingly important for investors to take note of other parameters too, while deciding between mutual funds. The expense ratio, or the proportion of recurring expenses that a fund charges to its schemes year after year, is one such parameter. True, given the SEBI-stipulated ceiling of 2.5 per cent on the annual expenses that may be charged to a fund, the expense ratio may not seem a significant factor. But it assumes greater importance when you consider that annual expenses can shave off as much as a fourth of the returns from a bond fund and a much higher proportion of the returns from a gilt or liquid fund.
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Of course, investors need to weigh the savings on expenses against the performance record before choosing a fund. Larger the fund, lower the expense ratio: The limit set by SEBI on annual recurring expenses, declines as the size of the fund increases. Equity funds are allowed to charge up to 2.5 per cent of the average assets as expenses for the first Rs.100 crore of investment. This falls to 2.25 per cent on the next Rs 300 crore of assets, 2 per cent on the next Rs 300 crore and to 1.75 per cent on any assets over Rs.700 crore. Funds investing in bonds are allowed to charge 0.25 per cent less under each of the above slabs. Therefore, purely from the point of view of expenses, investors would be better off investing in large sized funds of Rs.700 crore or more. However, one should bear in mind that in the Indian context, small sized funds often offer better maneuverability of portfolio and generate higher returns than large funds. Debt funds less cost-efficient: SEBI allows debt funds to charge lower expenses than equity funds; but it is not nearly enough to compensate for the vast difference in return expectations from the two products. One would expect returns of around 7-9 per cent from a debt fund in the current interest rate environment. Thus, annual expenses of 2.25 per cent on such a fund would certainly make a large dent on effective returns. On the other hand, the return expectation from an equity fund would be much higher at, say, 15-20 per cent. If an equity fund matches this expectation, the annual expenses of 2.5 per cent may not affect returns to the same extent as in a debt fund.
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Check actual expenses incurred: The ceiling specified by SEBI makes larger funds more cost-efficient than smaller ones and equity funds more costefficient than bond funds. But competitive pressures are forcing funds to charge lower expenses than those actually allowed by SEBI. In 2001-02, Templeton India Income Fund had an expense ratio of 1.63 per cent, Birla Income plus 1.65 per cent and PruICICI Income Plan 1.60 per cent all lower than SEBI-stipulated limits. Thus, investors can use expense ratios to choose from schemes with a similar track record. The historical, unit-wise statistics published by each fund with its half-yearly and annual results and the details provided in offer documents are the best places to glean this information. Checking out the proposed expense ratio is also important while investing in a fund's initial public offering, especially for debt products. In its recent debt fund offering, Sundaram Select Debt Fund offered to restrict its expense ratio to 0.65 per cent of the net assets for some of its plans. This implies that the fund would straightaway be in a position to generate an additional return of 1.6 per cent, relative to other debt funds that charge annual expenses of 2.25 per cent. Look for the trend: While evaluating a fund for investment, the trend in expense ratio over the years may be more important than just scrutinizing the ratio over one particular year. For instance, in the three years from 19992000 to 2001-02, Templeton India Income Fund's expense ratio declined from 1.89 per cent to 1.63 per cent.
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Over the same period, Sundaram Bond Saver's expense ratio rose from 1.58 to 1.84 per cent. A declining trend may show that an expansion in fund size is helping moderate its costs or that the fund is making some effort at costcutting. The trend also helps the investor get an idea of how much his investment is likely to be impacted by the expense ratio. Factor in the expense ratios while choosing from classes of funds: A balanced fund invests in a mix of bonds and equities and may, therefore, earn lower returns than a pure equity fund. Logically, therefore, one would think that a balanced fund would have a lower expense ratio than a pure equity fund. But often, reality does not bear this out. For instance, in 2001-02, the annual recurring expenses charged to Birla Balance, at 2.31 per cent of assets, was higher than the expense ratio of 2.24 per cent charged to the pure equity Birla Advantage Fund. Similarly, liquid funds tend to charge much lower expense ratios than gilt funds. While expense ratios for most liquid funds are at less than 1 per cent, the expense ratios for gilt funds are in the 1.2 to 1.8 per cent range. Yet, under normal circumstances, there may not be too much of a difference between the returns generated by gilt and liquid funds. If the expense ratio is an important parameter in the choice of a debt fund, it is crucial in choosing of an index fund. The stock selection skills of the fund manager have a limited role to play in the management of an index fund, which passively mimics a market index (such as the S&P CNX Nifty or the BSE Sensex).
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Therefore, the expense ratio may be one of the key factors that determine how much a fund's performance deviates from that of the index. In 2001-02, while the Franklin India Index Fund's expense ratio was 1.50 per cent, and IDBI Principal Index Fund's 1.48 per cent, PruICICI Index Fund had a ratio of 1.25 per cent.
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Searching of Scheme :
Which schemes will suit you best? First decide what your investment goals are. Take a short quiz, and our Asset Allocator will prescribe the right investment mix for you. Or choose a fund sub-category under the categories mentioned. A scheme objective indicates the desired returns by way of capital appreciation by the Mutual Fund. Based on broad objectives there are 6 categories. Equity Invest predominantly in stocks. Provide returns by way of capital appreciation. More volatile, but better returns. Good for long-term investors. Typical returns over long term of 15-25% p.a. Equity schemes are of the type:
Equity-Diversified:
Provide capital appreciation over a medium
to long period (2 - 5 years). Invest in stocks from a diverse array of industries. Prevent adverse impact due to a downturn in one or two sectors. Less volatile to Sectoral schemes. Typical returns between 1525% p.a.
Equity-ELSS: Offer tax rebates under section 88 of the IT law.
Diversify the equity risk by investing in a wider array of stocks across sectors. Variant of diversified equity. Typical returns between 15-20% p.a.
Equity-Index: Invest in stocks that make up a particular index.
Investment in each stock is in proportion to the stock's weight in the index. Volatility in sync with the index. A bull market can get max returns of 40% p.a. Bad year can erode principal by 30%.
Sectoral-Bank
Sectoral-Basic: Invest only in stocks in the basic industry (core
industries like petrochemicals, cement, steel, etc.) sector e.g., TISCO & Reliance. Least volatile to other Sectoral schemes. Benefit in the medium term (2 years). Typical returns could be as high as 15%.
Sectoral-FMCG:
Invest only in stocks in the fast moving consumer
goods sector e.g., HLL & Cadbury's. Medium risk-reward ratio. Benefit in the short term (2 years). Typical returns could be as high as 25%.
Sectoral-FMCG:
Invest only in stocks of multi-national companies in
various industries e.g., HLL & ABB. Medium risk-reward ratio. Benefit in the medium term (2 years). Typical returns could be as high as 25%.
Sectoral-Pharma: Invest only in stocks in the pharmaceutical sector
e.g., Ranbaxy & Novartis. Medium risk-reward ratio. Benefit in the medium term (2 years). Typical returns could be as high as 25%.
Sectoral-TMT: Invest only in stocks in the technology, media &
telecom sector e.g., Infosys & Zee Telefilms. High risk-reward ratio. Benefit in the short term (1 year). Typical returns could be as high as 50%.
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Debt Invest mainly in income-bearing instruments like bonds, debentures, government securities, and commercial paper & call money. Less volatile than equity schemes. Volatility depends on rupee depreciation, fiscal deficit, inflationary pressure etc. Returns depend on bond ratings. Typical returns between 7 to 12% p.a. Debt schemes are of the type: Gilt: Invest in government and money market securities or their combination. Tend to give higher returns than money market schemes. Good for parking short-term surplus funds. Easy entry & exit without load. Instant cash on redemption. Slightly volatile. Typical returns of 8.5-10% p.a. Income: Slightly more overweighed on corporate bonds (50-60% of portfolio). Also invests in government securities and money market instruments. Ideally suited for investment beyond 1 year. Typical returns of 11-12% p.a. Liquid: Invest in short-term debt instruments like T-bills, CDs, commercial papers & call money. Preserve the principal while yielding a modest return. Ideal for corporate investors. Good for parking short-term surplus funds. Easy entry & exit without load. Instant cash on redemption. Typical returns between 7-8% p.a. MIP: Variant of income scheme. Provide option to get monthly returns in the form of dividends. Returns are however not assured (except UTI). Typical returns of 10.5 -11.5% p.a.
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Section: 13 Distribution Channel Of Mutual Fund
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THE DISTRBUTION CHANNEL
Direct
Agents
Mutual Fund
Retail
Corporat e Banking
The Distribution Channel: In India, AMCs work with five distinct distribution channels: Direct, Banking, Retail, Corporate and Individual Financial Advisors (IFAs).
The Direct Channel:

In the direct channel, customers invest in the schemes directly through the AMC. The fund companies provide several tools to investors who invest through this channel. This includes monthly accounts statements, processing of transactions, and maintenance of records. In this channel, most investors
can invest through websites, or receive information through telephonic services provided by the company. Considering the fact that only about 10 20% of the total sales of an AMC come through this direct channel.
The Banking Channel:

The large customer base of banks, in the developed countries has played an important role in the selling of Mutual Funds. In the recent years, this channel has also opened up in India. Banks operating in India, including public sector, private and foreign banks have established tie-ups with various fund companies for providing distribution and servicing. The Relationship Managers (RMs) and Personal Bankers (PBs) selling this fund to their customers receive commissions and brokerage by the companies. Certain Non-Banking Financial Companies (NBFCs) have also started providing such services to the investors. This channel is now being used by almost every fund, although not all banks have started participating in the distribution of Mutual Funds. In the banking channel, usually high Net worth Individuals (HNWIs) trust the advice of bank managers and investment relationship managers in their investing decisions. During the time of NFOs, i.e., launch of new schemes, banks become a major point for advertising these new schemes. A distinct advantage of this channel is the most officers are well versed with the schemes and their performances. As a result, AMCs do not spend much time and money on educating the banks about their products.
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The Retail channel:

A customer can deal directly with a sub broker belonging to a distribution company, instead of going through the trouble dealing with several agents. Distribution companies sell the schemes of several fund houses simultaneously and a brokerage is paid to them by AMC whole funds they sell. The Retail channel offers the benefit of specialist knowledge and established client contacts and, therefore, private fund houses generally prefer this channel. Some of the major players in India in this channel are national players like Karvy, Birla Sun life, IL&FS and Cholamandalam. The Retail channel is vital to the industry as it offers a large network of branches and hence, a deep penetration into the markets. In the larger branches this channel is similar to the banking channel and as such is well aware of the market scenario and current performance of the funds. The banking and retail channel generally contribute to about 50-70% of the total AUM.
The Corporate Channel:

This channel includes variety of institutions that invest in shares on the companys name. These are businesses, trusts and even state and local governments. For institutional investors, fund managers prefer to create special funds and share classes. Corporate can either invest directly in mutual funds, or through an intermediary such as distribution house or a bank. Generally, corporate money comes in the funds through banks, as they manage large cash accounts with various private and public sector banks.
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The corporate channel may not exist as a separate channel of its own. Fund houses generally find that corporate money comes to them through either the banking channel, where Corporate investing with banks invest in mutual funds through these bank accounts.
Individual Financial Advisors (IFAs) or Agents:

The IFA channel is the oldest channel for distribution and was widely employed at the time when UTI held monopoly in the market. In recent times, with the emergence3 of distribution companies and banking channel, the importance of this channel has significantly decreased. An agent basically acts as interface between the customers and the fund house. There is a unique system in place in India, wherein; several sub brokers are working under one main broker. As per AMFI, over one-lakh agents are registered to sell mutual funds. SEBI has made it mandatory for all agents to pass the AMFI certification programme in order to get empanelled with the AMCs. The IFAs generally tap the smaller investors, and give significant volumes of transactions to the AMCs. However, this channel has tremendous potential as it has the highest penetration in the market. This is visible in success of both UTI and SBI mutual funds, which have relied on this channel for the major share of their investments. In case of other AMCs, this channel typically holds roughly 20 30% share in the entire AUM contribution. (Source: ICFAI Reader July-2006)
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Section: 14 Recommendation and Suggestions
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Recommendation and Suggestions

People know the concept of MF but they are not aware about the various schemes and awareness level in small town and villages are very less, so AMCs should try to make awareness about various schemes. One of the threats to MF industry is the competition from various investment options available in the market like post office, insurance and so on. As insurance and post office provides the return which is comparable to MF industry with less risk so this is one of huge threats. So, AMCs should reduce the risk which is involved in MF at the time of investing in MF by constructing the special effective risk management dept. Banks can go for arrangement of seminar where they can invite their regular customers, to provide information about MF and its schemes. Banks can attract their regular and new customers toward the MF schemes by appointing agents or Investment Advisor in their respective bank only because they have proper knowledge and professional expertise which is beneficial to customers. Therefore, Advisor will be good option doing counseling for MF.
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Section: 15 Conclusion
167
Conclusion
Up till now sought after like bank deposits, real estates, Gold, provident fund etc. especially due to fall in interest rates coupled with the rising inflation, and Mutual fund obviously become a viable alternative. Mutual fund is in the business of managing trust. If Mutual fund gain investors trust, money will follow. It is important to gain mind-share rather than wallet share of the investors. Currently Indian Mutual fund industry is gradually introduction to growing phase. Over the last few years level of awareness is much more was it was in past. But level of awareness has not yet reached the rural and other small towns and it is more of the smaller towns and it is more of an urban phenomenon. What is needed is spread of awareness beyond regional limits. Mutual fund as concept is well known, but the target audience still needed to gain more awareness. The future is very bright. This Mutual fund industry is playing an important role to provide an alternative avenue to the entire gamut of investors in a scientific and professional manner. Mutual fund industry has been evolving very well for an important reason that, today we have the best system and procedure, good regulatory mechanism, use of technology, transferring and sharing of details and dissemination of information at an improved level.
Section:16 Bibliography
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Bibliography
Book:
Mutual funds Data, Interpretation and Analysis by
K.G.Sahadevan. Published by: Prentice Hall of India.
Magazines & News papers:

ICFAI Reader, July 2006 Portfolio Organizer, September 2006 Financial Express, September 2006 Times Of India Economic Times DNA Money
Search Engine:
www.google.com www.ask.com www.msn.com
Websites:

www.moneycontrol.com www.valueresearchonline.com www.amfiindia.com www.rbi.com www.sebi.govt.in www.mutualfundsindia.com www.easymf.com
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Mutual Fund

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In Depth Study of Mutual Fund Industry

Section: 1 Introduction to Mutual Fund

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

Definition of Mutual Fund:

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

HISTORY & BACKGROUND:

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

Section: 2 Organization of Mutual Fund

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

Legal Structure of Mutual Fund

Who Promotes the MF :-

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

In Depth Study of Mutual Fund Industry

Registrar and Transfer Agent:

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

Role of AMC (Asset Management Company) Behind a Mutual Fund :

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

Process of Mutual Fund

In Depth Study of Mutual Fund Industry

Section: 3 Investment Options or Tools

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

Investment Tools Or Substitutes Of Mutual Fund :

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

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In Depth Study of Mutual Fund Industry

Post Office Monthly Income Scheme:

S.V. Institute of Management, Kadi

In Depth Study of Mutual Fund Industry

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In Depth Study of Mutual Fund Industry

Public Provident Fund:

In Depth Study of Mutual Fund Industry

S.V. Institute of Management, Kadi