FINANCIAL MARKETS AND SERVICES

REPORT ON

DATE:
15 NOVEMBER, 2010

GROUP 9
JATIN SAHNAN JAYDEEP DARIPA KARAN DARAK RAJAT DUDHORIA SUMAN LAL MUKHERJEE

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TABLE OF CONTENTS

SL. NO. 1 2 3 4 5 6 7 8 9 10 11 12

TOPIC Introduction Types Of Mutual Funds Advantages of MF Market Share US 64 Reasons for Set Back Restoring the Trust Dead End Dwindle to Dilute Initiating MF Investment Latest News References

PAGE NO. 3 6 13 14 17 18 20 22 23 24 24 25

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INTRODUCTION
Mutual Fund: A Mutual Fund is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in a large portfolio of stocks and / or bonds.

Evolution of Mutual Fund Industry: The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen a dramatic improvement, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it
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is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling. The mutual fund industry can be broadly put into four phases according to the development of the sector. Each phase is briefly described as under. First Phase - 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase - 1987-1993 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by 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.47,004cr as Assets Under Management. Third Phase - 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of Assets Under Management was way ahead of other mutual funds.

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Fourth Phase - Since February 2003 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which managed assets of Rs.153108 crores under 421 schemes.

Growth in Assets Under Management:

BY SEPT 2010, RS.715467.4367 CRORES - AUM

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TYPES OF MUTUAL FUNDS

General Classification of Mutual Funds: Open-end Funds Funds that can sell and purchase units at any point in time are classified as Open-end Funds. The fund size of an open-end fund is variable because of continuous selling and repurchases by the fund. An open-end fund is not required to keep selling new units to the investors at all times but is required to always repurchase, when an investor wants to sell his units. The NAV of an open-end fund is calculated every day. Closed-end Funds Funds that can sell a fixed number of units only during the New Fund Offer (NFO) period are known as Closed-end Funds. The corpus of a Closed-end Fund remains unchanged at all times. After the closure of the offer, buying and redemption of units by the investors directly from the Funds is not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions:

1. Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done at a discount to the NAV of the scheme. The NAV of a closed-end fund is computed on a weekly basis. 2. Closed-end Funds may also offer "buy-back of units" to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed. Load Funds Mutual Funds incur various expenses on marketing, distribution, advertising, portfolio churning, fund manager's salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds. No-load Funds All those funds that do not charge any of the above mentioned loads are known as Noload Funds. Tax-exempt Funds Funds that invest in securities free from tax are known as Tax-exempt Funds. All openend equity oriented funds are exempt from distribution tax. Long term capital gains and dividend income in the hands of investors are tax-free. Non-Tax-exempt Funds Funds that invest in taxable securities are known as Non-Tax-exempt Funds. In India, all funds, except open-end equity oriented funds are liable to pay tax on distribution income. Profits arising out of sale of units by an investor within 12 months of purchase are
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categorized as short-term capital gains, which are taxable. Sale of units of an equity oriented fund is subject to Securities Transaction Tax (STT). STT is deducted from the redemption proceeds to an investor.

1. Equity Funds: Equity funds are considered to be the more risky funds as compared to other fund types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: a. Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. b. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. c. Speciality Funds - Speciality Funds have stated criteria for investments and their
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portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of speciality funds:

i.

ii.

iii.

iv.

Sector Funds: Equity funds that invest in a particular sector/industry of the market are known as Sector Funds. The exposure of these funds is limited to a particular sector (say Information Technology, Auto, Banking, Pharmaceuticals or Fast Moving Consumer Goods) which is why they are more risky than equity funds that invest in multiple sectors. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. Option Income Funds*: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors.

d. Diversified Equity Funds - Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past.
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e. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky.

f. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced.

g. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds.

2. Debt / Income Funds: Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds:

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a. Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. b. Focused Debt Funds* - Unlike diversified debt funds, focused debt funds are narrow focus funds that are confined to investments in selective debt securities, issued by companies of a specific sector or industry or origin. Some examples of focused debt funds are sector, specialized and offshore debt funds, funds that invest only in Tax Free Infrastructure or Municipal Bonds. Because of their narrow orientation, focused debt funds are more risky as compared to diversified debt funds. Although not yet available in India, these funds are conceivable and may be offered to investors very soon. c. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors. d. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. e. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. 3. Gilt Funds: Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction.

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4. Money Market / Liquid Funds Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). 5 . Hybrid Funds As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India: a. Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. b. Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds. c. Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends. 6. Commodity Funds Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in
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gold, gold futures or shares of gold mines) are common examples of commodity funds.

7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits of a closed-end and an openend mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad. 9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.

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ADVANTAGES OF MUTUAL FUNDS

Safety : Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced. Transparency : Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator. Flexibility : Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic investment and withdrawal is also offered to the investors in most open-end schemes. Liquidity : An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid. Choice of Schemes : Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options. Less Risk : Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities. Low Transaction Costs : Due to the economies of scale , mutual funds pay lesser transaction costs. These benefits are passed on to the investors. Portfolio Diversification : Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio. Professional Management : Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own.

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MARKET SHARE OF VARIOUS COMPANIES

Average Assets under Management (AAUM) for the month of SEP-2010 (Rs in Lakhs) Average AUM For The Month Excluding Fund of Fund Of Funds Funds - Domestic but Domestic including Fund of Funds - Overseas Sr No Mutual Fund Name 1 AEGON Mutual Fund AIG Global Investment Group Mutual Fund Axis Mutual Fund Baroda Pioneer Mutual Fund Benchmark Mutual Fund Bharti AXA Mutual Fund Birla Sun Life Mutual Fund BNP Paribas Mutual Fund Canara Robeco Mutual Fund Deutsche Mutual Fund DSP BlackRock Mutual Fund Edelweiss Mutual Fund Escorts Mutual Fund Fidelity Mutual Fund Fortis Mutual Fund Franklin Templeton Mutual Fund N/A N/A

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

101977.07 463619.87 373138.07 250520.72 51087.23 6742134.55 N/A 771889.23 646149.9 2667368.47 21547.51 19786.51 853636.58 496462.88 4214221.55

0 0 0 0 0 3365.46 N/A 0 0 0 0 0 13451.78 0 116937.96

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17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

Goldman Sachs Mutual Fund HDFC Mutual Fund HSBC Mutual Fund ICICI Prudential Mutual Fund IDBI Mutual Fund IDFC Mutual Fund ING Mutual Fund JM Financial Mutual Fund JPMorgan Mutual Fund Kotak Mahindra Mutual Fund L&T Mutual Fund LIC Mutual Fund Mirae Asset Mutual Fund Morgan Stanley Mutual Fund Motilal Oswal Mutual Fund Peerless Mutual Fund Pramerica Mutual Fund PRINCIPAL Mutual Fund Quantum Mutual Fund Reliance Mutual Fund Religare Mutual Fund Sahara Mutual Fund SBI Mutual Fund Shinsei Mutual Fund Sundaram Mutual Fund

N/A 9310557.87 480980.16 6972752.43 219960.13 1839840.4 146828.1 652368.43 844769.03 2842982.2 354251 1972696.88 27518.53 235144.37 30541.54 262250.16 63000.66 564190.87 11947.77 10774854.23 1077984.98 75619.44 4210044.79 31902.62 1424070.9

N/A 0 0 2725.23 0 67202.76 5277.33 0 0 9488.78 0 0 0 0 0 0 0 0 171.04 0 0 0 0 0 0 15

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42 43 44

Tata Mutual Fund Taurus Mutual Fund UTI Mutual Fund Grand Total

2196363.66 269389.76 6761772.28 71328123.33

0 0 0 218620.34

Calculating the Herfindahl Index:

After calculating the percentage market share of each company we square the values and add them to bring out the Herfindahl index which shows the market competition. In the present scenario the Herfindahl index is 811.89 which is low and shows the market has high number of players and competition prevailing in the market is quite high for a for any new player to enter although opportunity is always there. Reliance mutual fund is having the highest market share out of all the 44 players with a market share of about 15.1 %.

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UNIT SCHEME-1964 [US-64]

UTI was established through a Parliament Act in 1964, to channelize the nation's savings via mutual fund schemes. This was done as in the earlier days, raising the capital from markets was very difficult for the companies due to the public being very conservative and risk averse. The first scheme introduced by UTI was the Unit Scheme-1964, popularly known as US-64. The fund's initial capital of Rs 5crore was contributed by Reserve Bank of India (RBI), Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) and other scheduled banks including few foreign banks. It was an open-ended scheme , promising an attractive income, ready liquidity and tax benefits. In the first year of its launch, US-64 mobilized Rs 19 crore and offered a 6.1% dividend as compared to the prevailing bank deposit interest rates of 3.75 - 6%. This impressed the average Indian investor who until then considered bank deposits to be the safest and best investment opportunity. However by the late 1990s, US-64 had emerged as an example for poor portfolio mismanagement. In 1998, UTI chairman P.S.Subramanyam revealed that the reserves of US-64 had turned negative by Rs 1098 crore. Immediately after the announcement, the Sensex fell by 224 points. By October 1998, US-64's equity component's market value had come down to Rs 4200 crore from its acquisition price of Rs 8200 crore. The net asset value (NAV) of US-64 also declined significantly during 1993-1996 due to turbulent stock market conditions. US-64's NAV was Rs 9.68 , but US-64 units were sold at Rs 14.55 and repurchased at Rs 14.25 in October 1998, thus were around 50% and 47%, above their estimated NAV.

NET ASSET VALUE

NAV of a mutual fund is calculated as the funds assets minus liabilities divided by the number of outstanding shares. Net asset value is most commonly used in the context of open-ended funds. A fund will issue and redeem shares and interests at a price calculated by reference to the NAV of the fund, with the intention that new investors receive a fair proportion of the fund and redeeming investors receive a fair proportion of the fund's value in cash. As a numerical example, if a fund has a NAV of $200 million and 1 million shares in issue on a certain day, the "NAV per share", being the price at which the shares will be issued, is $200. A person investing $40 million on that day will therefore be given 200,000 shares. Immediately following his investment the total NAV of the fund will be US$240MM, as the new investor's cash becomes part of the fund and is available for investment by the fund. The investor will then be entitled to
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1/6th of the fund's value when he withdraws his investment, proportionately adjusted for any subsequent profits or losses. NAV of US-64 = value of debt holding (rs.6532cr) + value of equity holding (rs.8200cr) + value of real estate (rs.386cr) / total number of outstanding units (1562cr units) = Rs. 9.68

REASONS FOR THE SET BACK

UTI never declared the NAV of US-64 - only the purchase and sale prices for the units were announced. Analysts remarked that the practise of not declaring US-64's NAV in the initial years was justified as the scheme was formulated to attract the small investors into capital markets. The declaration of NAV at that time would not have been advisable, as heavy stock market fluctuations resulting in low NAV figures would have discouraged the investors. This seemed to have led to a mistaken feeling that the UTI and US-64 were somehow immune to the volatility of sensex. UTI acquired public sector unit (PSU) stocks under the 1992-97 disinvestment program of the union government. Around Rs 6000-7000 crore was invested in scrips such as MTNL, ONGC, IOC, HPCL & SAIL. Even a typical balanced fund (equal debt and equity) usually did not put more than 30% of its corpus into equity. A Business Today report claimed that eager to capitalise on the 1994 stock market boom, US-64 had recklessly increased its equity holdings. By the late 1990s the fund's portfolio comprised around 70% equity. While the equity investments increased by 40%, UTI seemed to have ignored the risk factor involved with it. Most of the above investments fared very badly on the bourses, causing huge losses to US-64. The management failed to offload the equities when the market started declining. While the book value of US-64's equity portfolio went up from Rs 7,943 crore (June 1994) to Rs 13,627 (June 1998), the market value had actually declined in the same period from Rs 18,334 crore to Rs 10,029 crore. Analysts remarked that UTI had been pumping money into scripts whose market value kept falling. UTI was able to pay dividends out of its reserves which ultimately turned out to be negative in the year 1998. The reserves of us-64 turned negative by rs.1098cr and the sensex fell by 224 points post announcements oct 1998.

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DIVIDENDS DECLARED BY US-64

Year 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01

Dividend declared 18% 25% 26% 20% 20% 13.75% 19.50% 26% 26% 20% 13.50% 10.00%
Source: www.unittrustofindia.com

DIVIDEND DECLARED [%]

30 25 20 15 10 5 0

After Investing in PSU scripts the management failed to offload from them and as a result during 1994-95 the market value of its equity profile decreased , this corresponds to the decline in dividend after 1994 . Hence, UTI started paying dividends from its reserves which went negative in 1998 corresponding to major fall in dividends.

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RESTORING THE TRUST

UTI constituted under the chairmanship of Deepak Parekh to review the working of scheme and to recommend measures. The main role of this committee was to give both long-term benchmarks of performance and short-term corrective actions. Following are the certain steps taken: PSU shares were transferred to a Special Unit Scheme (SUS) subscribed by the government in 1998-99. This was done because the PSU stocks like IOCL, in which the scheme has invested a lot, was not performing and most of them are illiquid as the stocks are very highly priced. The offload of these were not possible as these may have led to price erosion. So, a separate scheme called SUS is created and all the PSU stocks under the governments disinvestment policy are transferred to it. The objective was to improve the NAV by the difference between the Market value and Book value. The rest shares of PSUs are brought by the government at face value. Inclusion of growth stocks from FMCG and IT sector in its portfolio. These are mainly the stocks that are bullish in the market and promises good returns in short-term.the objective was to temporarily increase the income distribution in the scheme to stop redemption and attract new investors. Some stocks that are included are HLL(now HUL), Smithkline Beecham etc. Complete exit from illiquid stocks like Esab Industries whose stocks are not traded much in the market because of high price. This will keep the portfolio buoyant and will avoid liquidity crunch in the scheme as experienced by the schemes presently. Income distributed under Unit 64 was made tax free for 3 years from 1999 in order to attract retail investors. This recommendation was specific because the scheme had more corporate investors at that time which didnt ensured the basic objective of it which was to mobilize domestic savings. Constitution of an ad-hoc asset management committee to oversee the working of mutual fund and to advice on both how the funds performance will be benchmarked and how the designing and marketing of the schemes are made under it. They are responsible to safeguard the interest of the investor as earlier the investors are misguided by inflated prices and dividends that are supposed to be paid by the performance of stocks, are actually paid from reserves which ultimately turned negative in 1998. UTI became more proactive in fund management: This is proven by the fact that in OCT.1999, stocks of crest are purchased at Rs.200-210 and at NOV. 1999 the stocks
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price were Rs. 340. The attempt made the NAV actually high and proved that the scheme is actually now operated by proactive fund managers who take informed decisions. Initiative to make US-64 scheme NAV driven: The Artificial pricing story discussed earlier is a case to misguide the investors. Now, the dividend payout is more NAV driven rather than paying it from reserve. The schemes performance is benchmarked on market index. That is, minimum the scheme should be passively managed depending on the movement of the market given the portfolio has equal constitution and proportion of shares as it is there in the market. The NAV is now calculated in a Marked- to- Market basis, i.e.. to calculate NAV on market value rather than book value. This occludes the chances of Artificial pricing. The real estate investments were revalued and transferred to development reserve fund: The real-estate funds which the scheme has invested a lot earlier in expectation of higher returns has actually not performed because of price decline. As a result it has amounted to a loss of Rs.386 cr. To prevent it in future, a reserve is created to write off all these losses which will be liquidated as we dispose off the real-estate assets and the benefit will be transferred to scheme holders. This was done to minimize the risk of these highly volatile assets. Two separate committee is made to manage Debt and equity components of the portfolio and a separate body is created which gives report to the top-management about the performance of stocks that are contained in the portfolio of the scheme. Core promoters such as IDBI added around Rs.453 crore to Unit capital to increase its capital base and overcome the liquidity crunch that the fund faced due to excess redemptions.

The implementation of these recommendations overall has improved the NAV from Rs.9.68 to Rs.16 and US-64 was once again graded by SEBI as one of the save avenue to inveset in.

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DEAD END
Though after proactive fund management NCAER & SEBI termed it as safe investment, this euphoria was short lived. The reasons are as follows: The announcement of Mr. Subramanium, chairman UTI in 1998, to emphasize on corporate investor despite the fact that the committee has recommended to emphasize on retail investors, raises doubts of the intension of UTI. The tax exempt on the distribution of income from the scheme turned out to be useless as most of the retail investors were retired peoples who already dont come under the Tax bracket.

The large investment in K-10 stocks eroded US-64 NAV after a subsequent market crash: The ICE stocks ( i.e.. infotech, communication and entertainment) stocks which came under the Ketan parekhs umbrella, was an avenue where the US-64 scheme has heavily invested in. it is said that this investment is influenced by the friendship of MR. ketan parekh and Mr. subramanium. After the bubble burst in this sectors, the stock prices came drastically down again hampering the NAV of US-64 again leading to controversy of participation of scam. This finally led to permanent abolishment of Badla in 2004.

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DWINDLE TO DILUTE
The understanding of the group about the case is that the trust is what dwindling and was deficiet for the entire industry till 2004. Otherwise, with 28 players and more than 400 funds and 40 years of establishment why this industry has only Rs.1540 bn of investment, which is lesser than the total deposits of SBI and less than 11% of the total banking deposits of the country? No industry has shown such slow pace of growth in history. The reason is clear and simple. People didnt trust Mutual funds. The reason that the group has tried to identify is as follows:

Pro- 64 - PSUs disinvestment thrust: Pre US-64 scam the scheme was under pressure to buy the illiquid stocks that came under the PSU disinvestment policy. They are so high priced that trading rarely use to happen and the fund manager has to buy it as UTI is a GOI undertaking. The result was loss of public money. Post-64 - K-10 thrust: Post- implementation of the recommendations of the Deepak parekh committee the fund again was engaged with K-10 stocks because of the friendship of Mr.Ketan parekh and Mr. Subramanium as mentioned earlier. The fall of ICE stocks in the market led to loss of public money again. Both the incidents points towards one thing. The Thrust raises doubts over fundamentals of the company. The priority was never investors interest but was to safeguard personal relationship, be it between government and UTI or Mr.Ketan parekh and Mr. Subramanium. But the loss was always hard earned money of public. So obviously It ultimately untie the trust over the scheme, the company and the industry overall as UTI is the first company of the industry in the country and lacked competition for a longer period of time.

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HOW TO INITIATE AN MF INVESTMENT

1) Always start with Passive funds as it helps in understanding of the market in a better manner and also is economic in terms of cost structure. 2) Move to active funds once you have developed a risk appetite as it brings in a fund managers role and your portfolio is now managed by expert which increase the probability of higher returns. 3) Always read the personal finance page of Economic times which have detailed NAV reports of all schemes under MF. 4) Track NAV on real-time basis over the www.amfiindia.com for all the schemes which one plan to invest in or already invested. 5) Always remember Mutual fund investments are subjected to market risks,

please read the offer document carefully before investing

6) Go through all the latest news on amfiindia website.

SOME LATEST NEWS:

1) The removal of entry load and cap on exit load has dissatisfied the fund managers as they are showing lesser interest on actively managing the fund of MF. The MF schemes are expected to see lesser growth in quantum in future and also the schemes may skew towards passive MFs from Active MFs in near future. 2) Tata Mutual Fund announces bonus under its scheme - Nov 9 , 2010 3) ICICI Prudential Mutual Fund launches ICICI Prudential Regular Savings Fund Nov 4 , 2010 4) Morgan Stanley Mutual Fund announces dividend under its two schemes - Nov 1 , 2010 5) SBI Mutual Fund announces dividend under its SBI Blue Chip Fund - Nov 1 , 2010 6) UTI MF announces dividend under its scheme - Oct 25 , 2010 7) Canara Robeco Mutual Fund revises load structure under its scheme - Oct 22 , 2010 8) Religare Mutual Fund converts Religare Infrastructure Fund into open ended scheme - Oct 20 , 2010 9) IDBI Mutual Fund announces dividend under IDBI Nifty Index Fund - Oct 11 , 2010
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REFERENCES
www.amfiindia.com www.investopedia.com www.investorwords.com http://www.mutualfundsindia.com/tot_news.asp http://www.investopedia.com/terms/m/mutualfund.asp

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