MUTUAL FUND INDUSTRY IN INDIA

MUTUAL FUND INDUSTRY

WHAT STOPS IT
FROM TAKING A
GIANT LEAP
IN
INDIA














Executive Summary

There is a fast growing demand for mutual funds and the critical reason behind this galloping growth rate is the steady fall in interest rates over the past few years, forcing retail investors to look for other alternate avenues to park their money such as hedge funds, pension funds etc.

Simultaneously rapid growing middle class savers have fuelled the entry of new players in this industry. With the advent of liberalization, many international AMC’s have started giving serious thought to the investment market with the world’s second largest population, i.e., India with more than 1 billion population and having the highest saving rate amongst the Asian countries, close to 30% after Japan.

The Mutual Fund industry has been continuously evolving, but the progress made by this industry has been not as phenomenal as it should have been, especially in terms of its population with retail investors, but it is more popular amongst institutional (corporate) clients mainly because of their understanding of the product, and their knowledge about MF benefits. Retail investors are still evolving their understanding with respect to financial planning, MF’s etc.

The Indian scenario is nevertheless not a replica of the counterparts in the west and is in fact unique in its own term. In the US,the fund manager’s manage assets worth almost $6.7 trillion (Rs 308 lakh crore) and embracing more than 8000 odd schemes having different themes offering the latest in investment flavor as is in tune with the market despite after the dotcom bust in 2000.

The American mutual fund industry started out in 1990 with almost $1.1 trillion in assets and by the end of decade reached a figure of over $7 trillion in assets under management, whereas ironically more than 50% of the schemes were comprised of equity based schemes.

However domestic mutual fund industry has remained where it was and has not been able to move as much as the western counterparts. In India only about 2% of the households own equity assets. Blame it on the see-sawing stock market or whatever which is giving a bad name to stock markets coupled with the scams, political interference apart from economic uncertainties.

The Indian retail investors have had a poor experience with the public sector Mutual funds like UTI in the past, which failed to give assured return on their schemes forcing investors to stick to their age-old conventional investment instruments like bank deposits, insurance, gold, jewellery etc.
Like most other Asians, Indians are also a category not willing to experiment with investment vehicles that do not assure them fixed returns.

Therefore this research attempts to study the above subject with reference to both the American and Indian Mutual Fund industry and determine reasons what restricts these funds from taking a giant leap in their growth figure.



Research Methodology

The method of sampling employed was mainly Probability sampling comprising of convenience sampling and stratified random sampling keeping in mind the time and convenience factor, simplicity, and the efficiency of these two methods to provide an unbiased estimate.

The survey includes sections on
1) Ownership of assets
2) Investment pattern

Another section includes equity investor’s views on various aspects of financial goal, use of the internet and use of professional financial advisor.

The final section of the survey gives information regarding demographic data on equity owners, such as their age, income, education and retirement status.

Interviewing and Sampling Procedures

Interviews were conducted personally and individually and were completed on March 2006. To ensure that high net-worth (HNI) households were represented in the study, additional interviews were conducted with HNI’s. A randomly selected sample of affluent equity owners was drawn from south Delhi area.

Throughout this report, percentages may not add to 100 because of rounding. Where respondents were allowed to provide multiple responses, percentages may add to more than 100.

Estimates derived through survey sampling are subject to sampling error. As sample size increases, the level of potential sampling error becomes smaller.



TABLE OF CONTENTS


S.No.
Particulars
Page No.


1.

Chapter 1 – Background & Introduction

a) Indian Mutual Fund Industry
I. History
II. Growth in AUM

b) US Mutual Fund Industry
I. History
II. Net Assets of Mutual Fund
8


9
11


14
16

2.

Chapter 2 – Overview of the Problem

a) Growth of MF Industry with respect to AUM & NAV
b) Taxation Structure in
I. India
II. US
17

18

22
24

3.

Chapter 3 – Data Analysis & Presentation

a) Comparative Similarities & Differences between US & Indian MF Industry
b) Review of the Problem
c) Analysis
d) Correlation Coefficient
e) Chi Square Test for selected 6 Schemes
25


26
31
38
41
42

4.

Recommendation

44

5.

Limitations
46

6.
Appendix

a) Sample Composition for Primary Data
b) Different Types of Mutual Fund


47
49

7.
Annexure

a) SEBI’s Code of Conduct for Intermediaries of Mutual Fund

b) How Fact sheets are misleading Investors

c) Questionnaire


52

54

56


8.
Glossary

58

9.

Bibliography
66


































Chapter – 1


Background and Introduction














Indian Mutual Fund Industry

History

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

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)

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

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.

Third Phase – 1993-2003
(Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile 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.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes.

The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.
As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

The graph indicates the growth of assets over the years:








Fig – 1
Growth in Assets under Management (AUM)



Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003.

Fig – 2
AUM Category wise



Traditionally, Indian investors have considered Mutual funds as a riskier investment product and have been comparing it with direct equity investments. This misperception among the investors has been changing over the past few years, thanks to the initiatives taken by AMFI and a few mutual fund companies, which have also been focusing on educating the investors rather than just selling their products.

Further, the increase in Independent Financial Advisors (IFAs) and professional mutual fund distribution companies in organized sector have also contributed to this development. Banks and Financial Institutions have ventured into the mutual fund distribution business and have contributed a lot towards the growth of the industry.

Their reach covers all spectrums of investors – from the retail investor in a small city to the wealthiest HNI in the most posh colonies of the metros. Some of the biggest global brands from the banking and financial services sector have also started their wealth management operations in India to cater to investors’ advisory needs. Banks also cater to the needs of institutional investors, provident funds, corporates, trusts etc. and are focusing on providing complete financial solutions to their clients.

The Indian mutual fund industry is moving towards the international trends where the mutual funds have very high acceptance level among the investors. The participation of Indian mutual funds in the equity markets has increased drastically as more and more investors are willing to take the assistance of professional fund managers for managing their monies.

Also, the increased complexity in the capital markets due to the emergence of new instruments requires real expertise for direct participation and this has led to growth in inflows in mutual funds which are managed by fund managers who have such expertise. Indirect access to all kinds of investment securities, affordability, liquidity, tax efficiency, superior performance at given risk level and the wide choice that is made available to the investors are some of the other factors which have contributed to the growth of this industry.

The increasing competition among the players, dynamic market conditions and the varying needs of investors are some of the reasons due to which the fund houses have been forced to work on product innovations. Over the last few years the industry has seen major changes in terms of new product offerings. Fund houses have been continuously improvising on the product range to suit specific requirements of the investors.

More and more products are being launched tailor-made to suit investors’ preferences making a wide range of products available to be effectively used for financial planning. The number of schemes offered has increased to over 1700 at the end of November 2005. The growth can be contributed to the aggressive marketing strategies, high standards of service and frequent disclosures apart from superior performance.

The tremendous growth in the industry has also resulted in drastic improvement in the quality of service. The transparency levels have increased manifold. Though the funds are required to disclose their portfolios on a quarterly / half yearly basis as per regulation, but the disclosures are being made on monthly and fortnightly basis. Liquid funds disclose their portfolio even on daily basis.

With such positive changes happening in the mutual fund industry, the acceptance level for mutual funds is bound to increase even more rapidly among the Indian investors.

The domestic mutual fund industry started in 1963 and has come along a long way since then. Until 1986, Unit Trust of India (UTI) had monopoly in the mutual fund industry and it was so popular that investors used to use UTI as a synonym for a mutual fund.

It was perceived as a product rather than a brand. The advent of private sector players in 1993 brought a major turnaround in terms of products offered and service standards and completely changed the personality of the industry.

















US Mutual Fund Industry

American funds is one of the most popular mutual fund families, primarily due to longevity, performance and the sales commissions they generate for financial advisors. Over the past decade, American investors increasingly have turned to mutual funds to save for retirement and other financial goals. Mutual funds can offer the advantages of diversification and professional management.

Mutual funds really captured the public's attention in the 1980s and '90s when mutual fund investment hit record highs and investors saw incredible returns. However, the idea of pooling assets for investment purposes has been around for a long time.

History and its Evolution

The idea of pooling resources and spreading risk using closed-end investments soon took root in Great Britain and France, making its way to the United States in the 1890s. The Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was an important step in the evolution toward what we know as the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand.

The Arrival of the Modern Fund

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors' Trust was the custodian of the Massachusetts Investors' Trust.

Later, State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Clark, an outfit that would launch the first no-load fund in 1928. A momentous year in the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of investments in business and trade.




Regulation and Expansion

By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-end funds. With the stock market crash of 1929, the dynamic began to change as highly-leveraged closed-end funds were wiped out and small open-end funds managed to survive.

Government regulators also began to take notice of the fledgling mutual fund industry. The creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 put in place safeguards to protect investors: mutual funds were required to register with the SEC and to provide disclosure in the form of a prospectus. The Investment Company Act of 1940 put in place additional regulations that required more disclosures and sought to minimize conflicts of interest.

The mutual fund industry continued to expand. At the beginning of the 1950s, the number of open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 new funds over the course of the decade. The 1960s saw the rise of aggressive growth funds, with more than 100 new funds established and billions of dollars in new asset inflows.

Hundreds of new funds were launched throughout the 1960s until the bear market of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the industry's growth later resumed.

The early mutual fund industry was, however, overtaken by events – namely, the 1929 stock market crash and the Great Depression. Mutual funds began to grow in popularity in the 1940s and 1950s. In 1940, there were fewer than 80 funds in United States, with total assets of $500 million. Twenty years later, there were 160 funds and $17 billion in assets. However, truly significant amounts of money did not start flowing into the funds until the mid-1980s.

The complexion and size of the mutual fund industry dramatically changed as new products and services were added. The first international stock mutual fund was introduced in 1940; today there are scores of international and global stock and bond funds. Before the 1970s, most mutual funds were stock funds, with a few balanced funds that included bonds in their portfolios. By 1972, there were 46 bond and income funds in United States, and another 20 years later, there were 1629.

An increasing proportion of US mutual fund assets is being invested outside the United States. There are at least three types of mutual funds that may invest abroad: international mutual funds, global mutual funds and emerging market mutual funds. At the end of 1996, the assets of international and global equity and bond funds were $321 billion, up from $230 billion at year-end 1995.

Table – 1

Total Net Assets of Mutual Funds
(billions of dollars)

March 06 Feb 06 % chg Dec 05
Stock Funds 5,339.9 5,198.1R 2.7 4,940.0
Hybrid Funds 588.1 582.5R 1.0 567.3
Taxable Bond Funds 1,039.5 1,043.2R -0.3 1,018.6
Municipal Bond Funds 345.0 346.1 -0.3 338.8
Taxable Money Market Funds 1,702.4 1,701.5R 0.1 1,706.5
Tax-Free Money Market Funds 344.2 349.5 -1.5 334.0
Total 9,359.2 9,220.8R 1.5 8,905.2
R=Revised data

Source – ICI


The first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924 and after one year had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924.

As of April 2006, there are 8,606 mutual funds that belong to the Investment Company Institute (ICI), the national association of Investment Companies in the United States, with combined assets of $9.207 trillion USD.




















Chapter – 2


Overview of the Problem












Growth of MF industry in India with respect to AUM & NAV


Table – 2

Assets Under Management (AUM) as at the end of Dec-2007 (Rs in Lakhs)
Mutual Fund Name AUM Average AUM For The Month
Excluding Fund Of Funds Fund Of Funds Excluding Fund Of Funds Fund Of Funds
1. ABN AMRO Mutual Fund 241727.68 0 277985.48 0
2. Benchmark Mutual Fund 304174.02 0 0
3. Birla Sun Life Mutual Fund 1243890.94 2196.58 0
4. BOB Mutual Fund 16243.79 0 0
5. Canbank Mutual Fund 216338.82 0 225151.93 0
6. Chola Mutual Fund 154995.52 0 0 0
7. Deutsche Mutual Fund 233873.65 0 316996.46 0
8. DSP Merrill Lynch Mutual Fund 864297.78 0 0
9. Escorts Mutual Fund 14717.03 0 0
10. Fidelity Mutual Fund 275679.07 0 271357.23 0
11. Franklin Templeton Mutual Fund 1665617.22 39616.6 1692041.02 40108.35
12. HDFC Mutual Fund 1761336.42 0 1843873.59 0
13. HSBC Mutual Fund 644696.97 0 692378.81 0
14. ING Vysya Mutual Fund 283112.88 0 0
15. JM Financial Mutual Fund 413133.11 0 0
16. Kotak Mahindra Mutual Fund 689349.49 50495.75 712888.75 51006.69
17. LIC Mutual Fund 563649.79 0 0
18. Morgan Stanley Mutual Fund 228920.17 0 225743.88 0
19. PRINCIPAL Mutual Fund 698259.57 0 0
20. Prudential ICICI Mutual Fund 2199244.97 4765.02 0
21. Reliance Mutual Fund 1523771.61 0 0
22. Sahara Mutual Fund 45930.97 0 52502.93 0
23. SBI Mutual Fund 1079705.41 0 1070299.13 0
24. Standard Chartered Mutual Fund 825232.58 5289.45 0
25. Sundaram Mutual Fund 293322.92 0 302991.07 0
26. Tata Mutual Fund 899791.41 0 0
27. Taurus Mutual Fund 20373.53 0 19608.39 0
28. UTI Mutual Fund 2522824.38 0 2560004.5 0
Total 19924211.7 102363.4 10263823.17 91115.04



Fig – 3

Average returns over last One year





Table – 3

Net Purchase and Sale of Mutual Funds

Date Equity (Rs. Crore) Debt (Rs. Crore)
Gross
Purchase Gross
Sales Net Purchase
/Sales Gross
Purchase Gross
Sales Net Purchase
/Sales
25-Jan-2007 794.89 1,025.72 -230.83 376.71 233.43 143.28
24-Jan-2007 527.39 584.70 -57.31 124.91 117.93 6.98
23-Jan-2007 398.31 450.32 -52.01 210.27 310.49 -100.22
20-Jan-2007 525.51 521.23 4.28 199.25 135.60 63.65
19-Jan-2007 531.24 483.57 47.67 235.03 245.64 -10.61
18-Jan-2007 395.11 657.64 -262.53 167.51 272.50 -104.99
17-Jan-2007 305.48 607.26 -301.78 307.96 499.02 -191.06
16-Jan-2007 313.69 530.06 -216.37 273.78 317.21 -43.43
13-Jan-2007 421.30 450.22 -28.92 267.83 294.47 -26.64
12-Jan-2007 923.55 602.47 321.08 755.64 238.92 516.72
10-Jan-2007 400.43 554.25 -153.82 240.25 243.40 -3.15
09-Jan-2007 345.14 655.33 -310.19 390.17 200.37 189.80
06-Jan-2007 434.99 449.60 -14.61 280.60 310.25 -29.65
05-Jan-2007 473.04 414.28 58.76 712.97 371.46 341.51
04-Jan-2007 515.07 621.52 -106.45 556.49 452.18 104.31
03-Jan-2007 394.62 467.80 -73.18 498.71 359.98 138.73
02-Jan-2007 240.34 462.97 -222.63 424.67 422.62 2.05
TOTAL 7,940.10 9,538.94 -1,598.84 6,022.75 5,025.47 997.28










Table – 4

Sales during the month of December, 2006

All Schemes Amount in Rs. Crores

Open End Close End Total
No. of Schemes Amount No. of Schemes Amount No. of Schemes Amount
Balanced 34 557 2 - 36 557
ELSS 23 155 11 - 34 155
Gilt 30 264 - - 30 264
Growth 177 5837 1 - 178 5837
Income 138 10091 50 3400 188 13491
Liquid/Money Market 43 76486 - - 43 76486
Total 445 93390 64 3400 509 96790























Taxation Structure for Mutual Funds in India

Taxation structure of mutual funds is divided into two parts. One angle looks at taxation from the point of view of the fund itself and the other looks at the taxation aspect with respect to the fund investor.

From the view point of investors following provisions are available: -

1) Tax Deduction at Source - The important point to note about mutual funds, for resident investors, is that for any income credited or paid by the fund no tax is deducted at source. This provision applies both to dividend payouts made by funds and to proceeds of redemption. Except for NRI’s, TDS is supposed to be made whenever NRIs redeem their investment in a mutual fund scheme.

2) Wealth Tax - No wealth tax is leviable on mutual fund units. This benefit comes to mutual funds by virtue of the fact that mutual fund units are not treated as 'assets' under the Wealth Tax Act.

3) Capital Gains Tax - Capital gains tax needs to be paid on all mutual fund units. The difference between the purchase and redemption price (in case of open-end funds) is used to calculate capital gains. Time is also a factor for this purpose. Units held for a period of less than one year are eligible for short term capital gains while those held for a period of longer than one year are eligible for long term capital gain.

Further, in the case of long term capital gain, the investor is given the option of choosing between a) 20 per cent tax rate with indexation benefit and b) 10 per cent tax rate without the benefit of indexation.
The latest budget has exempted capital gains from tax if the amount of gain is invested in Initial Public offerings (IPO).

Capital loss – It can be set off against other capital gains. But losses on the transfer of long-term capital assets can be set off only against gains from transfer of long-term capital assets; the balance long-term capital loss can be carried forward separately for eight assessment years to be set off only against LTCG.


4) Dividend tax free for investor - Section 10 is an all-encompassing section that lists the kinds of income that are to be excluded from calculation of total income.



5) Dividend distribution tax - while the modification of Section 10(33) made dividend tax free in the hands of all investors, another inclusion in the tax laws levied tax on dividends distributed by mutual funds. The tax, called Dividend Distribution Tax, is levied on all distributions of dividends made by mutual funds. However, there is no DDT levied on equities.

Funds are required to pay a tax of 12.5 per cent (plus surcharge and education cess) for dividends distributed to individuals and Hindu Undivided Families, and 20 per cent for dividends distributed to other persons. Dividends declared by equity-oriented funds (MFs with more than 50 per cent of assets in equities) are exempt from the dividend distribution tax (DDT).

Though investors are not liable to pay DDT but it indirectly affects the NAV of the schemes.

Schemes with Section 88 benefit.

Mutual Fund schemes that carry the benefit of Section 88 can essentially be spread across three categories - ELSS, Insurance Linked and Pension.

1) ELSS - Equity Linked Savings Schemes carry a tax rebate of 20 per cent of amount invested. However, only a maximum of Rs 10,000 is eligible for rebate in this category of schemes. These schemes come with a lock in period of 3 years. Further, appropriate legislation stipulates that atleast 80 per cent of the total corpus of these funds shall be invested in equity and related instruments. Currently, most mutual funds offer open-ended ELS schemes in which one can invest throughout the year.

2) Insurance Linked Schemes - Apart from ELSS schemes, mutual fund schemes with insurance benefits carry the benefit of Section 88. Such schemes piggy backs an insurance benefit with a mutual fund.

3) Pension Plans - the mutual fund industry in India is constrained by law from offering full fledged pension plans on the lines of the 401 K plans available in the United States. So far, UTI and Kothari Pioneer Mutual Fund are the only two mutual funds offering full-fledged Pension Plans with benefit under Section 88. While UTI offers Retirement Benefit Plan, Kothari Pioneer Mutual Fund offers KP Pension Plan.





Taxation Structure for Mutual Funds in US

The U.S. Securities and Exchange Commission (SEC) regulates funds according to the provisions of the Investment Company Act of 1940.
When fund sponsors sell fund shares to the public they are subject to regulation as broker-dealers under the Securities Exchange Act of 1934.

A mutual fund generally distributes all of its earnings each year and is taxed only on amounts it retains. This specialized “pass-through” tax treatment of mutual fund income and capital gains was established under the Revenue Act of 1936 .To qualify for this favorable tax treatment under the Code, mutual funds must meet, among other conditions, various investment diversification standards and pass a test regarding the source of their income.

Fund investors are liable for paying tax on a fund’s earnings, whether or not they receive the distributions in cash or reinvest them in additional fund shares.

Types of Distributions

Mutual funds make two types of taxable distributions to shareholders:-

 ordinary dividends
 Capital gains.

Dividend distributions come primarily from the interest and dividends earned by the securities in a fund’s portfolio, after expenses are paid by the fund. These distributions must be reported as dividends on an investor’s tax return.
Capital gain distributions represent a fund’s net gains, if any, from the sale of securities held in its portfolio for more than one year. When gains from these sales exceed losses, they are distributed to shareholders.


To help mutual fund shareholders understand the impact that taxes can have on the returns generated by their investments, the SEC adopted a rule that requires mutual funds to disclose standardized after tax returns for one-, five-, and 10-year periods.

After-tax returns, which accompany before-tax returns in fund prospectuses, are presented in two ways:

 after taxes on fund distributions only (pre-liquidation); and
 after taxes on fund distributions and an assumed redemption of
fund shares (post-liquidation).
















Chapter – 3


Data Analysis And Presentation

















Comparative Similarities and Differences

Equity ownership in US has grown manifold over the past many decades and now half of the US population invest in equities reason being there has been a drastic transition from age-old pension schemes towards individual stock or stock mutual funds. In America there is direct correlation between the age group and equity owned by investors. For instance younger investor’s exposure in equity market is very large on the contrary older investors avoid equity exposure.

But in India only 2% of the population invest in equity assets reason being like other Asian countries, Indians also are not willing to experiment with new investment avenues like insurance mutual funds, insurance, ETFs etc and prefer only age-old instruments like PPF, Fixed Deposits etc.

In US there are around 600 organizations selling more than 8,000 mutual fund schemes but in India there are only 40-60 organizations selling about only 800 schemes, which speak for its untapped potential.

Despite all differences there exists some similarities also, for instance both the Indian and US investors have same set of financial goals depending on their age group, i.e., younger investors wants to save to buy home or other large items, savings for their retirement etc.

With the increase in life expectancy older investors are saving for their post retirement life. But saving for retirement is by far the most frequently mentioned primarily financial goal for equity holders.

















Percentage of equity owners in each Age Group

Fig – 4

Source – Investment Institute of USA

Fig – 5

Source – Primary Data

In India only young investors between the age group of 25-35 invest in individual stock or stock mutual fund reason being people from 18-25 age group either studying or earning very minimal which limits them from investment but older investors avoid exposure to the equity market and invest in conventional instruments like PPF,Fixed Deposits etc. whereas in US almost all age group invest in equities.
Source of Information for Investors

Fig – 6

Source – Investment Institute of USA

Fig – 7

Source – Primary Data

In US investors follow their financial advisor’s recommendation but in India people are more dependent on their friends & family for their investments and then listen to their advisor.
As per the recent research done by ICI,it was found that both in US as well as in India “Internet” as a medium of source of information is becoming very popular. More and more investors surf the internet for their investment related queries.
Percentage of households owning Equities

Fig – 8

Source – Investment Institute of USA

In spite of the fact that India is an EMERGING country of this decade , only 2% of the household own equity whereas in United States , household own the maximum share of financial assets like IRA , individual stock or Exchange Traded Funds , index funds etc.

Many fund managers argue that investors base has actually increased but economists argue that it is not the retail investors who have started to participate in mutual fund industry rather it is the corporate people who are using funds as a strategic tool in their treasury operations.












Financial Goal of Investors

Fig – 9

Source – Investment Institute of USA

Fig – 10

Source – Primary Data

When it comes to financial goal of the investments both in US as well as in India “Savings for Retirement” is the primary goal of investors.


The present study attempts to identify the growth prospects of Mutual fund industry in India and what limits it from moving on an explosive expansion path in this country.



Review of the Problem

Table – 5

Comparison of Schemes

Scheme Eq Debt Return since Inception 1-Yr Return Nifty Returns Risk Stnd Dev. Beta AUM Ex. Ratio Entry Load

Franklin India Bluechip Fund 95 5 30.79 58.98 33.4 Avrge 6.87 0.93 20246 1.93 2.25

Franklin India Prima Fund 90 10 26.97 58.3 33.4 Avrge 7.69 0.78 24252 1.93 2.25

HDFC Equity Fund 80 20 25.6 73.79 33.4 Low 6.59 0.86 25088 2 2.25

HDFC Top 200 Fund 90 10 36.81 66.2 33.4 B. Avrge 7.11 0.92 10135 2.2 2.25

Principal Growth Fund 90 10 31.95 30.46 33.4 Avrge 6.54 0.84 3766 2.3 2.25

Sundaram Growth Fund 90 10 26.56 58.73 33.4 B. Avrge 6.6 0.87 1151 2.47 2.25



Abbreviations: -

Eq. = Equity
Avrge = Average
B.Avrge = Below Average
Stnd Dev. = Standard Deviation
AUM = Asset under Management
Ex. Ratio = Expense Ratio

Note – Above data is as on 31st January 2006.
Franklin India Bluechip Fund

Inception Date - Nov-30-1993

Investment Objective

This fund is a steady growth scheme that invests mainly in large cap blue-chip shares. Launched in October 1993 as a 3-year closed end fund, this scheme was converted into an open end fund from January 1997. Ever since its inception, this fund has been ranked consistently among India’s top performing funds.

Asset Allocation

Sector % Net Assets

Diversified 18.83
Automobile 16.30
Technology 13.70
Financial Services 11.98
FMCG 6.95
Basic/Engineering 6.59
Energy 5.71
Metals & Metal Products 4.52
Services 3.28
Chemicals 2.13
Construction 1.47

Top 5 Portfolio holdings as on 28-Feb-06

Company in %

LARSEN & TOU 6.51
H C L TECH 6.43
GRASIM IND 5.63
TATA MOTORS 5.35
I T C 5.22







Franklin India Prima Fund

Inception Date Nov 30, 1993

Investment Objective

Providing exclusive access to the finest of India's smaller companies is Franklin India Prima Fund, India's only fund with a clear focus on this dynamic segment of the stock market.
Research has shown that dynamic and well-managed, small and medium sized enterprises experience higher growth rates than their well established, larger counterparts. If identified early, investments in such companies could give substantial capital appreciation over time.
While there are thousands of listed smaller companies, not all of them can experience the same level of growth and success. Primary investment objective is to identify the winners amongst them which require time, effort and research.
Asset Allocation

Sector %Net Assets

Health Care 12.14
Automobile 9.72
Diversified 9.60
Chemicals 8.60
Technology 7.59
Financial Services 7.18
FMCG 6.88
Services 6.47
Construction 6.18
Basic/Engineering 5.72
Textiles 1.67
Metals & Metal Products 0.35

Top 5 Portfolio holdings as on 28-Feb-06

Company in %

Other Current Assets 7.10
A.B Nuvo 6.11
Jaiprakash Ass. 5.97
Mphasis BFL 4.55
Goodlass 3.73
HDFC Equity Fund

Inception Date Jan 01, 1995

Investment Objective

HDFC Equity Fund is a pre-dominantly large cap equity fund. It has a decade-long track record of impressive returns across market cycles. HDFC Equity Fund pursues an aggressive investment style. It usually invests in about 25 stocks.
For investors with a high risk appetite, HDFC Equity Fund makes an ideal investment option. The fund's ability to keep turbulence at bay despite managing a concentrated portfolio is a major positive.
In order to provide long term capital appreciation, the Scheme will invest predominantly in growth companies. Companies selected under this portfolio would as far as practicable consist of medium to large sized companies. The aim will be to build a portfolio, which represents a cross-section of the strong growth companies in the prevailing market. In order to reduce the risk of volatility, the Scheme will diversify across major industries and economic sectors.

Asset Allocation

Sector %Net Assets

Automobile 24.81
Technology 23.41
Basic/Engineering 15.35
Financial Services 8.60
Energy 8.59
Chemicals 5.35
FMCG 3.94
Services 2.84
Textiles 2.04
Metals & Metal Products 1.85

Top 5 Portfolio holdings as on 28-Feb-06

Company in %

Infosys Tech 8.78
S B I 7.92
Sstyam Computers 7.24
B H E L 7.05
O N G C 6.58
HDFC Top 200 Fund

Inception Date Oct 11, 1996

Investment Objective

The investment objective is to generate long term capital appreciation from a portfolio of equity and equity linked instruments. The investment portfolio for equity and equity linked instruments will be primarily drawn from the companies in the BSE 200 Index. Further, the Scheme may also invest in listed companies that would qualify to be in the top 200 by market capitalization on the BSE even though they may not be listed on the BSE This includes participation in large IPO where in the market capitalization of the company based on issue price would make the company a part of the top 200 companies listed on the BSE based on market capitalization.

Asset Allocation

Sector %Net Assets

Technology 23.17
FMCG 18.02
Automobile 13.96
Energy 13.50
Basic/Engineering 12.00
Financial Services 7.44
Chemicals 3.02
Services 3.02
Diversified 2.31
Health Care 0.95
Textiles 0.36


Top 5 Portfolio holdings as on 28-Feb-06

Company in %

O N G C 7.36
I T C 5.33
S B I 4.68
Infosys Technology 4.09
TCS 3.90

Principal Growth Fund

Inception Date Oct-25-2000

Investment Objective

The primary investment objective of the fund is to achieve long-term capital appreciation. The aim will be to take concentrated positions in the select strong stocks that are identified through the above valuation process. The fund will primarily invest in equities and equity-related instruments. The strategy is to maintain a diversified portfolio with an exposure to 25 to 30 select large-cap stocks across. The strategy is to identify stocks, which can provide capital appreciation in the long-term.

Asset Allocation

Sector %Net Assets

Technology 12.42
Financial Services 11.60
Basic/Engineering 10.61
Metals & Metal Products 8.17
Diversified 8.15
FMCG 8.04
Construction 7.67
Automobile 7.54
Health Care 6.18
Energy 5.62
Chemicals 5.50

Top 5 Portfolio holdings as on 28-Feb-06

Company in %

Cash and Other Assets 4.56
B H E L 4.00
L & T 3.65
Crompton Gr. 3.21
Hind Constn 3.10




Sundaram Growth Fund

Inception Date Apr-24-1997

Investment Objective

To achieve capital appreciation by investing in a well diversified basket of equities and equity-related instruments. Income generation would be the secondary consideration.
Sundaram Growth Fund is for the investor who can put away some money for the long term, to reach savings goals like buying a home, while not being unduly perturbed by short-term fluctuations in line with market movements. More importantly, this fund is for people who do not want to treat their investment in equity as a "speculation", but aim for reliable growth over the long-term.

Asset Allocation

Sector %Net Assets

Technology 16.85
Basic/Engineering 13.12
Construction 11.70
FMCG 11.30
Financial Services 9.80
Diversified 6.74
Metals & Metal Products 6.71
Automobile 4.75
Energy 4.56
Chemicals 3.59
Services 2.01
Health Care 1.21


Top 5 Portfolio holdings as on 31-Jan-06

Company in %

Cash and Other Assets 6.35
I-Flex 3.38
B H E L 3.27
TATA Tea 3.20
I T C 3.19

Analysis

For fund managers its time to get more cautious as the Sensex is climbing very high and there is no sign of correction in the near future, and with every extra point being added to the index, portfolios may start to shake as valuations get stretched.

Out of the 30 Sensex companies, almost 22 are trading at a much higher PE multiple than the Sensex PE of 20 times. This also means a lot of expectation has already been built into these stocks.

The corporate sector has completed three years of robust earnings growth from 63.8% in FY03 to 30.9% in FY05. For the quarter ended March 2006, data on about 750 companies have shown a 35% earnings growth rate, which is the highest in the last four quarters. The earnings momentum of Indian companies is expected to be subdued as compared to last year. The market is expecting corporate earnings to grow at a CAGR of 16-17% over the next few years. The rise in fuel prices is likely to boost inflation. It will also have an impact on the input cost for the companies and, in turn, on margins. Again, below average rainfall is predicted for the current year, which may also affect growth rates.

India's GDP is estimated to grow at 7.8% in FY08, whereas inflation has been pegged at 5%.Given the 8% growth in the GDP, one can still expect 17-18% market return for the next 4-5 years, which no other asset can give.

It is extremely important to shift one's portfolio mix from growth companies to companies and industries which hold a promising track record in recessionary times. Defensive stocks -- or industries -- are well-known for providing consistent returns and a downside cushion during times of economic recession or when the market rally goes bust.

Defensive strategy means getting into stocks that have lower momentum and are not cyclical in nature. These are stocks that continue to move up, irrespective of market movements. Traditionally, the defensive sectors or companies are identified on the basis of their ability to supply those goods and services one simply cannot do without. For instance, no matter how much economic conditions deteriorate, one still needs to eat or seek medical care.

However, many say it would not be a prudent idea to put all the bets on defensive sectors and lose the charm of the growth and momentum sectors. Fund managers feel what really works best is a mix-and-match strategy.



The Sensex has given a 20% return in Q4FY06 and 74% in FY06. Notwithstanding the support from the domestic economy, some money managers are more worried about the relatively high valuations coupled with the high growth of potentially speculative portfolio investments.

Some funds have started to take shelter by investing in derivatives, while others have turned to diversification as a defensive strategy against the volatility in the cash market. The fact sheet shows that at least five schemes have taken exposures in the futures and options market. These schemes are DSPML Equity, Kotak 30, Kotak MNC, Prudential ICICI Infrastructure and Sundaram India Leadership fund. Over the last one year, these funds have provided an average return of around 95% over the last one year.

Derivatives serve as one of the best hedges for investors. Other than hedging, one of the unique aspects of derivatives is the high leverage that they can contribute. This means that investors have the ability to obtain exposure to a relatively large asset amount for a small initial outlay. The result is a high-risk and high-reward investment. But derivative instruments are for sophisticated investors.

In general, investors prefer investments in pharmaceuticals, IT, automobiles and oil and gas companies as defensive strategies. Pharmaceutical companies are in the news for their acquisitions plans and improving domestic margins, yet they have relatively low P/E at around 18 times as compared to the Sensex P/E of 20x. For IT, the industry P/E is 30x, reflecting the industry growth rate and tier I companies are showing a forward P/E of 28x based on FY07 earnings.

Automobiles and oil and gas companies are generic for all-season investments. The auto sector has shown robust growth in the past and with rising per capita incomes and affordable interest rates, the sector is expected to continue its momentum. The budget has given an incentive to this sector in terms of excise cuts which has boosted demand.

Most fund managers are changing sector weights in their portfolios. At a time when the entire rally has been driven by large-cap companies, most mutual funds and portfolio managers have a chunk of the holding in Sensex companies. As a defensive strategy, they are increasing their weights in segments that they feel could act as a defense in bad times.

The pharmaceutical sector accounts for 4.6% in the Sensex. Many fund managers are actually taking this weight to almost 8% in their portfolios as they feel that it will act as the best defensive strategy.

Funds are also taking heavy exposures to oil and gas companies and, in the near future, this is one sector where investors will be allocating higher weightages. At current valuations, oil marketing and banking companies as safe bets to invest in. These sectors are still undervalued and have many opportunities within the sector.

Index funds and SIPs

For every rise of 1,000 points from 8,000 levels, there has been at least one company in the Sensex that has powered the index. These four companies are Bajaj Auto, ITC, Hindustan Lever and Reliance Industries, which have generated returns that are in the range of 34-94% in a span of seven months.

A fund manager holding these companies would have made a return of 52% over the last seven months -a little higher than the Sensex, which moved up by 50% over the same period.
Analysts and fund managers are of the opinion that the financial sector was not able to participate in the latter part of the rally. This includes companies like ICICI Bank, SBI, HDFC Bank and its parent HDFC. Increased competition in the retail lending market and tightening interest rates are squeezing the profit margins of these companies. But with the increase in demand for retail loans and no signs of the economy slowing, fund managers are taking a forward view on this sector.

At the end of the day, defensive strategies are about market timings. Investors who want to play it safe with the right balance of risk and returns are always advised to invest into systematic investment planning that gives rupee cost averaging especially into index funds for longer periods.

An investor can go for an SIP based on his risk appetitive. Though generically, an index fund is recommended, investors who have higher risk appetite can go in for diversified funds.

In general, experts say that investors now need to maintain a smooth balance between their stocks and mutual fund investments. It is even better to move out of stocks that have already run up and are not part of any index and park these funds either in cash or mutual funds. Eventually, the best strategy is one which has liberal doses of caution built into it.







Correlation Coefficient


X Y x=X - Mean x2 y=Y- Mean y2 xy
Scheme Return since Inception Beta
Franklin India Bluechip Fund 30.7900 0.9300 1.0100 1.0201 0.0633 0.0040 0.0640
Franklin India Prima Fund 26.9700 0.7800 -2.8100 7.8961 -0.0867 0.0075 0.2435
HDFC Equity Fund 25.6000 0.8600 -4.1800 17.4724 -0.0067 0.0000 0.0279
HDFC Top 200 Fund 36.8100 0.9200 7.0300 49.4209 0.0533 0.0028 0.3749
Principal Growth Fund 31.9500 0.8400 2.1700 4.7089 -0.0267 0.0007 -0.0579
Sundaram Growth Fund 26.5600 0.8700 -3.2200 10.3684 0.0033 0.0000 -0.0107

Total 178.6800 5.2000 0.0000 90.8868 0.0000 0.0151 0.6417

Mean 178.6800 5.2000
6.0000 6.0000

= 29.7800 0.8667



= 0.5 (approximate)

Correlation coefficient summarizes in one figure the direction and degree of correlation. Therefore +0.5 represents correlation is positive because the sign of “r” is positive and the magnitude of correlation is 0.5.

There is moderate degree of correlation between returns of the schemes and beta, i.e. if the beta goes up, returns of the scheme also goes up because of the philosophy “High risk High Returns”.



The coefficient correlation does not indicate the percentage of data that is explained. For correctly interpreting the correlation coefficient we have to fin=d the value of coefficient of determination.

The coefficient of determination is found by squaring r and it gives an idea as to what proportion of returns is explained by the variation in beta. Thus (0.5)2 or 25% of the variation of returns are explained by the linear regression fitted to the data given above. Even this does not mean that 25% of the data are explained. It only means that out of total variation of returns only 25% is due to beta and the rest is due to other factors.



Chi Square Test


Observed ( O ) Expected ( E )
Scheme Return since Inception Nifty Returns O - E ( O - E )2 ( O - E )2 / E
Franklin India Bluechip Fund 30.79 33.4 -2.61 6.8121 0.2040
Franklin India Prima Fund 26.97 33.4 -6.43 41.3449 1.2379
HDFC Equity Fund 25.6 33.4 -7.8 60.84 1.8216
HDFC Top 200 Fund 36.81 33.4 3.41 11.6281 0.3481
Principal Growth Fund 31.95 33.4 -1.45 2.1025 0.0629
Sundaram Growth Fund 26.56 33.4 -6.84 46.7856 1.4008

Total (X2) 5.0752


*(See Note)

Degree of freedom ( v ) = (c-1) (r-1)
= (2-1) (6-1)
=5% level of significance

Where v=degree of freedom
c=column
r=row

For v=5%, X2= 11.1

X2 distribution is a continuous probability distribution which has the value zero at its lower limit and extends to infinity in the positive direction. Negative value of X2 is not possible.

The exact shape of the distribution depends upon the number of degrees of freedom “v”.

The quantity X2 describes the magnitude of discrepancy between observed and expected, i.e. , with the help of X2 test it becomes easy to know whether a given discrepancy between expected and observed values can be attributed to chance or whether it results from the inadequacy of the theory to fit the observed values.

If the calculated value of X2 is greater than the table value, the difference between observed and expected is considered to be significant.

The number of degrees of freedom is described as the number of observations that are free to vary after certain restrictions have been imposed on the data.

While applying the test, the null hypothesis is that the 2 variables are independent, i.e., scheme’s return and market return. If the calculated value of X2 is less than the table value at a specified level of significance, the null hypothesis holds true, i.e., the two variables are independent. If calculate value of X2 is greater than the table value, the null hypothesis is rejected, i.e., the two variables are associated.

Since the calculated value of X2 ( 5.0752 ) is less than the tabulated value of X2 ( 11.1 ) , it is insignificant therefore the data is consistent.

*NOTE
Different schemes have different benchmarks selected by their fund manager and it is not feasible to compare each scheme’s returns with their benchmark index reason being it would bring inconsistency in the data, therefore nifty returns has been taken as it indicates the market portfolio returns for all the sectors and schemes.




Recommendation

One of the major confusion that every investor face is whether to opt for dividend option or growth option, therefore, our recommendation is in terms of its effect on returns from the fund, the dividend re-investment option is no different from the growth option, the dividend re-investment option is the superior one for investors who want the tax efficiency of the dividend option and are also willing to remain invested in equities through its ups and downs.

Equity funds usually offer three options for investors to choose from — the Dividend Payout option, the Dividend Re-investment option and the Growth option. A few funds have also started to offer a Bonus option. These options differ only in their method of distribution of returns.

Investors cash in on the returns earned by the fund from time to time through the dividend it declares, in growth option these returns are retained which is reflected in the appreciated NAV.

The Dividend re-investment option allows the investors to plough back the dividends declared by fund house into the scheme at the prevailing NAV.

This option is recommended for investors who are seeking tax efficiency and willing to remain invested in the scheme and this option is preferred for its liquidity.

For instance, suppose Investor-A invested Rs.1000 in a fund at an NAV of Rs.10 per unit, fetching him 100 units. Six months later, because of an appreciation in the fund's portfolio, the value of the units has grown to Rs 1,200. In the Dividend option, the fund may declare a dividend of Rs 2 per unit and pay out Rs 200. The value of your residual holdings in the fund would be Rs 1000.

In the Growth Option, he would not receive any payout, but the value of his holdings would be Rs 1,200 at the end of six months, as the value of the100 units you hold would have grown from Rs 10 to Rs 12 per unit. In the Dividend Re-investment option, the Rs 200 declared as dividends would be reinvested in the fund at the prevailing ex-dividend NAV and he would be left with 120 units worth Rs.10 each.

His investment value at Rs 1,200 would be the same as in the Growth option. The Dividend option (whether Reinvestment or Payout) is the more tax- efficient way of receiving your returns from an equity fund.


Table – 6

Comparison between Dividend and Growth Option

The Systematic Withdrawal Edge
Non-equity-oriented schemes Dividend Growth
a NAV per unit (Rs) 15.00 15.00
b Dividend per unit (Rs) 1.00 -
c Dividend distribution tax per unit (Rs) 0.14 -
d Post-dividend NAV (Rs) (a-b-c) 13.86 15.00
Source – Value Research Online

Table – 7

Recommendation for the Debt and Equity Mix

Equity MF Balanced MF MIPS Debt MF Fixed Inc. Total Equity Total Debt
Below 30 years 50% 30% 5% 5% 10% 70% 30%
30 - 45 years 40% 30% 15% 5% 10% 60% 40%
45 - 55 years 25% 25% 25% 5% 20% 45% 55%
Above 55 years 5% 10% 40% 5% 40% 15% 85%
Source – AMFI (Association of Mutual Funds In India)









Mutual fund is quite a new concept for many of the investors in India, therefore before investing into any scheme every investor should try to find out the following facts apart from the recommended mix of equity and debt as given in Table – 7 : -

1) History of the scheme
2) Returns
3) Entry / Exit Load
4) Expense Ratio
5) Beta of the portfolio
6) Churning Ratio
7) Investment Objective and Style


Limitations


Although analysis of this project matches the macro and micro environment of the mutual fund industry, but there are a few limitations in the study. Some of the limitations are mentioned below:

 Our study is limited to the Delhi region, as it was assumed that these samples represent the entire population in India.

 Because of time constraint, only limited information has been obtained.

 Most of the respondents were not willing to disclose their personal information regarding their investments pattern.













Appendix

Sample Composition for Primary Data

Fig – 11



Fig – 12




Fig –13



Fig – 14








Mutual Funds are essentially investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. Each unit of any scheme represents the proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by the fund from time to time. Mutual fund schemes are managed by respective Asset Management Companies (AMC). The benefits on offer are many with good post-tax returns and reasonable safety being the hallmark that we normally associate with them. Some of the other major benefits of investing in them are:

 Number of available options
 Diversification
 Professional Management
 Potential of Returns
 Liquidity
 Well Regulated
 Transparency
 Flexible, Affordable and a Low Cost affair


Different types of mutual fund schemes

By Structure

1) Open-ended schemes
2) Close-ended schemes
3) Interval schemes

By Investment Objective

1) Growth schemes
2) Income schemes
3) Balance schemes
4) Money Market schemes

Other types of schemes

1) Tax Saving schemes
2) Special schemes
3) Index schemes
4) Sector specific schemes

Open-end Funds

An Open-end Fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices

Close-ended Funds

A Close-ended Fund has a stipulated maturity period which generally ranges from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the Stock Exchanges where they are listed

Growth Funds

The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long term outlook and are seeking growth over a period of time

Income Funds

The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income

Balanced Funds

The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are ideal for investors looking for a combination of income and moderate growth

Money Market Funds

The aim of Money Market Funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for corporate and individual investors as a means to park their surplus funds for short periods

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity linknewed Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 88 of the Indian Income Tax Act, 1961

Index Schemes

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.

Sectoral Schemes

Sectoral Funds are those which invest exclusively in a specified sector(s) such as FMCG, Infotech, Pharmaceuticals, etc. These schemes carry higher risk as compared to general equity schemes as the portfolio is less diversified, i.e. restricted to sector(s) / industry (ies).




















Annexure

SEBI'S CODE OF CONDUCT FOR INTERMEDIARIES OF MUTUAL FUNDS

1. Take necessary steps to ensure that the clients' interest is protected.

2. Adhere to SEBI Mutual Fund Regulations and guidelines related to selling, distribution and advertising practices. Be fully conversant with the key provisions of the offer document as well as the operational requirements of various schemes.

3. Provide full and latest information of schemes to investors in the form of offer documents, performance reports, fact sheets, portfolio disclosures and brochures, and recommend schemes appropriate for the client's situation and needs.

4. Highlight risk factors of each scheme, avoid misrepresentation and exaggeration, and urge investors to go through offer documents/key information memorandum before deciding to make investments.

5. Disclose all material information related to the schemes/plans while canvassing for business.

6. Abstain from indicating or assuring returns in any type of scheme, unless the offer document is explicit in this regard.

7. Maintain necessary infrastructure to support the AMCs in maintaining high service standards to investors, and ensure that critical operations such as forwarding forms and cheques to AMCs/registrars and dispatch of statement of account and redemption cheques to investors are done within the time frame prescribed in the offer document and SEBI Mutual Fund Regulations.

8. Avoid colluding with clients in faulty business practices such as bouncing cheques, wrong claiming of dividend/redemption cheques, etc.

9. Avoid commission driven malpractices such as:

(a) Recommending inappropriate products solely because the intermediary is getting higher commissions there from.

(b) Encouraging over transacting and churning of mutual fund investments to earn higher commissions, even if they mean higher transaction costs and tax for investors.

10. Avoid making negative statements about any AMC or scheme and ensure that comparisons if any are made with similar and comparable products.

11. Ensure that all investor related statutory communications (such as changes in fundamental attributes, exit/entry load, exit options, and other material aspects) are sent to investors reliably and on time.

12. Maintain confidentiality of all investor deals and transactions.

13. When marketing various schemes, remember that a client's interest and suitability to their financial needs is paramount, and that extra commission or incentive earned should never form the basis for recommending a scheme to the client.

14. Intermediaries will not rebate commission back to investors and avoid attracting clients through temptation of rebate/gifts etc.

15. A focus on financial planning and advisory services ensures correct selling, and also reduces the trend towards investors asking for pass back of commission.

16. All employees engaged in sales and marketing should obtain AMFI certification. Employees in other functional areas should also be encouraged to obtain the same certification.




















How Fact sheets misleading Investors

At a time when the industry is evolving into launching more innovative products, the quality and presentation of information disseminated by the fund houses hasn’t kept up at the same pace. As an investor sifts through hundreds of fact sheets to discover the best funds for, lack of standardization in the information flow makes his/her job much more challenging.

The reason why investors should look at fact sheets from different fund houses is because in itself a fact sheet may strike as informative and even comprehensive, but when you compare fact sheets across fund houses, the inconsistency is glaring. Below, few points are listed which outline the most relevant information points where there is a lack of standardization.

1. Expense ratios

In developed markets like the US, there is a research industry that prides itself on selecting funds that give the best performance at the lowest expenses. In India the scenario is much different. If we ignore few exceptions like Franklin Templeton and PruICICI Mutual Fund, most fund houses do not disclose the expense ratios in their monthly fact sheets. The expense ratio disclosure is made through a press release on a half-yearly basis. A common refrain from most fund houses for non-disclosure of expense ratios is that the compliance is mandatory on a half-yearly basis. The same level of transparency needs to be extended to other important information.

2. Sector/company alignment

Aligning companies according to relevant sectors/industries is also something where standardization is required. Also sector names across fund houses are disparate. For instance DSP ML Equity Fund includes HCL Info systems under Hardware, while Sundaram Capex Opportunities regards it as IT (information technology). Even in terms of sub-sectors, there is a disparity. For instance, DSP ML Mutual Fund has a distinct sector for software, while Sundaram Mutual Fund bundles software in IT. So in Sundaram Mutual Funds fact sheet TCS and Infosys (which are software companies) are in the same sector (IT) as HCL Info systems (a predominantly hardware company). Apparently, AMFIs attempt to standardize the alignment of companies and sectors is not part of mandatory of compliance so most fund houses are not abiding by it. Another inconsistency is in the names of sectors. For instance, fund houses refer to Oil and Energy interchangeably as also Consumer Products and Consumer Non-Durables, Industrial Machinery, Industrial Products and Engineering.

3. Portfolio churn

Information on Portfolio Churn/Turnover is another piece of information that is not easily available. And when it is available, considerable time is spent in trying to unravel the formula behind it. To begin with not many fund houses give the Portfolio Churn details, with HDFC Mutual Fund, Franklin Templeton Mutual Fund and JM Mutual Fund being the exceptions. Even then there is no standardization in the methodology to calculate the portfolio churn. For instance, HDFC Mutual Funds and Franklin Templeton’s equity funds have a Portfolio Churn ratio based on last 1 year performance. On the other hand, JM Mutual Funds portfolio churn is based on last month’s performance. So while there are only three fund houses disseminating their portfolio churn ratios, even they are not comparable.

4. Average maturity

It is very important to know the average maturity detail while taking a call on whether to invest or not to invest in a particular debt fund. Unfortunately, even this information is not widely dispersed by fund houses. Some fund houses mention modified duration while some like DSP ML Mutual Fund mention the effective duration. Again the investor is the loser as he can’t take an informed decision on which debt fund merits investment.

In the end it can be summarize that it is AMFIs responsibility to step in and define the basic information that must make it to the fact sheet and the manner in which this information is calculated and displayed. Over a period of time, the basic information list can evolve to include more details.
















Questionnaire


Q.1 What is your age?
□ 18-25 □ 26-35
□ 36-45 □ More than 46Years

Q.2 What is your occupation?
□ Salaried □ Retired
□ Professional □ Self employed

Q.3 What is your salary range?
□ Less than 2 lakh □ 2 lakh – 5 lakh
□ 5 lakh – 10 lakh □ More than 10 lakh

Q.4 Do you invest in capital market?
□ Yes □ No

Q.5 If yes, do you invest in any of the followings:-
□ Fixed deposits □ Insurance
□ Shares □ Mutual funds
Why___________________________________________________________________

Q.6 What is your expected rate of return for your ideal investment?
□ 5-10 % □ 11-14 %
□ 15-20 % □ 21-40 %

Q.7 What is the source of information for your investments?
□ Friends/Family □ Newspapers
□ Internet □ Recommended by your Bank

Q.8 In which type of Mutual fund do you typically invest in?
□ Equity □ Hybrid
□ Debt



Q.9 What is the principal reason behind making investments in the market?
□ Children education □ House
□ Retirement □ Recommended by your Bank

Q.10 What are the reasons for not investing in the Stock Market/Mutual Funds?
□ High risk □ Huge investment
□ No expertise

Q.11 Are you aware about what is a Mutual Fund?
□ Yes □ No


Personal Information:
Name: - ____________________________________________________
Address: - ____________________________________________________
____________________________________________________






















Glossary

Asset Management Company
A company set up primarily for managing the investment of mutual funds. This body has to be a distinct entity different from the sponsor. The investments have to be made in accordance with the scheme objectives, the deed of the trust and provisions of the Investment Management Agreement between the trust and the AMC.

Asset allocation
The process of allocating the assets to different investment avenues like stocks, debt instruments depending on the investment objective of the mutual fund.

Annual return
It is the return generated by the fund in the preceding one year. Normally, return is measured by observing the change in the NAV over the period concerned after adjusting for dividends, bonus and rights if any.

Assets
In the context of a mutual fund scheme the term assets refers to the various holdings of the fund such as equity, fixed income instruments, money market instruments, cash, receivables etc.

Annualized Returns
Defines returns in uniform periods of a year. It standardizes returns generated in a period lesser or greater than a year to a per year basis thereby facilitating easy measurement and comparison of performance.

Balanced Fund / Mixed Funds
A type of fund that holds securities of two or more asset classes to meet its objective. The most common type of Balanced Funds / Mixed Funds hold different combinations of fixed income and equity securities.

Beta
A relative measure of the sensitivity of an asset's return to changes in the return of the market portfolio.

Benchmark
A measure used as a yardstick against which return generated by a mutual fund is evaluated.


Blue Chip Stocks
It refers to the stock of renowned companies with established and stable businesses. Such companies have a steady earnings stream.

Book value
It is net worth divided by the number of outstanding shares, where net worth is equity capital plus reserves and surplus minus accumulated losses.

Buy and Hold
It is an investment strategy wherein an investor holds on to the investment having full faith in the long-term investment strategy ignoring the short-term fluctuations.

Bottom up approach
An approach to stock picking that emphasises prospects of individual stocks over macro aspects like economic cycles and industry prospects.

Capital Gain
It is the difference between the sale price and the cost price of the security which could be either short term or long term. The long-term capital gains are taxed at a concessional rate.

Close-Ended Funds
These are funds that have a specified life span and a restriction on offer of fresh units for sale after the initial offer. While some funds do offer limited repurchase after a specified time, liquidity is available to the investor in case of close-ended scheme through the stock exchange where their units are normally listed.

Compounding
It happens when income earned out of an investment is reinvested back to generate the same return as the original investment

Contingent Deferred Sales Charge/CDSC
It is a conditional charge that may be levied by no load schemes in the event of the investor withdrawing his investments from the fund before the expiry of a certain period. The CDSC is phased out over a period of time.

Custodian
It is the institution responsible for the safe guarding of the securities for the benefit of the unit holders.

Dividend
Cash distributions made by mutual funds. In India dividends are inclusive of capital gains and income earned by the fund.

Discount to NAV
It is the difference between the market price of the unit and the Net asset value of the fund where the market price is ruling at less then the NAV of the scheme. The phenomenon is observed in close ended schemes whose units are listed on the bourses.

Diversification
It refers to the dispersion of fund money over a number of securities and asset classes. Diversification is undertaken by a fund to lower risk.

Dividend Reinvestment
It is a facility whereby the investor opts to channelise the proceeds of the income received by him from the fund back into the scheme thereby enabling him to buy more units.

Entry Load or Front End Load
Entry Load is a charge levied by the fund on the unitholder at the time of investment and it is linked to the NAV of the fund concerned.

Equity Fund or Growth Fund
A mutual fund whose portfolio consists primarily of the stock (equity) with the aim of providing the benefit of capital appreciation to the unit holders. Normally, such schemes focus on capital appreciation rather than regular income.

Exit Load or Back-End Load
A charge levied on the investor at the time of his exit from the scheme.

Expense Ratio
It is the ratio of annual expenses that are slapped on the investor to the average net asset value of the fund's units during the year.

Free Loading
A term used when mutual fund investors who have purchased load funds switch from one fund to another within the same fund family without having to pay another sales charge. Not all funds families have freeloading procedures.

Fee table
A table, found in a mutual fund's prospectus and annual reports, that discloses and illustrates the expenses and fees pertaining to the fund.

Fund Family
A group of funds sponsored by the same organization.

Fund Manager
The person responsible for the management of the fund's corpus.

Gilts/Government Securities
The securities that are issued by Reserve Bank Of India on behalf of the Central Government and/or a State Government, which carry sovereign guarantee. These securities do not carry any delinquency risk.

Global Funds
Mutual funds that invest in stocks of companies from all over the world.

Growth Investing
It is that philosophy of investment where investment is made in stocks of those companies that are growing rapidly in terms of both turnover and profits. Such companies typically exhibit high P/Es.

Initial Public Offer
It is the fund's first offering of units to the general public.

Inception Date
The date when the scheme's initial public offer comes to a close and the fund manager gets on with the process of designing the portfolio of the scheme.

Income Fund
A mutual fund set up with the specific objective of providing the investors the benefit of interest and dividends. They primarily invest in fixed income securities.

Index
The benchmark against which the performance of the fund is evaluated to see whether the fund is under performing or outperforming the benchmark.

Index Fund
A type of mutual fund whose aim is to replicate a market index. These funds are passively managed and the weightage of each security in the portfolio of the fund is the same as that found in the index.

Long term capital gain
The gain booked on an asset which has been held for more than 3 years or 1 year in case of mutual fund units.



Management Fee
It is the fees paid by the mutual fund to the asset management company for the services rendered in respect of the management of the portfolio, usually expressed as percentage of assets.


Maturity Date
The date when the issuer promises to repay the principal or the face value to the investor.

Minimum Investment Amount
The minimum amount below which the fund will not accept applications from the investor.

Money Market Funds
A mutual fund that limits its investments to money market instruments. Such funds provide the benefit of liquidity, capital preservation etc and are therefore ideally suited for those looking to park their money for a short period.

Mutual Fund
An investment trust that pools money from its unitholders and channelises that money into a variety of securities, such as stocks, bonds, and money-market instruments to achieve a specified objective. It offers the unitholders the benefit of diversification and professional management of the investment.

Net Asset Value (NAV)
It is the value derived after subtracting all liabilities except unit capital and reserves from total assets –including unamortised issue expenses and receivables of the fund. The NAV is a vital indicator of the fund performance as it reflects the current valuation of the underlying securities in the portfolio. The NAV is commonly quoted on a per unit basis.

Net Worth
It is equity capital plus reserves and surplus minus accumulated losses.

Operating Expenses
The expenses charged to the scheme for recovering the cost of operating the scheme and other transaction costs.

OCB
Overseas Corporate Bodies (OCBs) are bodies predominantly owned by individuals of Indian nationality or origin resident outside India and include overseas companies, partnership firms, societies and other corporate bodies which are owned, directly or indirectly, to the extent of atleast 60% by individuals of Indian nationality or origin resident outside India as also overseas trusts in which atleast 60% of the beneficial interest is irrevocably held by such persons.

Offer Document or Prospectus
It is a legal document issued by the asset management company describing the salient features of the scheme for the benefit of prospective investors. It has to be mandatorily contain information required by the Securities and Exchange Board of India, such as investment objective and policies, services, and fees.

Open-End Fund
Funds with an undefined life span that offer the facility of continuous sale and repurchase of units to the investor.

Portfolio
The list of securities owned by the mutual fund.

Portfolio transaction costs
The expenses associated with buying and selling securities, including commissions.

Premium to NAV
The amount by which the market value of the unit exceeds the Net Asset Value.

Recurring Investment Facility / RIF / Systematic Investment Plan / SIP
It is an arrangement wherein the investor can purchase units for a fixed amount every month. The amount is divided by NAV of the fund to arrive at the number of units purchased.

Recurring Withdrawal Facility / RWF / Systematic Withdrawal Plan / SWP
It is the facility offered by the fund wherein the unit holder has the liberty to withdraw fixed amount every month.

Redemption fee
A kind of sales charge that is levied on the unit holder at the time of his exit from the scheme. It is also termed as back-end load.

Redemption Price or Repurchase Price
The price level at which the unit holders can sell back the units to the issuer. Usually it is arrived at by subtracting the exit load from the net asset value of the scheme.


Registrar or Transfer Agent
It is the institution that maintains a record of all the unit holders of a fund and their unit ownership. Normally the registrar also mails the notices regarding the holding of the annual meetings and the distribution of dividends to the unit holders. It also supplies the annual statement to the unit holder representing the account position.

Risk-Free
Refers to paper carrying zero credit risk i.e. no risk of default in payment of dividend and principal. Normally, papers issued by governments are classified as risk free paper.

Real return
The actual return received on an investment after adjusting for the inflation. For example, if the nominal investment return for a particular period was 12% and inflation was 6%, the real return would be 6% (12% – 6%).

Risk-adjusted return
A measure of how much risk a fund absorbed to generate its returns.

Rupee cost averaging
Refers to the technique of lowering average cost through systematic investment of a defined amount at fixed intervals.

Sector Fund
Is a fund that restricts its investments to a defined sector or some defined sectors thereby limiting the scope of its investment universe.

Short term capital Gain
The capital gain booked on an asset which has been held for less than 3 years or 1 year in certain cases.

Sharpe ratio
A measure of risk-adjusted return. It is computed by dividing the fund’s excess returns (over and above the risk free returns) by the fund’s standard deviation.

Standard deviation
Is a measure that determines the volatility of a fund over a period of time. Mathematically, standard deviation measures the dispersion of values around a mean.

Tracking error
Is the difference between the return generated by an index fund and the index on which the fund is modelled.

Trail commission
This commission is paid by the fund to the broker. It is the amortization of the commission linked to the period for which investor stays with the scheme.


Trust Fund
The entire corpus of the Trust, unit capital and all property belonging to and/or vested in the Trustee.

Trustees
A person or a group of persons who have been named in the offer document to hold the securities in good faith for the benefit of the unit holders. They keep an eagle’s eye on the activities of the fund managers to ensure that the investments made are within the broad framework of the guidelines set by the fund overall supervisory authority over the fund managers. They ensure that the managers keep to the trust deed that the unit prices are calculated correctly and the assets of the funds are held safely.

Turnover
It is an indication of trading activity in the fund and represents the number of times the fund buys and sells the securities of the scheme. High turnover will mean active churning of the portfolio.

Time Horizon
The time period for which the investor is expected to hold on to the investment.

Top Down Approach
The investment philosophy which involves the EIS analysis. Here the fund manager first looks at the economy, industry and then filters down to the company that are likely to benefit from those favorable economic and industrial trends.

Underwriter
A banker or financial institution which agrees to buy the unsubscribed portion of any new issue if the issue fails to generate a good response and later on dispose it off at a premium.

Yield
It is the effective return to the investor taking into account only the dividend income and is usually expressed as a percentage of net asset value or market price.



Bibliography

For the purpose of study, the following secondary sources of data were consulted and hence the relevant information was built on.


WWW.VALUERESEARCHONLINE.COM

WWW.AMFI.COM

WWW.SEBI.COM

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WWW.MONEYCONTROL.COM

WWW.RBI.GOV.IN

WWW.BUSINESS-STANDARD.COM

WWW.OUTLOOKMONEY.COM

WWW.PERSONALFN.COM

WWW.ICI.ORG