Mutual Funds

WHAT IS A MUTUAL FUND?
A Mutual Fund is a trust that pools the savings of a number of investors who share a common investment objective IN turn buy assets
LEGAL STRUCTURE
FUND SPONSPOR/SETTLOR KOTAK MAHINDRA FINANCE LTD.
TRUST KOTAK MAHINDRA MUTUAL FUND INVESTMENT MANAGER & ADVISOR KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD.
TRUSTEE KOTAK MAHINDRA TRUSTEE CO. LTD. UNIT HOLDERS
Contd
21-2
Copyright 2002 by Prof. A.K. .Mishra All rights reserved.
LEGAL STRUCTURE
INVESTMENT MANAGER & ADVISOR KOTAK MAHINDRA ASSET MANAGEMENT CO. LTD.
APPOINTS CUSTODIANS REGISTRARS BANKS DISTRIBUTORS
21-3
Working of a Mutual Fund

INVESTORS Passed back to RETURNS
MUTUAL FUND LARGE CORPORATE SPECIALISTS MANAGE
Pool their money with
INVESTORS GET A BLEND OF LIQUIDITY RETURNS & SAFETY
FUND MANAGEMENT
Generate PORTFOLIO YIELDS HIGH RETURN TO MFs

21-4
Invest in SECURITIES INVEST IN BALANCED PORTFOLIO
TYPES OF MUTUAL FUNDS

Type of Mutual Fund Schemes Structure Open Ended Funds Close Ended Funds Interval Funds Investment Objective Special Schemes
Growth Funds Income Funds Balanced Funds Money Market Funds
Industry Specific Schemes Index Schemes Sectoral Schemes
21-5
MUTUAL FUNDS
OPEN ENDED OPEN FOR ALL THE YEAR MIN SUBS AMT 50CR NO DURATION REFUNDED IF MIN SUBS NOT ACHIEVED REPURCHASED ANY TIME REDEEMED AT NAV & LOAD FACTOR RANGES (4% TO 6%) AS REPURCHSED SO NOT LISTED AT STOCK EX TRADED AS PERMITTED LOT DIVID MAY /MAY NOT SWITCHOVER ALLOWED 21-6
CLOSE ENDED OPEN FOR FIXED PERIOD MIN SUBS AMT 20CR DURATION (5TO7 YEARS) REFUNDED IF MIN AMT NOT ACHIEVED MAY BE REPURCHASED (AFTER 2 TO 3 YRS) REDEMPTION SPECIFIED & DONE AT NAV - SERVICE CHARGE LISTED AT STOCK EX DIVID MAY/MAY NOT BE SWITCHOVER Prof. A.K. .Mishra All rights reserved. ALLOWED Copyright 2002 by
WHY INVEST IN MUTUAL FUNDS?

SAVE THROUGH MUTUAL FUNDS
INVEST THROUGH MUTUAL FUNDS

Have
Park
surpluses term investment liquidity
a long term objective your risk
Short Easy Tax
Profile Select
appropriate MF scheme, based on risk return requirement of equity and debt regularly/with flexibility
benefits
Mix
Invest
21-7
BENEFITS OF MUTUAL FUNDS

Management & Analysis Diversification & Divisibility Across Companies & Sectors Liquidity Entry & Exit at NAV Transparency Regular disclosures Convenient Administration (Record Keeping) Low Costs of operations (Lower transaction cost) Choice of schemes. Well Regulated. (By SEBI)
Professional
INVESTMENT OPTIONS
Instrument
Bank Deposits ICD s Call (thro PD s) T-Bills Mutual Funds Liquid Bond Serial Overnight to 1 month 1 month months 12 8% to 9.5% 9% 10.5% 9% - 10% No Low Credit No price risk High High High
Tenure
7 days to 1 yr. <180 days Overnight <12 months
Pre-Tax Returns
6% - 12% 9% - 11% 6.5% - 9% 7% - 9%
Risk
Low Medium Low Price Risk
Liquidity
Possible by breaking FD at cost No secondary mkt. Routed thro PD s High
Over 1 year
21-9
RIGHTS AS A MUTUAL FUND UNITHOLDER

Receive statement of accounts within 6 weeks from the date your request is received by the Mutual Fund Receive information about the investment policies, objectives, financial position and general affairs of the scheme Receive dividend within 30 days of their declaration, receive redemption proceeds within 10 days from the date of the valid redemption Vote in accordance with the Regulations to: - change the Asset Management Company - wind up the schemes. To receive communication from the Trustee about change in the fundamental attributes of any scheme
21-10
MUTUAL FUNDS
STRUCTURAL ISSUES (MUTUAL FUNDS)

MUTUAL FUND (REGISTERED WITH SEBI) MEANS: A FUND ESTABLISHED IN THE FORM OF TRUST
21-11
MUTUAL FUNDS
STRUCTURAL ISSUES (MUTUAL FUNDS)

BY A SPONSOR
BODY CORPORATE WHO ACTING ALONE OR IN COMBINATION WITH ANOTHER BODY CORPORATE FLOATS THE IDEA OF SETTING UP OF MUTUAL FUND ESTABLISHES MUTUAL FUND IN FORM OF TRUST TRUST DEED EXECUTED WITH BOARD OF TRUSTEES REGISTERS IT WITH SEBI 40% CONTRIBUTION TO AMC
21-12
MUTUAL FUNDS

STRUCTURAL ISSUES (MUTUAL FUNDS) TO RAISE MONIES BY TRUSTEES

HOLDG PROPERTY OF MF IN TRUST FOR BENEFIT OF UNIT HOLDERS
THROUGH THE SALE OF UNITS

REPRESENTING ONE UNDIVIDED SHARE IN THE ASSETS OF A SCHEME

FOR INVESTING IN SECURITIES APPLICATION FEES:5000; REGISTRATION FEES:10 LACS; ANNUAL FEES : 1 LAC
21-13
MUTUAL FUNDS
STRUCTURAL ISSUES(MUTUAL FUND TRUST)

MF TO BE CONSTITUTED IN FORM OF MF TRUST MANAGED BY A BOARD OF TRUSTES IN WHOSE FAVOUR TRUST DEED IS EXECUTED BY SPONSORS

50% MEMBERS NOT AFFILIATED WITH SPONSORS CONTROLS ALL CAPITAL PROPERTY OF MF SCHEMES/ HOLDS THEM IN TRUST FOR HOLDERS
21-14
MUTUAL FUNDS
STRUCTURAL ISSUES(MUTUAL FUND TRUST) APPOINTS AMCs ENSURES SCHEMES FLOATED & MANAGED BY AMC ARE IN ACCORDANCE WITH TRUST DEED

POWER TO OBTAIN REPORT/DISMISS AMC AN AMC NOT TO ACT AS TRUSTEE OF ANY MF APPOINT CUSTODIAN &SUPERVISE ITS ACTIVITIES
21-15
MUTUAL FUNDS
STRUCTURAL ISSUES (MUTUAL FUND TRUST LIST) ALLIANZ CAPITAL & MGT SERVICES LTD ANZ GRINDLAYS BANK TIMES MUTUAL FUNDS UNIT TRUST OF INDIA VLS FINANCE LTD. KOTAK MAHINDRA FINANCE LTD PRUDENTIAL CAPITAL MARKETS LTD. SBI FUNDS MANAGEMENT LTD CEAT MF & ASSET MANAGEMENT COMPANY LTD.
21-16
MUTUAL FUNDS
STRUCTURAL ISSUES (AMC)

MFs OPERATED BY AMCs -APPTD BY TRUSTEES AMCs & TRUSTEES TWO SEPARATE LEGAL
ENTITIES & ARMS LENGTH RELATIONSHIP MNTD

AMCs TO APPROVE MOA & AOA FROM SEBI

21-17
MUTUAL FUNDS
STRUCTURAL ISSUES (AMC)

AMCs MIN NW 5 CR (40% CONTRIB BY SPOSORS) 50% MEMBERS FROM OUTSIDE CANT ACQUIRE OUTSIDE THE SCHEME PROPERTY DISCLOSE REPURCHASE PRICE/NAV OF SCHEMES
21-18
MUTUAL FUNDS

STRUCTURAL ISSUES (AMC LIST) 20TH CENTURY AMC LTD APPLE ASSET MGT LTD. BOI AMC LTD. CREDIT CAPITAL AMC LTD. GIC AMC LTD. ICICI AMC LTD. ITC PIONEER AMC LTD. MORGAN STANLY AM INDIA LTD. PNB AMC LTD.
21-19
MUTUAL FUNDS

STRUCTURAL ISSUES (INVESTMENT MIX) EQUITY SHARES/EQUITY RELATED INSTRTS (CDs)/ DEBT INSTRUMENTS (NCDs, PSBONDS,GOVT SECT)/MONEY MARKET INSTRTS(TBs, CPs & BILLS) 5% CAP FROM ONE SCHEME IN ONE COS SHARE 10% CAP FROM ALL SCHEMES IN ONE COS SHARE 15%CAP FROM ALL SCHEMES IN ONE INDUSTRY
DEBT 5-20% 60-70% 40-50% MONEY MKT 0-10% 0-15% 0-10%
TYPICAL ASSET MIX SCHEME EQUITY GROWTH 70-90% INCOME 20-30% BALANCED 40-60%
21-20
MUTUAL FUND INDUSTRY

KEY FINANCIALS

NAV=
M.V OF FUNDS INVESTS+REC+ACCRUED INCOMELIABILITIES-ACCRUED EXP NO. OF SHARES OR UNITS OUTSTANDING
MARKET PRICE: IN CASE OF CLOSE ENDED REPURCHASE/REISSUE PRICE: OPEN ENDED DISCOUNT RATE OF RETURN= NAV AT END-NAV AT BEGINNING +
DIVIDEND PAID NAV AT BEGINNING
INITIAL EXPENSES: CEILING OF 6% RECURRING EXPENSES: MAX 3% OF AV NET ASSETS IN A YEAR

21-21

KEY FINANCIALS LOADS(CHARGED TO MF SCHEME) THREE TYPES

INITIAL ISSUE EXP (6% OF FUND RAISED)HIDDEN RECURRING EXP (3% MAX OF NET ASSETS) OTHER THAN INITIAL ISSUE EXP/ INCLUDES TRUSTEESHIP FEES /INCLUDES INVST MGT & ADVISORY FEE OF AMC (1.25% UPTO RS 100 CR & 1% OVER 100 CR)
21-22

KEY FINANCIALS LOADS(CHARGED TO MF SCHEME) THREE TYPES

AMC CHARGE FOR ISSUE/RECURRING COST(6%) IN OPEN END SCHEME DIFF BETWEEN PURCHASE & SALE PRICE NOT TO EXCEED 7% OF SALE PRICE
BACK END (DISCOUNT TO NAV) DEDUCTED DURING REPURCHASE/REDEMPTION
21-23

KEY FINANCIALS NAV OF A NO-LOAD FUND (20 LACS UNITS ISSUED)
VALUE OF SECURITIES HELD IN PORTFOLIO 500 LACS CASH IN HAND OF MUTUAL FUND 10 LACS TOTAL ASSETS 510 LACS LESS : OUTSTANDING LIABILITIES 110 LACS TOTAL NET ASSETS 400 LACS =RS 20 PER UNIT THUS NAV = Rs 400 LACS UNITS 20 LACS IF 10,000 NEW UNITS ISSUED AT NAV OF RS 20 PER UNIT THUS NAV = ^TOTAL ASSETS =RS 4,02,00,000= RS 20 PER UNIT ^UNITS UNITS 20,10,000 THUS NAV DOES NOT VARY DUE TO SELING OR BUYING NAV VARIES ON ANY VARIATION OF MARKET PRICES OF SECURITIES HELD IN THE PORTFOLIO OF MF
21-24

KEY FINANCIALS NAV OF A NO-LOAD FUND
NAV VARIES ON ANY VARIATION OF MARKET PRICES OF SECURITIES HELD IN THE PORTFOLIO OF MF NAV=(RS 6 MILL EQ + RS 4 MILL DEBT)- 2 MILL LIAB AS DEBT = 0.5
16 MILL UNITS IN TRUST
IF VALUE OF EQUITY IS DOUBLED, NAV SHIFTS NAV=(RS 12 MILL EQ + RS 4 MILL DEBT)- 2 MILL LIAB AS DEBT = 0.875
IF VALUE OF EQUITY IS HALFED THEN THE NEW NAV IS NAV=(RS 3 MILL EQ + RS 4 MILL DEBT)- 2 MILL LIAB AS DEBT = 0.3125

IN ABOVE, FUND SHOULD SWITCH FROM AGGRESSIVE TO DEFENSIVE INVEST TO AVOID RAPID EROSION OF NAV INVEST IN DEBT INSTRTS MAY BE ONE SOLUTION
21-25
KEY FINANCIALS NAV OF A LOAD FUND (20 LACS UNITS ISSUED)

IF MF IS A 4% FRONT LOAD FUND THEN NAV=NAV(OF NO-LOAD FUND) PER UNIT/1-% OF LOAD = RS 20= RS 20 = RS 20 = RS 20.80 AS CALLED OFFERING 1-4% 1-4/100 0.96 HERE OFFER PRICE (SALE PRICE) WILL BE 20.80 PER UNIT

BID PRICE (REPURCHASE PRICE) WILL BE RS 20.00 PER UNIT DIFFRENCE BETWEEN OFFER & BID PRICE IS 4% i.e. 80 PAISE IS CALLED SPREAD PAID TO FUND THERE IS A TWO WAY QUOTE PROVIDED BY IN OPEN FUND
21-26

KEY FINANCIALS MARS, PVT SECTOR MF LAUNCHED A GROWTH SCHEME WITH AN INITIAL TARGET OF Rs 100 CR. DEPLOYMENT OF FUNDS IS TO CONFIRM THE FOLLOWING COMPOSITION EQUITY 70%, DEBT 25% MONEY MARKET 5% INITIAL EXPENSES 4% DEBT COMPONENT INVESTED EQUALLY IN AAA & AA RATED INSTRUMENTS AT 18% & 20% RESPECTIVELY EQUITY PORTION INVESTED IN SENSEX SCRIPS AV. YIELD ON MONEY MARKET COMPONENT WAS 8% SENSEX WAS AT 3800 & AT TIME OF INVEST IS AT 2900 AFTER ONE YEAR DEBT & MONEY MKT INSTRTS VALUED AT COST RECURRING EXP MET OUT OF INCOME EARNED ON DEBT & MONEY MKT INSTRTS (assume 3% on size of fund)
COMPUTE NAV & SALE PRICE IF FRONT LOAD FACTOR IS 5%
21-27

PASSING THROUGH CRITICAL PHASE LIVING DEAD IN STOCK MARKETS LOST INVESTORS CONFIDENCE UTTER FAILURE IN INDIA

21-28
FEW EVIDENCES SHRIRAM ASSET MGT CO FINED (JUN 96) MORGAN STANLEY FINED (2/6/97)
RESORTING TO SHORT SALES PRICE RIGGING IN BHEL SCRIPS RENDERING PORTFOLIO MGT SERV TO GROUPS
CANSTAR UNABLE TO PURCHASE AT PROMISED NAV LIC MF HAD TO PURCHASE AT PROMISED NAV & BOOK THE LOSS TO AMC

21-29
MUTUAL FUND MONITOR

Particulars Growth Income Balanced Total
No. of Schemes Schemes giving -ve returns on annualised basis Schemes giving single digit annualised returns Schemes giving double digit annualised returns Source: Business Today
21-30
98 50 31 17
28 01 10 17
32 02 12 18
158 53 53 52
MUTUAL FUND MONITOR

INSTITUTIONS 1994-95 1995-96 1998-99
UTI Private Sector Public Sector TOTAL Source: Business Today
8120 1216 949
2470 375 327
860 115 156 1,131
10,285 3,172
21-31
MUTUAL FUND OPEARATION

FAILED IN ALL CHAINS OF OPERATIONS INVESTORS SERVICE THE CHAIN OF OPERATION PRODUCT DESIGN
PRODUCT MARKETING
OUT SOURCING
21-32
FUND MANAGEMENT
MUTUAL FUND OPERATION

PRODUCT DESGIN INNOVATION SUPERIOR DESIGN ADAPATABILITY
21-33

PRODUCT DESIGN DID LITTLE TO INNOVATE WITH INNOVATION 70% SCHEMES CLOSE END WITH POOR RETURNS UTI STILL CONTINUES WITH PLAIN VANILLAS INNOVATION ONLY IN OPEN END SCHEMEDS TIME TO DESIGN SECTOR, LOCATION BASED MFs
21-34

PRODUCT DESIGN- PACKAGED POTFOLIO MODEL KNOW BEFOREHAND Cos WERE INVEST BE MADE PORTFOLIO TO CONSIST OF 50 BLUE CHIP Cos WHICH HAVE CREATED ENORMOUS WEALTH TO HOLDERS & THEIR MKT CAP HAVE INCREASED FLEXIBILITY TO TIME INVESTMENTS TO TAKE ADVANTAGE OF PRICE MOVEMENTS FUND INITIALLY TO BE OPEN ENDED AUTOMATICALLY CONVERTED INTO CLOSE ENDED ONCE THE INVESTMENT CEILING IS ACVD
21-35

PRODUCT MARKETING COST AGGRESSIVE MARKETING UPFRONT COST
21-36

PRODUCT MARKETING COST & ETHICS ARE TWO IMPORATNT FACTORS UPFRONT COST BORNE BY INVESTOR OR AMC UTI CANT AGGRESSIVELY MARKET ITS PRODUCT MORGAN STANLEY MADE MFs AS IPOs & ALL NUANCES OF IPOs WERE BROUGHT IN
21-37

FUND MANAGEMENT CAPITAL PROTECTION MARKET TIMING ASSET QUALITY
21-38

FUND MANAGEMENT NON-QUALIFIED, UNPROFESSNL FUND MANAGERS LOOK MFs AS ANOTHER EQUITY PRODUCT IGNORE ASSET ALLOCATION, PORTFOLIO, TURNOVER & COST NO QICK ASSET REALLOCATION ON TIME DONT INCLUDE HIGH LIQUID BLUE CHIP STOCKS NOT BALANCING RISK RETURN EXPECTATION OF INVESTORS
21-39

FUND MANAGEMENT- SUGGESTED MODEL PROTECT CAPITAL FROM EROSION ALTERNATIVELY GUARANTEE CAPITAL SAFETY POSSESS EXCELLLENT RESEARCH CAPABILITIES TO ENSURE MARKET TIMING INVESTMENT STRATEGY FORMULATION FOLLOW APPROPRIATE ASSET ALLOCATION MODEL SUITING FUNDS OBJECTIVE QUICKLY RESTRURE ASSET ALOCATION ON NEED ENSURE QUALITY OF ASSETS BE IT EQTY OR DEBT ENSURE ECONOMICAL COST OF OPERATIONS BE IT MANAGEMENT FEES OR OTHER EXPENSES
21-40

OUTSOURCING COST CONTROL FLEXIBILITY CHOICE
21-41

OUTSOURCING NEW CONCEPT THAN TO DO THINGS IN HOUSE ENDORSED AS A GREAT COST CUTTING MEASURE CONVERTS FIXED COSTS TO VARIABLE COSTS ABROAD OUTSOURCING 100% FROM PRODUCT DESIGN TO INVESTOR SERVICING YET TO COME IN INDIAN FUND MANAGEMENT ONE AREA MAY BE DISTRIBUTION NETWORK
21-42

INVESTOR SERVICE CUSTOMER FOCUS BETTER CONFIDENCE EFFICIENT SERVICE
21-43

CUSTOMER FOCUS SCANT ATTENTION TO INVESTORS SERVICING IGNORING INVESTORS EDUCATION NOT INCLINED TOWARDS TRANSPARENCY NON DISCLOSURE OF PORTFOLIO LACK LUSTER SHOW ON RETURNS FRONT UNIT HOLDERS NOT TREATED AS CUSTOMERS GOOD SERVICE ATTRACTS MULTIPLE CUSTOMERS MORALE TREAT HIM LIKE CUSTOMER & INVEST IN TECNOLOGY TO REACH HIM FAR & WIDE LESSONS TO LEARN FROM Pvt SECTOR MFs
21-44

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WHAT IS A MUTUAL FUND?

TRUSTEE KOTAK MAHINDRA TRUSTEE CO. LTD. UNIT HOLDERS

APPOINTS CUSTODIANS REGISTRARS BANKS DISTRIBUTORS

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

Working of a Mutual Fund

Pool their money with

INVESTORS GET A BLEND OF LIQUIDITY RETURNS & SAFETY

Generate PORTFOLIO YIELDS HIGH RETURN TO MFs

Invest in SECURITIES INVEST IN BALANCED PORTFOLIO

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

TYPES OF MUTUAL FUNDS

Growth Funds Income Funds Balanced Funds Money Market Funds

Industry Specific Schemes Index Schemes Sectoral Schemes

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

WHY INVEST IN MUTUAL FUNDS?

INVEST THROUGH MUTUAL FUNDS

surpluses term investment liquidity

a long term objective your risk

Short Easy Tax

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

BENEFITS OF MUTUAL FUNDS

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

RIGHTS AS A MUTUAL FUND UNITHOLDER

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

STRUCTURAL ISSUES (MUTUAL FUNDS) TO RAISE MONIES BY TRUSTEES

THROUGH THE SALE OF UNITS

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

ENTITIES & ARMS LENGTH RELATIONSHIP MNTD

AMCs TO APPROVE MOA & AOA FROM SEBI

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND INDUSTRY

M.V OF FUNDS INVESTS+REC+ACCRUED INCOMELIABILITIES-ACCRUED EXP NO. OF SHARES OR UNITS OUTSTANDING

INITIAL EXPENSES: CEILING OF 6%  RECURRING EXPENSES: MAX 3% OF AV NET ASSETS IN A YEAR

MUTUAL FUND INDUSTRY

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND INDUSTRY

BACK END (DISCOUNT TO NAV) DEDUCTED DURING REPURCHASE/REDEMPTION

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND INDUSTRY

MUTUAL FUND INDUSTRY

KEY FINANCIALS NAV OF A LOAD FUND (20 LACS UNITS ISSUED)

MUTUAL FUND INDUSTRY

MUTUAL FUND INDUSTRY

MUTUAL FUND INDUSTRY

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND INDUSTRY

MUTUAL FUND MONITOR

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND MONITOR

UTI Private Sector Public Sector TOTAL Source: Business Today

8120 1216 949

2470 375 327

860 115 156 1,131

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND OPEARATION

MUTUAL FUND OPERATION

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND OPERATION

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND OPERATION

MUTUAL FUND OPERATION

Copyright 2002 by Prof. A.K. .Mishra All rights reserved.

MUTUAL FUND OPERATION

INITIAL EXPENSES: CEILING OF 6% RECURRING EXPENSES: MAX 3% OF AV NET ASSETS IN A YEAR