This action might not be possible to undo. Are you sure you want to continue?
CONCEPT OF MUTUAL FUND
INVESTOR EARN FROM MUTUAL FUND ADVANTAGES OF MUTUAL FUND DISADVANTAGES OF MUTUAL FUND FREQUENTIY USED TERM
2 3 4
TYPES OF MUTUAL FUND SCHEMES ORGANIZATION OF A MUTUAL FUND FUND MANAGEMENT STYLE & STRUCTURING OF PORTFOLIO INDIVIDUAL SCHEME ANALYSIS THEMATIC FUNDS INDEX FUNDS EQUITY LINKED SAVING SCHEMES DIVERSIFIED EQUITY FUNDS DEBT FUNDS CONSLUSION -
15 30 33 49 49 69 91 106 126 137
Ch. 1- Introduction The one investment vehicle that has truly come of age in India in the past decade is mutual funds. Today, the mutual fund industry in the country manages around Rs 329,162 crore (As of Dec, 2006) of assets, a large part of which comes from retail investors. And this amount is invested not just in equities, but also in the entire gamut of debt instruments. Mutual funds have emerged as a proxy for investing in avenues that are out of reach of most retail investors, particularly government securities and money market instruments. Specialization is the order of the day, be it with regard to a scheme’s investment objective or its targeted investment universe. Given the plethora of options on hand and the hardsell adopted by mutual funds vying for a piece of your savings, finding the right scheme can sometimes seem a bit daunting. Mind you, it’s not just about going with the fund that gives you the highest returns. It’s also about managing risk–finding funds that suit your risk appetite and investment needs. So, how can you, the retail investor, create wealth for yourself by investing through mutual funds? To answer that, we need to get down to brass tacks–what exactly is a mutual fund? Very simply, a mutual fund is an investment vehicle that pools in the monies of several investors, and collectively invests this amount in either the equity market or the debt market, or both, depending upon the fund’s objective. This means you can access either the equity or the debt market, or both, without investing directly in equity or debt Concept of a Mutual Fund A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most 2
suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:-
Savings form an important part of the economy of any nation. With savings invested in various options available to the people, the money acts as the driver for growth of the country. Indian financial scene too presents multiple avenues to the investors. Though certainly not the best or deepest of markets in the world, it has ignited the growth rate in mutual fund industry to provide reasonable options for an ordinary man to invest his savings. Investment goals vary from person to person. While somebody wants security, others might give more weightage to returns alone. Somebody else might want to plan for his child’s education while somebody might be saving for the proverbial rainy day or even life after retirement. With objectives defying any range, it is obvious that the products required will vary as well.
Investors earn from a Mutual Fund in three ways:
1. Income is earned from dividends declared by mutual fund schemes from time to time. 2. If the fund sells securities that have increased in price, the fund has a capital gain. This is reflected in the price of each unit. When investors sell these units at prices higher than their purchase price, they stand to make a gain. 3
Professional Management Mutual Funds provide the services of experienced and skilled professionals. All in all. Diversification Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. gilt and balanced funds. Though still at a nascent stage. the fund's unit price increases. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. debt. small and large investors. If fund holdings increase in price but are not sold by the fund manager. This risk of default by any company that one has chosen to invest in. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. liquid. a universal appeal. Investors of all categories could choose to invest on their own in multiple options but opt for mutual funds for the sole reason that all benefits come in a package. The range of products includes equity funds. Convenient Administration 4 . You can then sell your mutual fund units for a profit. This is tantamount to a valuation gain. benefits provided by them cut across the boundaries of investor category and thus create for them. They can manage the maturity of their portfolio by investing in instruments of varied maturity profiles. ensures that the investors are not cheated out of their hard-earned money. Indian MF industry offers a plethora of schemes and serves broadly all type of investors. Moreover. There are also funds meant exclusively for young and old. 3. 2. can be minimized by investing in mutual funds as the fund managers analyze the companies’ financials more minutely than an individual can do as they have the expertise to do so. which has enough teeth to safeguard investors’ interest. Advantages of Mutual Funds 1. the setup of a legal structure.3.
on a post tax basis. Transparency 5 . 4.5 percent (plus a surcharge of 10 percent). delayed payments and follow up with brokers and companies. custodial and other fees translate into lower costs for investors. debt funds provide enough liquidity. as in the cases of fixed deposits. Even historically. In nutshell we can say that these funds have delivered more than what one expects of debt avenues such as post office schemes or bank fixed deposits. Return Potential Over a medium to long-term. Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Apart from liquidity. The best performing funds have given returns of around 14 percent in the last one-year period. the investor gets the money back promptly at net asset value related prices from the Mutual Fund. On an average debt funds have posted returns over 10 percent over one-year horizon. 6. the units can be sold on a stock exchange at the prevailing market price or the investor can avail of the facility of direct repurchase at NAV related prices by the Mutual Fund.Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries. 5. Moreover. Liquidity In open-end schemes. Though they are charged with a dividend distribution tax on dividend payout at 12. we find that some of the debt funds have generated superior returns at relatively low level of risks. 7. Low Costs Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage. mutual funds are better placed to absorb the fluctuations in the prices of the securities as a result of interest rate variation and one can benefits from any such price movement. these funds have also provided very good post-tax returns on year to year basis. Since there is no penalty on pre-mature withdrawal. Mutual Funds save your time and make investing easy and convenient. the net income received is still tax free in the hands of investor and is generally much more than all other avenues. In closed-end schemes.
11. Choice of Schemes Mutual Funds offer a family of schemes to suit your varying needs over a lifetime. thereby reducing the gap between your actual purchase cost and selling price. If you hold units beyond one year. You can 6 . you can systematically invest or withdraw funds according to your needs and convenience. Simply put. What’s more. Well Regulated All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. regular withdrawal plans and dividend reinvestment plans. Here again. This limits him from diversifying his portfolio as well as benefiting from multiple investments. 12. you get the benefits of indexation. Affordability A single person cannot invest in multiple high-priced stocks for the sole reason that his pockets are not likely to be deep enough. investing through MF route enables an investor to invest in many good stocks and reap benefits even through a small investment. mutual funds offer significant tax advantages. depending upon the yearly cost-inflation index (which is calculated to account for rising inflation). Tax Benefits Last but not the least. the proportion invested in each class of assets and the fund manager's investment strategy and outlook. This reduces your tax liability. tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. They also give you the advantages of capital gains taxation. A mutual fund because of its large corpus allows even a small investor to take the benefit of its investment strategy. indexation benefits increase your purchase cost by a certain portion. 8.Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme. Investors individually may lack sufficient funds to invest in high-grade stocks. 10. 9. Dividends distributed by them are tax-free in the hands of the investor. Flexibility Through features such as regular investment plans.
Taxes 7 . No assured returns and no protection of capital If you are planning to go with a mutual fund. and disclosing the net worth of the guarantor. Assume. Understand these before you commit your money to a mutual fund. will see only a 5 per cent appreciation. A direct investment in the stock would appreciate by 50 per cent. 2. For instance. the lack of investment focus also means you gain less than if you had invested directly in a single security. A scheme cannot make any guarantee of return. even mutual funds have some inherent drawbacks. In addition. However. resulting in losses to investors. this must be your mantra: mutual funds do not offer assured returns and carry risk. where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation. unlike bank deposits. without stating the name of the guarantor. This is because most closed-end funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch. Reliance appreciated 50 per cent. The past performance of the assured return schemes should also be given. mutual funds are not insured or guaranteed by any government body (unlike a bank deposit. 3. Restrictive gains Diversification helps. But your investment in the mutual fund. if risk minimisation is your objective. your investment in a mutual fund can fall in value. There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. However.avail of a 20 per cent tax exemption on an investment of up to Rs 10. which had invested 10 per cent of its corpus in Reliance. a subsidiary of the Reserve Bank of India). 1.000 in the scheme in a year Disadvantages of mutual funds Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments.
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. 4. Management risk When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers. History of Mutual Funds in India 1963 1964 1987 1993 1996 2003 Establishment of Unit Trust of India Unit Scheme 1964 launched Entry of non-UTI, Public Sector mutual funds Entry of private sector funds First Mutual Fund regulations came into being Substitution of prevalent rules by SEBI (Mutual Funds) Regulations 1996 UTI bifurcated into two separate entities 2004 Specified Undertaking of Unit Trust of India - UTI Mutual Fund Existence of 421 schemes, managing assets worth Rs. 153108
Frequently used terms
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. • Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. • Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. • Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. • Sales Load
Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. • Repurchase or ‘Back-end’Load
Is a charge collected by a scheme when it buys back the units from the unitholders.
Ch. 2- Types of mutual fund schemes A wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
a) open-ended schemes b) close-ended schemes c) interval schemes
By investment objective:
a) growth schemes b) income schemes c) Balanced schemes d) money market schemes
a) Tax saving schemes b) special schemes c) index schemes d) sector specific schemes
a) Open-ended schemes Open-ended or open mutual funds are much more common than closed-ended funds and meet the true definition of a mutual fund – a financial intermediary that allows a group of investors to pool their money together to meet an investment objective– to make money! An individual or team of professional money managers manage the pooled assets and 10
and valued by the fund company or an outside agent. This means that the fund’s portfolio is valued at "fair market" value. or send a check. usually a percentage of the net asset value. Open funds range in risk depending on their investment strategies and objectives. whenever investors put money into the fund or take it out.e. They are established by a fund sponsor. usually a mutual fund company. Since this happens routinely every day. You will generally get a redemption (sell) request processed promptly. which is the closing market value for listed public securities. but not on the stock market.. but still provide flexibility and the benefit of diversified investments. There's no limit to the number of shares the fund can issue. which create the fund’s portfolio. total assets of the fund grow and shrink as money flows in and out daily. and can be purchased or redeemed at any time. An open fund issues and redeems shares on demand. you can buy online. the more shares there will be. Some open-ended funds charge an entry load (i. allowing your assets to be allocated among many different types of holdings. Diversifying your investment is key because your assets are not impacted by the 11 . which is deducted from the amount invested.choose investments. • Buying and Selling: Open funds sell and redeem shares at any time directly to shareholders. An open-ended fund can be freely sold and repurchased by investors. • Advantages: Open funds are much more flexible and provide instant liquidity as funds sell shares daily. Nor is the value of each individual share affected by the number outstanding. and receive your proceeds by check in 3-4 days. Open funds have no time duration. because net asset value is determined solely by the change in prices of the stocks or bonds the fund owns. To make an investment. A majority of open mutual funds also allow transferring among various funds of the same “family” without charging any fees. or if you have an account with the investment firm. The price you pay per share will be based on the fund’s net asset value as determined by the mutual fund company. a sales charge). you purchase a number of shares through a representative. The more investors buy a fund. not the size of the fund itself.
But. but by investor demand. b) Close-ended schemes Close-ended or closed mutual funds are really financial securities that are traded on the stock market. and it takes a dive. The fund retains an investment manager to manage the fund assets in the manner specified. if you have all of your assets in that one stock. will raise funds through a process commonly known as underwriting to create a fund with specific investment objectives. If a stock in the fund drops in value. Information regarding prices and net asset values are listed on stock exchanges. Similar to a company.fluctuation price of only one stock. liquidity is very poor. some funds invest in certain sectors or industries in which the value of the in the portfolio can fluctuate due to various market forces. and unlike the more common open funds discussed below. • Advantages: 12 . • Risks: Risk depends on the quality and the kind of portfolio you invest in. it may not impact your total investment as another holding in the fund may be up. Shares are purchased in the open market similar to stocks. Often the share price drops below the net asset value. Share prices are determined not by the total net asset value (NAV). Also. A sponsor. either a mutual fund company or investment dealer. there is typically a five-year commitment. however. thus affecting the returns of the fund. The time to buy closed funds is immediately after they are issued. you’re likely to feel a more considerable loss. thus selling at a discount. which leads to a spurt or a fall in the portfolio value. you cannot simply mail a check and buy closed fund shares at the calculated net asset value price. a closed-ended fund issues a fixed number of shares in an initial public offering. • Buying and Selling: Unlike standard mutual funds. thus affecting your returns. which trade on an exchange. A minimum investment of as much as $5000 may apply. One unique risk to open funds is that they may be subject to inflows at one time or sudden redemptions.
Such schemes may be classified mainly as follows: a) Growth / Equity Oriented Schemes The aim of growth funds is to provide capital appreciation over the medium to longterm. By investment objective: A scheme can also be classified as growth scheme. the discount usually decreases and becomes a premium instead. capital appreciation.The prospect of buying closed funds at a discount makes them appealing to experienced investors. investors must buy a fund with a strong portfolio. income scheme. or balanced scheme considering its investment objective. Such schemes normally invest a major part of their corpus in equities. and the stock market is in position to rise. with the ability to buy at a discount. when units are trading at a good discount. and their value can fluctuate drastically. Such funds have comparatively high risks. The mutual funds also allow the investors to change the options at a later date. So one advantage to closed-end funds is that you can still enjoy the benefits of professional investment management and a diversified portfolio of high quality stocks. etc. 13 . Shares can trade at a hefty discount and deprive you from realizing the true value of your shares. closed-ended funds can be fairly volatile. The discount is the difference between the market price of the closed-end fund and its total net asset value. As the stocks in the fund increase in value. Savvy investors search for closed-end funds with solid returns that are trading at large discounts and then bet that the gap between the discount and the underlying asset value will close. The investors must indicate the option in the application form. and the investors may choose an option depending on their preferences. Depending on their investment objective and underlying portfolio. Such schemes may be open-ended or close-ended schemes as described earlier. • Risks: Investing in closed-end funds is more appropriate for seasoned investors. These schemes provide different options to the investors like dividend option. Since there is no liquidity.
The idea is to replicate the performance of the benchmarked index to near accuracy. which works out to an annualised return of 17.Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. For instance. your investment would be worth Rs 34. the riskiest of asset classes. these are: Index funds These funds track a key stock market index. their portfolio mirrors the index they track.2 per cent. it arises because the index fund charges management fees. equities have outperformed all asset classes. Hence. barring a minor "tracking error". To illustrate with an example. historically. So. However. as a fund’s performance will invariably mimic the index concerned.570. Investing through index funds is a passive investment strategy.457. Equity funds As explained earlier. there are four types of equity funds available in the market. In the increasing order of risk. With share prices fluctuating daily. In August. even losses. Usually. marketing expenses and transaction costs (impact cost and brokerage) to its unitholders. when the Sensex was at 3. if the Sensex appreciates 10 per cent during a particular period while an index fund mirroring the Sensex rises 9 per cent. such funds show volatile performance. such funds invest only in stocks.000 in an index fund based on the Sensex on 1 April 1978. like the BSE (Bombay Stock Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty. assume you invested Rs 1. both in terms of composition and the individual stock weightages. A tracking error of 1 per cent would bring down 14 . there’s a difference between the total returns given by a stock index and those given by index funds benchmarked to it. At present. these funds can yield great capital appreciation as. the fund is said to have a tracking error of 1 per cent. an index fund that tracks the Sensex will invest only in the Sensex stocks. when the index was launched (base: 100). Termed as tracking error.
On the one hand. 15 .000. astute stock-picking by a fund manager can enable the fund to deliver market-beating returns.your annualised return to 16. unlike plain diversified funds. watch out for the extent of diversification prescribed and practised by your fund manager. stick to funds that are diversified not just in name but also in appearance. high return proposition. Although by definition. So. tax-saving funds get more time to reap the benefits from their stock picks.000. The only drawback to ELSS is that you are locked into the scheme for three years. but you won’t get the Section 88 benefits for the amount in excess of Rs 10. This discretionary power in the hands of the fund manager can work both ways for an equity fund. the lower the tracking error. whose portfolios sometimes tend to get dictated by redemption compulsions. tax-saving funds are like diversified funds. such funds are meant to have a diversified portfolio (spread across industries and companies). In terms of investment profile. the better the index fund. The crux of the matter is that your returns from a diversified fund depend a lot on the fund manager’s capabilities to make the right investment decisions. on the other hand. the returns will be far lower. You can invest more than Rs 10.2 per cent. if the fund manager’s picks languish. Tax-saving funds Also known as ELSS or equity-linked savings schemes. Understand that a portfolio concentrated in a few sectors or companies is a high risk. The one difference is that because of the three year lock-in clause. you can claim a tax exemption of 20 per cent from your taxable income. If you don’t want to take on a high degree of risk. On your part.000 a year in an ELSS. Diversified funds Such funds have the mandate to invest in the entire universe of stocks. these funds offer benefits under Section 88 of the Income-Tax Act. the stock selection is entirely the prerogative of the fund manager. on an investment of up to Rs 10. Obviously.
NAVs of such funds are likely to increase in the short run and vice versa. There are basically three types of debt funds. they invest exclusively in fixed-income instruments securities like bonds. Government securities and money market instruments. most other industries alternate between periods of strong growth and bouts of slowdowns. b) Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such funds attempt to generate a steady income while preserving investors’ capital. If the interest rates fall. however. such funds can invest in the entire gamut of debt instruments. unless you understand a sector well enough to make such calls. But there is also the risk of default–a company could fail to service its debt obligations. However. Most income funds park a major part of their corpus in corporate bonds and debentures.Sector funds The riskiest among equity funds. The way to make money from sector funds is to catch these cycles–get in when the sector is poised for an upswing and exit before it slips back. These funds are not affected because of fluctuations in equity markets. A sector fund’s NAV will zoom if the sector performs well. and money market instruments such as certificates of deposit (CD). Barring a few defensive. Income funds By definition. Government of India securities. However. commercial paper (CP) and call money. The NAVs of such funds are affected because of change in interest rates in the country. as the returns there are the higher than those available on government-backed paper. 16 . long term investors may not bother about these fluctuations. debentures. the scheme’s NAV too will stay depressed. avoid sector funds. Therefore. opportunities of capital appreciation are also limited in such funds. Such funds are less risky compared to equity schemes. sector funds invest only in stocks of a specific industry. and get them right. if the sector languishes. say IT or FMCG. corporate debentures. Such schemes generally invest in fixed income securities such as bonds. Therefore. evergreen sectors like FMCG and pharma.
in normal market conditions. The ‘risk’ in debt funds Although debt funds invest in fixed-income instruments. Liquid funds They invest in money market instruments (duration of up to one year) such as treasury bills. This pushes up the NAVs of debt funds. call money. it doesn’t follow that they are risk-free. Interest rate risk arises as a result of the inverse relationship between interest rates and prices of debt securities. interest rate risk and liquidity risk. existing debt securities become more precious. they don’t face the spectre of default on their investments. in line with the new market yield. Sure. and is the prime reason why the NAVs of debt funds don’t show a steady. gilt funds tend to give marginally lower returns than income funds. If interest rates rise. • Interest rate risk: This is common to all three types of debt funds. liquid funds are the least volatile. This element of safety is why. debt funds are insulated from the vagaries of the stock market. and rise in value. if interest rates fall. Among debt funds. Prices of debt securities react to changes in investor perceptions on interest rates in the economy and on the prevelant demand and supply for debt paper. and so don’t show the same degree of volatility in their performance as equity funds. On the other hand. in turn. This. prices of existing debt securities fall to realign themselves with the new market yield.Gilt funds They invest only in government securities and T-bills–instruments on which repayment of principal and periodic payment of interest is assured by the government. They are ideal for investors seeking low-risk investment avenues to park their short-term surpluses. 17 . So. brings down the NAV of a debt fund. CPs and CDs. they face some inherent risk. Still. namely credit risk. unlike income funds. consistent rise.
and vice-versa. They generally invest 40-60% in equity and debt instruments. safety of principal and timely payment of interest is paramount. Gilt funds invest only in government paper. Liquid funds too make a bulk of their investments in avenues that promise a high degree of safety. as they invest primarily in corporate paper. An income fund that has a big exposure to lowrated debt instruments could find it difficult to raise money when faced with large redemptions. There is no credit risk attached with government paper. More so. As with credit risk. That’s not the case with income funds. though. credit risk is real. corporate securities aren’t actively traded. The ability of a company to meet its obligations on the debt securities issued by it is determined by the credit rating given to its debt paper. A higher-rated debt paper is also normally much more liquid than lower-rated paper. when you go down the rating scale–there is little demand for low-rated debt paper. gilt funds and liquid risk don’t face any liquidity risk. For income funds. the lower is the chance of the issuer defaulting on the underlying commitments. Credit risk is not an issue with gilt funds and liquid funds. which are safe. but that is not the case with debt securities issued by companies. however. • Liquidity risk: This refers to the ease with which a security can be sold in the market. c) Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. The higher the credit rating of the instrument. While there is brisk trading in government securities and money market instruments. In the case of debt instruments. These funds are also affected 18 .• Credit risk: This throws light on the quality of debt instruments a fund holds. These are appropriate for investors looking for moderate growth.
Therefore. by a third party. However. They invest in a pre-determined proportion in equity and debt–normally 60:40 in favour of equity. Returns on these schemes fluctuate much less compared to other funds. Pooled funds are offered by trust companies. preservation of capital and moderate income. they are a good option for investors who would like greater returns than from pure debt. depending on the fund’s debt-equity spilt–the higher the equity holding. insurance companies. These schemes invest exclusively in safer short-term instruments such as treasury bills. balanced funds have an exposure to both equity and debt instruments. Pooled funds. Pooled funds and mutual funds are substantially the same. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. like mutual funds. A pooled fund operates like a mutual fund. a pooled fund is a trust that is set up under a "trust indenture". On the risk ladder. Other types of funds Pooled Funds A "pooled fund" is a unit trust in which investors contribute funds that are then invested. they fall somewhere between equity and debt funds. The trust indenture specifies an investment policy for the pooled fund and how management fees will be charged. and other organizations. but differ in their legal form. government securities. etc. commercial paper and interbank call money. Like a mutual fund. certificates of deposit. investment management firms. the higher the risk. or managed. but is not required to have a prospectus under securities law. As the name suggests. This specifies how the pooled fund will operate and what the duties of the various parties to the trust indenture will be.because of fluctuations in share prices in the stock markets. 19 . NAVs of such funds are likely to be less volatile compared to pure equity funds. and are willing to take on a little more risk in the process. d) Money Market or Liquid Fund These funds are also income funds and their aim is to provide easy liquidity.
by specific exemptions granted under the Securities Act. Pooled fund fees are usually lower than mutual funds. Publicly issued securities must meet certain requirements before issue.are "unit trusts". particularly in information disclosure through their prospectus. or "sophisticated investor". A "closed" pooled fund does not allow redemptions.000. such as custody and unit recordkeeping. Once a client is invested in a pool fund. Securities legislation define the rules for a "public" security. as these funds are created to deal with larger investors. Each pooled fund investment must be reported to the relevant Securities Commission. which means investment and trading in pooled funds is restricted. Fees for pooled funds can either be charged inside or outside the fund. and the trust indenture provides for the sponsor. An "open" pooled fund is the most common type of pooled fund. or reporting by issuers. This means that investors deposit funds into the trust in exchange for "units" of the fund. as well as. Pooled funds can be either "closed" or "open". Closed pooled funds are usually established to hold illiquid investments such as real estate or very specialized investment programs. This means that investments in pooled funds must be over $150. Pooled funds are allowed to charge their expenses from operations against the fund assets. Pooled funds are not "public" investments. and allows units to be redeemed at scheduled valuations. The fund trust indenture will specify how units are issued and redeemed. the result is identical to being in a mutual fund with the same investment mandate. 20 . except in specific circumstances or at termination of the trust. which reflect a pro-rata share of the fund's investments. as there tends to be less activity with fewer and more sophisticated pooled fund investors. trust companies or investment counselling firms are allowed to invest their clients in their own pooled funds. to hire outside agents to perform certain tasks. Valuation of pooled funds can be less frequent. such as hedge funds. or trustee. usually under the "private placement". the frequency and procedures for valuations. Pooled funds are exempt from prospectus requirements under securities law. The major difference between pooled funds and mutual funds is their legal status under securities law. Financial institutions such as banks. clauses in the Securities Act.
Although insurance companies "segregate" the assets to support these contracts.Insurance Segregated Funds An insurance segregated fund is an insurance contract issued under insurance legislation by an insurance company. An insurance segregated fund is an insurance contract or a "variable rate annuity". Another wrinkle of segregated funds is their tax status. Insurance companies "segregate" the portfolios which these contracts are based on. The unitholders own the trust which in turn owns the assets. A mutual fund is a trust. The buyer or "policy holder" has contracted for a payment that is based on the underlying prices of the portfolio that supports the contract but does not have a direct claim or ownership on the securities that form the portfolio. The contract can be issued with an initial "book value" that the company can agree to pay no matter what the actual value of the portfolio supporting the contract. Since they are insurance contracts. such as stocks and bonds. or sometimes a company. the company agrees to pay no less than the book value which is known as the "minimum value guarantee" or the "higher of book or market". which owns title to the actual securities in the funds. Since marketable securities increase over longer periods of time it becomes less important over time. but that it is actually something quite different. the price at which they were issued. dividing these assets from their general assets. The contracts have a minimum value. Legally. Initially. a segregated fund is an obligation of an insurance company and forms part of its assets. they are taxed as such. the holder of the contract does not own these assets. this guarantee feature has some value. If the market value of the portfolio falls below the book value. As an insurance contract. the insurance company issues the contract the same way it would an annuity or life insurance policy under the relevant insurance legislation. It is important to realize that a insurance segregated fund might look and act like a mutual fund. The insurance contract nature of a segregated fund makes for an interesting feature that insurance companies often use in their marketing. Its value is based on the performance of a portfolio of marketable securities. Sometimes segregated funds are used as investment options for "universal" or "whole life" life insurance which provides a savings option as 21 .
they are more risky compared to diversified funds. an insurance contract is not available to creditors in a bankruptcy. which allow compounding of investment income untaxed while inside the insurance contract. UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and Exchange Board of India for an omnibus fund that will have six options. It will have sub-funds that will focus on large-cap stocks.well as insurance. mid-cap stocks. Pharmaceuticals. Life companies market the tax shelter aspects of these contracts. for example. Software. While these funds may give higher returns. In Canada. banking. As always. UTI now has a UTI Growth Sectors Umbrella with five 22 . they are actually insurance contracts based on the valuation of a portfolio of marketable securities. It is best to opt for a broad investment mandate that is best championed by well-diversified equity funds. Thematic funds are those fund which invest in a stocks which will benefit from a particular theme like Outsourcing. Infrastructure etc. auto. investors are wise to consider all the aspects of insurance contracts in their legal jurisdiction prior to investment. Petroleum stocks. This means an RRSP that uses segregated funds would be protected from creditors in a bankruptcy while an RRSP which invested in mutual funds would be exposed. In summary. etc. PSU stocks and basic industries. Fast Moving Consumer Goods (FMCG). although insurance segregated funds look and function like mutual funds.g. The returns in these funds are dependent on the performance of the respective sectors/industries. Restrain the urge to invest in sector/thematic funds no matter how compelling an argument your agent or the fund house makes. Another sales aspect of segregated funds is their characteristics under bankruptcy legislation in some jurisdictions. The UTI Thematic Fund is the umbrella fund. e. there is little value that a restrictive and narrow theme can bring to the table. a) Specific Sectoral & Thematic funds /schemes These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. Over the long-term.
appreciation.options that focus on investing in stocks in the services. information technology. and consumer products. 23 . date and stop loss. The new fund also proposes to provide investors four automatic triggers that could be used for exit: value. petro. healthcare pharmaceuticals.
Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations. The sponsor establishes the mutual fund and registers the same with SEBI. is mandatory to have a three tier structure of Management Company. Sponsor must have a 5-year track record of business interest in the financial markets. Sponsor-Trustee-Asset Sponsor Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. 3. custodians and the AMC with prior approval of SEBI and in accordance with SEBI Regulations.Organization of a Mutual Fund The structure of mutual funds in India is governed by SEBI (Mutual Fund) Regulations. Sponsor appoints the Trustees. 1996. Trust 24 .Ch. 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. Sponsor must have been profit making in at least 3 of the above 5 years. In India.
The trust deed is registered under the Indian Registration Act. The AMC must have a net worth of at least 10 crore at all times. 1996. The Registrar and Transfer agent also handles communications with investors and updates investor records.The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act. The Registrar processes the application form. trust company. or other organization which holds and safeguards an individual's. bank. Registrar and Transfer Agent The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. redemption requests and dispatches account statements to the unit holders. Trustee Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). 1882 by the Sponsor. Asset Management Company (AMC) The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. the provisions of the Trust Deed and the Offer Documents of the respective Schemes. 1908. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. Custodian A custodian is an agent. mutual fund's. 25 . or investment company's assets for them. The main responsibility of the Trustee is to safeguard the interest of the unit holders and inter alia ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner.
it’s another to ride on this potent investment vehicle to create wealth in tune with your risk profile and investment needs. check if the investor’s objective matches yours. The offer document contains essential details pertaining to the fund. • Identifying the investment horizon How long on an average does the investor want to stay invested in a fund is as important as deciding upon your risk profile.Fund Management Style & Structuring of Portfolio Factors affecting Management style of a scheme It’s one thing to understand mutual funds and their working. It gives investors access to the fund’s portfolio. Investors look out for the Offer Document and Hey Information Memorandum (KIM) before they commit their money to a fund. • Knowing the profile Investor’s investments reflect his risk-taking capacity. So. Investors will invest only after they have found their match. its diversification levels 26 . For income and gilt funds. • Declare and Inform Watch what you commit. Here are seven factors that go a long way in helping an AMC meet its investor’s investment objectives. including the summary information (type of scheme.Ch. 4. have a one-year perspective at least. Investors would invest in an equity fund only if they are willing to stay on for at least two years. the only option among mutual funds is liquid funds. they seek expert advice from a qualified financial advisor. • The fund fact sheet Fund fact sheets give investors valuable information of how the fund has performed in the past. Equity funds might lure when the market is rising and peers are making money. Anything less than one year. but if you are not cut out for the risk that accompanies it. If they are racked by uncertainty. The factors listed below evaluate factors affecting the management style of a mutual fund scheme. investment objectives and investment procedure. name of the asset management company and price of units. among other things). financial information and risk factors. don’t bite the bait.
Many amateur investors get lured into such incentives and invest in such attractive schemes. The performance of the fund measured by the risk adjusted returns produced by the investor arises largely by successful portfolio management function. portfolio management is a ‘specialist’ function. debt or balanced fund. The more fact sheets they examine. else. and is a performer. Now how a fund manager manages the portfolio would depend on the type of the fund he is managing. they would diversify across fund houses. in the form of a percentage of the investor’s initial investment. From the investors’ perspective. The ideal investor’s focus would be to find a fund that matches his investment needs and risk profile. which may not meet their future expectations. The funds can be broadly classified as equity funds and debt funds. to invest in a particular fund. However. 27 . effective portfolio management will have to give returns acceptable to the investor. be it in an equity. That way.and its performance in the past. • Diversification across fund houses If Investors are routing a substantial sum through mutual funds. the better is their comfort level. They do track your investment on a regular basis. • Chasing incentives Some financial intermediaries give upfront incentives. in the complex world of financial markets. they spread their risk. the need for successful portfolio management function is obviously paramount. Portfolio management is an important foundation of mutual fund business. • Tracking investments The investor’s job doesn’t end at the point of making the investment. the investor may move to better performing funds. After collecting the investors’ funds.
An equity portfolio manager’s task consists of two major steps: a) Constructing a portfolio of equity shares or equity linked instruments that is consistent with the investment objective of the fund and b) Managing or constantly re-balancing the portfolio to produce capital appreciation and earnings that would reward the investors with superior returns. shares of one company may be very different in terms of their potential than shares of other companies. Thus. in order to construct his portfolio? The general answer is that his choice of shares to be included in fund’s portfolio must reflect the investment objective of the fund. it is called as an equity fund. the equity portfolio manager will choose from a universe of invisible shares in accordance with: a) The nature of the equity instrument. and b) A certain ‘investment style’ or philosophy in the process of choosing. Indian economy is going through a period of both rapid growth and rapid transformation.Equity Portfolio Management: When the fund contains more than 65% equity. the group of stocks selected will have certain unique characteristics. Thus. So how does the fund manager go about choosing the different types of stocks. more specifically. such that the portfolio as a whole is consistent with the scheme’s objectives. warrants or convertible debentures issued by many companies. However. in reality. chosen in accordance with the preferred investment style. Even within each category of equity instruments. How To Identify Which Kind Of Stocks To Include? The equity portfolio manager has available to him a whole universe of equity shares and other instruments such as preference shares. the industries with the growth prospects or blue chip shares of yesterday are no longer certain to continue to be in that category tomorrow. Thus such type of a fund would need equity portfolio management. you may see a mutual fund’s equity portfolio include shares of diverse companies. “New” sectors like software or 28 . or a stock’s unique characteristics.
when converted. the stock selection task of an active fund manager in India is by no means simple or limited. these are fixed rate debt instruments that are converted into specified number of equity shares at the end of the specified period. If preference shares are cumulative. Clearly. unpaid dividends for years of inadequate profits are paid in subsequent years. Preference shares do not entitle the holder to ownership privileges such as voting rights at the meetings. convertible debentures are debt instruments until converted. Convertible Debentures: As the term suggests. Losses as well as the profits are shared by the equity shareholders. In this process of rapid change.technology stocks have matured and newer sectors such as biotechnology are now making an entry in the investment markets. equity share are a risk investment. Warrants are in the nature of options on stocks. Preference Shares: Unlike equity shares. preference shares entitle the holder to dividends at the fixed rates subject to availability of profits after tax. We will therefore. 29 . Ordinary shares: Ordinary shareholders are the owners if the company and each share entitles the holder to ownership privileges such as dividends declared by the company and voting rights at the meetings. review how different stocks are classified according to their characteristics. Equity Warrants: These are long term rights that offer holders the right to purchase equity shares in a company at a fixed price (usually higher than the current market price) within specified period. bringing with them the potential for capital appreciation in return for the additional risk that the investor undertakes. Without any guaranteed income or security. they become equity shares.
at least in the past. b) Classification in terms of Anticipated Earnings In terms of anticipated earnings of the companies. There are Large Capitalization Companies.e.EQUITY CLASSES: Equity shares are generally classified on the basis of either the market capitalization or the anticipated movement of company earnings. the tax plan of ICICI Prudential AMC is essentially a mid-cap fund where as the tax plan of Reliance is large-cap fund. a) Classification in terms of Market Capitalization Market Capitalization is equivalent to the current value of a company. In India. Cyclical Stocks are the shares of companies whose earnings are correlated with the state of the economy. current market price per share times the number of outstanding shares. 30 . Large Cap shares are more liquid and hence easily tradable. Mid or Small Cap shares may be thought of as having greater growth potential. What matters to the fund managers is the potential dividend yields based on earning prospects. For example. Dividend Yield for a stock is the ratio of dividend paid per share to the current market price. The stock markets generally have different indices available to track these different classes of shares. Mid – Cap Companies and Small – Cap Companies. Different schemes of a fund may define their fund objective as a preference for the Large or Mid or the Small Cap Companies’ shares. it is imperative for the fund manager to understand these elements of the stocks before he selects them for inclusion in the portfolio. i. investors have indicated the preference for the high dividend paying shares. shares are generally classified on the basis of their market price relation to one of the following measures: Price/Earning Ratio is the price of the share divided by the earnings per share and indicated what the investors are willing to pay for the company’s earning potential.. Young and fast growing companies usually have high P/E ratios and the established companies in the mature industries may have lower P/E ratios.
Growth Stocks are shares of companies whose earnings are expected to increase at the rates that exceed the normal market levels.e. Approaches to Portfolio Management (Fund Management Style): Mutual funds can be broadly classified into two categories in terms of the fund management style i. 31 . this investment style would make the funds manager pick and choose those shares for investment whose earnings are expected to increase at the rates that exceed the normal market levels. actively managed funds and passively managed funds (popularly referred to as index funds). ii) Value Investment Style: wherein the funds manager looks to buy shares of those companies which he believes are currently under valued in the market. however. Value Stocks are share of companies in mature industries and are expected to yield low growth in earnings. Actively managed funds are the ones wherein the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. have assets whose values have not been recognized by investors in general. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns. but whose worth he estimates will be recognized in the market valuation eventually. in active fund management two basic fund management styles that are prevalent are: i) Growth Investment Style: wherein the primary objective of equity investment is to obtain capital appreciation. these companies may. they tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio. funds manager may try to identify such currently undervalued stocks that in their opinion can yield superior returns later. and in the process outperform the designated benchmark index.
investing in actively managed funds demands a deeper review and understanding of the fund house's investment philosophy. The active-passive tradeoff Categories Index funds S&P CNX Nifty BSE Sensex Average category returns 1-Yr (%) 3-Yr (%) 5-Yr (%) 40. Broadly speaking. passively managed funds/index funds are aligned to a particular benchmark index like the S&P CNX Nifty or the BSE Sensex.75 39. In the Indian context.a large cap/mid cap/small cap fund among others. This could be attributed to the fact that the Indian markets are still in an evolutionary phase and there exist a number of inefficiencies.05 . over varied time frames.On the contrary. the expense ratio and the tracking error (i. index funds occupy a smaller share of the market. Well-managed actively managed funds have been successful in outperforming index funds by a huge margin.22 32. investors need to consider two important aspects i.91 38.32 33. The endeavor of these funds is to mirror the performance of the designated benchmark index. by investing only in the stocks of the index with the corresponding allocation or weightage.e.37 30.50 44.38 41. the difference between the returns clocked by the designated index and index fund). Investing in index funds is less cumbersome as compared to investing in actively managed funds. These inefficiencies are in turn utilized by competent fund managers to outperform the index. the mutual fund industry is dominated by actively managed funds.e.20 Actively managed funds 29. A study was conducted wherein category averages of index funds (passive funds) were compared with those of diversified equity funds (active funds). also the investor needs to decide on the kind of funds he wishes to invest in . Conversely.96 35.05 30. This explains why many actively managed funds manage to outperform the index over the long-term (3-5 years).91 32 32.
if he expected a fall in market prices. diversified equity funds (38. The degree of outperformance further widens over 5-Yr. diversified equity funds have stolen the march over index funds powered by a strong showing. Not all actively managed funds are invest-worthy and capable of generating superior returns vis-à-vis benchmark indices (passively managed funds). however. In a nutshell. or on a given market index. diversified equity funds (41. NAV data as on February 8. 33 . causing his fund NAV to drop. without selling the stocks in the cash markets. such derivative contract may be based on individual share/scrips. a fund manager in India had no option but to sell his stocks. but derive their value from the underlying equity asset. index funds (40. equity portfolio managers have instruments available to them. It's the opposite over longer time frames (3-5 years). which permit them to reduce the loss in portfolio value. Until recently. a futures contract allows one to buy or sell the underlying asset at a specified future date. in the Indian context. However over longer time frames (3-Yr and 5-Yr). Growth over 1-Yr is compounded annualised) The results are quite interesting. Over 3-Yr.38 per cent). Use of Equity Derivatives for Portfolio Risk Management: An equity portfolio manager is always exposed to the risk that market prices of equities will decline.75 per cent) aligned to the BSE Sensex have comfortably outscored diversified equity funds (29. where actively managed funds rule the roost. Over the 1-Yr time frame.37 per cent CAGR) have outperformed index funds (32.91 per cent CAGR). However the same should not be seen as a blanket recommendation for actively managed funds.05 per cent CAGR) fare better than index funds (32.(Source: Credence Analytics. Equity Derivatives instruments are specially designed contracts that are traded separately on an exchange. 2007.05 per cent). index funds have proven their mettle over shorter time frames. Since the year 2000. the two basic types of exchange traded derivative instruments are Futures and Options.
if the market prices actually rose. our fund manager will not gain. he can forgo the premium and not exercise the option. This way he can still let his portfolio NAV. if the prices actually rise. Options. can be used to hedge an investment portfolio – by buying put options (or options to sell underlying asset) at a price (the premium).but being a traded instrument. contrary to the expectations. but his futures contract will show corresponding profit. if the price does not move in the direction you expected. he can sell the index futures at the current price for future delivery. too. if a funds manager holds an equity portfolio and expects the market to decline. this is called “hedging” portfolio risk. Successful Equity Portfolio Management: 34 . in this case. How does a fund manager use these futures and options contracts as a risk management instruments? Broadly. the rise in his equity portfolio value will be neutralized by the loss on his futures position. if the market did decline. while protecting the downside risk. however. the fund manager would not have any loss due to market decline. you would pay a premium for the acquisition of this right. since he had sold it at the higher past price. since he has the right to sell at a higher price. since he had sold futures at lower price relative to the current market levels. the contract can be liquidated without reaching its maturity date and so without taking or giving delivery of the underlying asset. whereas an options contract gives its holder the right to buy or sell the Nifty or Sensex index or the individual scrip for a future delivery at a certain strike price. but are not obliged to exercise that option. his equity portfolio value will come down. The funds manager can exercise the option only if the prices fall. Options contracts are available on both the market index and the individual shares. a futures contracts is an outright purchase for a future date.
generally up to one year. some schemes regarded as debt schemes do have maturity period a little 35 . the portfolio manager must avoid the temptation to invest into very large number of securities so as to maintain focus and facilitate sound tracking. although diversification is a major strength of mutual funds.Portfolio Management skills are innate in nature and strong intuitive traits from the portfolio manager. Nevertheless. • Develop a flexible approach to investing. Debt schemes of a mutual fund have a short maturity period.e. Be aware of the level of flexibility available while managing the portfolio. the time frame for the investment and economic expectations over this period. i. there are certain principles of good equity management that any portfolio manager can follow to improve his performance. • • Develop an investment strategy based on the investment objective. Just as the equity fund manager has to identify suitable stocks from a larger universe of equity shares. Avoid over – diversification. Markets are dynamic and it is impossible to buy ‘stocks for all seasons’ Debt Portfolio Management: Debt portfolio management has to contend with the construction and management of portfolio of debt instruments. a debt fund manager has to select from a whole universe of debt securities he wants to invest in. nevertheless. whether to capitalize on economic cycles. with the primary objective of generating income. • • • Set realistic target returns based on appropriate benchmarks. Decide on appropriate investment philosophy. or to focus on the growth sectors or finding the value stocks..
while those issued by financial institutions have maturities between one and three years. a debt fund invests mainly in instruments that yield a fixed rate of return and where the principal is secure. maturity varies between 3 months and 1 year. companies and other corporate bodies registered or incorporated in India. Commercial Paper: Commercial Paper (CP) is a short term. unsecured instrument issued by corporate bodies (public and private) to meet short term working capital needs. depending upon the maturity period of the scheme. this instrument can be issued to the individuals. banks. the funds managers invest more in “market-traded instruments” or the “debt securities”. as secured instruments. Certificate of Deposit: Certificate of Deposits (CD) are issued by scheduled commercial banks excluding regional rural banks. they are assigned credit rating by the rating agencies. eighteen months. 36 . thus in the context of “debt” mutual funds. in the form of certificates. Instruments in Indian Debt Market: the objective of a debt fund is to provide investors with a stable income stream. the difference in market-traded instruments and debt securities is that the former matures before one year and the later after a year. hence. CPs can be issued to NRIs on non – repatriable and non – transferable basis. bank CDs have a maturity period of 91 days to one year. the debt market in india offers the following instruments for investment by mutual funds. these are unsecured negotiable promissory notes.longer than a year. say. Corporate Debentures: Debentures are issued by manufacturing companies with physical assets. all publicly issued debentures are listed on the exchanges.
Floating Rate Bond (FRB): these are short to medium term interest bearing instruments issued by financial intermediaries and corporations. Debt Investment Strategies – An Aid for Debt Portfolio Management: let us have a look at some debt investment strategies adopted by the debt portfolio managers. these treasury bills are issued through an auction procedure. the yield is determined on the basis of bids tendered and accepted. UTI and many of the other mutual funds tended to invest in high yielding debt securities that gave adequate returns on the overall portfolio. the RBI issues T-bills for tenures: now 91 days and 364 days. the minimum maturity is 5 years for taxable bonds and 7 years for tax-free bonds. FRBs issued by the financial institutions are generally unsecured while those form private corporations are secured. the returns are 37 . in India. Treasury Bills. Buy and Hold: historically. the typical maturity is of these bonds is 3 to 5 years. PSU bonds are generally not guaranteed by the government and are in the form of promissory notes transferable by endorsement and delivery. Government Securities: these are medium to long term interest – bearing obligations issued through the RBI by the Government of India and state governments. Public Sector Undertakings (PSU) Bonds: PSU are medium and long term obligations issued by public sector companies in which the government share holding is generally greater than 51%. T-bills are short term obligations issued through the RBI by the Government of India at a discount. some PSU Bonds carry tax exemptions.
if yields rise. usually. it will incur a capital loss on its portfolio as and when revalued to current market price. if bond yields are expected to fall. prepayment or credit risks that are faced by any debt fund. Therefore. this strategy involves altering the average duration of bonds in a portfolio depending upon the fund manager’s expectations regarding the direction of interest rates. it does not take away the interest rate. it is akin to the Market Timing Strategy for equity investments. is the risk of default by the issuer. the fund manager would buy the bonds with longer duration and sell bonds with shorter duration. the price of bonds will fall. hence. Credit Selection: some debt managers look to investing in a bond in anticipation of changes on ots credit rating. to counter the prepayment risk. the fund would need to analyze the bond’s credit quality so as to implement this strategy. it has to be understood the strategy holds good as long as the general interest rate level are stable. based as the strategy is on interest rate anticipations. debt funds will specify the proportion of assets they will hold in instruments of different credit quality/ratings. active credit selection strategy would imply frequent trading of bonds in anticipation of changes in ratings. and hold these proportions.considered sufficient to reward the investors. an upgrade of a bond’s credit rating would lend to increase in its price. Prepayment Prediction: 38 . particularly if its maturities are long. Duration Management: if Buy and Hold is like Passive Fund Management. the funds would just encash the coupons and hold the bonds until maturity. thereby leading to a superior return. while the fund may generate sufficient current income according to original target. Duration Management is like Active Fund Management. these fund managers will tend to avoid bond with call provisions. while being an active risk management strategy. until the fund’s average duration becomes longer than the market’s average duration. another risk on the portfolio.
hence. the consequent change in exchange rates can affect interest rate levels in the country. or try to predict the course of the interest rates and decide what the prepayment is likely to be. as their price is directly dependent on them. and/or on account of changes in the country’s external balance of payments position. a fund which holds bonds with this provision is exposed to the risk of high yielding bonds being called back before maturity when interest rates decline. Exchange Rate: a key factor in determining exchange rates between any two currencies is their relative purchasing power. leading to an increase in the general level of interest rates. their market values are dependent on interest rate movements. inflation is generally measured by the Wholesale Price Index although t he Consumer Price Index is also tracked. the relative purchasing power between two currencies may change based on the performance of the respective economies. money becomes dearer. what matters at the end is the yield performance obtained by the fund manager. mechanisms for distribution of goods. while they may yield fixed rates of returns. this increase may be on account of factors arising within the country – change in production levels. 39 . etc. the fund manager would therefore strive to hold bonds with low prepayment risk relative to yield spread. the risks faced by such fund managers are the same as any other. Over a period. which in turn affect the performance of fund portfolio of which they are a part. debt securities are always exposed to interest rate risk. while this is an intricate subject in itself. we have summarized below some key elements that have a bearing on interest rate movements: Inflation: simply put. Interest Rates and Debt Portfolio Management: no matter which investment stragtegy is followed by a debt fund manager. it is essential to understand the factors that affect the interest rates. inflation is the percentage by which prices of goods and services in the economy increase over a period of time. and then increase or decrease his exposure. when the inflation rate rises.As noted earlier some bonds allow the issuers the option to call for redemption before maturity. in any case. in india .
it could impose a higher liquidity ratio on banks and institutions. interest rate swaps and forward rate agreements were introduced in 1999. in 2004. if the RBI wishes to curb excess liquidity in a monetary system. This would restrict credit leading to an increase in interest rates. thereby impacting the interest rates. in india. interest rate options are not yet available for trading on exchange. this role is played by the Reserve Bank. and increase in RBI’s bank rate has the effect of increasing interest rate levels. 40 . Similarly. though the market for these contracts has not yet fully developed. he can also buy or sell forward contracts or swaps bilaterally with other market players on OTC market. in India. RBI may also undertake open operations in Treasury Bills and Government securities with the intention of restricting / relaxing liquidity. to protect the value of his debt portfolio. a debt portfolio is always exposed to the interest rate risk. the RBI’s policies have a strong bearing on interest rate levels in the economy.Policies of the Central Bank: the central bank is the apex authority for regulation of the monetary system in a country. Use of Derivatives for Debt Portfolio Management: as explained above. interest rate derivatives contracts can be exchange traded or privately traded (on the OTC market). usually on an exchange. thus. a portfolio manager can sell interest rate futures or buy interest rate ‘put’ options. derivatives contracts can be used to reduce or alter the risk profile of the portfolios containing debt instruments. the National Stock Exchange has introduced futures on Interest Rates. hence.
there is a huge buzz about the Great Indian Gold Rush and its three themes -. consumption-led categories like the retail industry and outsourcing companies. and Telecom etc. metals. 5. Infrastructure. New initiatives such as Public-Private participation.Individual Scheme Analysis Section I. covers several sectors like power utilities.Thematic Funds.Ch. consumption and outsourcing. it will also require private participation to make significant progress on developing infrastructure. power. Power. infrastructure funds have caught the fancy of a lot of mutual funds. power equipment and construction companies. Ports. etc. Infrastructure funds are part of a mutual fund category called thematic funds. information technology. While sectoral funds invest in particular sectors like. as a theme. India needs to invest large amounts in areas like Roads. increase in FDI limits and adequate funding support from the government have provided a tremendous boost to the system and therefore companies engaged in this sector have delivered robust performance in the last couple of years. Unlike technology sector mutual funds (at best. Today. technology sector funds could buy stocks from telecom and media besides the software stocks it traditionally invests in). thematic funds invests in themes like infrastructure. oil and gas. Apart from government spending. Of these three. many new funds have been launched in this category in the last couple of years. say.infrastructure.Infrastructure Mutual funds constantly come out with different schemes. 41 . infrastructure funds are not restricted to a few sectors. to sustain high economic growth. We have made an attempt to compare the thematic infrastructure schemes of a few AMCs.
31st Aug./Unit) NAV (as on 30th April. 10 Growth option : Rs.91 Rs. 1. 5000 1. 2005 Rs.19 Dividend option : Rs. 19.81 Crores Rs. 14. 2007) money market instruments including call money.711.93% S&P CNX Nifty Minimum Investment Expense Ratio Benchmark Style Box: 42 .ICICI Prudential Infrastructure Fund Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Sankaran Naren To provide capital appreciation distribution the to unit holders to and by income investing predominantly in equity/equity related securities of companies belonging infrastructure development and the balance in debt securities and Inception Date Fund Size Face Value (Rs.
Call.29 Power 5.77 Dredging 2. CBLO & Reverse Repo Portfolio as on 30th April.67 Cash.43 Transportation 2.59 Telecom Services 2.12 Other Current Assets 0.3 Construction 8.Portfolio: Portfolio as on 30th April.1 43 Term Deposits 10.21 Non-Ferrous Metals 1. Call.07 Ferrous Metals 13.07 Total 100 .32 Cement 0. 2007 1% 3% 2% 6% 7% 11% 5% 0%4% 12% 0% 9% 2% 14% 6% 2% 5% Auto Ancillaries Cement Dredging Hotels Industrial Products Oil Power Transportation Term Deposits Other Current Assets 9% 2% Banks Construction Ferrous Metals Industrial Capital Goods Non-Ferrous Metals Petoleum Products Telecom Services CPs & CDs Cash.91 Petoleum Products 7. CBLO & Reverse Repo 5.41 Industrial Products 5.1 Industrial Capital Goods 9.6 Hotels 2.52 Oil 5.72 Banks 12. 2007 (% to NAV) Auto Ancillaries 3.8 CPs & CDs 1.
The portfolio is skewed towards large cap as the fund seeks to maximize the 44 . The fund normally holds 35-40 stocks in its portfolio spread across 14-20 sectors. Reliance Industries. BHEL. the scheme enjoys the benefits of investing in the booming services sector. SAIL. Tata Steel. as holdings in Ferrous Metals (Sesa Goa) has been replaced with Tata Steel. Due to this. Closely analyzing the equity portfolio. It is noticed that exposure to Auto has been reduced to zero. Jindal Steel. It is a multisector fund and therefore has a much lesser concentration risk than a typical sector fund. This points out that the fund manager is able to recognize the growth potential of the Banking sector in the Indian context. Tata Power. Approximately 83% of the funds are invested in equities of infrastructure related companies. The portfolio consists of several well-reputed companies of India viz. etc. we notice that a considerably high investment has been made in the banking sector. a large number when compared to most other thematic funds.Understanding the portfolio: The fund is well diversified in both its stock and sectoral exposures.
risk-return payoff. what distinguishes it from a typical sector fund is its pervasive definition of the infrastructure sector. Performance Record Our View The fund largely invests in equities from the infrastructure sector. 45 . UTI. The Scheme also exhibits term-deposits. The fund house has taken the liberty of including sectors like banking & financial services among a host of others for defining its area of investment. However. 10000 invested at inception vis-àvis the benchmark performance. Comparing the Benchmark The graph below indicates the movement of Rs. IDBI etc. CPs & CDs to reputed organizations like Allahabad Bank.
the fund can add value to informed investors who have a view on the infrastructure sector and a flair for medium to high risk investment avenues. In our opinion. it may also prevent spectacular performance from one or two of its stocks from showing up in the performance.The large number of stocks in the portfolio may reduce the fund's vulnerability to the fluctuations in each of its holdings. 46 . The scheme’s portfolio strategy is governed by its investment objective. However.
engineering etc. 812. 2004 Rs. 18./Unit) NAV (as on 30th March.UTI Infrastructure Fund Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Sanjay Dongre To provide Capital appreciation through investing in the stocks of the companies engaged in the sectors like Metals. 9th March. 10 Growth option : Rs. 25. power. 5000 BSE 100 Minimum Investment Benchmark Style Box: Portfolio: 47 . The fund will invest in the stocks of the companies which form part of Inception Date Fund Size Face Value (Rs. oil and gas. Building materials. 2007) Infrastructure Industries.99 Dividend option : Rs.99 Rs.19 Crores Rs. chemicals.
Portfolio as on 30th March. 2007 (% to NAV) Industrial Capital Goods 32.16 Total 100 Understanding the Portfolio 48 .06 Cement 7.44 Oil 3.56 Power 6.85 Finance 2. 2007 (% to NAV) Industrial Capital Goods Construction Cement Net Current Assets Ferrous Metals Industrial Products Unclassified Auto And Ancillaries Chemicals Telecommunications -service Petroleum Products Power Oil Finance Consumer Durables Deposit With Bank Consumer Non Durables Non-ferrous Metals Portfolio as on 30th March.83 Chemicals 0.74 Ferrous Metals 2.51 Non-ferrous Metals 0.54 Petroleum Products 9.95 Consumer Non Durables 0.37 Construction 9.29 Consumer Durables 2.17 Deposit With Bank 1.22 Telecommunications -service 11.62 Industrial Products 2.28 Unclassified 2.32 Net Current Assets 4.09 Auto And Ancillaries 0.
The scheme’s performance is highly linked with the overall economic growth of the country as the sectors in which the scheme invests are directly linked to the GDP growth of India. the fund has under performed its benchmark index BSE 100. closely followed by communication sector. This indicates higher exposure to company-specific risk. which has resulted in the underperformance.UTI Infrastructure Fund is positioned to follow a top down approach keeping in mind the economic scenario. Engineering & 49 . the risk in such a scheme may be perceived as higher. which are expected to perform better and select fundamentally strong companies in those sectors. The Fund portfolio reveals heavy investment in Basic/Engineering sector. The scheme’s performance is highly linked with the overall economic growth of the country as the sectors in which the scheme invests are directly linked to the GDP growth of India. Comparing the Benchmark: Our View: The scheme has invested in equities of on 20-25 companies. it has a relatively very low investment in the rapidly growing Auto Ancillaries sector. Further. During the month of March 2007. Although. Due to this. The ongoing monetary tightening in the economy has negative impact on sector. The fund’s endeavour is to pick sectors. The fund has invested almost 93% of its corpus in Equities.
Construction companies are likely to show strong quarterly numbers as well as strong order book position. which are more than 2-3 times of yearly revenues in coming quarters. 50 .
311 Rs. which could benefit from structural changes brought about by continuing liberalization in economic policies by the Government and/or from continuing investments in infrastructure. seeking to generate capital appreciation.E. 2007) both by the public and private sector 27th April.86 Crores Rs.Rs.DSP Merrill Lynch T.G.Rs. 19.R Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Soumendra Nath Lahiri An open ended diversified equity Scheme. 5000 BSE 100 Minimum Investment Benchmark Style Box: Portfolio: 51 . 10 Growth .I. from a portfolio that is substantially constituted of equity securities and equity related securities of corporates. 2004 Rs. 34./Unit) NAV (as on 30th April. 1499.1240 Dividend . Inception Date Fund Size Face Value (Rs.
95 Non-Ferrous Metals 0.11 Construction 8.74 Finance 4.83 Banks 7.42 Debt Instruments 2.72 Textiles & Textile Products 0.67 Transportation 3. 2007 Industrial Capital Goods 20.65 Engineering 0.48 Total 100 Understanding the Portfolio: 52 .66 Oil 3.47 Ferrous Metals 5.Portfolio as on 30th April. 2007 Industrial Capital Goods Petroleum Products Power Telecom Services Finance Industrial Products Cement Retailing Textiles & Textile Products Consumer Durables Cash & Cash Equivalents Construction Banks Media & Entertainment Ferrous Metals Transportation Oil Pharmaceuticals Engineering Non-Ferrous Metals Debt Instruments Portfolio as on 30th April.9 Petroleum Products 7.73 Pharmaceuticals 2.51 Cash & Cash Equivalents 1.63 Power 7.45 Consumer Durables 0.94 Industrial Products 3.22 Media & Entertainment 6.97 Telecom Services 6.57 Retailing 1.38 Cement 2.
I. DSP India T. is the first fund of its kind that covers infrastructral areas. which the Fund aims at capturing. The fund reduced exposure to the cement sector earlier this year.R.R. consisting of about 61 stocks. Fund was launched at a very opportune time when the Sensex was around 7. giving the common investor a chance to make the most of the ongoing economic reforms. on an average.G. NAV has grown 18 per cent for the past year and outpaced its benchmark BSE-100 by 3 percentage points.E.I.R's. on the back of continuing economic reforms.5 per cent. The Fund House is very bullish on the Indian Economy and believes that the improved GDP growth in the future shall strengthen the markets further. accounted for 23 per cent of the portfolio the past year and the top three sectors cornered 40 per cent of the assets. The Scheme began with a decent corpus of around Rs 200 crores and has been able to accumulate Rs 1.E.E. DSP India T.E.007 crores as of May 2006.500 and the India economy had begun to witness high growth. Fund is aimed at benefiting from the exponential growth that India is likely to witness in the coming decade. Capital goods stocks. Comparing the Benchmark The scheme has generated an annualised return of 53 per cent since inception and has outpaced its benchmark. the BSE 100.I. This strategy helped it contain losses during the postBudget correction. However. by 12 percentage points during the same period.G.DSP T.R. The fund has a well-diversified portfolio. pruning holdings from 13 per cent to 4. Better market capitalisation will result from unlocking as well as creation of value.G.I.G. In the same period. Our View: DSPML T. it outperformed peers such as Tata Infrastructure 53 . it has trailed the ICICI Pru Infrastructure Fund.
the T. been relatively consistent. However.E. leading to a higher risk profile. Concentrated bets on sectors such as capital goods also add to the fund's risk level. risk-averse investors may find diversified funds a better alternative.I. Investors also have to keep in mind that infrastructure theme funds usually have an exposure of 30-40 per cent to mid-cap stocks (market capitalisation less than Rs 5.G.and Birla Infrastructure Fund. trailing the benchmark in just seven of the past 24 months on a monthly return basis.000 crore). it staged a recovery subsequently. The fund's performance has. 54 . Hence.R Fund has a relatively diversified portfolio and thus carries a moderate risk profile. however. Though impacted by the mid-cap meltdown in May.
88 55 . 2005 Rs./Unit) NAV (as on 30th April. 2007 Construction 21.Rs. 2007) in the infrastructure sector. 15.05 Dividend . 11th September.Rs. 12. 5000 BSE 100 Minimum Investment Benchmark Portfolio: Portfolio as on 31st May.Caninfrastructure Fund Snapshot: Structure Fund Manager Fund Objective Open Ended Equity fund Umesh Kamath To generate income / capital appreciation by investing in equities and equity related instruments of companies Inception Date Fund Size Face Value (Rs.86 Rs. 2007 2% 9% 2% 5% 7% 15% Construction Energy Technology Chemicals Cash & Cash Equivalents 2% 21% 21% 16% Basic/Engineering Diversified Metal & Metal Products Services T-Bills Portfolio as on 31st May.5677 Rs. 10 Growth .29 Basic/Engineering 20. 81.
51 2.01 14.11 4.Energy Diversified Technology Metal & Metal Products Chemicals Services Cash & Cash Equivalents T-Bills Total 16.17 2.12 8.71 7.44 100 56 .77 2.
Prudential Corporation plc. the Government of India and representatives of Indian industry. 1993 on February 3 2004.Prudential ICICI Asset Management Company Limited has been incorporated with a capital of Rs 65 crore. UTI UTI Mutual Fund is managed by UTI Asset Management Company Private Limited (Estb: Jan 14. Through its investments.way above the stipulated norm of Rs 10 crore. 34500 Crore. India. 2003) who has been appointed by the UTI Trustee Company Private Limited for managing the schemes of UTI Mutual Fund and the schemes transferred / migrated from UTI Mutual Fund. as a provider of insurance products.A Comparative Study ICICI Prudential: Prudential ICICI Asset Management Company Limited is an investment management company and a 55:45 joint venture between Prudential Corporation plc. Prudential ICICIs product portfolio has grown from 2 closed ended funds to 8 open ended funds and 2 closed ended funds. for undertaking portfolio management services and also acts as the manager and marketer to offshore funds through its 100 % subsidiary. on the part of both partners. UTI AMC is a registered portfolio manager under the SEBI (Portfolio Managers) Regulations. to promote the industrial development of India by providing project and corporate finance to Indian industry. This investment . ICICI Ltd.. Both companies are financial giants. Channel Islands. represents a strategic long-term commitment. and each is a major player in its field. and ICICI Ltd. was established in 1955 by the World Bank. UK. UTI Mutual Fund has come into existence with effect from 1st February 2003. to the rapidly expanding financial services sector in India. The fund managers are also ably supported with a strong in-house 57 . UTI International Limited. registered in Guernsey. UK was incorporated in 1848. the London Stock Exchange. In a short span of 14 months. making it one of the largest institutional investors in the UK. UTI Asset Management Company presently manages a corpus of over Rs. it controls approximately 4% of all the listed shares on the second largest stock exchange in the world.
S. the money management arm of ML & Co.e. while the balance 60% (approximately). Canbank Mutual: Canbank Investment Management Services Ltd. DSP Merrill Lynch & Co. It is based in Princenton. has been set up as per the Securities and Exchange Board of India (Mutual Funds) Regulations. domestic and international asset classes and in major capital markets of the world. Calcutta.. Bangalore. 1933. The name of DSP Merrill Lynch Asset Management (India) Ltd. Inc. a securities and brokerage firm with over 130 years of experience in the Indian market. N. DSPML is a full fledged financial services organization with a broad employee base and offices in Mumbai. Its disciplined value oriented approach to managing its clients portfolios has been with the primary objective of seeking consistent returns over a long period. long-term strategic performance results. DSP Merrill Lynch.f 20th July..J. MLAM is a unit of Merrill Lynch Asset Management Group. MLAM holds 40% of the paid up share capital of the AMC.equity research department. w. The AMC has been appointed as the Investment Manager to the fund. Merrill Lynch Investment Managers investment philosophy is designed to seek consistent. Investment Management Agreement has been signed between Canbank Mutual Fund and the Investment Manager. Chennai. traces its origins to DS Purbhoodas & Co. a risk management department is also in operation. has been changed to DSP Merrill Lynch Investment Managers Ltd. took up a 40% stake in DSPFC and the name was changed to DSPML Ltd. a wholly owned subsidiary of Canara Bank. To ensure better management of funds. has been set up by DSPML and MLAM. New Delhi. Hyderabad and Cochin. is held by DSPML. to act as the Asset Management Company (AMC) to the Fund. After a decade long association. DSP Merrill Lynch DSP Merrill Lynch Asset Management (India) Ltd.. 2000. originally called DSP Financial Consultants Ltd... USA and offers a wide range of investment products in virtually all U. whereby the Investment Manager is empowered to manage the affairs of Canbank Mutual Fund and operate its various 58 .
through its network of branches in India and offices in London. Comparative Performance Study: Scheme v/s BSE Sensex Scheme CanInfrastructure DSP Merrill Lynch Tiger Fund ICICI Prudential Infrastructure Fund UTI Infrastructure Fund Asset Management Company Canbank Mutual Fund DSP Merrill Lynch Mutual Fund ICICI Prudential Mutual Fund UTI Mutual Fund Scheme Returns 27. The sponsor-Canara Bank. UAE and Hong Kong.47 36.34 31.52 8. Of the twenty Schemes.22 8. Moscow.02 Index Returns 34.35 44. Canbank Mutual Fund was one of the pioneers of the Mutual Fund Movement in India.Schemes.22 59 .91 43.88 8.39 52. five Schemes have been fully redeemed so for and remaining fifteen Schemes are being managed by the Investment Manager.80 Difference -7. Canbank Mutual Fund has launched 20 Schemes since its inception. is a leading Nationalised Bank operating in India and abroad.56 40.
we are used to the concept of professional fund management. from the point of view of investment returns. it has shown a relatively low performance.I.G.25 33. we hereby observe that.e. from analysis of the past performance since inception of the schemes in question. we may recommend DSPML T. ICICI Prudential Infrastructure have performed satisfactorily and seem to have generated returns well above the Exchange indices.Index Funds In India.R to investors with an expectation that the positive performance will be maintained even in future by the fund scheme.39 44.fund managers select a portfolio of stocks so as to get "high returns". Further.I. A unifying feature of all of these funds is that they are all actively managed funds -. Thus. Section II.E. too.Scheme v/s NSE Nifty Scheme CanInfrastructure ICICI Prudential Infrastructure Fund Asset Management Company Canbank Mutual Fund ICICI Prudential Mutual Fund Scheme Returns 27.18 As evident from the performance analysis of the mutual fund schemes in question. a host of mutual funds are available to investors. BSE-100.56 Index Returns 32. If numbers are to be considered. Moreover.G. 60 .R shows the highest returns since inception.E.38 Difference -4. DSPML T. Today. we can clearly see that Caninfrastructure has underperformed when it comes to comparison with its own benchmark i. when we compare it with a common platform using the BSE Sensex or NSE Nifty.86 11.
on a risk-adjusted basis. typically they are more risky than those which offer lower returns. and the excess returns are not repeated in following years. when funds offer high returns. it can also never do worse than the index. The simplest fact is that beating the market is hard. This type of fund management leaves no decisions open. index funds explicitly give up the biggest objective of every active fund manager. Such funds are called index funds. This sounds completely unlike the efforts of all fund managers in the country. all over the world. For instance. The behaviour of an actively managed fund fluctuates more than passively managed index funds. An index fund is a fund whose daily returns are the same as the daily returns obtained from an index. on a risk-adjusted basis. On the other hand. 2. about what companies to hold and how much to invest in each company. Thus.An alternative approach towards fund management exists: that of a fund which is passively managed. Why would it be a good idea? 1. where a good fund manager is considered to be one who can invests a lot of resources into researching which are the companies to hold so that the returns on the managed portfolio is more than what the "market" offers. Results of this nature have been observed in a wide variety of markets. The behaviour of the market index. In India also. Two decades of study of evaluation of mutual funds suggest that most funds fail to beat the market. The problem of identifying a good fund manager is as hard as picking good stocks. it is passively managed in the sense that an index fund manager invests in a portfolio which is exactly the same as the portfolio which makes up an index. it is often the case that this owes to good fortune. This is contrary to active management. Matters are made worse by the fact that the performance of fund managers fluctuates with changes of the management team that runs a fund changes. A Nifty index fund has all its money invested in the Nifty fifty companies. the track record of funds at outperforming the market is dismal. Thus. is 61 . It is hence obvious that an index fund can never "beat the index". held in the same weights of the companies which are held in the index. which is that of "beating the market". the NSE-50 index (Nifty) is a market index which is made up of 50 companies. When funds do beat the market. That is. in comparison.
Risk greater than the market index can be obtained by borrowing at the riskless rate and investing in the market index. Active managers incur various expenses: wages for research and fund management staff. Low risk portfolios can be constructed by putting a smaller fraction of money into the market index. wouldn't the personal fund manager do something unique that addresses his needs? In this sense. as compared with the volatility of a fund NAV (which could change for a variety of reasons). the Wilshire 5000. who would not be as willing to accept so much risk in her investment and would settle for a lower amount of returns. Hence. the FTSE 100 and the FTSE All-Share Index. There is an additional issue of management fees. In contrast. A young person.it has a more reliable risk-return tradeoff. and transactions costs in trading.to take care of the investment objectives of everyone. Ultimately. or government treasury bills) and the market index.more predictable -. portfolios need to be tuned to specific situations. investors who buy into these funds are paying these costs. Any investor can choose an acceptable level of return and risk by mixing these two in varying proportions. You know more about what the volatility of Nifty is going to be next month.a riskless investment and an index fund -. at the start of her career. 62 . might be willing to make a more risky investment for higher returns compared to a retired person. In this case. But an argument can be made that different investors have different needs. Index funds avoid almost all these costs. If a rich person can afford to hire a personal fund manager. Some common indices include the S&P 500. Index funds are available from many investment managers. costs of buying data and computer power. we only need two funds -. 3. based on past experience. The above set of points seems to suggest a strong case for index funds. don't we need something more than just holding the index? A well-researched body of financial economics suggest that there are exactly two assets that are important: the riskless asset (like money in the bank.
41 Basic Auto Engineering as on 31st May.21 33.44 Unrated Net Receivable/Payable 10. The fund was earlier known as Index Equity Fund.87 Instruments AAA Market Cap(Rs Cr) Average 3089.26 AA+ Portfolio as on 31st May.55Net Assets Instruments % 13.66 Giant Construction Commercial Paper Certificate of Deposit Services 3. Up to 10 per cent of the corpus would be invested in fixed income securities and money market securities.65 Large Chemicals P1+ 52. 2007 (% to NAV) 6.19 Investment Asets Stock Portfolio0.1222.41 AAA & 7.58 28.42 Tiny -FMCG Money Market 1.28 Financial Services 3.89 AA Portfolio P/E Assets Total 100 Total 25.81 AAA Small 42.25 Cash. 2007 Portfolio as on 31st May.75 Cash 33.92 6.78 Mid Through Others 36.28 Construction FMCG % of% Net Assets Instruments Market Technology Capitalization Portfolio Bonds/NCDs 45.72 Commercial Other CurrentRatio 17.4032.UTI Master Index Fund Objective The fund is an actively managed index fund.3426.47 11. 2007 (% to NAV) Basic/Engineering 25.53100100100 Total Total Total Total 100 Total 100 .29 Chemicals 3.&Services DiversifiedandCertificate 3.72 Net CurrentValuation Bonds/NCDsPaper 18.16 26.71 66.43 Cash Diversified Money Market A+ 8.88 2. It was converted in to an open-ended scheme in October 2000.78 Pass Call 15.51 Financial % Net Assets Services 42. Portfolio as on 30th April. 2007 Portfolio Technology Mobile 13.28 Bonds/NCDs 66.59 32. and will invest at least 90 per cent of the funds mobilised in a basket of securities drawn from NSE 50 and BSE 30 indices.47 P1+ st Portfolio as on 31 May.67 Automobile Portfolio as on 31st May. 2007 (% to NAV) 16. 2007 (% to NAV) 14.32 Securitised Debt 63 Cash & 6.
97 0.38 11.68 Diversified 12.96 Industrial Services 7.56 Financial Services Basic/Engineering Average Energy 14540.74 1.87 Fund (G) Textiles Tiny Current Assets 0.42 5. 2007 31 Oil 4.Software as on 31st May.09 43.97 Automobile MF Scheme LIC Reliance Index-Sensex UTI Master Index Non-ferrous Metals Index .17 Finance&Market Cap(Rs Cr) 4.06 9.82 Mid Metals & 1.09 Petroleum Products 12. 2007 Energy Diversified Cap(Rs Average Market ProductsCr) 2895.27 -2.57 Portfolio Pharmaceuticals 3.8% 1002.70 2.97 Portfolio Banks 14.24 Technology Technology Auto Mobile Diversified Financial 8.84 0.96 Market Capitalization % of5.62 Technology Portfolio as on 31st May.41 2.94 Power Care & related products 3.89 49.56 Other 1 Year 39.94 FMCG 10. Investment(Rs) Total Assets(Rs.26 11. 2007 (% to NAV)14.43 Mid Health Care 35.95 Textiles 1.81 2.90 Health FMCG Capital Goods 9.74 % Returns* (%) Absolute Relative to Sensex ** Relative to Nifty ** 1wk 3 months 6 months 1 year 3 years* Inception 12.38 41.70 18.87 UTI Branches 01-JUN-98 as on 30-Apr-07 94.07 Energy Assets Net Current Plan (G) 0.41 Automobile Portfolio as on 31 May.46 Basic/Engineering 8.94 Technology 19./Mn) Registrars Launch Date Asset Allocation Equity Shares Net Current Assets Style Box: Equity Equity-Index Open 5000 492.Sensex 1.51 Metals & 6.94 Construction Large Construction 1. 2007 Portfolio as on 31 May.89 4.84 6.64 0.53 17. 2007 (% to NAV) 18.45 Textiles related product Services Portfolio as on st st May.02 Other Current Assets Plan (G) 5.73 Services8.94 18.90 3.3% as on 30-Apr-07 % Of Asset .50 Small 40.Scheme Snapshot Fund Manager Swati Kulkarni Scheme Objective Scheme Sub-Objective Scheme Type Min.41 Financial Services 8.62 12.14 Health 4.53 18.84 Telecommunications -service 9. 2007 Sector Allocation Sector I T .20 -3.39 Chemicals Construction FMCG FMCG Cement 4.97 7.85 Auto 5.70 Portfolio as on 31stst May.26 % 5.99 2.37 Services 64 Ferrous Metals 2.3% Total 37.30 Construction Services Market TextilesCapitalization % of Portfolio 5.83 Basic/Engineering Care Energy 8.90 Metals Giant Basic/Engineering 52.24 Diversified 9.27 Health Care 12.22 Metals Metal 6.32 Chemicals Financial Giant 19.52 Large Automobile 3.24 Consumer Non Durables 7.23 Services Metal Products 2.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.