You are on page 1of 65

INTRODUCTION TO MUTUAL FUNDS:-

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 appreciations realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a Mutual Fund.

A Mutual Fund is a body corporate registered with the Securities and Exchange Board
of India (SEBI) that pools up the money from individual/corporate investors and invests
the same on behalf of the investors/unit holders, in Equity shares, Government
securities, Bonds, Call Money Markets etc, and distributes the profits. In the other
words, a Mutual Fund allows investors to indirectly take a position in a basket of assets.
Mutual Fund is a mechanism for pooling the resources by issuing units to the investors
and investing funds in securities in accordance with objectives as disclosed in offer
document. Investments in securities are spread among a wide cross-section of industries
and sectors thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at same time. Investors of
mutual funds are known as unit holders.

1
The investors in proportion to their investments share the profits or losses. The mutual
funds normally come out with a number of schemes with different investment
objectives which are launched from time to time. A Mutual Fund is required to be
registered with Securities Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.
http://www.amfiindia.com/showhtml.aspx?page=mfconcept

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The history
of mutual funds in India can be broadly divided into four distinct phases
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up
by the Reserve Bank of India and functioned under the Regulatory and administrative
control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and administrative
control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the
end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds)


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

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)

2
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund registered
in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of
India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

3
http://www.amfiindia.com/showhtml.aspx?page=mfindustry

4
ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organizational
set up of a Mutual Fund:

(For detailed definitions in the above chart refer to annexure 1)

Mutual Funds diversify their risk by holding a portfolio of instead of only one asset.
This is because by holding all your money in just one asset, the entire fortunes of your

5
portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk
is substantially reduced.

Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds
contains the same risk as investing in the markets, the only difference being that due to
professional management of funds the controllable risks are substantially reduced. A
very important risk involved in Mutual Fund investments is the market risk. However,
the company specific risks are largely eliminated due to professional fund management.
http://www.amfiindia.com/showhtml.aspx?page=mfconcept#B

IMPORTANT CHARACTERISTICS OF A MUTUAL FUND


• A Mutual Fund actually belongs to the investors who have pooled their

Funds. The ownership of the mutual fund is in the hands of the Investors.

• A Mutual Fund is managed by investment professional and other

Service providers, who earns a fee for their services, from the funds.

• The pool of Funds is invested in a portfolio of marketable investments.

• The value of the portfolio is updated every day.

• The investor’s share in the fund is denominated by “units”. The value

of the units changes with change in the portfolio value, every day. The

value of one unit of investment is called net asset value (NAV).

• The investment portfolio of the mutual fund is created according to The stated

Investment objectives of the Fund.

OBJECTIVES OF A MUTUAL FUND:


• To Provide an opportunity for lower income groups to acquire without
Much difficulty, property in the form of shares.

6
• To Cater mainly of the need of individual investors, whose means are small?
• To Manage investors portfolio that provides regular income, growth,
Safety, liquidity, tax advantage, professional management and diversification.

http://www.amfiindia.com/showhtml.aspx?page=ourobjectives

ADVANTAGES OF MUTUAL FUNDS:

• Diversification: An investor undertakes risk if he invests all his funds in a single


scrip. Mutual funds invest in a number of companies across various industries and
sectors. This diversification reduces the risk of the investment.

• Professional Management: An investor lacks the knowledge of the capital


market operations and does not have large resources to reap the benefits of
investment. Hence, he requires the help of an expert. Mutual funds are managed
by professional managers who have the requisite skills and experiences to analyse
the performance and prospectus of companies.

• Regulatory oversight: Mutual funds are subject to many government regulations


that protect investors from fraud.

• Liquidity: It's easy to get your money out of a mutual fund. Write a check, make
a call, and you've got the cash.

• Convenience: You can usually buy mutual fund shares by mail, phone, or over
the Internet. It reduces paperwork, saves time and makes investment easy.

7
• Low cost: Mutual fund expenses are often no more than 1.5 percent of your
investment. Expenses for Index Funds are less than that, because index funds are
not actively managed. Instead, they automatically buy stock in companies that are
listed on a specific index

• Transparency: Mutual funds transparently declare their portfolio every month.


Thus, an investor knows where his/her money is being deployed and in case they
are not happy with the portfolio they can withdraw at a short notice.

• Flexibility: Mutual funds offer a family of schemes, and investors have the option
of transferring their holdings from one scheme to other.

Tax benefits: Mutual fund investors now enjoy income tax benefits. Dividends
received from mutual funds’ debt schemes are tax exempt to the overall limit of
Rs 9000 allowed under section SOL of the Income Tax Act.
http://www.amfiindia.com/showhtml.aspx?page=mfconcept#C

DISADVANTAGES OF MUTUAL FUNDS


•  Hidden costs: The mutual fund industry tactfully buries costs under layers of
jargon. These costs come despite of negative returns. Examples of such costs
include sales charges, annual fees, and other expenses; and depending on the
timing of their investment, investors may also have to pay taxes on any capital
gains distribution they receive — even if the fund went on to perform poorly after
they bought shares.
•  Lack of control: Investors typically cannot ascertain the exact make-up of a
fund's portfolio at any given time, nor can they directly influence which securities
the fund manager buys and sells or the timing of those trades.
•  Dilution: Because funds have small holdings in so many different companies,
high returns from a few investments often don't make much difference on the
overall return. Dilution is also the result of a successful fund getting too big.
When money pours into funds that have had strong success, the manager often has
trouble finding a good investment for all the new money.

8
•  Price Uncertainty: With an individual stock, one can obtain real-time (or
close to real-time) pricing information with relative ease by checking financial
websites or through a broker, as can one observe stock price changes by the hour
or minute. By contrast, with a mutual fund, the price at which one purchases or
redeems shares will typically depend on the fund's NAV, which the fund might
not calculate until many hours after the order has been placed. In general, mutual
funds must calculate their NAV at least once every business day, typically after
the major U.S. exchanges close.

STRUCTURE OF A MUTUAL FUND

Sponsor

Trustee Mutual
s fund

ASSET
MANAGEMENT
COMPANY

Custodia Registra
n r

http:/1/2/personal/investments/mutual-fund/mutual-fund-structure

9
INVESTORS PROFILE:
An investor normally prioritizes his investment needs before undertaking an
investment. So different goals will be allocated to different proportions of the total
disposable amount. Investments for specific goals normally find their way into the debt
market as risk reduction is of prime importance, this is the area for the risk-averse
investors and here, Mutual Funds are generally the best option. One can avail of the
benefits of better returns with added benefits of anytime liquidity by investing in open-
ended debt funds at lower risk, this risk of default by any company that one has chosen
to invest in, can be minimized by investing in Mutual Funds as the fund managers
analyze the companies financials more minutely than an individual can do as they have
the expertise to do so.

Moving up the risk spectrum, there are people who would like to take some risk and
invest in equity funds/capital market. However, since their appetite for risk is also
limited, they would rather have some exposure to debt as well. For these investors,
balanced funds provide an easy route of investment, armed with expertise of investment
techniques, they can invest in equity as well as good quality debt thereby reducing risks
and providing the investor with better returns than he could otherwise manage. Since
they can reshuffle their portfolio as per market conditions, they are likely to generate
moderate returns even in pessimistic market conditions.

Next comes the risk takers, risk takers by their nature, would not be averse to investing
in high-risk avenues. Capital markets find their fancy more often than not,
because they have historically generated better returns than any other avenue,
provided, the money was judiciously invested. Though the risk associated is
generally on the higher side of the spectrum, the return-potential compensates for
the risk attached.

MUTUAL EXPECTATIONS AND BENEFITS

10
Everyone expects the New year to usher an era of joy and prosperity and certainly looks
forward to a windfall in terms of good things to come. Investor is no exception to this.
But before one rushes to celebrate with new investments, it would be appropriate to take
a look at how Y2K treated Mutual Funds (MFs) - the investment vehicle of the small
investor.

A happy-go-lucky-man turned investor would have nothing to write home about, had he
invested in the Year 2000 and stayed invested throughout the year. Positive returns
seemed like a state of utopia in Y2K. What a transformation in an Industry that had
witnessed almost triple digit returns in 1999 when BSE Sensex had generated returns of
about 65 percent.

What was common to MFs in Y2K was the presence of technology, media & telecom
sector scrip’s in portfolios of most funds, especially equity growth funds. Birla
Advantage Fund with and exposure of 67%, Alliance to the tune of 71% are just to name
a few. While the bull phases did not raise any questions about the portfolio compositions,
the bear phases certainly did. NAVs of most of these funds plummeted raising questions
on the extent of portfolio diversification.

When the bull phase came to an end and when most of the funds stood stripped with the
downslide of most of the TMT stocks, most fund managers moved to quality portfolio
levels and reduced their IT exposure to reasonable levels. Most equity diversified funds,
today, maintain IT exposure at 20% to 37% while simultaneously picking up both old and
new economy stocks. But fund managers still are willing to bet on TMT stocks despite
the tumultuous experience they have had in Y2K. While accepting the possibility of a
downward revision of their growth rate, they foresee no indications of a significant
slowdown from at least India based companies. They concur that the fundamentals of IT
sector are strong with future growth, however, being at a modest pace. They are now of
the view that a mixture of old and new economy scrips would form an ideal portfolio.

While the crash in IT share prices has resulted in a re-balancing of portfolios, action on
the old economy front would further narrow the gap between the so called ‘click and

11
mortar’ and ‘ brick and mortar’ companies-bring with it a greater diversification in MF
portfolios.

MF Industry in India, like any other Industry, has had its nascent stage and is still trying
to grapple with several inconsistencies. The Industry is now approaching a stage where a
cross section of investing community has begun to comprehend that MFs provide and
ideal investment vehicle to meet their varied investment objectives in the long run with
adequate emphasis on portfolio diversification. All in all, MFs have had their share of
lessons in Y2K and are waiting for newer horizons in Y2K+1 with abated breath.
http://www.karvy.com/articles/mutualexpect.htm

TYPES OF MUTUAL FUNDS:


1. OPEN-ENDED MUTUAL FUNDS:-
The holders of the shares in the Fund can resell them to the issuing Mutual Fund
Company at the time. They receive in turn the net assets value (NAV) of the shares at
the time of re-sale. Such Mutual Fund Companies place their funds in the secondary
securities market. They do not participate in new issue market as do pension funds or
life insurance companies. Thus they influence market price of corporate securities.
Open-end investment companies can sell an unlimited number of Shares and thus keep
going larger. The open-end Mutual Fund Company Buys or sells their shares. These
companies sell new shares NAV plus a Loading or management fees and redeem shares
at NAV. In other words, the target amount and the period both are indefinite in such
funds

2. CLOSED-ENDED MUTUAL FUNDS:-


A closed–end Fund is open for sale to investors for a specific period, after which
further sales are closed. Any further transaction for buying the units or repurchasing
them, Happen in the secondary markets, where closed end Funds are listed. Therefore
new investors buy from the existing investors, and existing investors can liquidate their
units by selling them to other willing buyers. In a closed end Funds, thus the pool of
Funds can technically be kept constant. The asset management company (AMC)

12
however, can buy out the units from the investors, in the secondary markets, thus
reducing the amount of funds held by outside investors. The price at which units can be
sold or redeemed Depends on the market prices, which are fundamentally linked to the
NAV. Investors in closed end Funds receive either certificates or Depository receipts,
for their holdings in a closed end mutual Fund.
http://www.amfiindia.com/showhtml.aspx?page=mfconcept#D

ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS:-


In India Mutual Fund usually formed as trusts, three parties are generally involved viz.
• Settler of the trust or the sponsoring organization.
• The trust formed under the Indian trust act, 1982 or the trust company
registered under the Indian companies act, 1956
• Fund mangers or The merchant-banking unit
• Custodians.
http://business.mapsofindia.com/mutual-funds/organization.html

MUTUAL FUNDS TRUST:-


Mutual fund trust is created by the sponsors under the Indian trust act, 1982
Which is the main body in the creation of Mutual Fund Trust?
The main functions of Mutual Fund trust are as follows:
♦ Planning and formulating Mutual Funds schemes.
♦ Seeking SEBI’s approval and authorization to these schemes.
♦ Marketing the schemes for public subscription.
♦ Seeking RBI approval in case NRI’s subscription to Mutual Fund is Invited
♦ Attending to trusteeship function. This function as per guidelines can be
assigned to separately established trust companies too. Trustees are required to
submit a consolidated report six monthly to SEBI to ensure that the guidelines

13
are fully being complied with trusted are also required to submit an annual
report to the investors in the fund.

FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY


(AMC)
AMC has to discharge mainly three functions as under:
I. Taking investment decisions and making investments of the funds through
market dealer/brokers in the secondary market securities or directly in the
primary capital market or money market instruments

II. Realize fund position by taking account of all receivables and realizations,
moving corporate actions involving declaration of dividends,etc to compensate
investors for their investments in units; and

III. Maintaining proper accounting and information for pricing the units and arriving
at net asset value (NAV), the information about the listed schemes and the
transactions of units in the secondary market. AMC has to feed back the trustees
about its fund management operations and has to maintain a perfect information
system.
CUSTODIANS OF MUTUAL FUNDS:-
Mutual funds run by the subsidiaries of the nationalized banks had their respective
sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign banks with
higher degree of automation in handling the securities have assumed the role of
custodians for mutual funds. With the establishment of stock Holding Corporation
of India the work of custodian for mutual funds is now being handled by it for
various mutual funds. Besides, industrial investment trust company acts as sub-
custodian for stock Holding Corporation of India for domestic schemes of UTI,
BOI MF, LIC MF, etc

Fee structure:-

14
Custodian charges range between 0.15% to 0.20% on the net value of the
customer’s holding for custodian services space is one important factor which has
fixed cost element.

RESPONSIBILITY OF CUSTODIANS:-
♦ Receipt and delivery of securities
♦ Holding of securities.
♦ Collecting income
♦ Holding and processing cost
♦ Corporate actions etc

FUNCTIONS OF CUSTOMERS
♦ Safe custody
♦ Trade settlement
♦ Corporate action
♦ Transfer agents

RATE OF RETURN ON MUTUAL FUNDS:-


An investor in mutual fund earns return from two sources:
♦ Income from dividend paid by the mutual fund.
♦ Capital gains arising out of selling the units at a price higher than the
acquisition price

Formation and regulations:


1. Mutual funds are to be established in the form of trusts under the Indian trusts
act and are to be operated by separate asset management companies (AMC s)
2. AMC’s shall have a minimum Net worth of Rs. 5 crores;
3. AMC’s and Trustees of Mutual Funds are to be two separate legal entities and
that an AMC or its affiliate cannot act as a manager in any other fund;

15
4. Mutual funds dealing exclusively with money market instruments are to be
regulated by the Reserve Bank Of India
5. Mutual fund dealing primarily in the capital market and also partly money
market instruments are to be regulated by the Securities Exchange Board Of
India (SEBI)
6. All schemes floated by Mutual funds are to be registered with SEBI

Schemes:-
1. Mutual funds are allowed to start and operate both closed-end and open-end
schemes;
2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs 20
crore;
3. Each open-end scheme must have a Minimum corpus of Rs 50 crore
4. In the case of a Closed –End scheme if the Minimum amount of Rs 20 crore
or 60% of the target amount, which ever is higher is not raised then the entire
subscription has to be refunded to the investors;
5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50 crore
or 60 percent of the targeted amount, which ever is higher, is no raised then
the entire subscription has to be refunded to the investors.

Investment norms:-
1. No mutual fund, under all its schemes can own more than five percent of any
company’s paid up capital carrying voting rights;
2. No mutual fund, under all its schemes taken together can invest more than 10
percent of its funds in shares or debentures or other instruments of any single
company;
3. No mutual fund, under all its schemes taken together can invest more than 15
percent of its fund in the shares and debentures of any specific industry, except
those schemes which are specifically floated for investment in one or more
specified industries in respect to which a declaration has been made in the offer
letter.

16
4. No individual scheme of mutual funds can invest more than five percent of its
corpus in any one company’s share;
5. Mutual funds can invest only in transferable securities either in the money or in
the capital market. Privately placed debentures, securitized debt, and other
unquoted debt, and other unquoted debt instruments holding cannot exceed 10
percent in the case of growth funds and 40 percent in the case of income funds.

Distribution:
Mutual funds are required to distribute at least 90 percent of their profits annually in
any given year. Besides these, there are guidelines governing the operations of mutual
funds in dealing with shares and also seeking to ensure greater investor protection
through detailed disclosure and reporting by the mutual funds. SEBI has also been
granted with powers to over see the constitution as well as the operations of mutual
funds, including a common advertising code. Besides, SEBI can impose penalties on
Mutual funds after due investigation for their failure to comply with the guidelines.
http://www.investorwords.com/3174/mutual_fund_custodian.html

MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes


These schemes mainly invest in equity. They seek to achieve long-term capital
appreciation by responding to the dynamically changing Indian economy by moving
across sectors such as Lifestyle, Pharma, Cyclical, Technology, etc.

♦ Sector Schemes
These schemes focus on particular sector as IT, Banking, etc. They seek to generate
long-term capital appreciation by investing in equity and related securities of
companies in that particular sector.

17
♦ Index Schemes
These schemes aim to provide returns that closely correspond to the return of a
particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest
in all the stocks comprising the index in approximately the same weightage as they are
given in that index.

♦ Exchange Traded Funds (ETFs)


ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE
Sensex. They are similar to an index fund with one crucial difference. ETFs are listed
and traded on a stock exchange. In contrast, an index fund is bought and sold by the
fund and its distributors.

♦ Equity Tax Saving Schemes


These work on similar lines as diversified equity funds and seek to achieve long-term
capital appreciation by investing in the entire universe of stocks. The only difference
between these funds and equity-diversified funds is that they demand a lock-in of 3
years to gain tax benefits.

♦ Dynamic Funds
These schemes alter their exposure to different asset classes based on the market
scenario. Such funds typically try to book profits when the markets are overvalued and
remain fully invested in equities when the markets are undervalued. This is suitable for
investors who find it difficult to decide when to quit from equity.

♦ Balanced Schemes
These schemes seek to achieve long-term capital appreciation with stability of
investment and current income from a balanced portfolio of high quality equity and
fixed-income securities.

18
♦ Medium-Term Debt Schemes
These schemes have a portfolio of debt and money market instruments where the
average maturity of the underlying portfolio is in the range of five to seven years.

♦ Short-Term Debt Schemes


These schemes have a portfolio of debt and money market instruments where the
average maturity of the underlying portfolio is in the range of one to two years.

♦ Money Market Debt Schemes


These schemes invest in debt securities of a short-term nature, which generally means
securities of less than one-year maturity. The typical short-term interest-bearing
instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial
Paper and Inter-Bank Call Money Market.

♦ Medium-Term Gilt Schemes


These schemes invest in government securities. The average maturity of the securities
in the scheme is over three years.

♦ Short-Term Gilt Schemes


These schemes invest in government securities. The securities invested in are of short to
medium term maturities.

♦ Floating Rate Funds


They invest in debt securities with floating interest rates, which are generally linked to
some benchmark rate like MIBOR. Floating rate funds have a high relevance when
interest rates are on the rise helping investors to ride the interest rate rise.

♦ Monthly Income Plans (MIPS)

19
These are basically debt schemes, which make marginal investments in the range of 10-
25% in equity to boost the scheme’s returns. MIP schemes are ideal for investors who
seek slightly higher return that pure long-term debt schemes at marginally higher risk.

DIFFERENT MODES OF RECEIVING THE INCOME EARNED


FROM MUTUAL FUND INVESTMENTS
Mutual Funds offer three methods of receiving income:

♦ Growth Plan
In this plan, dividend is neither declared nor paid out to the investor but is built into the
value of the NAV. In other words, the NAV increases over time due to such incomes
and the investor realizes only the capital appreciation on redemption of his investment.

♦ Income Plan
In this plan, dividends are paid-out to the investor. In other words, the NAV only
reflects the capital appreciation or depreciation in market price of the underlying
portfolio.

♦ Dividend Re-investment Plan


In this case, dividend is declared but not paid out to the investor, instead, it is
reinvested back into the scheme at the then prevailing NAV. In other words, the
investor is given additional units and not cash as dividend.

MUTUAL FUND INVESTING STRATEGIES:

20
1. Systematic Investment Plans (SIPs)
These are best suited for young people who have started their careers and need to build
their wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals
in the Mutual fund scheme the investor has chosen, an investor opting for SIP in xyz
Mutual Fund scheme will need to invest a certain sum on money every
month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)


These plans are best suited for people nearing retirement. In these plans, an investor
invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at
regular intervals to take care of his expenses

3. Systematic Transfer Plans (STPs)


They allow the investor to transfer on a periodic basis a specified amount from one
scheme to another within the same fund family – meaning two schemes belonging to
the same mutual fund. A transfer will be treated as redemption of units from the scheme
from which the transfer is made. Such redemption or investment will be at the
applicable NAV. This service allows the investor to manage his investments actively to
achieve his objectives. Many funds do not even charge any transaction fees for his
service – an added advantage for the active investor.

ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS:


There are several reasons that can be attributed to the growing popularity and suitability
of Mutual Funds as an investment vehicle especially for retail investors:
ASSET ALLOCATION
♦ Mutual Funds offer the investors a valuable tool – Asset Allocation. This is
explained by an example.
An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100
crores and invested the money in various investment options, will have Rs.1 lakh
spread over a number of investment options as demonstrated below:

21
Investment Type Percentage of Total portfolio of Investors portfolio
Allocation (% of the Mutual Fund allocation (Rs.)
total portfolio) scheme (Rs. In
crores)
EQUITY: 57% 57 57,000
State Bank of India 15% 15 15,000
Infosys Technologies 12% 12 12,000
ABB 10% 10 10,000
Reliance Industries 9% 9 9,000
MICO 7% 7 7,000
Tata Power 4% 4 4,000
DEBT: 43% 43 43,000
Govt. Securities 20% 20 20,000
Company Debentures 10% 10 10,000
Institution Bonds 9% 9 9,000
Money Market 4% 4 4,000
Total 100% 100 1,00,000

Thus ‘Asset Allocation’ is allocating your investments in to different investment


options depending on your risk profile and return expectations.

• DIVERSIFICATION
Diversification is spreading your investment amount over a larger number of
investments in order to reduce risk. For instance, if you have Rs.10,000 to invest in
Information Technology (IT) stocks, this amount will only buy you a handful of
stocks of perhaps one or two companies. A fall in the market price of any of these
company stocks will significantly erode your investment amount instead it makes
sense to invest in an IT sector mutual fund scheme so that your Rs.10,000 is spread
across a larger number of stocks thereby reducing your risk.

• PROFESSIONALS AT WORK

22
Few investors have the time or expertise to manage their personal investments every
day, to efficiently reinvest interest or dividend income, or to investigate the
thousands of securities available in the financial markets. Fund managers are
professionals and experienced in tracking the finance markets, having access to
extensive research and market information, which enables them to decide which
securities to buy and sell for the fund. For an individual investor like you, this
professionalism is built in when you invest in the Mutual Fund.

• REDUCTION OF TRANSACTION COSTS


While investing directly in securities, all the costs of investing such as brokerage,
custodial services etc. Borne by you are at the highest rates due to small transaction
sizes. However, when going through a fund, you have the benefit of economies of
scale; the fund pays lesser costs because of larger volumes, a benefit passed on to its
investors like you.

• EASY ACCESS TO YOUR MONEY


This is one of the most important benefits of a Mutual Fund. Often you hold shares
or bonds that you cannot directly, easily and quickly sell. In such situations, it could
take several days or even longer before you are able to liquidate his Mutual Fund
investment by selling the units to the fund itself and receive his money within 3
working days.

• TRANSPARENCY
The investor gets regular information on the value of his investment in addition to
disclosure on the specific investments made by the fund, the proportion invested in
each class of assets and the fund manager’s investment strategy and outlook.

• SAVING TAXES
Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of
the Income Tax Act. Under this section, an investor can invest up to Rs.10,000 per

23
Financial year in a tax saving scheme. The rate of rebate under this section depends
on the investor’s total income.

• INVESTING IN STOCK MARKET INDEX


Index schemes of mutual funds give you the opportunity of investing in scrips that
make up a particular index in the same proportion of weightage that these scrips
have in the index. Thus, the return on your investment mirrors the movement of the
index.

• INVESTING IN GOVERNMENT SECURITIES


Gilt and Money Market Schemes of Mutual Funds also give you the opportunity to
invest in Government Securities and Money Markets (including the inter banking
call money market)

• WELL-REGULATED INDUSTRY
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.

• CONVENIENCE AND FLEXIBILITY


Mutual Funds offer their investors a number of facilities such as inter-fund transfers,
online checking of holding status etc, which direct investments don’t offer.

RISKS ASSOCIATED WITH MUTUAL FUNDS:-


Investing in Mutual Funds, as with any security, does not come without risk. One of the
most basic economic principles is that risk and reward are directly correlated. In other
words, the greater the potential risk the greater the potential return. The types of risk
commonly associated with Mutual Funds are:

24
1) MARKET RISK
Market risk relates to the market value of a security in the future. Market prices
fluctuate and are susceptible to economic and financial trends, supply and demand, and
many other factors that cannot be precisely predicted or controlled.

2) POLITICAL RISK
Changes in the tax laws, trade regulations, administered prices, etc are some of the
many political factors that create market risk. Although collectively, as citizens, we
have indirect control through the power of our vote individually, as investors, we have
virtually no control.

3) INFLATION RISK
Interest rate risk relates to future changes in interest rates. For instance, if an investor
invests in a long-term debt Mutual Fund scheme and interest rates increase, the NAV of
the scheme will fall because the scheme will be end up holding debt offering lower
interest rates.

4) BUSINESS RISK
Business risk is the uncertainty concerning the future existence, stability, and
profitability of the issuer of the security. Business risk is inherent in all business
ventures. The future financial stability of a company cannot be predicted or guaranteed,
nor can the price of its securities. Adverse changes in business circumstances will
reduce the market price of the company’s equity resulting in proportionate fall in the
NAV of the Mutual Fund scheme, which has invested in the equity of such a company.

5) ECONOMIC RISK
Economic risk involves uncertainty in the economy, which, in turn, can have an adverse
effect on a company’s business. For instance, if monsoons fail in a year, equity stocks
of agriculture-based companies will fall and NAVs of Mutual Funds, which have
invested in such stocks, will fall proportionately.

25
PERFORMANCE MEASURES OF MUTUAL FUNDS:
Mutual Fund industry today, with about 30 players and more than six hundred schemes,
is one of the most preferred investment avenues in India. However, with a plethora of
schemes to choose from, the retail investor faces problems in selecting funds. Factors
such as investment strategy and management style are qualitative, but the funds record
is an important indicator too.
Though past performance alone cannot be indicative of future performance, it is,
frankly, the only quantitative way to judge how good a fund is at present. Therefore,
there is a need to correctly assess the past performance of different Mutual Funds.
Worldwide, good Mutual Fund companies over are known by their AMC’s and this
fame is directly linked to their superior stock selection skills.

For Mutual Funds to grow, AMC’s must be held accountable for their selection of
stocks. In other words, there must be some performance indicator that will reveal the
quality of stock selection of various AMC’s.

Return alone should not be considered as the basis of measurement of the performance
of a Mutual Fund scheme, it should also include the risk taken by the fund manager
because different funds will have different levels of risk attached to them. Risk
associated with a fund, in a general, can be defined as Variability or fluctuations in the
returns generated by it. The higher the fluctuations in the returns of a fund during a
given period, higher will be the risk associated with it. These fluctuations in the returns
generated by a fund are resultant of two guiding forces. First, general market
fluctuations, which affect all the securities, present in the market, called Market risk or
Systematic risk and second, fluctuations due to specific securities present in the

26
portfolio of the fund, called Unsystematic risk. The Total Risk of a given fund is sum of
these two and is measured in terms of standard deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which represents
fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of
a Mutual Fund is to the changes in the market; higher will be its beta. Beta is calculated
by relating the returns on a Mutual Fund with the returns in the market. While
Unsystematic risk can be diversified through investments in a number of instruments,
systematic risk cannot. By using the risk return relationship, we try to assess the
competitive strength of the Mutual Funds one another in a better way. In order to
determine the risk-adjusted returns of investment portfolios, several eminent authors
have worked since 1960s to develop composite performance indices to evaluate a
portfolio by comparing alternative portfolios within a particular risk class.

The most important and widely used measures of performance are:


• The Treynor’Measure
• The Sharpe Measure
• Jenson Model
• Fama Model

1) The Treynor Measure:-


Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index.
This Index is a ratio of return generated by the fund over and above risk free rate of
return (generally taken to be the return on securities backed by the government, as there
is no credit risk associated), during a given period and systematic risk associated with it
(beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.


Where,
Ri represents return on fund,

27
Rf is risk free rate of return, and
Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indication of unfavorable performance.

2) The Sharpe Measure :-


In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is
a ratio of returns generated by the fund over and above risk free rate of return and the
total risk associated with it.
According to Sharpe, it is the total risk of the fund that the investors are concerned
about. So, the model evaluates funds on the basis of reward per unit of total risk.
Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,
Si is standard deviation of the fund,
Ri represents return on fund, and
Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.

Comparison of Sharpe and Treynor


Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
evaluating the risk return relationship for well-diversified portfolios. On the other hand,
the systematic risk is the relevant measure of risk when we are evaluating less than
fully diversified portfolios or individual stocks. For a well-diversified portfolio the total

28
risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and
systematic risk (Treynor measure) should be identical for a well-diversified portfolio,
as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that
ranks higher on Treynor measure, compared with another fund that is highly
diversified, will rank lower on Sharpe Measure.

3) Jenson Model:-
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the differential Return
Method. This measure involves evaluation of the returns that the fund has generated vs.
the returns actually expected out of the fund1 given the level of its systematic risk. The
surplus between the two returns is called Alpha, which measures the performance of a
fund compared with the actual returns over the period. Required return of a fund at a
given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)
Where,
Ri represents return on fund, and
Rm is average market return during the given period,
Rf is risk free rate of return, and
Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return from
the actual return of the fund.

Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the
fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of
market is primitive.

4) Fama Model:-

29
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these two is
taken as a measure of the performance of the fund and is called Net Selectivity.

The Net Selectivity represents the stock selection skill of the fund manager, as it is the
excess returns over and above the return required to compensate for the total risk taken
by the fund manager. Higher value of which indicates that fund manager has earned
returns well above the return commensurate with the level of risk taken by him.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where,
Ri represents return on fund,
Sm is standard deviation of market returns,
Rm is average market return during the given period, and
Rf is risk free rate of return.

The Net Selectivity is then calculated by subtracting this required return from
the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure and
Jenson model use Systematic risk is based on the premise that the Unsystematic risk is
diversifiable. These models are suitable for large investors like institutional investors
with high risk taking capacities as they do not face paucity of funds and can invest in a
number of options to dilute some risks. For them, a portfolio can be spread across a
number of stocks and sectors. However, Sharpe measure and Fama model that consider
the entire risk associated with fund are suitable for small investors, as the ordinary
investor lacks the necessary skill and resources to diversify. Moreover, the selection of
the fund on the basis of superior stock selection ability of the fund manager will also
help in safeguarding the money invested to a great extent. The investment in funds that

30
have generated big returns at higher levels of risks leaves the money all the more prone
to risks of all kinds that may exceed the individual investors' risk appetite.

COMPANY PROFILE
(KOTAK MAHINDRA)

Kotak Mahindra Mutual Fund (KMMF) is managed by Kotak Mahindra Asset


Management Company Ltd., a wholly owned subsidiary of Kotak Mahindra
Bank Ltd. Kotak Mahindra Mutual Fund launched its Schemes in December 1998 and
today manages assets over and above Rs. 7353.82 cr. contributed by more than 1,99,818
investors in various schemes. KMMF has to its credit the launching of innovative
schemes and plans like Kotak Gilt and Free Life Insurance with Kotak Bond Deposit
Plan.

Kotak Mahindra is one of India's leading financial institutions, offering complete


financial solutions that encompass every sphere of life. From commercial banking, to
stock broking, to mutual funds, to life insurance, to investment banking, the group caters
to the financial needs of individuals and corporates.

The group has a net worth of around Rs.1,700 crore and employs over 4,000 employees
in its various businesses. With a presence in 74 cities in India and offices in New York,
London, Dubai and Mauritius, it services a customer base of over 5,00,000

Kotak Mahindra has international partnerships with Goldman Sachs (one of the world's
largest investment banks and brokerage firms), Ford Credit (one of the world's largest
dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset
management conglomerate).

31
Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned
subsidiary of KMBL, is the asset manager for Kotak Mahindra Mutual Fund (KMMF).
KMAMC started operations in December 1998 and has over 1,99,818 investors in various
schemes. KMMF offers schemes catering to investors with varying risk - return profiles
and was the first fund house in the country to launch a dedicated gilt scheme investing
only in government securities.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &
Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and
that's when the company changed its name to Kotak Mahindra Finance Limited.

Since then it's been a steady and confident journey to growth and success.
Kotak Mahindra Finance Limited starts the activity of Bill Discounting
Kotak Mahindra Finance Limited enters the Lease and Hire Purchase market.
The Auto Finance division is started the Investment Banking Division is started.

Enters the Funds Syndication sector

1995 Brokerage and Distribution businesses incorporated into a separate company -


Kotak Securities. Investment Banking division incorporated into a separate company -
Kotak Mahindra Capital Company.

1996 The Auto Finance Business is hived off into a separate company - Kotak Mahindra
Primus Limited. Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra
Limited, for financing Ford vehicles. The launch of Matrix Information Services Limited
marks the Group’s entry into information distribution.

1998 Enters the mutual fund market with the launch of Kotak Mahindra Asset
Management Company.
Kotak Mahindra ties up with Old Mutual plc. For the Life Insurance business.
Kotak Securities launches kotakstreet.com - its on-line broking site. Formal
commencement of private equity activity through setting up of Kotak Mahindra Venture
Capital Fund.

2001 Matrix sold to Friday Corporation Launches Insurance Services

32
2003 Kotak Mahindra Finance Ltd. converts to bank Kotak Mahindra is one of India's
leading financial institutions, offering complete financial solutions cities in India and
offices in New York, London, Dubai and Mauritius, it services a customer base of over
5,00,000.
has international partnerships with Goldman Sachs (one of the world's largest investment
banks and brokerage firms), Ford Credit (one of the world's largest dedicated automobile
financiers) and Old Mutual (a large insurance, banking and asset management
conglomerate that encompass every sphere of life. From commercial banking, to stock
broking, to mutual funds, to life insurance, to investment banking, the group caters to the
financial needs of individuals and corporates.
The group has a net worth of around Rs.1,700 crore and employs over 4,000 employees
in its various businesses. With a presence in 74 cities in India and offices in New York,
London, Dubai and Mauritius, it services a customer base of over 5,00,000.

Kotak Mahindra has international partnerships with Goldman Sachs (one of the world's
largest investment banks and brokerage firms), Ford Credit (one of the world's largest
dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset
management conglomerate).
Kotak Mahindra Asset Management Company Limited (KMAMC), a wholly owned
subsidiary of KMBL, is the asset manager for Kotak Mahindra Mutual Fund (KMMF).
KMAMC started operations in December 1998 and has over 1,99,818 investors in various
schemes. KMMF offers schemes catering to investors with varying risk - return profiles
and was the first fund house in the country to launch a dedicated gilt scheme investing
only in government securities.

33
Kotak Investment Banking* (KIB), India's premier Investment Bank is a strategic joint
venture between Kotak Mahindra Bank Limited (KMBL) and the Goldman Sachs Group,
LLP.
KMBL has come into existence in March 2003 through the conversion of Kotak
Mahindra Bank Ltd. into a Commercial Bank. Kotak Mahindra is one of India's leading
financial institutions, offering complete financial solutions that encompass every sphere
of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to
investment banking, the group caters to the v needs of individuals and corporates.
The group has a net worth of over Rs.1,550 crore and employs over 3,000 employees in
its various businesses. With a presence in 60 cities in India and offices in New York,
London, Dubai and Mauritius, it services a customer base of over 5,00,000.
Kotak Mahindra has international partnerships with Goldman Sachs (one of the world's
largest investment banks and brokerage firms), Ford Credit (one of the world's largest
dedicated automobile financiers) and Old Mutual (a large insurance, banking and asset
management conglomerate).
Kotak Investment Banking (KIB) and Kotak Institutional Equities represent the securities
business of the Kotak Mahindra Group **(KI), both, joint ventures with Goldman Sachs
involved in brokerage, distribution and research.

34
We are a full service Investment Bank bringing to our clients the global reach and
expertise of Goldman Sachs and the local knowledge and skills of Kotak Mahindra. As a
full service Investment Bank, Kotak Investment Banking core business areas include
Equity Issuances, Mergers & Acquisitions, Advisory Services and Fixed Income
Securities and Principal Business.

Our strength lies in understanding our clients' businesses backed by a strong research
team and an extensive distribution network, which spans a wide variety of investors
across the country. We are also the first Indian Investment Bank to be registered with the
Securities & Futures Authority in the UK (through our wholly owned subsidiary) and the
National Association of Securities and Dealers in the USA.
We are also the first Indian Investment Bank to be appointed by the Government of India
as a Co-lead Manager in their international divestment of Gas Authority of India Ltd
through a GDR offering.
We are today well positioned in an increasing globalised environment to provide full
service to its clients based either in India or overseas.
RESEARCH METHODOLOGY
The Methodology involves randomly selecting Open-Ended equity schemes of different
fund houses of the country. The data collected for this project is basically from one
sources, that is:-

1. Secondary sources: Collection of data from Internet and Books.

HYPOTHESIS
The Hypothesis of the study involves Comparison between:
1. Kotak Opportunities fund.
2. Reliance Equity Opportunities fund.
3. Franklin India Flexi fund.
4. HDFC Core & satellite fund.
5. HSBC India Opportunities fund.

35
NEED OF THE STUDY:
The project’s idea is to project Mutual Fund as a better avenue for investment on a
long-term or short-term basis. Mutual Fund is a productive package for a lay-investor
with limited finances, this project creates an awareness that the Mutual Fund is a
worthy investment practice. Mutual Fund is a globally proven instrument. Mutual
Funds are ”Unit Trust” as it is called in some parts of the world has a long and
successful history, of late Mutual Funds have become a hot favorite of millions of
people all over the world.

The driving force of Mutual Funds is the ‘safety of the principal’ guaranteed, plus the
added advantage of capital appreciation together with the income earned in the form of
interest or dividend. The various schemes of Mutual Funds provide the investor with a
wide range of investment options according to his risk bearing capacities and interest
besides; they also give handy return to the investor. Mutual Funds offers an investor to
invest even a small amount of money, each Mutual Fund has a defined investment
objective and strategy. Mutual Funds schemes are managed by respective asset
managed companies sponsored by financial institutions, banks, private companies or
international firms. A Mutual Fund is the ideal investment vehicle for today’s complex
and modern financial scenario.

The study is basically made to analyze the various open-ended equity schemes of
different Asset Management Companies to highlight the diversity of investment that
Mutual Fund offer. Thus, through the study one would understand how a common man
could fruitfully convert a pittance into great penny by wisely investing into the right
scheme according to his risk taking abilities.

SCOPE:
The study here has been limited to analyse open-ended equity Growth schemes of
different Asset Management Companies namely Kotak Mahindra Mutual Fund,
Reliance Mutual Fund, HDFC Mutual Fund, Franklin Templeton Mutual Fund,
HSBC Mutual Fundseach scheme is analysed according to its performance against the

36
other, based on factors like Sharpe’s Ratio, Treynor’s Ratio, β (Beta) Co-efficient,
Returns.

OBJECTIVES:
1. To project Mutual Fund as the ‘productive avenue’ for investing activities.
2. To show the wide range of investment options available in Mutual Funds by
explaining its various schemes.
3. To compare the schemes based on Sharpe’s ratio, Treynor’s ratio, β Co-
efficient, Returns and show which scheme is best for the investor based on his
risk profile.
4. To help an investor make a right choice of investment, while considering the
inherent risk factors.
To understand the recent trends in Mutual Funds world.

The comparison between these schemes is made based on the following factors
A) Sharpe’s Ratio
B) Treynor’s Ratio
C) β (Beta) co-efficient.
D) Returns

A) The Sharpe’s Measure:-


In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is
a ratio of returns generated by the fund over and above risk free rate of return and the
total risk associated with it.
According to Sharpe, it is the total risk of the fund that the investors are concerned
about. So, the model evaluates funds on the basis of reward per unit of total risk.
Symbolically, it can be written as:

37
Sharpe Index (Si) = (Ri - Rf)/Si
Where,
Si is Standard Deviation of the fund.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.

B) The Treynor Measure:-


Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index.
This Index is a ratio of return generated by the fund over and above risk free rate of
return (generally taken to be the return on securities backed by the government, as there
is no credit risk associated), during a given period and systematic risk associated with it
(beta). Symbolically, it can be represented as:
Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,
Ri represents return on fund,
Rf is risk free rate of return,
and Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indication of unfavorable performance.

C) β (Beta) Co-efficient:-
Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV
of the fund vis-à-vis market. The more responsive the NAV of a Mutual Fund is to the
changes in the market; higher will be its beta. Beta is calculated by relating the returns
on a Mutual Fund with the returns in the market. While unsystematic risk can be

38
diversified through investments in a number of instruments, systematic risk cannot. By
using the risk return relationship, we try to assess the competitive strength of the
Mutual Funds vis-à-vis one another in a better way.
β (Beta) is calculated as N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2

D) Returns:- Returns for the last one-year of different schemes are taken for the
comparison and analysis part.

DATA ANALYSIS& INTERPRETATIONS:


Note: All the data used for analysis is taken up to the period 28-febuary-2006

KOTAK OPPORTUNITIES FUND


• Kotak opportunities is a open-ended equity Growth scheme.
• Kotak opportunities is a diversified aggressive equity scheme
• The fund has portfolio turnover ratio.
• The fund manager is optimistic on the markets in the long term and expects good
returns from the same.
• The fund manager is of the opinion that the market may not fall due to the abundent
liquidity in the system.However the fund managers sees high oil prices a big concern
in the global markets.
• The fund has invested into equities to the tune of 94.45% of the total portfolio.

39
RELIANCE EQUITY OPPORTUNITIES FUND:
• Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme.
• Reliance Equity Opportunities Fund is an aggressive diversified equity scheme
• Reliance Equity Opportunities is to seek to generate capital appreciation and provide
long term growth opportunities by investing in a portfolio constituted of equity
securities and equity related securities.
• The fund has a high portfolio turnover ratio.
• It has Instrument type such as Equity & Equity related Instruments and Debt &
Money Market Instruments.

HDFC Core and Satellite Fund


• HDFC Core and Satellite Fund is an Open-Ended Equity Scheme.
• HDFC Core and Satellite Fund is an diversified equity scheme
• The Scheme may seek investment opportunity in the ADR / GDR / Foreign Equity
and Debt Securities, in accordance with guidelines stipulated in this regard by SEBI
and RBI from time to time.
• The net assets of the Scheme will be invested primarily in equity and equity related
instruments in a portfolio comprising of 'Core' group of companies and 'Satellite'
group of companies.
• The 'Satellite' group will comprise of predominantly small-mid cap companies that
offer higher potential returns but at the same time carry higher risk

FRANKLIN INDIA FLEXI CAP EQUITY FUND


• Franklin india flexi cap Fund is an Open-Ended Equity Scheme.
• Franklin india flexi cap Fund is an aggressive diversified equity scheme
• It is an investment avenue that has the potential to provide steady returns and capital
appreciation over a five-year period through a mix of fixed income and equity
instruments.

40
• It has a investment team has a rich experience of investing in both equity and fixed
income instrument that has translated in to a good investment performance from its
hybrid scheme

HSBC India opportunities Fund


• HSBC India Opportunities Fund is an Open-Ended Equity Scheme.
• It is a scheme seeking long term capital growth through investments across all
market capitalizations, including small, mid and large cap stocks.
• The investment is to seek aggressive growth by focussing on mid cap companies in
addition to investments in large cap stocks.
• The fund aims to be predominantly invested in equity and equity related securities

KOTAK OPPORTUNITIES FUND


Fund Manager: (Mr. Anand Shah)

OBJECTIVE:-
To generate capital appreciation from a diversified portfolio of equity and equity
related securities Kotak Opportunities is a diversified equity scheme, with a flexible
investing style. It will invest in sectors, which our Fund Manager believes would
outperform others in the short to medium-term. Kotak Opportunities’ speciality lies in
giving the Fund Manager flexibility to act based on his views on the market; and in
allowing him to invest higher concentrations in sectors he believes will outperform
others.
As markets evolve and grow, new opportunities for growth keep emerging. Kotak
Opportunities would endeavour to capture these opportunities to generate wealth for its
investors.

♦ KOTAK OPPORTUNITIES FUND PERFORMANCE:-


(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D

41
LAST 1
MONTH 5.92 2.84 4.25 -1.41 1.67 1.98 -2.35 -20.11 404.71
LAST 3 13.1
MONTHS 24.61 1 4.25 8.86 20.36 78.49 180.38 -9.847 96.97
LAST 6 30.1
MONTHS 34.42 4 4.25 25.89 30.17 670.29 781.10 25.89 670.29
Since 45.9
Inception 78.17 9 4.5 41.49 73.67 1721.42 3056.56 22.78 519.04
125.8
TOTAL 74.83 7 2472.19 4015.70 18.70 1691.02

Where,
Rp - Portfolio Return- Kotak opportunities
Rm - Market Return-Fund’s bench mark- S& P CNX 500
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-


=Σ X/N
= 74.83/ 4
= 18.70
• CALCULATION OF STANDARD DEVIATION (σ ):-
= √ Σ (X-Xbar) 2 / N
= √1691.02/4
=√422.75
=20.56
• CALCULATION OF BETA CO-EFFICIENT:-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(5208.85) – (90.35)(126.21)
4(4117.22) – (90.35) 2
= 4(4015.70)-(74.83)-(125.87)
4(2472.19)-(74.83) 2
= 16062.8-9418.85
9888.76-5599

42
= 6643.95
4289.76
=1.54
• CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf / σ
=125.87 /20.56
= 6.12

• CALCULATION OF TREYNOR’S RATIO:-


= Rp-Rf / β
= 125.87/1.54
= 87.73/100

=0.8173

GRAPH SHOWING KOTAK OPPORTUNITIES FUND PERFORMANCE:-

K O T A K O P P O R T U N IT IE S

7 8. 1 7

45 .99
RETURNS

3 4 .4 2
30 .1 4
24 .6 1

13 .1 1
5.9 2 4 .5
2 .84 4. 25 4. 2 5 4 . 25

L A S T 1 M O N TH LA S T 3 M O N TH S L A S T 6 M O N TH S S IN C E IN C E P TIO N 09
S E P TE M B E R -20 0 4

K O TA K O P P O R TU N ITIE
S &S P C N X-5 0 R
0f

Interpretation:-

43
• Last I Month : It reveals that Kotak Opportunities Returns are 5.92
As compare to Funds Benchmark Returns are 2.84, and
The Risk Free Rate is common for next 9 months. (i.e., 4.25%)
• Last III Months: It reveals that Kotak Opportunities Returns are 24.61
As compare to Funds Benchmark Returns are 13.11, and
The Risk Free Rate is common for next 6 months. (i.e., 4.25%)
• Last VI Months: It reveals that Kotak Opportunities Returns are 34.42
As compare to Funds Benchmark Returns are 30.14, and
The Risk Free Rate is common for next 3 months. (i.e., 4.25%)
• Since Inception: It reveals that Kotak Opportunities Returns are 78.17,
As compare to Funds Benchmark Returns are 45.99, and

There is a slight Increase in Risk Free Rate by 0.25% (i.e., 4.5%)


compare to last 9 Months.

HDFC CORE& SATELLITE FUND:

Objective:-
The objective of the scheme is to generate capital appreciation through equity
investment in companies whose shares are quoting at prices below their true value.

♦ HDFC CORE& SATELLITE FUND PERFORMANCE:-


(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
LAST -
1MONTH 1.15 3.72 4.25 -0.53 -3.1 0.2809 1.643 20.7925 432.3280563
LAST 3 13.8 12.2 -
MONTHS 16.46 2 4.25 9.57 1 91.5849 116.8497 10.6925 114.3295563
LAST 31.3
6MONTHS 35.6 31.1 4.25 26.85 5 720.9225 841.7475 26.85 720.9225
Since 49.6 65.1
Inception 69.64 6 4.5 45.16 4 2039.4256 2941.7224 24.8975 619.8855063

44
105.
TOTAL 81.05 6 2852.2139 3901.9626 20.2625 1887.465619

Where,
Rp - Portfolio Return-HDFC core & Satellite Fund
Rm - Market Return-Fund’s benchmark-BSE-200
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-


=Σ X/N
= 81.05/4
= 20.26
• CALCULATION OF STANDARD DEVIATION (σ):-
= √ Σ (X-Xbar)2 / N
= √1887.4/4
= √471.75
=21.71
• CALCULATION OF BETA CO-EFFICIENT:-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(3901.9) –(81.05)(105.6)
4(4026) – (89.75) 2
= 15607.5-8558.8
11408.8-6569.1
=7048.7
4839
=1.45

• CALCULATION OF SHARPE’S RATIO:-


=Rp-Rf-/ σ
=105.6/21.71

45
=4.86

• CALCULATION OF TREYNOR’S RATIO:-


= Rp-Rf/β
= 105.6/1.45
= 72.82/100
=0.7282

GRAPH SHOWING HDFC CORE& SATELLITE FUND PERFORMANCE:-

H D F C C o r e & S a te llite F u n d P e rfo rm a n c e

80

6 9 .6 4
70

60
4 9 .6 6
50
RETURNS

40 35.6
31.1
30

20 16.46
13.82

10
3 .7 2 4.25 4.25 4.25 4.5
1 .1 5
0
L A S T 1 M O N TH L A S T 3 M O N TH S LA S T 6 M O N TH S S IN C E IN C E P TIO N 1 7 S E P TE M B E R -
2004

Rp Rm Rf

Interpretation:

46
• Last I Month : It reveals that HDFC Core & Satellite Fund Returns are 1.15
as compare to Funds Benchmark Returns are 3.72, and The Risk
Free Rate is common for next 9 months. (i.e., 4.25%)
• Last III Months: It reveals that HDFC Core & Satellite Fund Returns are 16.46
as compare to Funds Benchmark Returns are 13.82, and The
Risk Free Rate is common for next 6 months. (i.e., 4.25%)
• Last VI Months: It reveals that HDFC Core & Satellite Fund Returns are 35.6,
as compare to Funds Benchmark Returns are 31.1 and The Risk
Free Rate is common for next 3 months. (i.e., 4.25%)
• Since Inception: It reveals that HDFC Core & Satellite Fund Returns are 69.64,
as compare to Funds Benchmark Returns are 49.66, and There is
a slight increase in Risk Free Rate by 0.25%(4.5%) compare to
last 9 Months.

RELIANCE EQUITY OPPORTUNITIES FUND:

Investment Objective:

The primary investment objective of the scheme is to seek to generate capital


appreciation & provide long-term growth opportunities by investing in a portfolio
constituted of equity securities & equity related securities and the secondary
objective is to generate consistent returns by investing in debt and money market
securities.

♦ RELIANCE EQUITY OPPORTUNITIES FUND PERFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D

47
LAST 1
MONTH 2.4 3.72 4.25 -0.53 -1.85 0.2809 0.9805 -20.935 438.274225
LAST 3
MONTHS 16.22 13.82 4.25 9.57 11.97 91.5849 114.5529 9.57 91.5849
LAST 6
MONTHS 29.46 31.1 4.25 26.85 25.21 720.9225 676.8885 6.445 41.538025
Since
Inception 54.99 50.23 4.5 45.73 50.49 2091.2329 2308.9077 45.73 2091.2329

TOTAL 81.62 85.82 2904.0212 3101.3296 40.81 2662.63005

Where,
Rp - Portfolio Return-Reliance equity opportunities fund
Rm - Market Return-Fund’s Benchmark BSE-500
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-


=Σ X/N
= 81.62/ 4
= 20.40
• CALCULATION OF STANDARD DEVIATION (σ):-
= √ Σ (X-Xbar)2 / N
= √2662.63/4
= √665.65
=25.80
• CALCULATION OF BETA CO-EFFICIENT;-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(3101.32) – (81.62)(85.82)
4(2904.02) – (81.62) 2
= 12405-7002.91
11616-6661.82
=5402.09
4954.18

48
=1.09
• CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf/ σ
=85.82
25.23
=7.29
• CALCULATION OF TREYNOR’S RATIO:-
= Rp-Rf/β
= 85.82/1.47
= 37.32/100
=0.37
GRAPH SHOWING RELIANCE EQUITY OPPORTUNITIES FUND
PERFORMANCE:-

R E L IA N C E E Q U IT Y O P P O R T U N IT IE S F U N D

5 4 .9 9
50.23

3 1 .1
2 9 .4 6
RETURNS

1 6 .2 2
1 3 .8 2

3.72 4.25 4.25 4 .2 5 4 .5


2.4

L A S T 1 M O N TH L A S T 3 M O N TH S L A S T 6 M O N TH S S IN C E IN C E P TIO N 3 1 M A R C H
2005

R E L IA N C EB S E -1 0 0 R f

Interpretation:-
• Last I Month: It reveals that Reliance Equity Opportunities Fund
Returns are 2.4 as compare to Funds Benchmark Returns Are
3.72, and The Risk Free Rate is common for next 9 months. (i.e.,
4.25%)

49
• Last III Months: It reveals that Reliance Equity Opportunities
Fund Returns are 16.22 as compare to Funds Benchmark Returns
are 13.82, and The Risk Free Rate is common for next 6 months.
(i.e., 4.25%)
• Last VI Months: It reveals that Reliance Equity Opportunities
Fund Returns are 29.46 as compare to Funds Benchmark Returns
are 31.1 and The Risk Free Rate is common for next 3 months.
(i.e., 4.25%)
• Since Inception: It reveals that Reliance Equity Opportunities Fund Returns
are 54.99, as compare to Funds Benchmark returns are 50.23, and
There is a slight increase in Risk Free Rate by 0.25%(4.5%)
compare to last 9 months.

FRANKLIN INDIA FLEXI CAP EQUITY FUND


Fund Managers: (Mr. K N Siva Subramanian & R Sukumar Rajah)

Investment objective:
Stocks of companies are usually categorized as large-cap, midcap, and small-cap
depending on their market capitalization. History has demonstrated that these categories
tend to perform differently through economic and market cycles. For example, mid or
small cap stocks could move up sharply during a certain time period while large cap
stocks remain range bound and vice versa. On the other hand, large-cap stocks tend to be
less volatile than mid & small-cap stocks on account of factors such as size, market
leadership..etc. Moreover, such periods of out performance are typically followed by a
consolidation phase and a possible reversal of the situation. In order to derive optimal
returns from the stock markets, investments need to be diversified and have flexibility to
shift allocations across market caps.

Designed to help you achieve this with a single investment is Franklin India Flexi Cap
Fund (FIFCF). An open-end diversified equity fund, FIFCF seeks to provide medium to

50
long-term capital appreciation by investing in stocks across the entire market
capitalization range.

♦ FRANKLIN INDIA FLEXI CAP FUND PEFORMANCE:-

(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
- -
LAST 1MONTH 3.47 3.72 4.25 -0.53 0.78 0.281 0.4134 20.935 438.274225

LAST 3 MONTHS 16.49 13.82 4.25 9.57 12.2 91.58 117.1368 10.1 102.01

LAST 6 MONTHS 36.58 31.1 4.25 26.9 32.3 720.9 868.0605 17.28 298.5984
SINCE INCEPTION
March 2, 2005 61.8 50.23 4.5 45.7 57.3 2091 2620.329 18.88 356.4544

TOTAL 81.6 101 2904 3605.9397 25.325 1195.337025

Where,
Rp - Portfolio Return-Franklin flexi cap fund
Rm - Market Return-Fund’s Benchmarks S&P CNX-500
Rf - Risk free rate of return.

CALCULATION OF ARTHMETIC MEAN:-


=Σ X/N
= 81.6/ 4
= 20.4

CALCULATION OF STANDARD DEVIATION (σ):-


= √ Σ (X-Xbar)2 / N
= √1195/4
= √298.75
= 17.28

51
CALCULATION OF BETA CO-EFFICIENT;-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(3605) – (81.6)(101)
4(2904) – (2904) 2
= 14420-8241.6
11616-8433
=6178.4
3183
=1.94
CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf/ σ
=101
17.28
=5.84
CALCULATION OF TREYNOR’S RATIO:-
= Rp-Rf/β
=101/1.94
= 52.06/100 or 0.52

GRAPH SHOWING FRANKLIN INDIA FLEXI CAP FUND PERFORMANCE:-

52
F ra n k lin in d ia fle x i c a p fu n d

70
61.8
60

5 0. 2 3
50

40 36.58
RETURNS

31.1
30

20 16 . 4 9
13.8 2

10
3.47 3.72 4.25 4 .2 5 4.25 4.5

0
L A S T 1 M O N TH L A S T 3 M O N TH S L A S T 6 M O N TH S S IN C E IN C E P TIO N M a rc h 2, 2 0 0 5

Rp Rm Rf

Interpretation:

• Last I Month : It reveals that Franklin India flexi Cap Fund Returns are 3.47 as
compare to Funds Benchmark Returns are 2.8, and The Risk Free
Rate is common for next 9 months. (i.e., 4.25%)
• Last III Months: It reveals that Franklin India flexi Cap Fund Returns are
14.49 as compare to Funds Benchmark Returns are 13.11, and
The Risk Free Rate is common for next 6 months. (i.e., 4.25%)
• Last VI Months: It reveals that Birla Sun-life Equity Opportunities Fund
Returns are 36.58 as compare to Funds Benchmark Returns are
30.14 and The Risk Free Rate is common for next 3 months. (i.e.,
4.25%)
• Since Inception: It reveals that Birla Sun-life Equity Opportunities Fund
Returns are 61.8, as compare to Funds Benchmark Returns are
47.75 and There is a slight Increase in Risk Free Rate by
0.25%(4.5%) compare to last 9 months.

53
HSBC INDIA OPPORTUNITIES FUND
Fund Manager: (Mr.Sanjiv Duggal)
Investment objective:
The fund is an open-ended equity scheme seeking long term capital growth through
investments across all market capitalizations, including small, mid and large cap
stocks. The fund will endeavour to invest in large cap companies as well as identify
mid stocks, which have the potential to become blue chip large cap stocks over
time. The investment style is to seek aggressive growth by focussing on mid cap
companies in addition to investments in large cap stocks. This fund aims to be
predominantly invested in equity and equity related securities. However, it could
move a significant portion of its assets towards fixed income securities if the fund
becomes negative on negative on equity markets.

♦ HSBC INDIA OPPORTUNITIES FUND PEFORMANCE:-


(Rm- (Rp- (X
YEAR Rp Rm Rf Rf) Rf) X2 XY -Xbar) D2

X Y D
LAST 1
MONTH -0.57 2.81 4.25 -1.44 -4.82 2.0736 6.9408 -19.695 387.893025
LAST 3
MONTHS 12.45 13.45 4.25 9.2 8.2 84.64 75.44 9.15 83.7225
LAST 6
MONTHS 27.67 28.13 4.25 23.88 23.42 570.2544 559.2696 13.67 186.8689
Since
Inception 48.62 45.88 4.5 41.38 44.12 1712.3044 1825.6856 11.58 134.0964

TOTAL 73.02 70.92 2369.2724 2467.336 14.705 792.580825

Where,
Rp - Portfolio Return-
Rm - Market Return,
Rf - Risk free rate of return.

• CALCULATION OF ARTHMETIC MEAN:-


=Σ X/N

54
= 73.02/ 4
= 18.25

• CALCULATION OF STANDARD DEVIATION (σ):-


= √ Σ (X-Xbar)2 / N
= √792.58/4
= √198.14
=14.07
• CALCULATION OF BETA CO-EFFICIENT;-
= N (Σ XY) – Σ XΣ Y
N (Σ X2) – (Σ X) 2
= 4(2467.33) – (73.02)(70.92)
4(2369.27) – (73.02) 2
= 9869.32-5178.57
9477.08-5331.92
=4690.75
4145.18
=1.13
• CALCULATION OF SHARPE’S RATIO:-
= Rp-Rf/ σ
=70.92
14.07
=5.04
• CALCULATION OF TREYNOR’S RATIO: -
= Rp-Rf/β
=70.92/1.13
= 62.76/100
=0.62
GRAPH SHOWING HSBC INDIA OPPORTUNITIES FUND
PEFORMANCE:-

55
H S B C IN D IA O P P O R T U N IT IE S

60

48 .62
50 4 5. 88

40

30 2 7. 6728 .13
RETURNS

20
12 .4513. 45

10
4. 25 4 .2 5 4. 25 4 .5
2.81

0
1 /1 /19 00 -0 .5 7 /19 00
1 /2 1/ 3/190 0 1 /4 /19 00 1/ 5/190 0 1 /6 /19 00

-1 0

H S B C B S E -50 0 R f

Interpretation
• Last I Month : It reveals that HSBC India Opportunities Fund Returns are
-0.57 as compare to Funds Benchmark Returns are 2.81, and The
Risk Free Rate is common for next 9 months. (i.e., 4.25%).
• Last III Months: It reveals that HSBC India Opportunities Fund Returns are
12.45as compare to Funds Benchmark Returns are 13.45, and
The Risk Free Rate is common for next 6 months. (i.e., 4.25%).
• Last VI Months: It reveals that that HSBC India Opportunities Fund
Returns
are 27.87 as compare to Funds Benchmark Returns are 28.13
and The Risk Free Rate is common for next 3 months. (i.e.,
4.25%)
• Since Inception: It reveals that HSBC India Opportunities Fund Returns
are 48.82, as compare to Funds Benchmark returns are 45.82, and
There is a slight Increase in Risk Free Rate by 0.25 % (4.5%)
compare to last 9 months

56
OBSERVATIONS;
Observations are made from the data analysis.
The following observations are drawn from the analysis of schemes:

KOTAK FRANKLIN RELIANCE HDFC HSBC


OPPORTUNITIES INDIA EQUITY CORE & INDIA
FUND FLEXI OPPORTUNITIE SATELLITE OPPORT-
CAP FUND S FUND UNITIES
FUND FUND

57
Monthly return’s 5.92 3.47 2.4 1.15 -0.57

Sharpe’s Ratio 6.12 5.84 7.29 4.86 5.04

Treynor’s Ratio 0.81 0.52 0.37 0.72 0.62

Co-efficient (β ) 1.54 1.94 1.09 1.45 1.13

Std.Deviation (σ ) 20.56 17.28 25.80 21.71 14.07

LIMITATIONS OF THE STUDY

1. The study is limited only to the analysis of different schemes and its suitability
to different investors according to their risk-taking ability.

2. The study is based on secondary data available from monthly fact sheets,
websites and other books, as primary data was not accessible.

3. The study is limited by the detailed study of various schemes of Five Asset
Management Company.
SUGGESTIONS:-

• The Asset Management Company must design the portfolio in such a way, to
increase the returns.
• The Asset Management Company must design the portfolio in such a way, to lessen
the risk that is common in the market.
• The Asset Management Company must dedicate itself, because it motivates the
investors and potential investors to invest in Mutual Funds.
• The Asset Management Company must manage the Fund efficiently and with
dedication to earn the goodwill of the public.

58
• The Asset Management Company must make the most advantageous use of print
and electronic media in order to motivate the investors and potential investors to
invest in Mutual Funds.

CONCLUSIONS
After interpreting the above data the following conclusions have been made

Kotak Opportunities Fund:


• It is a diversified aggressive equity fund.
• It is a open-ended equity scheme
• Since the β ratio is high it implies the risk is high
• As the returns are more in Kotak Opportunities compare to other Four AMC’s

59
• It is suitable for investors looking for medium risk and moderate returns with in a
time period of 1-3 years.

Franklin India Flexi Cap Fund:


• It is a diversified equity fund.
• It is a open-ended equity scheme
• Since the β ratio is high it implies the risk is high
• In Franklin the returns are more compare to other Three AMC’s (HDFC,
RELIANCE, HSBC)

Reliance Equity Opportunities Growth Fund:


• It is a diversified equity fund.
• It is a open-ended equity scheme
• Since the β ratio is high it implies the risk is high
• In Reliance Equity Opportunities the returns are medium compare to other AMC’s

HDFC Core & Satellite Fund:


• It is a diversified equity fund.
• It is a open-ended equity scheme
• In HDFC the returns are low compare to other AMC’s
• It is a value based fund
• It is a low risky fund

HSBC India Opportunities Fund:-


• It is a diversified equity fund.
• It is a open-ended equity scheme
• In HSBC the returns are lesser than other AMC’s
• It is a low risky fund

60
BIBLIOGRAPHY

Layman’s Guide to Mutual Funds By “OUTLOOK”


Mutual Funds Primer By “ECONOMIC TIMES”

www.amfiindia.com
www.kotakmutual.com
www.reliancemutual.com

61
ANNEXURE’S

ANNEXURE-I

Sponsor

Sponsor is the person who acting alone or in combination with another body corporate
establishes a Mutual Fund. Sponsor must contribute at least 40% of the net worth of the

62
Investment Managed and meet the eligibility criteria prescribed under the securities and
Exchange Board of India (Mutual Fund) Regulations, 1996. The Sponsor is not
responsible or liable for any loss or short fall resulting from the operation of the
schemes beyond the initial contribution made by it towards setting up the Mutual Fund.

Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the
Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian
Registration Act, 1908.

Trustee

Trustee is usually a company (Corporate body) or a Board of Trustees (body of


individuals). 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, 1996, the provisions of the Trust Deed and the Offer Documents of the
respective Schemes. At least 2/3rd directors of the Trustee are independent directors
who are not associated with the Sponsor in any manner.

Asset Management Company (AMC)

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent
to the Mutual Fund. The Registrar processes the application form, redemption requests
and dispatches account statements to the unit holders. The Registrar and Transfer agent
also handles communications with investors and updates investor records.

63
Unit Holders

Unit Holders are those investing in Mutual Fund.

Custodian

Custodian is the agency, which will have the legal possession of all the securities
purchased by the Mutual Fund.
SEBI

The Stock Exchange Board of India (SEBI) is regulatory authority of the Mutual Funds.

ANNEXURE II

Equity Fund is the one in which much of the portfolio is invested in corporate
securities and Debt Fund is the one in which much of the portfolio is invested in Gilt
and money market securities.

In an Open-ended Mutual Fund, there are no limits on the total size of the corpus.
Investors are permitted to enter and exit the open-ended Mutual Fund at any point of
time at a price that is linked to the net asset value (NAV).
In case of Closed-ended funds, the total size of the corpus is limited by the size of the
initial offer.

• A Dividend plan entails a regular payment of dividend to the investors.


• A Re-investment plan is a plan where these dividends are reinvested in the scheme
itself.
• A Growth plan is one where no dividends are declared and investor only gains
through capital appreciation in the NAV of the fund.

64
NAV is the net asset value of the fund. Simply put it reflects what the unit held by an
investor is worth at current market prices.

The broad guidelines issued for a Mutual Fund:


SEBI is the regulatory authority of Mutual Funds. SEBI has the following broad
guidelines pertaining to Mutual Funds:

• Mutual Funds should be formed as a trust under Indian Trust Act and should be
operated by Asset Management Companies.

• Mutual Funds need to set up a Board of Trustee Companies. They should also
have their Board of Directories.

• The net worth of the Asset Management Company should be at least Rs.10
crore.

• Asset Management Companies and Trustees of a MF should be two separate and


distinct legal entities.

• The Asset Management Companies or any of its companies cannot act AS


managers for any other fund.

• Asset Management Company has to get the approval of SEBI for its articles and
Memorandum of Association.

• All Mutual Fund Schemes should be registered with SEBI.

• Mutual Funds should distribute minimum of 90% of their profits among the
investors.

65