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With Specific Reference To
Submitted to Mr. Sanjay Pachauri
BLS Institute of Management
(Approved by AICTE Ministry of HRD Government of India) Mohan Nagar, Ghaziabad (U.P.)
Submitted in Partial Fulfillment of the Requirement of the Post Graduate Diploma in Management as Dissertation (PGDM 2008-10)
Submitted by: Vinay Kumar Aggarwal PGDM 4th Semester (Finance & Marketing) Roll No.-5220342128
With Specific Reference To Submitted to Mr. Sanjay Pachauri BLS Institute of Management (Approved by AICTE Ministry of HRD Government of India) Mohan Nagar, Ghaziabad (U.P.) Submitted in Partial Fulfillment of the Requirement of the Post Graduate Diploma in Management as Dissertation (PGDM 2008-10) Submitted by: Vinay Kumar Aggarwal PGDM 4th Semester (Finance & Marketing) Roll No.-5220342128 CONTENTS Executive Summary BY MARKET CAPITALISATION SHARPE RATIO CONCEPT OF FINANCIAL PLANNING 1 1 1 1 1 1 1 1 1 1 1 1 1 2 9 9 52 62 66
I would like to thank my guide Mr. Amit Chadha (for his kind guidance and support through the project. He has always been there whenever I need any expert advice and have been more than willing to go out of the way to help. I am grateful to the Library and Computer Center staff for all the help and cooperation extended to us. Finally, I would also like to take this opportunity to thank all my friends who took out time to go through our documents and provide me positive criticism. The project would not have been a value addition without the help of the above stated people.
Statement about the problem:
A Mutual Fund is a trust that collects the savings of a number of investors who share a common financial goal and pools it together to create a larger resource of money. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The securities could be further subdivided into technology securities, pharmaceutical securities, FMCG securities etc. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders proportionately i.e. on the basis of the number of units owned by them (pro rata). 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 portfolio at a relatively low cost. Anybody with surplus money can invest, even as little as a few thousand rupees can be invested in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. The team undertakes this in the most professional manner. Markets for equity shares, debentures, bonds and other fixed income instruments; real estate, derivatives and other assets have reached their maturity and are driven by latest up-to-date information. A mutual fund is thus the ideal investment vehicle for today’s complex and modern financial scenario. Price changes in these assets are driven by global events occurring every day, in-fact every minute in faraway places. It will be very difficult, in-fact next to impossible for an ordinary individual to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The costs of hiring these
professionals per investor are very low, as the pool of money invested is large. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.
Why is the particular topic chosen?
Being the student of finance and from the family where dealing in money market is the main business. My keen area of interest is to work on a project where I can highlight on a topic which can help the common people also to know about something which is very difficult to digest for them on the front end. While talking to many peoples in day to day life I come to know that Mutual Funds are something about which the most of the peoples have perceptions that it is just like the same as dealing in Shares in which they can either earn or can lose their all amount. So, I decided to take up my project in the area where I can remove this perception of peoples that Mutual Funds and Shares are same. I had interviewed some people in and around Delhi city to know more about the Mutual Funds from the consumer’s point of view. Special care was taken to include people from all income brackets. Many people had no idea of Mutual Funds, which showed the low awareness level among the people of Delhi about the Mutual Funds. This stresses the need for better marketing
What contribution would the project make?
Mutual funds are financial intermediaries, which collect the savings of investors and invest them in a large and well-diversified portfolio of securities such as money market instruments, corporate and government bonds and equity shares of joint stock companies. MF’s can survive and
thrive only if they can live upto the hopes and trusts of their individual members. This project deals with the structure of the Indian MF industry and it’s constituents. It also classifies the Mutual fund schemes and describes the major players in the industry, with specific reference to Unit Trust Of India (UTI) A Mutual Fund is a trust that collects the savings of a number of investors who share a common financial goal and pools it together to create a larger resource of money. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The securities could be further subdivided into technology securities, pharmaceutical securities, FMCG securities etc. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders proportionately i.e. on the basis of the number of units owned by them (pro rata). In the end it is concluded and recommended that there is a need for Better marketing to increase awareness level, focus on building a relationship of trust and commitment with the investors, provide better rate of returns to the investors than offered by other investment options and providing better service to the investors While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks. 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 portfolio at a relatively low cost.
Objective and scope of the study:
The Mutual Fund Industry is fast gaining popularity in today’s unpredictable financial scenario. It is emerging as one of the most lucrative investment options. The primary objective of the project is to gain detailed insight into this Industry. I have tried to systematically and objectively look into all-important aspects. A combination of primary and secondary data has been used. The former, though limited, has helped us give first hand information on company and investor sentiments. The latter has been used to understand the theoretical aspects. Strategic importance has been given to both current and past trends and we have tried to correlate both in a manner to gain maximum insight. This document has been designed to serve a two-fold purpose. The first, which is also the main objective of the project, is to reflect our understanding of this industry. The second is to provide the reader similar detailed knowledge The prime objective of the research was to determine the perception of the Indian investor towards Mutual funds and this is demonstrated in the later part of this report.
Limitations of the study:
The major constraint faced by me in making the project was time. The time was not enough to know in detail about the factors, to major the performance of all mutual funds companies in the industry and to what extent each factor is responsible for the same. Also in some cases the companies contacted, were not willing to provide adequate information about the Mutual funds schemes, this constraint led to inability to cover the whole data. Which could give us clearer picture of the subject. Most of the data about the companies are collected from the concerned Companies Website or directly through the Concerned Companies, which can be manipulated or exaggerated by the company (Window dressing). However, inspite of all these limitations and constraint, a humble attempt to present useful information and format with an analytical picture of the study with suggestions has been made.
Research in this project will be conducted with the help of the following: This research is exploratory in nature .I shall be collected data from various primary and secondary sources. The choice of sample scheme will be guided by the fact that a reasonable amount of information will available and representing true picture of Indian mutual fund industry. The methodology adopted for the completion of this project will be divided into four stages.
The first stage included understanding the Concept, Structure and policy (related to Mutual funds) in the Indian mutual fund industry and Secondary data for this purpose will be collected through various books on mutual funds, business newspapers, business magazines, trade journals, annual & quarterly performance reports of the concerned mutual funds companies and the World wide web (www Information- concerned websites mentioned in the Bibliography). The second stage included the input stage in which various types of information data would be collected related to various mutual funds. The data was collected through discussions & interviews with the representatives of the companies. The financial and other relevant data will be extracted from the performance and annual reports of the Asset management companies (AMC) concerned In the third stage all the gathered data will be arranged and tabulated to arrive at the necessary conclusion. All the information was correlated into tabulation charts and in figures to make the information easy to understand. Primary collection of data included preparation of tools like Questionnaires to evaluate various schemes mutual funds and to determine the perception of the Indian investor towards the mutual funds. The results and findings of primary data will be collected (Sample Questionnaire) is given in the Annexure*. The last stage, i.e. the output stage included analyzing of the processed information in to final findings and comparing the information with the data of mutual fund companies and then arriving of final conclusions and policy recommendations to UTI.
Mutual funds are financial intermediaries, which collect the savings of investors and invest them in a large and well-diversified portfolio of securities such as money market instruments, corporate and government bonds and equity shares of joint stock companies. MF’s can survive and thrive only if they can live up to the hopes and trusts of their individual members. This project deals with the structure of the Indian MF industry and its constituents. It also classifies the Mutual fund schemes and describes the major players in the industry, with specific reference to Unit Trust of India (UTI) This research is exploratory in nature. I collected data from various secondary sources. The choice of sample scheme was guided by the fact that a reasonable amount of information was available and representing true picture of Indian mutual fund industry. I met 25 people in and around Delhi city to know more about the Mutual Funds from the consumer’s point of view. Special care was taken to include people from all income brackets. About 10 people had no idea of Mutual Funds, which showed the low awareness level among the people of Delhi about the Mutual Funds. This stresses the need for better marketing In India, the trend is that investors invest when there is a boom in the stock market and withdraw their holdings in times of slump. This is absolutely contrary to how the system works abroad as their investments take place in the slump period when greater units can be purchased with same amount of money. Withdrawals are correspondingly done in boom times as
maximum return is achieved. This is the right strategy and Mutual Fund companies are trying to create this awareness among consumers. . In the end it is concluded and recommended that there is a need for Better marketing to increase awareness level, focus on building a relationship of trust and commitment with the investors, provide better rate of returns.
A Mutual Fund is a trust that collects the savings of a number of investors who share a common financial goal and pools it together to create a larger resource of money. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The securities could be further subdivided into technology securities, pharmaceutical securities, FMCG securities etc. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders proportionately i.e. on the basis of the number of units owned by them (pro rata). 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 portfolio at a relatively low cost. Anybody with any surplus money that can be invested, even as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy. The team undertakes this in the most professional manner. Markets for equity shares, debentures, bonds and other fixed income instruments; real estate, derivatives and other assets have reached their maturity and are driven by latest up-to-date information. A mutual fund is thus the ideal investment vehicle for today’s complex and modern financial scenario. Price changes in these assets are driven by global events occurring every day, in-fact every minute in faraway places. It will be very difficult, in-fact next to impossible for an ordinary individual to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank
transactions etc. A mutual fund is the answer to all these situations. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. The costs of hiring these professionals per investor are very low, as the pool of money invested is large. In effect, the mutual fund vehicle exploits economies of scale in all three areas - research, investments and transaction processing. While the concept of individuals coming together to invest money collectively is not new, the mutual fund in its present form is a 20th century phenomenon. In fact, mutual funds gained popularity only after the Second World War. Globally, there are thousands of firms offering tens of thousands of mutual funds with different investment objectives. Today, mutual funds collectively manage almost as much as or more money as compared to banks.
How Mutual Fund Industry Works
The working of Mutual Funds can be briefly stated in the form of the points below: • A draft offer document is prepared at the time of launching the fund. Typically, it pre specifies the investment objectives of the fund, the risk associated, the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation. In India, as in most countries, these sponsors need approval from a regulator, SEBI (Securities exchange Board of India) in our case. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations. • A sponsor then hires an asset management company to invest the funds according to the investment objective. • It also hires another entity to be the custodian of the assets of the fund and perhaps a third one to handle registry work for the unit holders (subscribers) of the fund.
In the Indian context, the sponsors promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC).
Mutual Fund industry today, with about 34 players and more than five 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 AMCs and this fame is directly linked to their superior stock selection skills. For mutual funds to grow, AMCs 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 AMCs. One industry that has undergone the most dramatic transformation in the post- liberalization era of the nineties is the financial services industry and in particular, the mutual funds industry. There has been a paradigm change in the quality and quantity of product and service offerings. UTI remained the monopoly player in the mutual fund sector until 1987, when public sector banks and insurance companies were permitted to enter the fray. Finally, in 1993, the Securities and Exchange Board of India (SEBI) came up with comprehensive mutual regulations, that permitted the private sector to start with mutual funds operations. These were later replaced by the SEBI Mutual Fund Regulations, 1996.
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 the. The history of mutual funds in India can be broadly divided into four distinct phases First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. 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 1993. erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July 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.
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. Undertaking of Unit Trust of India, The Specified under an functioning
administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations With recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
ASSETS UNDER MANAGEMENT (AUM) have grown as follows:
AS ON 31st MARCH 1965 1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 31-mar-06 AUM (Rs. Crores) 24.67 88.30 169.95 455.30 2,209.61 19,130.92 72,967.17 74,315.31 70,197.41 58,918.22 70,623.50 103,452.98 90,587.00 100,594.00 79,464.00 231862.00
The graph indicates the growth of assets over the years.
Mutual fund schemes may be classified on the basis of its structure and its investment objective. This classification is shown below.
Types Of Mutual Funds
B C lo I n s e t e E r v a
a n l
s e d F
t r u ns
c t u d e
r e d L Fo G B a
B ua w
s e dF s u t h
d n F u
n d Ns o
I n L
v e o m
s a e M
t m d F a F u
n n n
t d d t
O s s F u
e O d p F e un n Ed u n d s
r o l a
n I nd c s o
FM u o n n d e s y
r k e
O T I n d a x u S a v i n s p g
s e s r a l S c h e m e s
S S p c e h c e i a m l eS s c e Ic n i f d i c e xS cS h c e h mSe
s t r y
me e c s e t os
Open-ended Funds An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. Closed-ended Funds A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
Interval Funds Interval funds combine the features of open-ended and close-ended schemes. They are open for sale or redemption during pre-determined intervals at NAV related prices. Growth Funds The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a majority of their corpus in equities. It has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. Income Funds The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities. Income Funds are ideal for capital stability and regular income. Balanced Funds The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. These are ideal for investors looking for a combination of income and moderate growth. Money Market Funds The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work. Tax Saving Schemes These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing in Mutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested before September 30, 2000. Industry Specific Schemes Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like InfoTech, FMCG, and Pharmaceuticals etc. Index Schemes Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50 Sectoral Schemes Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries or various segments such as 'A' Group shares or initial public offerings.
Alone UTI with just one scheme in 1964 now competes with as many as 400 odd products and 34 players in the market. In spite of the stiff competition and losing market sh-are, UTI still remains a formidable force to reckon with. Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now passé with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible. The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generations of private funds which have gained substantial mass are now seen flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry. By rewarding honest and transparent management with higher valuations, a system of risk-reward has been created where the corporate sector is more transparent then before. Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are improving. Funds collection, which averaged at less than Rs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 1998-99. In the current year mobilization till now have exceeded Rs300bn. Total collection for the current financial year ending March 2000 is expected to reach Rs450bn. What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs. 7819.34 crore during the first nine months of the year as against a net inflow of Rs.604.40 crore in the case of public sector funds. Mutual funds are now also competing with commercial banks in the race for retail investor’s savings and corporate float money. The power shift towards mutual funds has become obvious. The coming few years will show that the traditional saving avenues are losing out in the current scenario. Many investors are realizing that investments in savings accounts are as good as locking up their deposits in a closet. The fund mobilization trend by mutual funds in the current year
indicates that money is going to mutual funds in a big way. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-99. India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund assets are not even 10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in the first quarter of the current fiscal year mutual fund assets went up by 115% whereas bank deposits rose by only 17%. (Source: Think tank, The Financial Express September 99) This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets, which improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not close down completely. Their role as intermediaries cannot be ignored. It is just that Mutual Funds are going to change the way banks do business in the future. Banks v/s Mutual Funds CHARACTERISTICS BANKS Returns Low Administrative exp. High Risk Low Investment options Less Network High penetration Liquidity Quality of assets Interest calculation Guarantee
MUTUAL FUNDS Better
Low Moderate More Low improving At a cost Better Not transparent Transparent Minimum balance between 10th.Everyday & 30th. Of every month Maximum Rs.1 Lac on deposits None Table 1.1
Morgan Stanley Asset Management (I) Pvt. Ltd.
Morgan Stanley Dean Witter & Co. is a preeminent global financial services firm that provides a wide range of services to major corporations, governments, financial institutions and high-net-worth individuals worldwide. With approximately 50,000 employees in 24 countries, the Firm has a significant presence in every financial market. Morgan Stanley Dean Witter (MSDW) Investment Management is the institutional asset management division of MSDW & Co. MSDW Investment Management was established in 1975 to help governments, corporations, pension funds and non-profit organizations meet their long-term investment objectives. MSDW Investment Management manages US$ 385 billion for institutional and individual investors. MSDW Investment Management manages three major offshore India funds, the India Magnum Fund (traded on the Dublin Stock Exchange), the India Investment AG (listed on the Zurich Stock Exchange) and the India Investment Fund (traded on the New York Stock Exchange). The Morgan Stanley Growth Fund was launched in January 1994 and garnered an initial corpus of Rs. 981 crores. MSGF is listed on the Mumbai, Delhi, Calcutta, Chennai and Ahmedabad Stock Exchanges and is also traded on the National Stock Exchange. In 1997, MSGF units were placed as eligible securities with the National Securities Depository Limited, which made it possible for unit holders to hold units in electronic/dematerialized form. No. of schemes No. of schemes including options Equity Schemes 1 1 1
Corpus under management 981 Crore as on Jun 30, 1999
DSP Merrill Lynch Investment Managers
DSP Merrill Lynch Asset Management (India) Ltd., (a company registered under the Companies Act, 1956) has been set up by DSPML and MLAM,
to act as the Asset Management Company (AMC) to the Fund. The AMC has been appointed as the Investment Manager to the fund, MLAM holds 40% of the paid up share capital of the AMC, while the balance 60% (approximately), is held by DSPML. The Investment Manager was approved by SEBI to act as the AMC for the Mutual Fund. Merrill Lynch Investment Managers investment philosophy is designed to seek consistent, long-term strategic performance results. Its disciplined value oriented approach to managing its client’s portfolios has been with the primary objective of seeking consistent returns over a long period. DSP Merrill Lynch Asset Management (India) Ltd. has been changed its name to DSP Merrill Lynch Investment Manager’s Ltd. w.e.f. 20th July 2003. No. of schemes No. of schemes including options Equity Schemes Debt Schemes Short term debt Schemes Equity & Debt Gilt Fund 8 13 3 2 2 2 4
Corpus under management 1342.02 Crore as on Jun 30, 2003
Birla Sun Life Asset Management Company Ltd
Birla Sun Life AMC Ltd. is a joint venture between Sun Life Assurance Company of Canada and the Aditya Birla Group, one of Indian leading Industrial houses. Sun Life Assurance Company of Canada is a leading financial services organization, providing a diversified range of risk management, wealth management and money management products for individuals and corporations worldwide. Sun Life commenced business in Canada in 1871, and is headquartered in Toronto with major operations in Canada, United States, United Kingdom and Asia Pacific. Sun Life has consistently earned ratings that rank among the best in the North American financial services sector. It has a major presence in the growing mutual fund markets through MFS Investment Management in the U.S., and through Spectrum
United Mutual Funds in Canada. It is also active in the unit trust business in the U.K., and its near term plans include consideration of mutual fund offerings in the Philippines. The Aditya Birla group is a multinational group consisting of the best known companies in India in a range of key sectors like Textiles (GRASIM), Rayon (Indian Rayon), Aluminum (HINDALCO), Petroleum (MRPL), Finance (BGFL), Fertilizers (Indo-Gulf). Birla Mutual Fund offers investment Schemes which aim to cater to every need of the investor. Drawing on the expertise of a worldwide staff of over 10,000 people and a network of more than 65,000 agents and distributors, Sun Life is committed to providing not just products and services, but solutions for clients financial and risk management needs. No. of schemes 10 No. of schemes including options 20 Equity Schemes 8 Debt Schemes 2 Short term debt Schemes 2 Equity & Debt 2 Gilt Fund 6 Corpus under management 3742 Crore as on Jun 30, 2003
Kothari Pioneer Asset Management Company Ltd.
Kothari Pioneer Mutual Fund is sponsored by the Investment Trust of India Ltd. of the H C Kothari Group and Pioneer Investment Management Inc. (PIM) of The Pioneer Group Inc., USA. Kothari Pioneer is one of India s first mutual fund in the private sector. Today, it manages Rs.2700 crores in assets for over 650,000 investors across a range of growth, balanced, income, liquid and tax saving funds. The sponsors of the fund are Pioneer Investment Management (PIM), USA and the Investment Trust of India, who together bring more than 120 years of experience in financial services. PIM currently manages over $24 billion in assets worldwide on behalf of individual and institutional investors. Based in Boston, Pioneer has financial services operations in Germany, Ireland, Poland, Czech Republic, India and Russia. Its flagship fund, Pioneer Fund, was founded in 1928 and is the fourth oldest mutual fund in the United States. No. of schemes 21 No. of schemes including options 34 Equity Schemes 18 Debt Schemes 12
Short-term debt Schemes Equity & Debt Money Market
2 1 1
Corpus under management 2600 Crs. as on Jun 30, 2003
Sun F & C Asset Management (India) Pvt. Ltd.
SUN F&C Asset Management (India) Pvt. Ltd. is an equal joint venture between Foreign & Colonial Emerging Markets Ltd. U.K. and SUN Securities (India) Pvt. Ltd. Foreign & Colonial, established in 1868, is one of Europe s leading asset management groups. F&C is a part of Hypo Bank, one of Germany s oldest and largest banks and has been investing in the Indian stock markets since 1993. SSIL is an Indian subsidiary company of Sun Group. Its activities consist of principal investment and investment management operations in emerging markets and technologies as well as international commercial activities. SUN F&C currently manages and advises India Performance Fund (an offshore fund), SUN F&C Value Fund (a domestic fund) and F&C sponsored Indian Investment Company SICAV (INDICO). SUN F&C launched its Indian operations by becoming the domestic advisor to FCEMs INDICO fund. It has since then launched India Performance Fund, an offshore fund, in 1996 and five domestic schemes Value Fund (1997), Money Value Fund (1998), Balanced Fund (1999), Emerging Technologies Fund (2003), Monthly Income Plan (2003) and Resurgent India Equity Fund (2003). Over the last 5 years, the Company has built a strong track record of managing asset classes, equity and debt. Today, Sun F&C manages/advises a corpus of over Rs.1000 crore (US$230 mn), of which over 50% is equity. This corpus is spread over 8 schemes, 6 domestic and 2 offshore. A team of 56 people spread over 8 location service almost 80,000 customers. No. of schemes No. of schemes including options Equity Schemes Debt Schemes Short term debt Schemes Equity & Debt 7 12 4 5 2 1
Corpus under management 720 Crore as on May 31, 2003
Every year, millions of Indians entrust their savings to Unit Trust of India to build up a financially secure future. This faith and confidence of investors stem from UTI's commitment, as reflected in its long track record to ensure its investors, safety, liquidity and attractive yield on their investments. Set up in 1964, by an Act of Parliament, UTI Act 1963, UTI has grown into one of the biggest players and carved out a special position in the Indian capital market. Today, UTI manages an aggregate portfolio of Rs. 72,698 Crore as on 31/12/1999 and services 45 million investor accounts under 90 saving schemes catering to varying needs of different classes of investors. UTI has a servicing and distribution network of 53 branch offices, 320 District Representatives and about 87,000 agents. It provides a complete range of services to its investors, at a low gross cost of less than 1.01 percent of invisible funds and does not charge any asset management fee. Management: Chairman Shri M Damodaran Executive Directors Shri K G Vassal Shri A K Thakur Shri M M Kapur Shri A N Palwankar Shri S K Basu Dr Basudeb Sen Shri B G Daga
Savings Plans and Funds: UTI is a symbol of trust and confidence among Indian investors. In the last seven years, the number of schemes managed by UTI increased from 35 to 92, while the number of unit holding accounts recorded a sevenfold increase from 65 lakhs to over 450 lakhs. UTI's expanding product range cover a broad spectrum of investment goals and includes open end and closed-end income and capital accumulation funds. Among the most popular are Unit Scheme 1964 and Master series equity schemes such as Mastershare, Masterplus, Master Equity Plans, etc. UTI also manages schemes aimed at meeting specific needs like ♦ Low cost insurance cover (ULIP) ♦ Monthly income needs of retired persons and women. ♦ Income and liquidity needs of religious and charitable institutions and trusts. ♦ Building up funds to meet cost of higher education and career plans for children. ♦ Future wealth and income needs of girl child and women. ♦ Building savings to cover medical insurance at old age. ♦ Wealth accumulation to meet income needs after retirement. The Market – Trust and Reach: Individual household investors account for 99% of UTI's investor accounts and about 65% of unit capital of UTI schemes. Products are distributed through a marketing force of about 87,000 commission-based canvassing agents trained to explain the products and provide related service support to investors. Today, these agents are supervised by 320 Chief Representatives who guide the investors, organize, train and motivate the agents in their respective areas of operation (specified districts).
Investors under various schemes of UTI are now serviced through 53 UTI branches, 213 collection centers and offices of 6 Registrar and Transfer Agencies appointed by UTI. Besides there are 52 franchises offices, which accept applications and distribute certificates to unit holders. UTI has set up its own associate company, UTI-Investor Services Limited (UTIISL), to meet the growing needs of unit holder servicing. UTI is also currently implementing a technology upgradation program, involving networking of on-line computer systems at UTI's offices, and offices of Registrars and Transfer Agencies. This would enable UTI to improve service quality significantly. UTI publishes weekly/daily NAVs for all its listed schemes and offers a prospectus for every scheme. It also publishes half-yearly results for all schemes and releases information on portfolio as also largest shareholding for growth schemes and Unit Scheme 1964. UTI adheres to disclosure requirements specified by SEBI. Fund deployment: Equity Investing: More than fifty percent of total funds of UTI Schemes are invested in equity. UTI is the largest operator in the Indian equity market with total investments worth Rs 35,007.83 crores at book value. Its various funds collectively hold stocks in more than 1500 Indian companies and account for over 8 percent of the market capitalization of all listed scripts on the Bombay Stock Exchange.
UTI is one of the main providers of debt finance to the corporate sector. Investment in corporate debt instruments account for 38 percent of the total investible funds. Credit market operations cover a range of instruments including publicly issued and privately placed debentures, bonds and medium term notes. UTI's debt portfolio quality is represented by 98 percent performing assets.
UTI is also one of the largest investors, among non-banking institutions in the money market. About 11 percent of the total investible funds are accounted for by government paper and call deposits. Investment guidelines: Consistent with the UTI Act, UTI's investment decisions are guided by investors' interests. UTI's operations are guided by UTI Act, 1963 and UTI's investments are subject to prudential exposure norms and limits laid down by UTI regulations. It cannot invest more than 10 percent of a particular scheme corpus in the equity of any one company. UTI's investment decisions are backed by inputs from independent group’s setup for equity research, investment appraisal and credit rating. A Conglomerate with a vision: As a distinctive financial institution, UTI manages funds raised through common investible vehicles and at the same time provides companies financial services, including underwriting. To create a diversified financial conglomerate and to meet investor's varying needs under a common umbrella, UTI has set up a number of associate companies in the field of banking, securities trading, investor servicing, investment advice and training. ♦ UTI Bank Ltd (1994)--the first private sector bank to be set up under RBI guidelines. ♦ UTI Securities Exchange Ltd (1994)--the first institutionally sponsored corporate stock-broking firm. ♦ UTI Investor Services Ltd (1993)--the first institutionally sponsored Registrar and Transfer agency. ♦ UTI Institute of Capital Markets (1989)--the first such institute in Asia, excluding Japan. o UTI Investment Advisory Services Ltd (1988)--the first Indian Investment Advisor registered with SEC, US. Consistent with financial sector deregulation, UTI has plans to enter insurance, pension fund and credit rating businesses.
Global links: UTI pioneered the offshore fund investment in Indian securities. The India Fund launched in 1986 as a closed-end fund, became a multi-class openended fund in 1994. Thereafter, in 1988 UTI floated the India Growth Fund, which is listed, on the New York Stock Exchange. Both India Fund and India Growth Fund have increased their corpus through rights issues. Besides the Columbus India Fund, launched in 1994, UTI launched the India Access Fund, an Indian Index Fund (tracking the NSE 50 index) in 1996. UTI International Limited is a 100% subsidiary of Unit Trust of India, registered in the island of Guernsey. This company was set up with the primary objective of administration and marketing of various offshore funds managed by UTI as also to act as the management company for these funds as required by the Guernsey Law. UTI International Ltd has an office in London to market UTI's offshore funds to institutional clients in UK, Europe and USA. It is also responsible for developing new products as well as new business opportunities of UTI. This office also looks after ongoing investor relations with foreign investors and has succeeded in greatly improving communication between UTI and its clients and distributors abroad. UTI International Ltd has played an important role in launching three new offshore funds of UTI - the India IT Fund Ltd, the India Debt Fund Ltd and the India Public sector Fund Ltd. To cater to various needs of NRI investors based in the Gulf region, UTI has a Representative office at Dubai. The representative office covers all the six GCC countries viz. UAE, Oman, Kuwait, Saudi Arabia, Qatar and Bahrain. The Dubai office of UTI acts as a liaison office between our NRI investors in the Gulf and UTI offices all over India. Besides providing information on current and new schemes of UTI, it also co-ordinates with UTI offices in India for all after-sale requests of unit holders/agents. In the recent past, UTI has extended its support to the development of Unit Trusts in other developing countries, like Sri Lanka and Egypt. Besides providing technical advice, UTI also participated in the equity capital of the Unit Trust Management Company of Sri Lanka.
Research strength: UTI has its own research set-up to deal with different areas. The areas of research analysis cover macro economy, capital markets, financial sector and mutual funds. Equity Research and Credit Rating groups also cover industry and corporate performance. UTI Institute of Capital Markets conducts training programmes for the financial community and helps develop modern and scientific approach towards investment management. It also serves as a forum to discuss ideas and issues relevant to the capital market besides publishing research papers relating to capital market. Schemes offered: No. of schemes No. of schemes including options Equity Schemes Debt Schemes Equity & Debt Money Market Gilt Fund 72 115 31 69 3 1 2
Corpus under management 72500 Crore as on Jun 30, 2003
Schemes of a Mutual Fund: The asset management company shall launch no scheme unless the trustees approve such scheme and a copy of the offer document has been filed with the Board. Every mutual fund shall along with the offer document of each scheme pay filing fees. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision including the disclosure on maximum investments proposed to be made by the scheme in the listed securities of the group companies of the sponsor The mutual fund and asset Management Company shall be liable to refund the application money to the applicants If the mutual fund fails to receive the minimum subscription amount referred to in clause (a) of sub-regulation (1) If the moneys received from the applicants for units are in excess of subscription as referred to in clause (b) of sub-regulation (1). The asset management company shall issue to the applicant whose application has been accepted, unit certificates or a statement of accounts specifying the number of units allotted to the applicant as soon as possible but not later than six weeks from the date of closure of the initial subscription list and or from the date of receipt of the request from the unit holders in any open ended scheme. Rules Regarding Advertisement: The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which are incorrect or false. Investment Objectives and Valuation Policies: The price at which the units may be subscribed or sold and the price at which such units may at any time be repurchased by the mutual fund shall be made available to the investors. General Obligations: Every asset management company for each scheme shall keep and maintain proper books of accounts, records and documents, for each scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of the fund and
intimate to the Board the place where such books of accounts, records and documents are maintained. The financial year for all the schemes shall end as of March 31 of each year. Every mutual fund shall have the annual statement of accounts audited by an auditor who is not in any way associated with the auditor of the asset management company. Procedure for Action In Case Of Default: On and from the date of the suspension of the certificate or the approval, as the case may be, the mutual fund, trustees or asset management company, shall cease to carry on any activity as a mutual fund, trustee or asset management company, during the period of suspension, and shall be subject to the directions of the Board with regard to any records, documents, or securities that may be in its custody or control, relating to its activities as mutual fund, trustees or asset management company. Restrictions on Investments: A mutual fund scheme shall not invest more than 15% of its NAV in debt instruments issued by a single issuer, which are rated not below investment grade by a credit rating agency authorized to carry out such activity under the Act. Such investment limit may be extended to 20% of the NAV of the scheme with the prior approval of the Board of Trustees and the Board of asset Management Company. A mutual fund scheme shall not invest more than 10% of its NAV in un rated debt instruments issued by a single issuer and the total investment in such instruments shall not exceed 25% of the NAV of the scheme. All such investments shall be made with the prior approval of the Board of Trustees and the Board of asset Management Company. No mutual fund under all its schemes should own more than ten per cent of any company's paid up capital carrying voting rights. Such transfers are done at the prevailing market price for quoted instruments on spot basis. The securities so transferred shall be in conformity with the investment objective of the scheme to which such transfer has been made. A scheme may invest in another scheme under the same asset management company or any other mutual fund without charging any fees, provided that aggregate inter scheme investment made by
all schemes under the same management or in schemes under the management of any other asset management company shall not exceed 5% of the net asset value of the mutual fund. The initial issue expenses in respect of any scheme may not exceed six per cent of the funds raised under that scheme. Every mutual fund shall buy and sell securities on the basis of deliveries and shall in all cases of purchases, take delivery of relative securities and in all cases of sale, deliver the securities and shall in no case put itself in a position whereby it has to make short sale or carry forward transaction or engage in badla finance. Every mutual fund shall, get the securities purchased or transferred in the name of the mutual fund on account of the concerned scheme, wherever investments are intended to be of long-term nature. Pending deployment of funds of a scheme in securities in terms of investment objectives of the scheme a mutual fund can invest the funds of the scheme in short term deposits of scheduled commercial banks. No mutual fund scheme shall make any investment in; Any unlisted security of an associate or group company of the sponsor; or Any security issued by way of private placement by an associate or group company of the sponsor; or The listed securities of group companies of the sponsor which is in excess of 30% of the net assets [of all the schemes of a mutual fund] No mutual fund scheme shall invest more than 10 per cent of its NAV in the equity shares or equity related instruments of any company. Provided that, the limit of 10 per cent shall not be applicable for investments in index fund or sector or industry specific scheme. A mutual fund scheme shall not invest more than 5% of its NAV in the equity shares or equity related investments in case of openended scheme and 10% of its NAV in case of close-ended scheme.
Fund sponsor: The Sponsor Company establishes the mutual fund in the form of a trust and registers it with SEBI. The board of trustees holds the fund in trust for unit holders and ensures compliance with SEBI regulations, trust deed guidelines and the terms of the asset management agreement by the AMC. As an investor one should check the sponsors track record. Scrutiny of the fund sponsor's track record may forewarn you against jolts like the CRB scandal. Apart from a consistent track record, sponsors should have requisite experience and background in managing mutual funds. Fund manager: The fund manager is an employee of the asset management company who formulates the investment strategy and invests the funds. As an investor in the fund one should - Understand the investment philosophy of the fund manager. - Check the returns he has generated on funds previously managed by him, and - Find out whether the fund manager has delivered on the investment objectives of the funds he has managed in the past.
Type of fund
1. Open ended funds: Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. Such funds announce sale and repurchase prices from time to time. In an openended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. This is because open-ended schemes are permitted to buy/sell their own units. 2. Close ended funds: Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market. In such schemes, the period of the scheme is specified at the outset. They have a definite target amount for the funds and cannot sell more after initial offering. If the scheme is limited, investors can trade units on the bourses, just like equities and debentures.
Type of scheme
Mutual funds can offer different investment schemes. These schemes can be classified as: 1. Growth Funds Investment objective: Capital appreciation of equity shares Investment avenue: Equity shares of companies with high growth potential 2. Income Funds Investment objective: Providing safety of investments and regular income Investment avenue: Bonds, debentures and other debt related instruments as well as equity shares of companies with high dividend payouts. There are 2 aspects of income funds viz. low investment risk with constant income and high investment risk generating high income. 3. Balanced Funds Investment objective: Modest risk of investment and reasonable rate of return Investment avenue: Judicious mix of equity shares, preference shares as well as bonds, debentures and other debt related instruments 4. Money Market Mutual Funds (MMMFs) Investment objective: To take advantage of the volatility in interest rates in the money market Investment Avenue: Certificate of deposits (CDs), call money market,
commercial papers. Investors who had earlier stayed away from the money market can participate indirectly through MMMFs. 5. Specialized Funds Investment Objective: To take advantage of conditions in a particular sector or a specific income producing security Investment Avenue: Specialized investments in securities of companies in certain sectors or specific income producing securities 6. Leveraged Funds Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds Investment avenue: Speculative and risky investments like short sales to take advantage of declining market. 7. Index Funds Investment Objective: To increase the value of the portfolio in line with the benchmark index (ie. BSE Sensex, S&P CNX 50) Investment Avenue: Investments only in those shares that form a part of the benchmark index, in exactly the same proportion, so that the value of the index fund varies in proportion with the benchmark index.
8. Hedge Funds Investment Objective: To hedge risks in order to increase the value of the portfolio Investment Avenue: Employ speculative trading principles - buy rising shares and sell shares whose prices are likely to fall. As an investor you should invest in schemes, which meet your criteria in terms of you need for regular income, capital appreciation, and safety of principal.
Fees and charges
AMCs charge a fee for managing the funds. As an investor in the fund we must be aware of the fees and charges of the AMC. Two schemes with more or less similar performances would generate different returns if one of the two schemes charges high fees.
The public offering price
A sales load represents the money received by the AMC as compensation for distributing units. It helps the fund to meet its expenses relating to sales literature, promotion, distribution, advertising and agent/broker commissions. The Public offering Price (POP) is the price at which an investor buys into the fund and is a function of both the NAV and sales load. For instance, if the Funds NAV is Rs 12/- and the applicable sales load is 6% the POP is NAV/ (1-Sales load) =12/(1-. 06) = 12.77 If the investor applied for Rs 10,000 worth of units he would receive 783.085 units (10,000/12.77). You might be required to pay such load charges either at the time of buying the units or at the time of selling the units. As an investor you should be aware of such entry. /exit loads as they could have a material impact on returns.
Investors need to understand the tax implications before investing in the schemes, as one scheme may offer more attractive post-tax returns compared to its peers. As Union budgets regularly offer tax benefits to mutual funds and mutual fund investors, you as an investor must review the tax implications of mutual fund investments.
Service levels vary across funds. Level of communication also varies across funds. While some disclose the fund portfolio annually, others disclose it quarterly, and some others disclose it monthly.
Performance and NAV
Every fund is benchmarked against an index like the BSE Sensex, CNX SNP 50, BSE 200, etc. As an investor you must track the funds performance against the benchmark index. Also it could be useful for the investor to compare its performance with other funds. /exit loads as they could have a material impact on returns.
2000000 1500000 1000000 500000 0
20 00 20 01 01 20 02 02 20 03 03 20 04 04 20 05 05 -0 6
GDP per Capita
Gross Domestic savings Savings with Commercial Banks Mobilization by Mutual Funds
Graph Showing Company Net Flows
Company 2001-02 2002-03 2003-04 2004-05 2005-06 Names Kothari Pioneer 309.46 -10 -81.4 -5.59 161.1 ICICI Prudential 90.28 528.53 Birla Mutual 162.2 25.03 111.58 260.41 474.49 Fund Templeton 119.79 53.14 242.76
600 500 400 300 200 100 0 -100 -200 Kothari Pioneer ICICI Prudential Birla Mutual Fund Templeton 2001-02 2002-03 2003-04 2004-05 2005-06
Graph Showing Relation Between Market Indices And Mutual Funds Sales
Month May'02 Aug'03 Nov'04 Feb'05 April'06
BSE Sensex 3964 4898 4622 5447 4658
NSE Index 1132 1412 1376 1655 1407
MF Sales 2920.666667 3537.333333 4752 8703.666667 6662
10000 8000 6000 4000 2000 0
02 Au g' 03 No v' 0 4 Fe b' 05 ay ' Ap r il'0 6
BSE Sensex NSE Index MF Sales
SWOT ANALYSIS OF MUTUAL FUNDS
Strengths of Mutual Funds are: 1.The fund industry has introduced the best products and services, and delivered superlative performances. 2.It allows small investors to invest in market cheaply and efficiently. 3.You get to own several companies no matter how much you decide to invest. In other words you get instant ‘diversification’. 4.You can easily make monthly contributions. 5.A professional manager is the one managing the money. Theoretically because of his/her experience and knowledge you should receive above average returns. 6.Very high transparency, risk of fraud is very less. 7.For every kind of profile (ie conservative, moderately aggressive, aggressive) there are investment options available. Weaknesses of Mutual Funds are: 1.Load being charged for entry into and exit from a particular fund is the biggest weakness of funds. 2.Lack of flexibility. 3.Load is charged irrespective of the performance of the fund. 4.Expense ratio is charged separately ie you pay management fee no matter if the fund makes you money or not. 5.A large majority of mutual fund companies don’t come close to beating market averages like the S&P 500.
Opportunities for Mutual Funds: 1.Only .5% of Indian savings is invested in mutual funds. Therefore there is a large potential for the fund industry to mobilize the savings of people into investments in MF’s. 2.Mutual funds are currently not allowed to invest in real estate. MF making investments in property should be allowed. Government is making necessary efforts. Threats to the Mutual Funds: 1.One of the biggest ills plaguing the fund industry today is called late trading. The deal is to offer preferential treatment to large investors by offering them backdated net asset values (NAVs).
ULIP (Unit Linked Investment Plan)- if the time horizon of the
investor is more than 15 years, ULIP becomes a threat to fund industry. Also the brokers say (banks) get higher brokerage if an investor invests in ULIP rather than MF’S. 3.PPF (Public Provident Fund) is also a threat since it gives guaranteed return since no investment is risk free. Anyone who invests in mutual funds runs the risk of losing money. 4.Real estate also poses a big threat for the industry since investor prefers investing in property rather than funds. 5.Portfolio management has now been started by various institutions such a (Kotak securities), whereby a separate portfolio can be designed for an individual investor. Here an individual is saved if the fund manger does not make right decision regarding fund’s portfolio.
Financial Aspects of Mutual Funds:
Net Asset Value:
Before venturing into the market related functional aspects of Mutual funds, it is important to understand the evaluation criteria of these funds. Just as a business is evaluated by the level of its profits, a mutual fund is assessed on the basis of its “net asset value”, as explained below. The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by dividing the net asset value of the fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention. Calculation of NAV The most important part of the calculation is the valuation of the assets owned by the fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the asset value is given below. Asset value is equal to Sum of market value of shares/debentures
+ Liquid assets/cash held, if any + Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid
Asset Management Company (AMC): An Asset Management Company or AMC is the investment manager of the respective trust, which is entitled to invest in different securities on behalf of unit holders, in line with the objectives of respective schemes. Load: The charge collected by a Mutual Fund from an investor for selling the units or investing in it. Entry load: When a charge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load. The entry load percentage is added to the NAV at the time of allotment. Exit load: An Exit load or Back-end load or Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). The exit load percentage is deducted from the NAV at the time of redemption or transfer between schemes. Systematic Investment Plan: .
Systematic Investment Plan is normally offered by many open-ended mutual funds in order to encourage regular investments. This plan allows an investor to purchase additional units of the Scheme by investing fixed amount of rupees every month/quarter. The beauty of the plan is that as the market falls the number of units purchased by the investor increases as the purchases are linked to the NAV. This concept is called Rupee Cost Averaging. Rupee Cost Averaging does not guarantee a profit or protect against a loss. Rupee Cost Averaging can smooth out the market's ups and downs and reduce the risk of investing in volatile markets. Systematic Withdrawal Plan: The unit holder may set up a Systematic Withdrawal Plan on a monthly, quarterly or semi-annual or annual basis to redeem a fixed number of units Price/Earnings Ratio: Abbreviated as P/E Ratio or P/E. Sometimes referred to as the "multiple." Calculated by dividing the stock's current price by the company's current annual earnings per share, usually from the last four quarters (known as the Trailing P/E Ratio), but sometimes from the estimates of the earnings expected in the next four quarters (the Projected P/E ratio), or from the sum of the last two actual quarters and the estimates of the next two quarters. In and of itself, the P/E Ratio tells very little, but can be usefully compared to the P/E Ratios of other companies in the same industry, or to the market in general, or to the company's own historical P/E Ratios, in order to determine how much the market is currently willing to pay for a share of the company's earnings.
BY MARKET CAPITALISATION Market capitalization: Stock Funds are often grouped by the size of the companies they invest in big, small or tiny. By size we mean a company's value on the stock market: the number of shares it has outstanding multiplied by the share price. This is known as market capitalization.
Big companies tend to be less risky than small companies. But smaller companies can often offer more growth potential. The best idea is probably to have a mix of funds that gives an exposure to large-cap, midsize and small companies.
A fund's market capitalization will indicate whether the fund emphasizes the stocks of blue-chip companies with large market capitalizations, emerging companies with small capitalizations, or something in between. a) Large Cap Funds: Large cap funds invest their assets primarily in companies, which have a sizable market capitalization. Different fund houses define `Sizable' differently. This is usually mentioned in the fact sheets for the investor's benefit. For instance, in its IPO (Franklin Flexi Cap), Templeton defined large caps as companies with a market capitalization in excess of Rs 15 bn (Rs 1,500 crores). Companies below this threshold were categorized as mid/small caps. Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap stocks), because such companies are usually widely researched and information is widely available. Large-cap funds are less volatile than funds that invest in smaller companies. Usually, that means we can expect smaller returns but stable returns.
E.g.: Kotak 30, HDFC Top 200 Fund, Franklin India Bluechip Fund, HSBC Equity Fund for instance, invest predominantly in large caps. b) Mid Cap Funds: These funds invest in companies that have a lower market capitalization than the large caps. For instance, Sundaram Mutual Fund defines mid caps as stocks with a market capitalization of less than Rs 18 bn. However, this level varies from fund house to fund house. As with large caps, BSE (BSE Mid Cap 200) and S&P CNX (S&P CNX Mid Cap 200) have designed their own indices for mid cap stocks. Investments in mid caps are a riskier proposition as compared to investments in large cap funds. In fact, a mid cap stock could well graduate to a large cap over the years giving the investor a significant return on his investment. E.g.: Franklin India Prima Fund, Kotak Mid-Cap, Magnum Global Fund, Sundaram Select Mid Cap fund are some examples of mid cap funds. c) Small Cap Funds: Small cap funds invest in companies with a smaller market capitalization. (Sundaram SMILE) - Sundaram Mutual Fund defined small caps as stocks with a market capitalization of less than Rs 2 bn. investing in small cap funds is fraught with considerable risk. Small cap companies in most cases are just evolving. Again, as with mid caps, information on small caps is not easily available so these companies are under-researched or maybe not researched at all. So we are contending with a relatively unknown entity here. However, the risk-return trade-off is much higher vis-à-vis large caps and mid caps.
The volatility of the fund often depends on the aggressiveness of the manager. Aggressive small-cap managers will buy hot growth and technology companies, taking high risks in hopes of high rewards. More conservative "value" managers will look for companies that have been beaten down temporarily by the stock market. Currently this is a niche segment as there is no fund investing purely in small cap stocks. Sundaram SMILE is probably the first small cap fund of its kind. d) Multi/Flexi-Cap Funds: Just about every second mutual fund IPO these days is a multi/flexi cap fund. The fund manager has the mandate to shift across market capitalizations depending on the growth opportunity. This is generally dictated by the market happenings i.e. which sector is driving growth at a given time or which market segment (market capitalization) is witnessing the latest rally. But generally, there's a ceiling on how far the fund manager can go in a particular market segment or sector. This helps in keeping the portfolio relatively diversified and mitigate risks. In terms of risk-return trade-off, these funds are positioned between large caps and mid caps. Some multi cap funds include - DSP ML Opportunities, Tata Equity Opportunities and Principal Resurgent India Fund.
HOW TO INVEST IN MUTUAL FUND
Step One - Identify the Investment needs: Our financial goals will vary, based on the age, lifestyle, financial independence, family commitments, and level of income and expenses among many other factors. Therefore, the first step is to assess the needs. We can begin by defining the investment objectives and needs, which could be regular income, buying a home or finance a wedding or educate children etc. Step Two - Choose the right Mutual Fund: The important thing is to choose the right mutual fund scheme, which suits our requirements. The offer document of the scheme tells us its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some factors to evaluate before choosing a particular Mutual Fund are the track record of the performance of the fund over the last few years. Other factors could be the portfolio allocation, the dividend yield and the degree of transparency etc. Step Three - Select the ideal mix of Schemes: Investing in just one Mutual Fund scheme may not meet all the investment needs. We may consider investing in a combination of schemes to achieve our specific goals. Step Four - Invest regularly: The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum each month, we buy fewer units when the price is higher and more units when the price is low, thus bringing down the average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. We can also avail the systematic investment plan facility offered by many open-end funds.
Step Five- Start early: It is desirable to start investing early and stick to a regular investment plan. If we start now, we will make more than if we wait and invest later. The power of compounding lets us earn income on income and our money multiplies at a compounded rate of return. Step Six - The final step: Finally we need to fill in the application forms of various mutual fund schemes and start investing. We may reap the rewards in the years to come. Mutual Funds are suitable for every kind of investor - whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking.
COMPARATIVE ANALYSIS OF MUTUAL FUNDS
BETA A Beta is a measure of risk that, when applied to investment portfolios, provides useful statistical information. It compares a mutual fund's volatility with that of a benchmark. If the beta of the stock is 1, it means that the returns in the stock are highly correlated to the benchmark index. A fund with a beta greater than 1 is considered more volatile than the market; and a fund with a beta less than 1 means less volatile.
COMPARATIVE ANALYSIS HDFC TOP 200 0.91 PRU ICICI GROWTH 0.98 RELIANCE VISION 0.89
0.9 0.85 BETA 0.8 0.75 0.7 UTI HDFC CAPITAL BUILDER Funds RELIANCE GROWTH BETA
Most mainstream equity funds have Betas in the range of .85 to 1.05 (fairly close to the 1.00 Beta represented by the market in the aggregate). Especially conservative stock funds may register Betas as low as .75, meaning that in a -10% market decline, their values might be expected to fall -7.5%. Aggressive funds with Betas of 1.25 might see their values fall by -12.5%. We can see that the betas of nearly all the funds are similar apart from the beta of Pru-ICICI Growth, which has a very high beta, which implies that the fund is very volatile. An important point to be considered is that with different objectives, the mid-cap and large cap betas also different. Large cap betas are more towards market beta which implies that these funds have been more stable unlike mid cap betas which are more volatile
ALPHA Alpha is a financial term describing that part of an investor's return that is due to the skills of the investment manager, as distinct from the return of the market as a whole. Alpha can provide a deeper perspective on the performance of equity schemes to a mutual fund investor. While analyzing performance, we would like to know how much of the return was attributable to the market as a whole, and how much due to the manager's ability to select stocks. Value Added by Fund Manager (or alpha) indicates the return that is not attributable to the market, or in other words the added value the manager achieved over and above the result of the market. COMPARATIVE ANALYSIS:
A fund manager who reduces risks by booking profits has also to be careful in reinvesting. If the reinvesting is badly managed, the returns may not be superior. Then, despite a lower beta, the performance may be flat. The measure `Alpha' indicates the value added by a fund manager. HDFC TOP 200 1.73 PRU ICICI GROWTH 0.65 RELIANCE VISION 2.27
3 2.5 ALPHA 2 1.5 1 0.5 0 UTI HDFC CAPITAL BUILDER Funds RELIANCE GROWTH ALPHA
Alpha can be seen as a measure of a fund manager's performance. This is what the fund has earned over and above (or under) what it was expected to earn. Thus, this is the value added (or subtracted) by the fund manager's investment decisions. In the large cap funds, it can be see that the alpha of the Reliance Vision is highest i.e 2.27. This can be attributed to the high churning of funds done by the fund manager. The lowest alpha is of Pru-ICICI Growth being 0.65; meanwhile the beta of this fund is the maximum.
Again, in the mid cap funds also the alpha of reliance growth is the maximum which can be attributed to the above reasons. Another trend is that overall the alpha of mid-cap funds is higher as compared to large cap funds. One reason could also be that in this time period when the study was done, the mid cap funds were performing quite well as compared to large cap funds.
SECTOR ALLOCATION The division of an investment portfolio among major sectors usually to diversify the risk. In this context, two approaches can be followed:
Top-down approach- Herein firstly the sectors are chosen, and thereafter-strong companies are chosen in these sectors. E.g. HSBC Equity Bottom-up approach- Herein the investments are done in fundamentally sound companies. E.g. Franklin India Bluechip.
PORTFOLIO CONCENTRATION: This refers to the concentration of the allocation in top few sectors. Depending on the objective of the mutual fund, the fund could be concentrated or diversified. HDFC Equity Fund is a very concentrated fund. Meanwhile Reliance Growth is a very diversified fund Funds exposure to different kinds of sectors is another parameter on which the different mutual funds can be compared. Most funds have adequate exposure to technology stocks. Lately most funds have increased their exposure to banking sector stocks. However reliance has a very different stock allocation investing in automobile and heavy engineering sectors.
The total risk of a given fund is measured in terms of standard deviation of returns of the fund. Standard Deviation is a measure of scattering of the values about the average (mean) value. It tells us how much the values have deviated from the mean of the values. It is calculated by using returns of the scheme i.e. the Net Asset Value (NAV), and is a measure of the dispersion of the scheme's return around its average return.
8 7.8 7.6 7.4 7.2 7 6.8 6.6 6.4 6.2 6 UTI HDFC CAPITAL BUILDER Funds RELIANCE GROWTH
COMPARATIVE ANALYSIS When used in relation to mutual funds, it tells about the volatility of the scheme. The higher is the value, the more volatile are the returns and vice versa.
UTI STANDARD DEVIATION 6.91
HDFC TOP 200 7.27
PRU ICICI GROWTH 7.35
RELIANCE VISION 7.44
Mid Cap Funds The standard deviation is more in mid cap funds. This shows that mid cap funds are more volatile as compared to large cap funds.
In the large cap funds the highest standard deviation is of reliance vision, reliance vision falls in the category of high risk and high return.
Meanwhile the standard deviation of the Franklin India Blue chip is the lowest, this fund is considered as one of the most stable returns giving fund. However in the mid cap fund the highest standard deviation is of Franklin India Prima. This is because Franklin India prima has lately changed its sectoral composition, trying to make it as an aggressive fund.
SHARPE RATIO Sharpe ratio, worked by Nobel Laureate Bill Sharpe, tries to quantify how a fund performs relative to the risk it takes. It is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it (standard deviation). Symbolically it is written as:
( Ri − Rf )
Where, SI= Sharpe Index Ri = Return on the fund Rf = risk free rate of return (e.g. a 90 day T-Bill)
σ = Standard Deviation
0.6 0.58 0.56 0.54 0.52 0.5 0.48 0.46 UTI HDFC CAPITAL BUILDER Funds RELIANCE GROWTH S.R.
• Retail Investors prefer to invest in debt-based funds when they invest for short periods and are looking for steady returns. On the contrary, when they invest for long periods, they prefer to go for equity based funds as it is seen that in the long period, equity funds out-perform debt funds. This money is either from their capital gains or for some specific purpose in the future like their child’s education, marriage, purchase of house etc. • Business Investors invest a lot in the end of June when Mutual Funds are close to declaring dividends. This is because this gets them the benefit of writing off their capital gains as follows – 1. Say the NAV per unit of the Mutual Fund is Rs. 20.00 at time of purchase. 2. The business buys the Mutual Fund units at this price and dividends are declared say Rs. 4.00 per unit. 3. Then after the cool off period when the Mutual Fund opens, the NAV per unit is Rs. 16.00 per unit (Rs. 20.00 – Rs. 4.00 dividend declared). 4. The business then sells off the units at Rs. 16.00 per unit and claims capital looses to the tune of Rs. 4.00 per unit, which can be used by them to write off their capital profits. 5. This actually is not a capital loss as that amount has already been reimbursed to the unit holder in terms of dividends. • In India, the trend is that investors invest when there is a boom in the stock market and withdraw their holdings in times of slump. This is absolutely contrary to how the system works abroad as there investments take place in the slump period when greater units can be purchased with same amount of money. Withdrawals are correspondingly done in boom times as maximum return is achieved. This is the right strategy and Mutual Fund companies are trying to create this awareness among consumers.
• The outlook for the Mutual Fund Industry as predicted by the representatives of the companies that I visited is very bright. They all expect the market to go up by Diwali (Indian festival) and New Years and also expect consumer awareness and interest to improve. Efforts are being made by them to increase awareness and services offered by them. All this would result in major increase in their collections and of the industry as a whole. Also a large number of new companies and schemes are soon going to be launched which will increase the variety for consumers and also improve the quality of services offered due to the increase in competition.
CONCEPT OF FINANCIAL PLANNING
Financial planning is an exercise aimed to ensure availability of right amount of money at the right time to meet the individual’s financial goals.
An investor, depending on the age, risk taking ability and time horizon,
should accordingly put his/her money in different asset classes in the proportion that suits their unique needs and requirements the best.
With the complexity and dynamism of the financial markets increasing
with the passage of time, there is a massive information overload for all investors. Big investors like FIIs have the time and expertise to manage such risks. But for a retail investor, this can be highly intimidating. It is best to ascertain one's own unique requirements based on the parameters discussed above, depending on which one can draw out an investment plan.
In this section we analyzed the customer’s investment objectives and preferred investment style. This includes: 1. To understand the basic objectives of investment, the time horizon (the time period for which the customer wants to invest) 2. To explore the tolerance to volatility associated with various financial assets 3. To understand the attitude of the customer to different risk levels in various market conditions. (Risk appetite)- Aggressive, Moderately aggressive, Conservative. Finally after analyzing the above parameters with the help of the personal financial review we quantified the ability of the customer to take the investment risk associated with the various financial assets. After this we made 2-3 dummy portfolios suggesting suitable portfolio mix.
1) A few respondents due to confidentiality constraints did not disclose the average investment made. 2) The future investment in mutual funds depends heavily on the availability of funds. 3) It is seen from the analysis that most of the people in India specifically Delhi have no idea of Mutual Funds. This showed the low awareness level among the people of Delhi about the Mutual Funds therefore I recommend that there is need for better marketing of Mutual Funds and specifically target investors who invest in stock markets and small investors who prefer banks for their investments and create awareness amongst them about investing in Mutual Funds. 4) It is recommended that the Asset Management Companies (AMC) more specifically UTI should come up with new Mutual Fund schemes which focus on security of money, better rate of return, liquidity, profitability. They should concentrate more on building up investor’s confidence, as it is seen from the analysis that most of the investors are not confident of the safety and security of their investments in Mutual Funds especially after the UTI Scam in India. 5) It is strongly recommended that Asset Management Companies (MF Companies) specifically UTI provide reliable and more true and transparent information to the investors as the investor is ready to invest in Mutual Funds only if they are given more reliable information. It is also recommended that Asset Management Companies (MF Companies) focus on building a relationship of trust and commitment with the investors. 6) All the people interviewed expected a rate of return of 17-18% on their investments in Mutual Funds therefore if the Asset Management Companies (AMC) more specifically UTI are able to provide that return they can attract more investors. 7) In the near future, a large number of new companies and schemes are soon going to be launched which will increase the variety for investor and will lead to increase in competition. in the industry and This stresses the need to improve the quality of services offered and improve individual fund performance. 8) The capital market has been growing by leaps and bounds. Thus the stock market in India is on the right track and there will be major improvements in the near future This expansion will act as an impediment to the small investors who either has the option to play the market or to have the knowledge to keep pace with the corporate information of thousands of companies. Their mutual funds will form a
favorable alternative provided there is transparency, reliability and authenticity in their functioning.
Mr. Amit Chadha Mr. Ankit Gupta
Finance Head (DXN Trading (I) Pvt. Ltd). Student of International College of Financial Planning (Security Analysis).
Mr. Deepak Sharma Student of International College of Financial Planning (Security Analysis). Mr. Sunil Kumar Mr. Devendera Student of International College of Financial Planning (Security Analysis). Arbitrageur (CPR Capital Services Ltd.)
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