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MUTUAL FUND INVESTORS-THEIR EXPECTATIONS & STRATEGIES IN CHANGING SCENARIO BY ANKIT GUPTA A report submitted in partial fulfillment of requirements of MBA program of
TABLE OF CONTENTS
Topic Page No. Acknowledgement………………………………… 4 Abstract …………………………………………... Introduction About the project……………………………... 6 5
Indian mutual fund industry………………….. 7 About the organization……………………….. 10 Mutual funds Concept……………………………………….. 12,13 Characteristics………………………………… 14 Advantages……………………………………. 14 Disadvantages…………………………………. 16 Types of mutual funds…………………………. 17 Constitution of mutual funds…………………… 23 Net asset value…………………………………. 26 Nature of income distribution………………….. 27 Why an investor leaves a fund………………….. 29 Latest AUM …………………………………….. 30 Study Scope of the study………………………………. 38 Objective of the study…………………………… 38 Methodology used……………………………….. 39 Limitations ………………………………………. 40 Findings of the study…………………………….. 41
Comparative analysis of mutual funds………………... 57 Scope of SCB investment products…………………… 61 Recommendations made to SCB……………………… 65
References…………………………………………….. 68 Appendix……………………………………………… 69
I would like to express my sincere thanks to the management of Standard Chartered Bank, M.I. Road, Jaipur Branch who gave me the opportunity to work and study in a large organization. My success at Standard Chartered Bank was because of the contribution and guidance provided by the staff of Standard Chartered Bank, M.I. Road, Jaipur Branch. I express my sincere gratitude to Mrs. Nidhi Mathur (Relationship Manager Excel Banking) & (company guide) Standard Chartered Bank, Jaipur. I would also express my Sincere thanks to Mr. Anurag Sharma (Branch Manager) Standard Chartered Bank, M.I. Road Branch, Jaipur. I also express my gratitude to Prof. Esha Sharma (Faculty guide) who guided me from time to time in completion of my project. Last but not the least, I would like to thank all the respondents for giving their precious time and relevant information and experience, I required, without which the project would have not been completed.
Mutual funds have been one of the most preferred investment instruments. They are looked upon by individual investors as financial intermediaries/ portfolio managers who process information, identify investment opportunities, formulate investment strategies, invest funds and monitor progress at a very low cost. Thus the success of mutual funds is essentially the result of the combined efforts of competent fund managers and alert investors. A competent fund manager should analyze investor behavior and understand their needs and expectations, to gear up the performance in order to meet investors’ requirements. The project “Mutual fund investors – expectations & strategies in changing scenario” is to understand the changing sentiments, expectations & strategies of the investor. The volatility of stock market has affected the mutual funds sales. There has been a plunge in the sales of mutual funds. The expectations & strategies of the investors have changed. This has become a challenge for fund houses. Investors’ preference has changed. Now they are not sure about what the investors want. This project aims at understanding their behavior & thus giving recommendations to SCB for meeting these challenges. Thus, to analyze the difference between investors’ expectations & investment managers’ approach. The project will seek to cover all the fundamental aspects related to mutual funds & investment in mutual funds. The project will also cover the various problems of the global scenario that has affected the Indian market. Then it will analyze the behavior of investors in changing scenario. There will also be a comparative analysis of some of the star ranked mutual funds as per the expectations of the investors, so as to understand whether the star ranked mutual funds are catering to the requirements & expectations of the investors or not. Basically, the project is to understand the investors, behavior & to give recommendations to Standard Chartered Bank on how to meet these changing expectations of the investors & offer the product accordingly. There are many other investment products offered by Standard Chartered. This project also covers that what are the opportunities for such investment products.
The growth and maturation of mutual fund industry is the greatest investment story of the twentieth century. With the introduction of innovative products, the world of mutual funds nowadays has a lot to offer to its investors. With the introduction of diverse options, investors need to choose a mutual fund that meets his risk acceptance, his risk capacity levels and has similar investment objectives as the investor. There are a large number of schemes available in the market to cater to the different needs of the investor. As on 29th Feb, 2008, there were 5343 mutual fund schemes in the market. The market has been bullish in past few months & has given huge returns. Even the retail investors started investing in a big way expecting the rally to continue. But with change in the global scenario, there has been a sudden & unexpected downfall in the market which sunk the investors’ expectations, creating a negative sentiment in the market. This has also affected the mutual fund investments. Since Indian economy is no more a closed market, and has started integrating with the world markets, external factors which are complex in nature are also affecting us. Factors such as Sub-prime problem, expected US recession, an increase in short-term US interest rates, the hike in crude prices and many other factors have made Indian market volatile. The market has shown a downfall of --% in past 3 months. There has been sharp fall in the sales of mutual funds in past 2 months, since January. The average asset under management (AUM) of the mutual fund industry has declined sharply by 6.62% in March 2008, according to data released by Association of Mutual Funds in India (AMFI). This shows that there has been a change in the investors’ sentiments & expectations.
INDIAN MUTUAL FUND INDUSTRY
The Indian mutual fund industry is dominated by the Unit Trust of India which has a total corpus of Rs700bn collected from more than 20 million investors. The UTI has many funds/schemes in all categories i.e. equity, balanced, income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. UTI was floated by financial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI
is government owned and controlled, which, while legally incorrect, is true for all practical purposes. The second largest category of mutual funds is the ones floated by nationalized banks. Canbank Asset Management floated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GIC AMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of the other prominent ones. The aggregate corpus of funds managed by this category of AMCs is about Rs150bn. The third largest categories of mutual funds are the ones floated by the private sector and by foreign asset management companies. The largest of these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate corpus of assets managed by this category of AMCs is in excess of Rs250bn The growth and development of Indian Mutual Fund Industry can be broadly divided into four 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) Highlight of phase was entry of Public Sector Funds. In 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) in June 1989 and General Insurance Corporation of India (GIC) In Dec. 1990. Public Sector Bank also established their own Mutual Funds:SBI Mutual Fund (June 1987) 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). By the end of 1993, the mutual fund industry had assets under management of Rs. 47,004 crores. Third Phase (1993 – 2003)
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 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 Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes
ABOUT THE ORGANISATION
COMPANY’S HISTORY The Standard Chartered Group was formed in 1969 through a merger of two banks: The Standard Bank of British South Africa founded in 1863 and the Chartered Bank of India, Australia and China, founded in 1853.
The Chartered Bank
• • •
Founded by James Wilson following the grant of a Royal Charter by Queen Victoria in 1853. Chartered opened its first branches in Mumbai (Bombay), Calcutta and Shanghai in 1858, followed by Hong Kong and Singapore in 1859. Traditional business was in cotton from Mumbai (Bombay), indigo and tea from Calcutta, rice in Burma, sugar from Java, tobacco from Sumatra, hemp in Manila and silk from Yokohama. Played a major role in the development of trade with the East which followed the opening of the Suez Canal in 1869 and the extension of the telegraph to China in 1871. In 1957 Chartered Bank bought the Eastern Bank together with the Ionian Bank's Cyprus Branches. This established a presence in the Gulf.
The Standard Bank
Founded in the Cape Province of South Africa in 1862 by John Paterson. Commenced business in Port Elizabeth, South Africa, in January 1863. Was prominent in financing the development of the diamond fields of Kimberley from 1867 and later extended its network further north to the new town of Johannesburg when gold was discovered there in 1885. Expanded in Southern, Central and Eastern Africa and by 1953 had 600 offices. In 1965, it merged with the Bank of West Africa expanding its operations into Cameroon, Gambia, Ghana, Nigeria and Sierra Leone.
From the early 1990s, Standard Chartered has focused on developing its strong franchises in Asia, the Middle East and Africa using its operations in the United Kingdom and North America to provide customers with a bridge between these markets. Secondly, it would focus on consumer, corporate and institutional banking and on the provision of treasury services - areas in which the Group had particular strength and expertise.
Through global network of over 1,700 branches and outlets, SCB offer personal financial solutions to meet the needs of more than 14 million customers across Asia, Africa and the Middle East. The various services offered by SCB include: 1) 2) 3) 4) 5) Personal Banking SME Banking Wholesale Banking Islamic Banking Private Banking
Private Bank advisors and investment specialists provide customized solutions to meet the unique needs and aspirations of investors. The various products offered by Private banking include: • • • • • Mutual funds Capital protected products Derivative Arbitrage Products Equity Advisory Services Fixed income products
Mutual funds have huge potential. Standard Chartered bank deals in more than 2000 mutual funds. They offer a huge range of funds for varied customers. Initially they make investors fill the customers so that they can understand the requirements of the customers and thus provide services accordingly. This project basically covers the mutual funds investors’ sentiments, to understand them and make recommendations to SCB.
A mutual fund is a pool of money, collected from investors, & is invested according to certain investment objectives. A mutual fund is created when investors put their money together. It is therefore a pool of the investors’ funds. The most important characteristic of a mutual fund is that the contributors & the beneficiaries of the fund are the same class of people, namely the investors. The term mutual means that investors contribute to the pool, & also benefit from the pool. There are no other claimants to the funds. The pool of funds held mutually by investors is the mutual fund. A mutual fund’s business is to invest the funds thus collected, according to the wishes of the investors who created the pool. In many market these wishes are articulated as “investment mandates.” Usually, the investors appoint professional investment managers, to manage their funds. The same objective is achieved when professional investment managers create a “product,” and offer it for investment to the investors. This product represents a share in the pool, & pre-states investment objectives.
CONCEPT OF MUTUAL FUNDS
Characteristics of Mutual Funds
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 the investment professionals & other service providers, who earn a fee for their services, from the fund.
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 change with the change in the portfolio’s value, everyday. The value of one unit of investment is called as the Net Asset Value or NAV.
The investment portfolio of the mutual fund is created according to the stated investment objective of the fund.
Advantages of Mutual Funds
Portfolio Diversification By offering readymade diversified portfolios, mutual funds enable investors to hold diversified portfolio. Though investors can create their own diversified portfolios, the costs of creating and monitoring such portfolios can be high, apart from the fact that investors may lack the professional expertise to manage sucha portfolio.
Professional Management • Mutual fund are managed by investment managers(AMCs) who are appointed by trustees & bound by the investment management agreement, on the how’s & whys of their investment management functions. • AMCs are also required to be adequately capitalized, & are closely regulated by SEBI. AMCs competing for funds under management therefore bring in significant professional expertise & are bound by regulatory & trustee supervision. • Investment managers & funds are also bound by the AMFI code of ethics, which foster professional standards in the industry.
Reduction in risk Mutual funds invest in a portfolio of securities. This means that all the funds are not invested in the same investment avenue. It is well known that risk & returns of various investment options do not move uniformly or in sympathy with one another. Therefore, holding a portfolio that is diversified across investment avenues is a wise way to manage risk. When such a portfolio is liquid & marked to market, it enables investors to continuously evaluate the portfolio & manage their risks more efficiently.
Reduces Transaction cost Mutual funds provide the investors the benefit of economies of scale, by virtue of their size. Though the individual investor’s contribution may be small, the mutual fund is large enough to be able to reduce costs. These benefits are passed on to the investors.
Liquidity • Most of the funds being sold today are open-ended. That is, investors can sell their existing units, or buy new units, at any point of time, at prices that are related to the NAV of the fund on the date of the transaction. This enables investors to enjoy a high level of liquidity on their investments.
• Since investors continuously enter & exit funds, funds are actually able to provide liquidity to investors, even if the underlying markets, in which the portfolio is invested, may not have the liquidity that the investor seeks.
No control over cost Since investors do not directly monitor the fund’s operations they cannot control the costs effectively. Regulators therefore usually limit the expenses of mutual funds.
No tailor-made portfolio Mutual fund portfolios are created and marketed by AMCs, into which investors invest. They cannot create tailor made portfolios.
Managing a portfolio of funds As the number of mutual fund increase, in order to tailor a portfolio for himself, an investor may be holding a portfolio of funds, with the costs of monitoring them & using them, being incurred by him.
TYPES OF MUTUAL FUNDS
There are various types of mutual fund schemes available in the market. Currently there are 5373 mutual funds schemes available in the Indian market. Broadly the various types of mutual funds are differentiated on the basis of: On the basis of STRUCTURE, mutual funds can be divided into 3 types: a) Open Ended Schemes It is the pool of fund which is open for sales & repurchases. 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 NAV related prices. Therefore both the amount of funds that the mutual fund manages & the number of units vary everyday. The key feature of open-end schemes is liquidity. Open-ended funds have to balance the interests of investors who come in, investors who go out & investors who stay invested. Open-ended funds are offered for sale at a prespecified price, in the initial offer period. After a pre-specified period, the fund is declared open for further sales & repurchases. These transactions happen at the computed NAV related price. b) Closed Ended Schemes
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. Therefore new investors buy from the existing investors, & 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 price at which units can be sold or redeemed depends on the market prices, which is fundamentally linked to the NAV. 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. c) Interval schemes
Interval Schemes are that scheme, which combines the features of open-ended and closeended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. On the basis of INVESTMENT OBJECTIVE, mutual funds can be divided into 4 types: a) Growth Option Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. In it incomes earned are retained in the investment portfolio, & allowed to grow, rather than being distributed to the investors. The return to the investors is at the rate at which his initial investment has grown over the period for which he was invested in fund. The NAV will vary with the value of the investment portfolio while the number of unit held will remain constant.
b) Income Scheme Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
c) Balanced Funds Funds that invest both in debt & equity markets are called balanced funds. Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. A typical balanced fund would be almost equally invested in both the markets. A balanced fund also tends to provide investors exposure to both equity & debt markets in one product. Therefore the benefits of diversification get further enhanced, as equity & debt markets have different risk and return profiles.
d) Money Market Schemes
Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income .These debt funds invest only in instruments with a maturity less than a year. The investment portfolio is very liquid, & enables investors to hold their investments for very short horizons of a day or more. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
On the basis of NATURE, mutual funds can be of 3 types:
a) Equity Funds These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. Equity funds can be further divided into 4 types:
Simple equity funds
These funds invest a pre-dominant portion of the funds mobilized in equity & equity related products. In most cases about 80-90% of their investments are in equity shares. These funds have the freedom to invest both in primary & secondary markets for equity.
Sector Specific funds
These funds choose to invest in one or more chosen sectors of the equity markets. These sectors could vary depending on the investor preference & the return-risk attributes of the sector. Sector specific funds are not as well diversified as simple equity funds, as they tend to focus on fewer sectors in the equity funds, as they tend to focus on fewer sectors in the equity markets. They can exhibit very volatile returns.
Tax Saving Funds(ELSS)
One variation of the simple equity fund is the ELSS (Equity Linked Saving Schemes). These funds, named variously in the mutual fund industry, are equity funds formed under a special scheme notified by the Government of India in 1990. According to the provisions of this notification, investment in a specially formed mutual fund product, that invest at least 90% of its funds in equity & equity-linked investments is eligible for a tax rebate, up to a maximum investment of Rs. 10,000, under section88 of the Income Tax Act. Investors have to hold their units for a minimum lock-in period of 3 years, in order to avail of the tax rebate.
Primary market funds
These funds invest in equity shares, but do so only when a primary market offering is available. The focus is on capturing the opportunity to buy those companies which issue their equity in primary markets, either through a public offer or through private placements.
It is an alternative approach to creating an equity portfolio for investors, is to avoid taking views on the performance of companies, & instead focus on creating a diversified portfolio, that simply replicates an existing market index. In order to track the return performance of markets, market indices of a sub-set of trading stocks is created. This strategy is also called passive fund management. The costs of this strategy are lower, & the fund performance virtually tracks the market index. An index fund provides an ideal exposure to equity markets, without the investors having to bear the risks & costs arising from the market views that a fund manager may take.
Other equity funds
Equity funds can also be created to invest in equity shares of companies with specific attributes. For Example, there are small stock funds, which invest only in
equity shares of small companies; there are PSU funds which specialize in investing only in PSU stocks; there is a top 200 fund, which invests in companies within the universe of the top 200 equity stocks; there is a select equity fund, which invests from the universe of stocks comprising the A group companies of the Bombay Stock Exchange; & there is a 30-stock fund that limits the number of stocks in its portfolio to 30 stocks. All these products try to define a subset of the equity market, in terms of size &other attributes, & tend to focus on that segment.
b) Debt Funds Debt funds are those that pre-dominantly invest in debt securities. Since most debt securities pay periodic interest to investors, these funds are also known as income funds. However, investing in debt products can also offer a growth option to their investors. The universe of debt securities comprises of long term instruments such as bond issues by central & state governments, public sector organizations, public financial institutions & private sector companies; and short term instruments such as call money lending, commercial papers, certificates of deposit; & treasury bills. Debt funds tend to create a variety of options for investors by choosing one or more of these segments of the debt markets in their investment portfolio. Debt funds can be further divided into 5 types:
A gilt fund invests only in securities that are issued by the government, & therefore does not carry any credit risk. These funds invest in short & long-term securities issued by the government. These funds are preferred by institutional investors who have to invest only in government paper. These funds also enable retail investors to participate in the market for government securities, which is otherwise a largeticket wholesale market.
These funds invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities • MIPs
These funds invest maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. • Short Term Plans(STPs)
These funds are meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. • Liquid funds
These funds are also known as Money Market Schemes, These funds provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on riskreturn matrix and are considered to be the safest amongst all categories of mutual funds. c) Balanced Funds As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. The benefits of diversification get further enhanced, as equity & debt markets have different risk &return profiles.
CONSTITUTION OF A MUTUAL FUND
The structure of mutual funds in India is governed by the SEBI (mutual fund) Regulations, 1996. These regulations make it mandatory for mutual funds to have a three-tier structure of Sponsor-Trustee-Asset Management Company (AMC). The sponsor is the promoter of the mutual fund, & appoints the Trustees. The trustees are responsible to the investors in the mutual fund, & appoint the AMC for managing the investment portfolio. The AMC is the business face of the mutual fund, as it manages all the affairs of the mutual fund. The mutual fund & the AMC have to be registered with SEBI. SEBI regulations also provide for who can be a sponsor, trustee & AMC, & specify the format of agreements between these entities. These agreements provide for the rights, duties & obligations of these three entities. These agreements provide for the rights, duties & obligations of these three entities.
The sponsor is the promoter of the mutual fund. The sponsor establishes the mutual fund & registers the same with SEBI. • Sponsor appoints the trustees, custodians & the AMC with prior approval of SEBI, & in accordance with SEBI Regulations. • Sponsor must have at least 5-year track record of business interest in the financial markets. • • Sponsor must have been profit making in at least 3 of the above 5 years. Sponsor must contribute at least 40% of the capital of the AMC.
The mutual fund, which is a trust, is managed either by a Trust company or a board of Trustees. It is the responsibility of the trustees to protect the interest of investors, whose fund is managed by the AMC. The AMC & other functionaries are functionally accountable to the trustees.
Asset Management Company (AMC)
The mutual fund is operated by a separately established asset management company (AMC). It manages the funds of the various schemes. It is entrusted with the specific task of mobilizing funds under the scheme. The trustee, on the advice of the sponsor, usually appoints the AMC. The trust deed authorizes the trustee to appoint the AMC. The AMC is usually a private limited company, in which the sponsors & their associates or joint venture partners are shareholders. The AMC has to be SBI registered entity, & should have a minimum net worth of Rs. 10 crores. Following are the various types of AMCs we have in India • AMCs owned by banks
• • • •
AMCs owned by financial institutions AMCs owned by the Indian private sector company AMCs owned by foreign institutional investors AMCs owned jointly by Indian & foreign sponsors.
Custodians are responsible for the securities held in mutual fund’s portfolio. They discharge an important back-office function, by ensuring that securities that are bought, delivered & transferred to the books of the mutual funds, & those funds are paid out when a mutual fund buys securities. They keep the investment account of the mutual fund, & also collect the dividends and interest payments due on the mutual fund investments. Custodians also track corporate actions like bonus issues, right offers, offer for sale, buy back & open offers for acquisition.
Agents (R & T Agents)
Registrars & Transfer
The R & T agents are responsible for the investor servicing functions, as they maintain the records of investors in mutual funds. • applications. • by the investors on application forms. They process investor Record details provided
• details regarding their investments in mutual fund. • information on the performance of mutual funds. • to investors • information as communicated by investors.
Send out to investor Send out periodical Process dividend payout Incorporate changes in
• Keep the investment record up to date, by recording new investors & removing investors who have withdrawn their money.
NET ASSET VALUE (NAV)
NAV represents the actual value of per unit of a fund. It is calculated as: (Market value of all investments + Income + Profit – Loss - Expenses) Number of units in the mutual fund The above components stand for: Market value of all the investments Every security in the fund’s portfolio has a market value. The value of the entire portfolio is calculated to reach this figure. It is here that any capital appreciation or depreciation of the portfolio is reflected.
This is the interest income earned by debt securities or dividend income earned by stocks in the portfolio.
This is the capital gain realized by selling a security (debt or equity) at a price higher than its purchase price.
This is the capital loss suffered by selling a security (debt or Equity) at a lower price than its purchase price.
This is the actual expenses incurred by the fund. For example, fees paid to AMC, custodians, registrars etc., SEBI restricts the expenses that can be paid by the fund.
2 facts emerge from the above:
• All the income, expenses , profits & losses of a mutual fund are reflected in one single number – its value, i.e. its NAV • “Market Value of investments” is a major determinant of NAV. Thus, a mutual fund will reflect market conditions.
NATURE OF INCOME DISTRIBUTION TO INVESTORS
Mutual fund offers a variety of options to investors, in the manner in which the returns from their investments are structured. At a broad level, the investors have 3 options which are: • Dividend Option Investors, who choose a dividend option on their investments, will receive dividends from the mutual funds, as & when dividends are declared.
Dividends are paid in the form of warrants, or are directly credited to investors’ bank account.
• Growth option Investors who do not require periodic income distributions can choose the growth option, where the income earned are retained in the investment portfolio, & allowed to grow, rather than being distributed to the investors. Investors with longer-term investment horizons, & limited requirements for income, choose this option. The return to the investors is at the rate at which his initial investment has grown over the period for which he was invested in the fund. The NAV of the investor choosing this option will vary with the value of the investment portfolio, while the number of units held will remain constant.
• Re-investment Option Investors re-invest the dividends that are declared by the mutual fund, back into the fund itself, at NAV that is prevalent at the time of re-investment. In this option, the number of units held by the investor will change with every re-investment. The value of the units will be similar to that under the dividend option.
SELECTION OF FUNDS
Following are the steps recommended by John Bogle, former chairman of Vanguard Group of Funds in United States: • For Equity funds Classify the equity funds into broad categories that signify their return & risk characteristics. Classify funds further on the basis of fund manager style. Investors may want to choose between value & growth styles, depending on their risk & return preferences Evaluate the performance of the schemes. This is done both within the peer group, & comparison with the bench mark Under the structural characteristics of the scheme like Size of the fund, fund age, portfolio manager’s experience, and costs of investing. Understanding the portfolio characteristics of the scheme like percentage of cash in portfolio, market capitalization of the fund, portfolio turnover, portfolio risk, and statistics-ex marks of the portfolio, beta, and gross dividend yield. “The performing fund will have higher ex marks, lower beta, & higher gross dividend yield.”
• For Debt/Bond funds
Fund age & size – Newer & smaller fund may not be risky to the investors. Relative Yield – the total return on the fund may not be risky to the investors. Costs expenses ratio in a bond fund is very important, higher loads & expenses could lead to a “yield sacrifice.” Quality of the portfolio – Better the rating of the bonds in the portfolio, better the fund. Average maturity – the duration of the portfolio, and therefore is related to the average maturity. Higher the average maturity means higher interest rate risk in the fund.
WHY AN INVESTOR LEAVES A FUND
Change in a Fund's Manager When investors put their money into a fund, they are putting a certain amount of trust into the fund manager's expertise and knowledge, which they hope will lead to an outstanding return on an investment that suits their investment goals. Thus, fund manager plays an important role when investors put in their money in mutual funds. Change in Strategy If investors research their fund before investing in it, they most likely invested in a fund that accurately reflects their financial goals. If their fund manager suddenly starts to invest in financial instruments that do not reflect the mutual fund's original goals, they may want to re-evaluate the fund you are holding. For example, if a small-cap fund starts investing in a few medium or large-cap stocks, the risk and direction of the fund may change. Consistent Underperformance This can be tricky since the definition of "underperformance" differs from investor to investor. If the mutual fund returns have been poor over a period of less than a year, then investors may not liquidate, thinking that liquidating their holdings in the portfolio may not be the best idea since the mutual fund may simply be experiencing some short-term fluctuations. However, if they have noticed significantly poor performance over the last two or more years, they may liquidate their holdings. The Fund Becomes Too Big In many cases a fund's quick growth can hinder performance. The bigger the fund, the harder it is for a portfolio to move assets effectively. Fund size usually becomes more of an issue for focused funds or small-cap funds, which either deal with a smaller number of shares or invest in stock that has low volume and liquidity.
Latest Asset under Management for all Mutual Fund Houses
Amount in crores
MUTUAL FUND NAME
NO. OF SCHEMES
ASSET UNDER MANAGEMENT As on Mar As on Feb Net Inc/Dec as 31,2008 29,2008 on Mar 31,2008
ABN AMRO Mutual Funds AIG Global Investment Group Mutual Fund Benchmark Mutual Fund BIRLA Mutual Funds BOB Mutual Funds Canara Robeco Mutual Fund DBS Chola Mutual Fund Deutsche Mutual Fund DSP Merrill Lynch Mutual Fund Escorts Mutual Funds Fidelity Mutual Funds Franklin Templeton Investments HDFC Mutual Funds HSBC Mutual Funds ICICI Prudential Mutual Fund ING Mutual Funds JM Financial Mutual Fund JPMorgan Mutual Funds Kotak Mahindra Mutual Fund LIC Mutual Funds Lotus India Mutual Funds Morgan Stanley Mutual Funds PRINCIPAL Mutual Funds Quantum Mutual Funds Reliance Mutual Funds
325 54 12 330 22 54 80 176 207 26 39 225 351 212 416 251 171 9 178 112 212 3 151 6 331
6675.73 3,148.63 5611.00 34750.00 70.34 2484.28 1,963.92 11996.00 19136.00 175.8 8294.05 29604.33 43762.7 13953.08 51810.85 9844.71 11,032.93 2081.42 16135.52 13387.40 10057.10 3172.00 11,780.02 64.22 77210.04
6813.54 3,303.49 4,954.72 36,391.00 79.69 3,146.58 2,953.32 14,404.85 19,940.40 146.93 9,487.17 29,424.58 46,291.97 15,530.08 62,008.95 9,844.71 12,559.79 2,481.12 19,367.84 15,103.00 9,763.88 3,599.49 13,318.69 65.38 93,531.68
-137.81 -154.86 656.28 -1641 -9.35 -662.3 -989.4 -2408.85 -804.4 28.87 -1193.12 179.75 -2529.27 -1577 -10198.1 00.00 -1526.853 -399.7 -3232.32 -1715.6 293.22 -427.49 -1538.67 -1.16 -16321.64
As per the graph, we can see there has been a sharp increase in the sales of mutual funds in the month of January. The volatility of the market started in January. When the market decreased in January, investors thought that it is correction and they put in money so as to buy mutual funds at lower NAV. But after the market crashed on 21st January, investors began to panic. In the month of February there has been a sharp decrease in the sales of mutual funds. This is because of
downward motion of market in February. In March there has been a slight recovery in the sales.
Balanced funds’ sales showed the same trend. There had been a sudden increase in the sales of balanced funds. As balanced funds is the combination of both equity & debt. So investors who had less risk taking capacity invested in these funds. But again in February there has been a sharp decline in the sales of balanced funds & same continued in the month of March.
Income funds basically invest in debts. There had been a sharp increase in the sales in month of January. But a slight decrease in the month of February. There has been increase in the sales of such funds in March. It is because of their returns are assured & they are less risk averse.
After the volatility of market, investors have developed a negative sentiment. And it is visible from the sharp increase in the sales of gilt funds. They do not have credit risk. And they invest in government securities only. Therefore, investors invested more in the gilt funds. There has been a sharp increase in the month of February, in spite of the decrease in the mutual funds sales. There has just been a slight decrease in the month of March. But overall the sales of gilt funds have increased to a very large extend.
Sales of gold funds have increased many folds because people are moving towards commodities to hedge against inflation or market fall & gold ETF offer the advantage of not holding physical gold as well as flexibility to sell at any time & turn to equity or debt because selling instrument is easier rather than physical quantity & procuring gold is not an easy task plus flexibility is another reason why gold ETF is preferred against gold
These funds basically aim at liquidity. They invest in short term bonds & securities. These funds also followed the trend. There has been increase in the sales in the month of January but a slight decrease in the month of February. Again these funds’ sales increased in the month of March.
SCOPE OF THE STUDY
The study is confined to the mutual fund investors of Jaipur city of Rajasthan state of India. The stated investors of Jaipur are currently working here and they all are investing in mutual funds for last at least two years and recently in Feb – Mar 2008 .So the respondents are capable enough to understand the major investment technicalities and react accordingly.
To understand the concept of wealth management & various mutual funds and what they offer to the investors.
To understand the effect of the changing conditions on the mutual funds
To understand the expectations & various strategies taken by mutual fund investors under various conditions. How their investment strategies and expectations changes with changing scenario.
To analysis some of the star ranked mutual funds in the market & compare them with the Standard Chartered’s mutual funds.
To make recommendations to SCB as to cope with changing sentiments of the investors.
Primary data is collected through a questionnaire & collecting answers from investors to understand the investor’s needs, choice & strategies under various conditions. The questionnaire is aimed at gathering firsthand knowledge of investor’s point of view.
• Sample design Random sampling method is used for collection of data and necessary information for which sample size of 100 respondents in Jaipur city have been taken for study.
• Analysis & Interpretation The study mainly deals with changed strategies and expectations of Individual Investors towards Mutual funds in Jaipur city due to the volatility of the market. Respondents were screened and inclusion was purely on the basis of their knowledge about Financial Markets, MFs in particular. This was necessary, because the questionnaire presumed awareness of some basic terminology about Mutual Funds. The purpose of the survey was to understand mainly their fund selection behavior, various factors influencing this behavior, their investment objectives, changing strategies in changing scenario and also the conceptual awareness level among individual investors. The survey was conducted during Mar-Apr 2008, among 100 educated, geographically dispersed individual investors of Jaipur city. Sample of the Questionnaire is given in Annex I 1. The unit of observation and analysis of survey is only among Individual Investors whose definition is “An Individual who has currently invested in any Mutual Funds. Since it is an exploratory study no specific hypothesis is formulated. Since the study is entirely based on the personal opinion of the respondents, the collected data is presented in tabular form .Pie charts and diagrams are also used as a presenting tool for the effective presentation. Percentage and majority method has been used to analyze the responses given by the respondents. For most important questions the responses have been accepted according to the most frequently similar responses given by the respondents of one similar group and after that the whole responses of all respondents were compiled in order to get a clear snap shot of the investment behavior. So primarily the direct responses according to majority of sample has been accepted
Secondary data will be collected through internet, magazines. Various journals, books, various AMC’s Fund Fact sheets and Standard Chartered Bank study material so as to collect information about mutual fund market, stock exchange and about wealth management.
LIMITATIONS OF THE STUDY
1) Geographical constraint - Sample size is limited to 100 educated individual
investors in the city of Jaipur. The sample size may not adequately represent the national market.
2) Sampling constraints - Simple Random and judgment sampling techniques
is due to time and financial constraints. Time constraint - This study has not been conducted over an extended period of time having both ups and downs of stock market conditions which a significant influence on investor’ s buying pattern and preferences.
FINDINGS OF THE STUDY
1) PERSONAL INFORMATION ABOUT INVESTORS Under this category investors were asked 5 questions:
What is your age?
Basically this question is being asked to study a trend of investment according to the age of an investor. Age plays an important role in the investment pattern of a particular person. A person who is younger may invest more in equity as he can have higher risk appetite. A person who is in middle age may prefer to invest in balanced funds. A person who is aged may prefer to invest in debt funds as his risk appetite will be the lowest. He would not be looking towards long term investments but he must be looking towards constant returns, so may want to invest in debt funds.
CATEGORY 20-30 YRS 31-40YRS 41-50 YRS 550 ABOVE
NO. OF RESPONDENTS 30 30 25 15
(b) Which investment tool, generally you choose for your investment purpose.
INVESTMENT TOOL Bonds Equity Fixed Deposits Gold Mutual funds Others
NO. OF RESPONDENTS 7 23 4 25 40 1
Analysis: • Around 11% investors want to invest in secured instruments like bonds & FDs • Around 23% are high risk takers. They invest in equity. • Around 25% people invest in gold. It is the second most popular investment tool. As it has given huge returns in past few months. • Around 40% invests in mutual funds, which shows that they want to balance between risk and returns.
(c) What is your investment expenditure ratio?
INVESTMENT-EXPENDITURE RATIO Less than 20% 20-80% 30-70% 40-60% 50-50%
NO. OF RESPONDENTS 24 36 15 25 0
Analysis: • Around 25% of the investors invest less than 20% of their income. This is a huge potential base. • The major part lies in the bracket 20-80% ratio. • 25% investors invest in the ratio of 40-60% which is less.
How stable is your income source?
STABILITY OF INCOME Stable Unstable Moderate Fluctuating
NO. OF RESPONDENTS 60 5 25 10
Analysis: • As 60% investors have a stable income source. Earlier they had a psychology of investing in stable investment instruments like bonds & fixed deposits rather than investing in equity market where returns can be much higher than present investments but they are showing risk aversion because of the equity market’s volatility. Based on this it can be said that they do not believe in the economical condition of the country and market stability. But no conditions have changed. People with stable income are also ready to take risk • 25% has moderate income
• 10% has fluctuating. This basically comprises of business men • Only 5% state their income to be unstable
d) Which bank/organization is providing you the investment services?
Analysis: • Only 30% of the investors invest through banks/financial institutes • Out of 100 investors, who invest in mutual funds, 70% do not take investment services from the bank or any other institute. • There are still large part investors who invest on their own.
HOW INVESTORS TAKE INVESTMENT DECISION?
Under this there were 3 different questions asked to the respondents:
(a) Before making an investment decision, how do you conclude that for which investment instrument you should go for? REASON FOR INVESTMENT According to return analysis According to esteemed group After consultation with financial advisor According to market trend NO. OF RESPONDENTS 50 5 15 30
• As the data show that only 25% respondents of the total population choose their investment medium after consultation or according to their peer group. They are not anymore dependent on what others have to say. They decide for their own money. • 75% of respondents follow the return analysis & market trend method for arriving at an investment decision. This shows that people have become educated. They know where there money should go. What are their requirements?
(b) Do you generally invest in popular mutual funds or analyze the funds & performance before investment decisions? REASON FOR CHOOSING MUTUAL FUND Follow the popularity Follow the esteemed group Careful analysis of the fund After consultation with financial advisor NO. OF RESPONDENTS 5 15 50 30
• Around 50% of people still choose mutual funds after consultation. These shows that people believe more on what other advisors has to say rather than making their own decisions • Another 50% do the return analysis & other analysis of the funds to decide on which fund to invest in
(c)What factors do you keep in mind before investing in mutual funds?
FACTOR Brand Name Product features Quality of service Transparency Past performance
NO. OF RESPONDENTS 20 5 5 5 65
• While choosing a fund the most important thing that matters to investors is past performance of the mutual funds • Next is the brand name. This shows the brand name inculcates trust and investors want to invest where they feel that their money is safe. • Other factors like product features & quality services & transparency are not that important to investors
Simply as the topic may seem, but the investment objective of an investor forms the base for his investment foray. Investment objective
refers to the expectations & requirements that an investor desires his investment to live up to. Every investment is followed by an investor’s attempt to attain some gain out of it. But the GAIN is just not the capital appreciation that satisfies an investor, its timely attainment is as mandatory as the realization of gain itself. The various schemes in the mutual fund industry are designed to suit the particular investment purpose of the investors. The idea of customization has penetrated into this industry as well & with the growing diversified needs of the investors, several schemes are formulated that help the customer achieving his goal & making his investment valuable. This customization is the key reason for the spurt in the investment avenue. Other than this, at times it may be identified that investors may hold more than one expectation. In such a case he tries to create a portfolio for himself that lives up to all his expectations. There are many counselors who provide counseling in the same avenue basing & researching their decisions on certain parameters which are small things but could have the biggest of impact on one’s investments.
Age also plays an important role in the investment objective. The model portfolio that has been recommended for investors by Jacobs for investors according to their life cycle stages is
INVESTORS Young unmarried professional Young couple with 2 income & 2 children Older couple single income Recently retired couple
RECOMMENDED MODEL PORTFOLIO 50% in aggressive equity funds 25% in high yield bond funds, growth & income funds 25% in conservative money market funds 10% in money market funds 30% in aggressive equity funds 25% in high yield bond funds & long term growth funds 35% in municipal bond funds 30% in short term municipal funds 35% in long term municipal funds 25% in moderately aggressive equity 10% emerging growth equity 35% in conservative equity funds for capital preservation/income 25% in moderately aggressive equity for modest capital growth 40% in money market funds
Under this category there were 4 questions asked:
(a) If you have to invest Rs. 100, how will you divide it in the following categories?
INVESTMENT OBJECTIVE Long term(5-6years)/ Capital appreciation Mid -term(2-3years)/growth appreciation Short term(monthly)/ Liquidity
NO. OF RESPONDENTS
Analysis: • Around 64% investors are interested in long term investments. They look at both growth & capital appreciation • Around 25% interested in mid- term returns within the span of 2 to 3 years • Most of the investors look for growth so there are less people who invests in short term funds
(b) What is your investment objective, while investing in mutual funds?
INVESTMENT OBJECTIVE Growth Liquidity Income
NO. OF RESPONDENTS 45 5 25
Analysis: • As the data show that 45% investors have opted for growth, 25 % income or the liquidity & 30 % for balanced. Here the liquidity and balanced can be taken as same because they both show short term object instead of long term object. We can conclude that a majority of investors show a short term object nearly about 80 % means they are not investing in the market with a broader horizon of stability of the economy or the market. The result also describes that they are not investing in stock market; they are going for the debt market as they opt for the liquidity or the balanced returns. A lower proportionate of the growth option show that they do not want to invest for long term means they may have a view that the stock market will not be able to perform well in long time. The bull ride of the economy is short in nature according to their response. Because for obtaining growth in future they need to invest for long term in stock market. So a lower response regarding investment in favor of the growth shows that they still seek security for their savings & they are risk averse. (c) What is your investment strategy?
INVESTMENT STRATEGY Low risk, low return Mid risk, mid return
NO. OF RESPONDENTS 15 55
High risk, high return
Analysis: • Around 30% investors can take high risk. That shows that they want high returns • Most of the investors are risk averse i.e. they want medium risk. They want to strike a balance between risk and return • This category is of low risk appetite people who basically invests in gilts & bonds and have lowest returns
Under this category there are 3 questions asked to the customers:
What is your view about stock market?
VIEW ABOUT STOCK MARKET It will decrease further This is the bottom Will decrease further but then recover Will recover now
NO. OF RESPONDENTS 25 5 40 30
Analysis: • Majority of investors think that market will recover. They think that it will recover back to its bullish walk • Only 5% thinks that market will stagnate here.
• There is another major part of investors that thinks that market will decrease further. This shows a negative sentiment of the investors & thus impacts the sale of mutual funds • Another 30% thinks that market will now recover, it will not fall further.
(b) With current scenario, how risky do you find investing in mutual funds? RISK IN INVESTING IN MUTUAL FUND NO. OF RESPONDENTS Low risk Medium risk High risk Very high risk 20 45 30 5
Mutual Fund Risk
very high 5% low 20% high 30%
Analysis: • 5% investors think that investing in mutual funds is of high risk • 20% investors think that investing in mutual funds is of low risk
• 30% think that it is high risk to invest in mutual funds • 45% think that investing in mutual fund is of medium risk and this truly stands in context of mutual funds because mutual funds diversify the risk to a large extend as compared to equity.
(c) As the market is going down, what is your investment strategy?
CHANGED INVESTMENT STRATEGY Selling off existing funds Wait & watch Buying more as the NAV is low
NO. OF RESPONDENTS 10 60 30
Analysis: • 10% people have negative sentiments. They want to sell of their existing investments. • 60% people say that their strategy is to wait and watch. They want to give market more time to recover. • 30% people take it as an opportunity. They think that market will recover. This is the time to buy because they are getting a good deal at very low prices.
COMPARATIVE ANALYSIS OF MUTUAL FUNDS
There are around 5343 mutual fund schemes currently in market. It is difficult for an investor to choose from them. That is where wealth management comes into play. There are certain mutual funds that are star ranked by the wealth managers. So these mutual funds are analyzed on the basis of the parameters as per the investors’ and to observe the following: 1) Difference between the parameters of the investors & investment managers. 2) Currently star ranked funds catering to the needs of investors 3) Funds 4) Difference between the output of current star ranked funds & expectations of investors 5) Need for changing the investment strategies.
Recommendation Recommendation by SCB Name of the fund Last 1 year % Last 3 years % Since Inception % Total Equity % Expense Ratio % Corpus (crs.) Inception Date Principal Personal Tax Saver 30.3 31.2 31.7 121.6 2.5 360 1-Jan-96
Recommendation by Market Tata tax Advantage fund –1 20.46 28 35.1 93 2.22 510 10-Apr-99
EQUITY INDEX Recommendation Recommendation by SCB Name of the fund ICICI Prudential Index Fund
Recommendation by Market LIC MF Index Fund -
Last 1 year % Last 3 years % Since Inception % Expense Ratio % Corpus (crs.) Inception date Sharpe Beta Treynor
26.2 34.9 27.1 1.25 37 25-Feb-2002 .25 1 .89
Sensex Plan - Growth 18.1 34.01 26.69 2.05 44.23 28-Nov-2002 .21 .92 .77
EQUITY LARGE CAP DIVERSIFIED Recommendation Recommended by SCB Recommended by Market Name of the fund Last 1 year % Last 3 years % Since Inception % Total Equity % Expense Ratio % Corpus (crs.) DSP Merill Lynch Top 100 Equity Fund 28.1 37.6 48.6 85 2.3 802 Templeton India Growth Fund- Dividend 33.4 31.8 21.3 96.8 2.32 320
EQUITY SECTOR CONCENTRATED Recommendation Name of the fund Last 1 year % Last 3 years % Since Inception % Total Equity % Expense Ratio % Corpus (crs.) Recommendation Name of the fund Last 1 year % Last 3 years % Since Inception % Expense Ratio % Recommended by SCB Kotak Oppportunity Fund 33.7 42.1 44.9 89.1 2.29 700 Recommended by Market DSP Merrill Lynch India Tiger Fund 29.7 42.8 45.1 90.2 1.91 3831
BALANCED FUNDS Recommended by SCB Recommended by Market HDFC Balanced Fund Benchmark Split capital fund 13.18 Na 21.11 Na 18.06 14.28 2.21 0
Sharpe Beta Treynor
.20 .82 .52
.19 .87 .44
FIXED INCOME GILT – LONG TERM Recommendation Recommended by SCB Name of the fund ICICI Prudential Gilt Fund Investment Plan Last 1 year % 8.2 Last 3 years % 6.3 Since Inception % 10.8 Expense Ratio % 1.15 Sharpe .12 Beta .80 Treynor .07 LIQUID FUNDS Recommendation Recommended by SCB Name of the fund Last 1 year % Last 3 years % Since Inception % Expense Ratio % Sharpe Beta Treynor HDFC Cash Management Fund- Saving Plan 8.2 7.0 6.5 0.58 2.24 .15 .3 Recommended by Market HDFC Gilt Fund Long Term Plan-growth 6.96 4.17 7.88 1.48 .05 .77 .03
Recommended by Market Principal Money Manager Fund-Regular-growth Na Na 7.78 Na Na Na Na
INVESTMENT PRODUCTS OFFERED BY SCB
Standard Chartered Bank offers other investment products under wealth management & SCB is a pioneer in them. These can be other products that can be offered to investors but many investors are not aware of them. These products include: Unit linked insurance plan (ULIP) A unit linked insurance policy is one in which the customer is provided with a life insurance cover and the premium paid is invested in either debt or equity products or a combination of the two. In other words, it enables the buyer to secure some protection for his family in the event of his untimely
death and at the same time provides him an opportunity to earn a return on his premium paid. In the event of the insured person's untimely death, his nominees would normally receive an amount that is the higher of the sum assured (insurance cover) or the value of the units (investments).However, there are some schemes in which the policyholder receives the sum assured plus the value of the investments. Every insurance company has four to five ULIPs with varying investment options, charges and conditions for withdrawals and surrender. Moreover, schemes have been tailored to suit different customer profiles and, in that sense, offer a great deal of choice. The advantage of ULIP is that since the investments are made for long periods, the chances of earning a decent return are high. Just as in the case of mutual funds, buyers who are risk averse can buy into debt schemes while those who have an appetite for risk can opt for balanced or equity schemes. However, the charges paid in these schemes in terms of the entry load, administrative fees, underwriting fees, buying and selling charges and asset management charges are fairly high and vary from insurer to insurer in the quantum as also in the manner in which they are charged.
Structured notes A debt obligation that also contains an embedded derivative component with characteristics that adjust the security's risk/return profile. The return performance of a structured note will track that of the underlying debt obligation and the derivative embedded within it. A structured note is a hybrid security that attempts to change its profile by including additional
modifying structures. A simple example would be a five-year bond tied together with an option contract for increasing the returns.
Arbitrage funds Arbitrage is a strategy, which involves simultaneous purchase and sale of identical or equivalent instruments in two or more markets in order to benefit from a discrepancy in pricing. This strategy normally acts as a shield against market volatility as the buying and selling transactions offset each other. In an arbitrage transaction, returns are calculated as the difference between the futures price and cash price at the time of the transaction. Ideally the positions are held till the expiry of the futures contract when the offsetting positions cancel each other and initial price difference is realized. This arbitrage strategy makes the fund immune to market volatility i.e. the fund will not be affected by market fluctuations. Since the portfolio of arbitrage funds is completely hedged at all times to lower the risk of loss/erosion of gains, it also in turn caps the returns that the fund could have clocked if the portfolio was not hedged i.e. these funds have a limited upside. Despite the fact that arbitrage funds offer investors the opportunity to benefit from investments in equities by making use of derivatives, the fund cannot be compared to conventional diversified equity funds, especially on the returns parameter. The returns from arbitrage funds would typically be much lower than those of equity funds. That could be one reason why despite their equity holdings, arbitrage funds are benchmarked against indices like CRISIL Liquid Fund Index for want of a more appropriate index. Fixed income funds An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Unlike a variable-income fund, where payments change based on some underlying measure such as short-term interest rates, the payments of a fixed-income security are known in advance. An example of a fixed-income security would be a 5% fixed-rate government bond where a $1,000 investment would result in an annual $50 payment until maturity when the investor would receive the $1,000 back. Generally, these types of assets offer a lower return on investment because they guarantee income.
Portfolio management services(PMS)
Professional Investment Management Services are no longer the privilege of only large institutional investors. Portfolio Management Services (PMS) is one such service that is fast gaining eminence as an investment avenue of choice for High Net worth Investors l. PMS is a sophisticated investment vehicle that offers a range of specialized investment strategies to capitalize on opportunities in the market. The Portfolio Management Service combined with competent fund management, dedicated research and technology, ensures a rewarding experience for its clients. Most portfolio managers allow you to choose between a fixed and a performance-linked management fee. If you opt for the fixed fee, you may pay between 2-2.5 per cent of portfolio value; this is usually calculated on a weighted average basis. The structure for the performance-linked fee differs across players; usually, this includes a flat fee of 0.5-1.5 per cent. The portfolio manager also gets to share a percentage of your profit — usually 15-20 per cent — earned over and above a threshold level, which may range between 8 per cent and 15 per cent. Apart from management fees, separate charges will be levied towards brokerage, custodial services and towards meeting tax payments. However, a PMS may only add significant value in the following cases: Equity bias: Portfolio management services may be ideal for a person who seeks a substantial investment in the stock markets. An equity portfolio also offers greater scope for a manager to add value than does a debt portfolio. Several of the established players in the PMS business focus on equity investments, though some also offer hybrid products. Large surplus to invest: The minimum portfolio size that portfolio managers accept for a customized portfolio ranges from Rs 25 lakh to Rs 5 crore.
Real estate Funds An REMF is like a mutual fund for real estate assets. In other words the asset management company (AMC) invests in a range of real estate assets around the country and creates a fund based on those assets. Investors can buy shares in those funds which are traded on a daily basis on stock exchanges. The value of the shares depends on the value of the underlying real estate assets.
REMFs have many advantages over direct investment in real estate. • It allows investors to invest according to their income and financial circumstances. • The portfolio of real estate assets will be a lot more diversified than a single home with assets ranging from office space to residential properties all around the country as well as securities based on the real estate sector. • Investors don't have to deal with the legal and maintenance hassles of owning property and can instead rely on the professional expertise of the AMCs. Finally if they need quick money, these funds are liquid assets which can be sold conveniently and rapidly.
• Savings Objective of Individual Investors
Savings Objective of the majority of Individual Investors is ‘to invest in moderate risk ’, thus throwing light on the nature of risk averse investors. AMC can attract a pool of investors by designing products for Risk-Averse investors. But there is also a pool of investors that are ready to take high risk. Nearly 30% of the investors are ready to take high risk as they want high returns. These investors can be of high potential for equity based funds.
• Savings instrument preference among individual investors
Now only 11% investors invest in secured investments like bond & fixed deposits. Now they prefer mutual funds over other investments. Around 23% of investors invest in equity. This group shows the highest risk appetite and thus shows a huge potential Around 25% of the investors invest in gold. This is the second most preferred investment tool next to mutual funds. It also shows a huge potential as now gold
ETF are available. And the increase in gold price & thus increase in gold ETF is very much evident.
• Investment expenditure Ratio
Maximum investors show their expenditure ratio of 20-80%. But still around 25% of investors have income-expenditure ratio of less than 20%. Thus it shows that still many investors are not investing properly & thus they need professional investment services.
• Stability of income
Around 60% investors have a stable income source. Earlier they had a psychology of investing in stable investment instruments like bonds & fixed deposits rather than investing in equity market where returns can be much higher than present investments but they use to show risk aversion because of the equity market’s volatility. Based on this it can be said that they did not believe in the economical condition of the country and market stability. But now conditions have changed. People with stable income are also ready to take risk. More people are ready to explore new investment avenues. They are ready to invest in various types of investment.
• Investment advice
Around 70% of the investors do not take investment advice. They do investments on their own. This shows that investors have become more educated. They have more know- how of the market. But this can also be taken as a potential. Because, still there are investors who need advice. Standard Chartered Bank should target such investors. Around 25% of the investors make investments after consultation with their peer group or financial advisors. Still around 75% of the investors make investment decisions on their own by making return analysis or market research. The study shows the investors’ need for ‘Good Return’ is highest among features, followed by Safety, Liquidity, Tax Benefit, Capital Appreciation, Professional Management and Diversification Benefits.
• Preferential Feature in mutual funds among individual investors
• Reason for choosing a mutual fund
The most preferred reason for choosing the mutual fund is the past returns. Around 65% of the investors choose a mutual fund on the basis of past performance. Thus
SCB should offer more of those mutual funds that have good track record. Next most preferred feature is the brand name. In case of an NFO brand name plays an important role.
• Investment strategy
Around 64% of the investors have long term investment strategy. They want to invest for longer period. For such investors SCB can offer more of equity funds. As though the market is volatile now but it is going to give huge returns in 3 to 4 years. As these investors are ready to wait they can be of huge potential.
• Preference of Mutual Fund Investing Over Equity Investing
The emergence of an array of savings and investment options and the dramatic increase in the popularity of Mutual Funds, in the recent years in India, has opened up an entirely new area for value creation and management. A house-holder investor with few rupees left over after paying for housing and two wheeler installments, is puzzled as to where he must park his funds safely, given the volatility of the market. This category may include people who either have a low awareness level about MF industry or still do not completely believe that MFs can get the same return like that of Equity shares. Around 75% of the investors say that investing in mutual funds, risk ranges from low to medium. This shows that sentiments of investors have changed towards mutual funds
• Sentiments towards market
Around 75% of investors believe that the market will recovers again. This shows a positive sign for mutual funds. So investors can be offered long term investments which can give returns. Around 25% of investors believe that market won’t recover. For such investors gilt funds and money market funds can be offered Around 60% of investors want to play safe. With current market volatility they want to wait and watch. Around 30% of the investors are looking at this as an opportunity to invest more in mutual funds as mutual funds are available at lower NAVs. This can prove to be a good potential customer base for SCB
• Future strategy of investors
• • • • • • • • •
www.mutualfundsindia.com www.google.com www.amfiindia.com www.nseindia.com www.investopedia.com www.moneycontrol.com www.wikipedia.com www.bseindia.com www.standardchartered.in.com
• The Economics Times • Jeffery Lawrence, (2005), “Leading the Way” • Study material “Standard Chartered Bank” , (2006), “Group code of Conduct-Leading by Examples” • Study material “5Cs sales process”, “Standard Chartered Bank” • ICFAI Press, “Mutual Funds”, (2004)
• “Mutual Funds Handbook”, (2004), Invest India Economic Foundation Private Limited.
NAME:CONTACT NO. :AGE:EDUCATION:1) Working Profession • Service • Businessman • Self Employed • Student • Retired • Housewife • Others (specify)
2) Which investment tool, generally you choose for your investment purpose. (can tick more than one) • Bonds • Fixed Deposits • Mutual Funds • Equity • Gold • Others(specify)
3) Before making an investment decision, how do you conclude that for which investment instrument you should go for? • According to return analysis • According to esteemed group (one’s intra circle, which is relied by you) • After consultation with your financial adviser • According to market trend.
4) What is your investment expenditure ratio? • Less than 20% • 20 – 80%
• 30 – 70%
• 40 – 60% • 50 – 50%
5) If you have to invest Rs 100, how will you divide it in the following categories? • Long term (5-6 years)/ Capital appreciation • Mid Term (2-3 years)/ Growth appreciation • Short Term (monthly)/ Liquidity 6) If you have to invest Rs. 100, how will you divide it in the following investments? • Short Term • 3 – 5yrs • 6 – 10yrs • 11 – 15yrs • More than 15yrs ------------------------------------
7) What is your investment objective, while investing in mutual funds? • Growth • Income • Balanced • Liquidity • Others
8) What are the factors that you keep in mind before investing in mutual funds? • Brand name • Quality of service • Past performance • Product features • Transparency • Others (specify)
9) Do you generally invest in popular mutual funds or analyze the funds & performance before investment decisions?
• Follow the popularity • Follow the esteemed group • Careful analysis of the fund • After consultation with financial advisor. 10) What is your investment strategy? • Low risk, low return • Moderate risk, moderate return • High risk, high return
11) What is your view about the stock market? • It will decrease further • This is the bottom • It will decrease further but then will recover • It will recover now 12) As the market is going down, what is your investment strategy? • Selling off existing funds • Wait &watch • Buying more funds as this is the right time to purchase
13) With current scenario, how risky do you find investing in mutual funds? • Low risk • Medium risk • High risk • Very high risk
14) How stable is your income source • Stable • Unstable • Moderate • Fluctuating 15) Which bank is providing u the investment services? ----------------------------------------------------------------------------------Thank You for filling the questionnaire
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