ACKNOWLEDGEMENT

I take this opportunity to thank Prof. P.C.Basu my internal guide for his valuable guidance.

I am also obliged to the staff of the library of NIMIMS for their sincere support.

In the end I wish to thank all those who directly or indirectly helped me in completing the project.

HISTORY OF MUTUAL FUNDS IN INDIA

PROJECT GUIDE: P.C. BASU

PREPARED BY: SONALI MITRA MFM III B- YEAR 1999-2002 ROLL NO:105

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INDEX

Introduction 1. The Basics 2. Emergence of Mutual Funds in India 3. Mutual Funds in India - Revisited 4. 1999 – Year of the funds 5. Mutual funds and the Budget 2000-2001, 1999-2000 6. Mutual Funds and its Tax Implications for small investors 7. Various Regulatory Measures 8. Some Major Mutual Funds in India: UTI SBI Mutual Fund ICICI PRU Mutual Funds 9. Extracts and Press Releases
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10.

Conclusion

Glossary Select Bibliography

Introduction :
The Indian Economy is under transition on account of the ongoing structural adjustments programmes and liberalisation. Economic transition is usually marked by changes in the market mechanism, institutional integration, market regulation, relocation of savings and investment, and changes in intersectoral relationships. These changes often include negativity and shake the investors confidence in the capital market. Mutual funds as efficient allocator of resources play a crucial role in this transitional period. Unfortutnately, however, not only has the importance of Mutual Funds been recognised but there has also been a lack of understanding about the effective role of Mutual Funds in the Indian Market Scenario. Moreover, the social, psycological and economic fundamentals which have a strong bearing on the success of the Mutual Fund Industry in India are often missing. My main objective is to study the trends in the Mutual Fund Industry right from its inception in India and to suggest certain investment techniques and strategies keeping in mind the various regulations. In order to achieve this, it is most important to rectify the prevailing environment of information about the mutual fund industry and that individual investors are educated about the unique advantages of mutual fund investing in a deregulated, high-risk, competitive market. Although I have primarily focussed on issues relating to the mutual fund industry in India, I have drawn from the experience of some developed countries like USA, UK and Japan, where I felt a comparision was necessary. This project is mainly divided into 10 chapters.Chapter 1 discusses about the basics of a Mutual Fund, the relationship between mutual funds and financial markets and includes as overview of the emerging charecteristics of the Indian Mutual Fund Market.

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Chapter 2, includes the Emergence of Mutual Fund Industry since 1964-2000 in detail. The Unit trust of India , the first mutual fund of India, was promoted as a part of the overall development strategy of the eraly 1960`s. However the subsequent development of the industry was influenced by the changing economic environment and market pressures. These developmental aspects have also been discussed in this chapter. Chapter 3, gives a bird-view of the Happenings of the Mutual Fund Industry in IndiaRevisited Chapter 4, talks about the Year 1999 which saw immense future potential and developments in this sector. This year signaled the year of resurgence of mutual funds and the regaining of investor confidence in these MF’s . But, the sole factor that gave revival to the Mutual Fund Industry was the Union Budget. Chapter 5, covers the influence of the budget of 2000-2001 and 1999-2000 on the mutual funds Industry. Chapter 6, discusses the tax implications of Mutual Funds for small, individual investors Chapter 7, puts emphasis on the various regulations set up by SEBI, P K Kaul Committee, SEBI Advisory Committee, Melagm Committee, Tarapore Committee. Chapter 8, discusses some major Mutual Funds in India such as UTI Mutual Fund, SBI Mutual fund, ICICI Prudential Mutual Fund etc. Chapter 9, contains certain extracts and press releases Chapter 10, summaries the major observations of this study and indicates what measures ae necessary for the healthy growth of Mutual Funds in India This project also includes a glossary of mutual fund terminology and a selective bibliiography. I must admitt that inspite of my best efforts there may be other important issues which have not been discussed.

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real estate. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an invincible surplus of as little as a few thousand rupees can invest in Mutual Funds. The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them (pro rata). i. the more the contribution the higher the ownership and vice versa. skills. These could range from shares to debentures to money market instruments.The Basics What is a Mutual Fund? A Mutual Fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The fund belongs to all investors with each investor's ownership depending on the proportion of his contribution to the fund. An individual also finds it difficult 6 .e. understand their implications and act speedily. Each Mutual Fund scheme has a defined investment objective and strategy. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. Markets for equity shares. A typical individual is unlikely to have the knowledge. Price changes in these assets are driven by global events occurring in faraway places. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified. A mutual fund is the ideal investment vehicle for today’s complex and modern financial scenario. derivatives and other assets have become mature and information driven. inclination and time to keep track of events. bonds and other fixed income instruments. professionally managed portfolio at a relatively low cost.

. investments and transaction processing. the mutual fund vehicle exploits economies of scale in all three areas research. 7 . the mutual fund in its present form is a 20th century phenomenon. While the concept of individuals coming together to invest money collectively is not new. mutual funds gained popularity only after the Second World War. the sponsors promote the Asset Management Company also. In the Indian context. there are thousands of firms offering tens of thousands of mutual funds with different investment objectives.g. A sponsor then hires an asset management company to invest the funds according to the investment objective. A mutual fund is the answer to all these situations. in which it holds a majority stake. In fact. It appoints professionally qualified and experienced staff that manages each of these functions on a full time basis. 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. these sponsors need approval from a regulator. the risk associated. Birla Global Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd. which has floated different mutual funds schemes and also acts as an asset manager for the funds collected under the schemes. mutual funds collectively manage almost as much as or more money as compared to banks. SEBI (Securities exchange Board of India) in our case. investments. The large pool of money collected in the fund allows it to hire such staff at a very low cost to each investor. Typically. brokerage dues and bank transactions etc. In India. E. Globally. as in most countries. In effect. A draft offer document is to be prepared at the time of launching the fund. it pre specifies the investment objectives of the fund. SEBI looks at track records of the sponsor and its financial strength in granting approval to the fund for commencing operations. Today. In many cases a sponsor can hold a 100% stake in the Asset Management Company (AMC). the costs involved in the process and the broad rules for entry into and exit from the fund and other areas of operation.to keep track of ownership of his assets.

what they cannot. it is important that the investors. Hence.. and how they function differently from other intermediaries such as the banks. at the initiative of the reserve Bank of India and the Government of India. mutual funds are still a new financial intermediary in India.Emergence of Mutual Funds Mutual funds now represent perhaps the most appropriate investment opportunity for most investors. the investment advisors and even the fund employees acquire better knowledge of what mutual funds are.the fund industry has already overtaken the banking industry. the mutual fund agents /distributors.A. It is no wonder then that in the birthplace of Mutual Funds – the U. 8 . Despite the continuos growth in the industry. The History of Mutual Funds The mutual fund industry in India started in 1963 with the formation of Unit trust of India. as financial markets become more complicated and sophisticated. more funds being under mutual fund management than deposited with Banks.S. investors need a financial intermediary who provides the required knowledge and professional expertise on successful investing. The Indian Mutual Fund industry has already started opening up many of the exciting investment opportunities to Indian investors. We have started witnessing the phenomenon of more savings now being entrusted to the funds than to the banks.

Later in 1970s and 1980s. but was later delinked from RBI. The first Indian offshore fund. In 1963. Mastershare could be termed as the first diversified equity investment scheme in India. though it remains the largest player in the fund industry. In absolute terms. new schemes like Children`s Gift Growth fund (1986) and Mastershare (1987) were launched. many Indian investors have taken to direct investing on the stock markets. UTI catered to the demand for income-oriented schemes by launching Monthly Income Schemes. the history of mutual funds in India can be broadly divided into three distinctb phases. Phase I: 1964-87 (Unit trust of India) This phase spans from 1964-1987. Over the years. Since then. was launched in August 1986. a somewhat unusual mutual fund product offering” assured terms”. and still one of the largest schemes. Now. the largest number of investors in any single investment scheme. Six new schemes were introduced between 1981 and 1984. now moving towards becoming fully open-end. US-64 attracted. launched by UTI was Unit Scheme 1964. So direct influence of UTI on the markets may be less than before. During 1984-87. but still counts UTI as its largest player with the largest corpus of investible funds among all mutual funds currently operating in India.The objective then was to attract the small investors and introduce them to market investments. The mutual fund Industry in India not only started with UTI. The first. Operationally. UTI`s operations in the stock market often determined the direction of market movements. Foreign and other institutional players have been brought in. It was also at least partially the first open-end scheme in the country. India Fund. the investible funds corpus of even UTI was still relatively small 9 . Until 1980`s. and probably still has. During 1990s. U TI was set up by the Reserve Bank of India. UTI was established by an Act of Parliament and given a monopoly. UTI started innovating and offering different schemes to suit the needs of different classes of investors. Unit Linked Insurance Plan(ULIP) was launched in 1971.

bringing in competition.175 Phase 2. LIC Mutual Fund (launched 1989). These mutual funds helped enlarge the investor community and the investible funds. But.at about Rs 600 crores in 1984. and Indian Bank Mutual Fund (launched in 1990) followed by Bank of India Mutual Fund. This was followed by Canbank Mutual Fund (launched in December 1987). many public sector banks and financial institutions were allowed to establish mutual funds. UTI had grown large as evidenced by the following statistics: 1987-88 Amount Assets Under Mobilisation as % Gross Domestic Savings UTI 2.1% 3. From 1987 to 1992-93.700 6. the fund industry expanded nearly seven times interms of Assets Under Management as seen in the following figures: 1992-93 Amount Mobilised (Rs Crores) Assets Under Management (Rs Crores) Mobilisation as % of Gross Domestic Savings 10 . Public Sector mutual funds.1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non-UTI.1% Mobilised(Rs Crores Mangement(Rs Crores) Total 2.175 6. With the opening up of the economy. The State Bank of India established the first nonUTI mutual fund.700 3. at the end of this Phase One. GIC Mutual Fund and PNB Mutual Fund.SBI Mutual Fund – in November 1987.

this segment of the fund industry now has been witnessing much greater investor confidence in them. 3. Quite significantly. But another important factor has been the steadily improving performance of several funds 11 . One influencing factor has been the development of a SEBI driven regulatory framework for mutual funds. five private sector mutual funds launched their schemes followed by six others in1994-95.028/. Initially. although with nearly 20% market share ceded to the Public Sector Funds. Phase 3: 1993-1996 (Emergence of Private Funds) A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993.1% in 1988) to fund investments. foreign fund management companies were also allowed to operate mutual funds. But. 61. investment management techniques and investor servicing technology that makes the Indian mutual fund industry today a vibrant and growing financial intermediary.2% 0.9% 6.964 13.1% During this period.247 8.021 38. The total assets under management had grown to Rs. the mobilization of funds by the private mutual funds was slow. most of them coming into India through product innovations.UTI Public Sector Total 11. The Indian Mutual fund has passed through three phases. During the year 1993-94.crores at the end of 1994 and the number of schemes were 167. UTI was still the largest segment of the industry. as they started allocating larger part of their financial assets and savings (5.057 1. giving the Indian investors a broader choice of `fund families` and increasing competition for the existing public sector funds.757 47. The second phase is between 1987 and 1993 during which period 8 funds were established (6 by banks and one each by LIC and GIC).2% in 1992.004 5. investors were shifting away from bank deposits to mutual funds.

The third phase began with the entry of private and foreign sectors in the Mutual fund industry in 1993.themselves. Investors in India now clearly see the benefits of investing through mutual funds and have started becoming selective. The mutual fund industry seems to mark the beginning of a new phase in its history. 1996. given their far-reaching impact on the fund industry and investors. Kothari Pioneer Mutual fund was the first fund to be established by the private sector in association with a foreign fund. has since scaled new heights in terms of mobilisation of funds and number of players. Similarly. the 1999 Union Government Budget took a big step in examining all mutual fund dividends from income tax in the hands of investors. These regulations set uniform standards for all funds and will eventually be applied in full to Unit trust of India as well. In fact. Both the 1996 regulations and the 1999 Budget must be considered of historic importance. Phase 4: 1996 ( SEBI Regulation for Mutual Funds) The entire mutual fund industry in India. despite initial hiccups. More investor friendly regulatory measures have been taken both by SEBI to protect the investor and by the Government to enhance investors` returns through tax benefits. even though UTI is governed by its own UTI Act. most investors-small or large-have started shifting towards mutual funds as opposed to banks or direct market investments. UTI has been voluntarily adopting SEBI guidelines for most of its schemes. a phase of significant growth in terms of assets under management. Consider the growth in assets as seen in the figures below: 1998-99 12 . Deregulation and liberalisation of the Indian economy has introduced competition and provided impetus to the growth of the industry. A comprehensive set of regulations for all mutual funds operating in India has been accomplished with SEBI (Mutual Fund) Regulations. Finally.

732 Private Sector 7.789 Total 23. by March 1999.377 April-Oct 99 Amount Mobised (Rs Crores) UTI 8.966 Total 21.222 Private Sector 13.656 14.000 crores to nearly 87. UTI`s share of mobilisations has decreased to 55% (from 85% in 1992-93).000 crores in just one year.08% 1.679 Assets Under Management (Rs Crores) 53.1% Public Sector 1.860 68.320 8. while the share of the 13 . Within the growing industry.312 Assets Under Management (Rs Crores) 64.949 Public Sector 1. as seen by the figure of assets under management which have gone from over 68.14% 5.292 6.79% 0.017 86.276 8.Amount Mobised (Rs Crores) UTI 11.472 Mobilization as % of Gross Domestic Savings 2.323 (Source: Association of Mututal Funds In India) The size of the industry is growing rapidly.

0.13. The share of the private players has risen rapidly since then.849 crores.070 per unit on a face 10 under the open-ended gilt scheme. has generated a one-year return of 9. As on August end 2000.92 percent.0. The fund house has paid out a dividend of 0. K Gilt Unit Scheme‘98 Savings Plan and K Liquid schemes.02.0130 per unit on a face value of Rs. but also by the growing acceptance of the private sector funds. 10. which was launched in Dec 1998. It is also clear that the enhanced share of the private sector is explained not only by the growing appetite for mutual funds.005 crores as total assets under management. As at the end of financial year 2000 (31st March) 32 funds were functioning with Rs. While under the Dividend – Reinvestment Plan of the Liquid scheme there has been a pay out 0. The record date for the dividend declaration has been fixed as Oct 28. The open-ended Gilt Fund.130 percent or Rs. 1. Currently there are 34 Mutual Fund organizations in India managing over Rs.000/crores. Kotak Mutual Fund has declares dividend (On Oct 31 . 1. 2001. 2001) Kotak Mahindra Mutual Fund has declared dividend under its.70 percent or Rs. During April to October 1999. The Securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies for the first time Several private sectors Mutual Funds were launched in 1993 and 1994. Mobilizations during the period of 7 months in fact exceeded the same for the whole year of 1998-99.02.private sector stood at 37%. there were 33 funds with 391 schemes and assets under management with Rs. 1. 14 . the private sector accounted for 59% of mobilizations.

The then Finance Minister. The already existing companies found it difficult to raise fresh capital. T. Earnest efforts were required to canalize savings of the community into productive uses in order to speed up the process of industrial growth. Krishnamachari set up the idea of a unit trust that would be "open to any person or institution to purchase the units offered by the trust. The ride through these 36 years is not been smooth. While some are for mutual funds others are against it.2000) The end of millennium marks 36 years of existence of mutual funds in this country. as investors did not respond adequately to new issues. With war on the borders and economic turmoil that depressed the financial market.T. entrepreneurs were hesitant to enter capital market. UTI commenced its operations from July 1964 . UTI came into existence during a period marked by great political and economic uncertainty in India. and even among them as far as possible. is intended to cater to the needs of individual investors.The impetus for establishing a formal institution came from the desire to increase the propensity of the middle and lower groups to save and to invest. to those whose means are small. However." 15 .Mutual Funds In India – Revisited (1964 . this institution as we see it. Investor opinion is still divided.

16 . This was followed by the entry of others like BOI. etc.90000 crore. When the private sector made its debut in 1993-94. sponsored by public sector banks. UTI commenced its operations from July 1964 " with a view to encouraging savings and investment and participation in the income.His ideas took the form of the Unit Trust of India. Starting with an asset base of Rs. The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). The industry was one-entity show till 1986 when the UTI monopoly was broken when SBI and Canbank mutual fund entered the arena. scope of business. the period of 1994-96 was one of the worst in the history of Indian Mutual Funds. 25 crore in 1964 the industry has grown at a compounded average growth rate of 27% to its current size of Rs. powers and functions of the Trust as well as accounting. The party did not last long. disclosures and regulatory requirements for the Trust. George Soros and Capital International along with the host of domestic players join the party. But for the equity funds. profits and gains accruing to the Corporation from the acquisition. JP Morgan." Different provisions of the UTI Act laid down the structure of management. an intermediary that would help fulfill the twin objectives of mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued to the small investors. Jardine Fleming. The opening up of the asset management business to private sector in 1993 saw international players like Morgan Stanley. the stock market was booming. LIC. From one player in 1985 the number increased to 8 in 1993. GIC. holding. One thing is certain – the fund industry is here to stay. management and disposal of securities.

This time around all the participants are involved in the revival of the funds ----. the unit holders. No longer were the mutual funds interested in selling the concept of mutual funds they wanted to talk business which would mean to increase asset base. both at the hands of the investor as well as the mutual fund.So new schemes for new IPO’s were inevitable. made them more attractive and provides acceptability among the investors. An insight of the Union Budget on mutual funds taxation benefits is provided later. It provided centre stage to the mutual funds. the other related parties. The funds started to regulate themselves 17 . The budget brought about a large number of changes in one stroke.1999—YEAR OF THE FUNDS Mutual funds have been around for a long period of time to be precise for 36 yrs but the year 1999 saw immense future potential and developments in this sector.the AMC’s. The Union Budget exempted mutual fund dividend given out by equity-oriented schemes from tax. and to get asset base and investor base they had to be fully armed with a whole lot of schemes for every investor . The quest to attract investors extended beyond just new schemes. However the sole factor that gave lifer to the revival of the funds was the Union Budget. This year signaled the year of resurgence of mutual funds and the regaining of investor confidence in these MF’s.

18 . 1961. the industry is maturing and the investors and funds are frankly and openly discussing difficulties opportunities and compulsions. The above two sections provided relief from capital gains tax if investments were made in specified securities and locked in for a period of 3 years in the case of 54EA and 7 years in the case of 54EB. Mutual Funds and the Budget 2000-2001. investors have lost out on a very viable alternative for tax saving and funds also would be faced with the problem of ‘hot money’ as there would no longer be any lock in period for investments. • Increase in dividend tax from 10% to 20% for debt funds. It is estimated that 54EA investments formed approximately 15% of the corpus. With the withdrawal of the exemption to mutual funds. Mutual fund units were one of the specified securities and this resulted in a lot of money realised as profit from sale of securities being reinvested in the market through mutual funds.and were all out on winning the trust and confidence of the investors under the aegis of the Association of Mutual Funds of India (AMFI) One cam say that the industry is moving from infancy to adolescence.1999-2000 : Mutual Funds and the Budget 2000-2001: Important measures : • • Deletion of sections 54 EA and 54 EB of the Income Tax Act.

5% from the average of approximately 14%. This is expected to hurt retail investment in debt schemes and could lead to a pull out and reduced mobilization. it is widely felt that the finance minister could have simply extended some of the benefits enjoyed by mutual funds to banks and FIs. these schemes could attract some of the investment that is pulled out from debt schemes. resulting in large inflows into the capital markets through mutual funds. since open ended equity schemes are free from paying dividend tax. widened the tax base and reduced procedural delays. Two implications of this move could be: • Reinvestment of dividends by investors. Mutual funds and the Budget 1999-2000 The Union Budget of India. This would lead to a reduction in returns available to investors by approximately 1. 1999 presented in Parliament on February 27 has brought good things for mutual fund investors. The budget aims at making mutual funds tax friendly for the individual investor. Instead of taxing debt schemes so as to bring parity between the banks and mutual funds. • Switch over from debt to equity schemes. since capital gains would be taxed at a lower rate as compared to dividend. 19 . investors would prefer to reinvest dividend and earn long-term capital appreciation. The experience with mutual funds has in any case shown that turning dividends tax free in the hands of investors has simply improved collections.The existing dividend tax payable by debt schemes has been doubled to 20%.

the benefits of section 80L 20 . Since investors shall be receiving tax-free dividends. equity & debt or a debt scheme will all be tax-free for the investor.e. For the investor it does not matter what kinds of mutual fund scheme they have invested in. Dividend whether received from equity.Mutual Funds and its Tax Implications on small investors: includes    Income Received From Mutual Funds Tax implication for income received on open-end equity oriented scheme Tax implication for income received from schemes other than open-end equity oriented scheme   Distribution Tax Long Term Capital Gains arising from sale of mutual fund units Income Received From Mutual Funds The Finance Bill has made income (i. dividends) received from all mutual funds tax free in the hands of investors. Effective April 1. 1999 (i. assessment year 2000-2001) investors need not pay any tax on dividend received from a mutual fund.e.

Tax implication for income received on open-end equity oriented scheme: As per the Finance Bill. however. Effective April 1. The good news is that the distribution tax does not have to be paid on all types of mutual fund schemes. 1999 will be subject to the tax. For financial year 1999-2000. Now that investors will receive tax-free dividends from mutual funds. open-end equity oriented schemes will be exempt from paying the distribution tax.000 (of which Rs. In fact. only distributions made after June 1. An open-end equity oriented scheme is defined as one where more than 50% of the scheme's investible funds are invested in domestic equities. The monthly average. Difference Between TDS and Distribution Tax 21 . The 50% is computed taking the annual average of the monthly averages of the scheme's equity holdings.1999. This tax has been fixed at 10%. Section 80L is no longer applicable to dividends from them. Tax implication for income received from schemes other than open-end equity oriented scheme By definition all schemes that are not open-end equity oriented schemes must pay a distribution tax. in turn.3. the actual tax will be 11% since the mutual fund must pay a 10% surcharge as well. While dividends in the hands of the investor are free from tax.4.000 was specifically reserved for mutual funds) for dividends received from mutual funds together income from other securities. 15. mutual funds are now required to pay a "distribution tax" of 10%.will no longer be relevant to mutual funds. Section 80L allowed you to take a deduction of up to Rs. for a period of three years.1999. income distributed under the US-64 scheme and other openended equity oriented scheme of UTI and Mutual Funds would be exempt from the levy of this tax for a period of three financial years starting from 1. is calculated by taking the opening and closing percentage of a particular month's equity holdings.

a tax that has to be paid by the fund. The benefit of cost indexation. these do not get the benefit of the capping of capital gains tax. Long Term Capital Gains arising from sale of mutual fund units As per the current provisions of the budget. persons would have the option of either availing of cost indexation on the capital gains and paying 20 per cent capital gains tax or paying a flat rate of 10 per cent without cost indexation. Hence. In cases where the investor is not liable to pay tax he may claim an exemption from TDS by filing a Form 15H with the fund. As a result. UTI may get this benefit as the SCRA definition includes all 'securities issued by a body corporate' and UTI is one by statute.The distribution tax is different from "TDS" or tax deducted at source. not the investor. he cannot file for exemption from distribution tax. However. As per the earlier Income Tax law. 22 . in all schemes where the mutual fund has to pay a distribution tax. the fund deducts tax and deposits it with the Government. however. It is not a direct tax paid by the investor therefore. Since the definition of securities in the SCRA Act does not include units issued by mutual funds. Distribution tax is. the maximum capital gains tax payable has been capped at 10 per cent. This tax is deducted by the fund from income payable to the investor and the investor gets credit of the same while filing his annual return of tax. The present budget capped capital gains tax at 10 per cent for securities as defined under Section 2(h) of SCRA and listed in recognised stock exchanges in India. the dividend pay out will be affected to that extent by the 11% distribution tax. however. That is. In the case of TDS. while the dividend pay out will be tax-exempt in the hands of the investors. would not be available in such cases. long-term capital gains from shares and securities were taxed at 20 per cent after giving benefit of cost inflation indexation. long term capital gains arising from the sale of listed securities and shares as defined under the Securities Contracts (Regulation) Act. 1956 (SCRA) are now chargeable to tax at a maximum rate of 10 %. The finance ministry is considering extending the benefit of the 10 % cap on long term capital gains tax to units of all mutual funds.

1996 The mutual funds have become an important vehicle for mobilisation of savings particularly from the household sector. Tax laws may change in the future and the applicability of these laws may vary from person to person.Important :The above is a general description of the tax laws. introducing prudential norms to 23 . depending on your particular circumstances. 1996      P K Kaul Committee Report Sebi Advisory Committee Report Findings from Malegam Committee Report ENS Economic Bureau Report Findings from Tarapore Committee Report Amendments to the Securities and Exchange Board of India (Mutual Funds) Regulations. The SEBI has been taking steps towards improving the standards of disclosure for mutual funds. You should consult with your own tax advisor with respect to the tax benefits available from a mutual fund investment Various Regulatory Measures:  Amendments to the Securities and Exchange Board of India (Mutual Funds) Regulations.

and trustees will have to specifically comment on such transactions recorded in the half yearly reports which they would submit to SEBI. In case of transactions undertaken with any non-associate broker. the aggregate investment already made by all existing schemes in group companies. The salient features of the amendments are given in the box 1. the SEBI has been seeking to give greater degree of freedom to fund managers to structure their schemes according to investor preferences. The AMCs must submit quarterly reports to the trustees on transactions in the securities of group companies during the quarter. the maximum investments proposed to be made by the scheme in the securities of the group companies of the sponsor and also. 24 . Simultaneously with the introduction of stringent regulations to raise the compliance standards. • Unitholders' approval will no longer be required for rollover of schemes and for converting close-ended into open-ended schemes. Mutual funds have been prohibited from making investments in unlisted/privately placed securities of associate/group companies of the sponsor. With this end in view the SEBI has further amended the Mutual Fund Regulations which were notified in 1996. Asset Management Companies (AMCs) will not be required to disclose in the scheme offer document. • Security transactions with associate brokers shall not exceed 5 per cent of the quarterly business done by the mutual fund.7: Amendments to the Mutual Fund Regulations • Aggregate investment by a mutual fund in listed and /or to be listed securities of group companies of the sponsor shall not exceed 25 per cent of the net assets of all schemes of the fund.7: Box I. if this 5 per cent limit is exceeded. provided the unitholders are given an option to redeem their holdings in full at NAV based prices. AMCs will be required to record in writing the justification for exceeding the limit and report this to the trustees on a quarterly basis.prevent misuse of funds by the asset management companies and to afford a greater degree of protection to the investors.

• • Standard as well as scheme specific risk factors. an abridged offer document i. the memorandum containing key information. thereby enabling the investors to take informed investment decisions. Both these documents were prepared on the basis of broad based views and comments from the Association of Mutual Funds of India and Price Waterhouse LLP. Both these documents have strengthened the disclosure standards in the offer documents of mutual fund schemes.• Independent trustees who are not associated with the sponsor shall now constitute two third of the Board of Trustees instead of the earlier provision of 50 per cent. In addition. • Memorandum containing key information must accompany all application forms of mutual fund schemes to ensure adequate disclosures to investors. 25 . from various Investors' Associations and retail investors contacted through press.e. The standard offer document and memorandum mandate the following disclosures. in the case of assured return schemes. past history of the mutual fund in meeting assurances under such schemes as well as the resources available to the guarantors on the basis of which guarantee is being provided for the new scheme. The auditors will now be required to comment on the compliance of the regulations and investor’s grievances and redressal thereof by the mutual funds. which must accompany all scheme application forms in terms of sub regulation (4) of regulation 29 of the Regulations. • Submission of the Due Diligence Certificate by the AMC to the SEBI and reproduction of its contents in the offer document. • fundamental attributes of the scheme. has also been standardized. • • Full portfolio disclosure in the Annual Report of Mutual Funds is now mandatory. Standard offer document and memorandum containing key information The SEBI prepared a standard offer document which prescribes the minimum disclosure requirements to be contained in the offer document of any mutual fund scheme.

• • transactions with associates undertaken by the mutual fund for the last three years.• details of the trustees/members of the Board of Directors of the trustee company/AMC as well as a note on the activities of the sponsor and its financial performance for the last three fiscal years. Apart from making recommendations. criminal cases or economic offence cases and any enquiry/adjudication proceedings under the SEBI Act and the regulations made thereunder. that all the SEBI registered mutual funds and fund managers would be permitted to invest in overseas markets. any pending material litigation proceedings. the SEBI set up a working group to frame the modalities and guidelines for investment by domestic mutual funds in the overseas markets. Various 26 . In this context. the committee would also be devising a model MIS system particularly at the AMC and the trustee level. recommending clarifications regarding the manner of compliance with some of the provisions of the Regulations and additionally. • all cases of penalties awarded by any financial regulatory body. P. that are in progress against the sponsor or any of its associates including the AMC/Trustee company/Board of Trustees or any of the directors or key personnel (specifically the fund managers) of the AMC. 1996. Working group on overseas investments by mutual funds The Reserve Bank of India (RBI) in its credit policy announced in October 1997. initially within an overall limit of USD 500 million and a ceiling for individual fund at USD 50 million and within such limits as announced by the RBI from time to time. study the feasibility of organising mutual funds alternatively as companies and the applicability of the Indian Trusts Act vis-a-vis Trustees. year-wise disclosure of past performance of all schemes launched during the last three fiscal years on the basis of historical per unit statistics including annualized return for all schemes (excluding redeemed schemes). Kaul Committee : A Committee was set up under the Chairmanship of Mr. P.K.K. Kaul to recommend the manner of discharge of responsibilities by the trustees as laid down in regulation 18 of the SEBI (Mutual Funds) Regulations.

the trustees did not respond to the notice issued by the SEBI. under Section I (B) of the SEBI Act.Dhanvarsha 4 and 5. where the inspection report observed certain irregularities is being referred for adjudication/enquiry. violation of RBI directions and various irregularities committed by the sponsors of GFC Mutual Fund and Asia Pacific Mutual Fund. • On account of deteriorating financial position. Hon'ble Bombay High Court appointed a provisional administrator for CRB Mutual Fund. fee structure and restrictions on overseas investments are being considered by the working group. the SEBI took up the matter with the trustees of the Fund. 1992. However. the Chairman passed an order prohibiting the Fund from launching any further scheme and from dealing with the securities and funds of the scheme till further orders. SEBI. Another case.issues such as appointment of overseas advisers and global custodians. The case was referred for adjudication. there had been a steep decline in the NAVs of both the schemes. Action taken against asset management companies of mutual funds • There was a delay of 30 days in listing the units of one mutual fund scheme on the stock exchange for violation of the provisions of the SEBI Act and the Securities and Exchange Board of India (Mutual Funds) Regulations. in meeting the redemption benefits as assured in the offer documents. 1996. On account of adverse market conditions. (action has been initiated by the RBI against this NBFC). Consequently. the Chairman. Therefore. The SEBI is working out a scheme to protect the interests of the unitholders. 190 crore. Both the Funds were prohibited from undertaking any activity under the Regulations. LIC Mutual Fund had launched two schemes . • On account of financial irregularities and illegalities committed by the CRB Capital Markets Limited which is also the sponsor of CRB Mutual Fund. • • Difficulties faced by assured return schemes In 1992. The sponsor - 27 . passed orders prohibiting them from launching any schemes. there was a deficit of Rs.

Ind Jyothi of Indian Bank Mutual Fund. IDBI’s control over UTI likely to end soon. PNB Mutual Fund paid assured returns on guaranteed schemes. Guidelines for investment / trading in securities by employees of AMCs and mutual fund trustee companies. In case of their Ind Prakash scheme also. Similarly upon the SEBI's advice. the sponsor of the Fund . The Committee approved the guidelines for investment/ trading in securities by employees of AMCs and mutual fund trustee companies so as to avoid any conflict of interest or any abuse of an individual's position and also to ensure that the employees of 28 . In the case of Festival Boinanza Growth Scheme of BOI Mutual Fund. on the due dates of redemption of these two schemes. all assets of the schemes would stand transferred to LIC. special units against payment of funds by the LIC.LIC. whereby the Mutual Fund would allot to LIC. This was to be effected by means of a scheme of arrangement.Indian Bank agreed to pay the assured returns. 2001 The SEBI Advisory Committee on Mutual Funds met today and made the following decisions: 1. As the arrangement offered by the LIC was in the interest of unitholders. launched prior to the notification of the 1993 Regulations. Punjab National Bank was required to meet the shortfall. the SEBI allowed the scheme. In the process. Another scheme. the SEBI had advised them to pay returns to the unitholders as mentioned in the offer document. The units would be managed by the AMC and can be redeemed by the LIC as and when it desires. Sebi Adisory Committee Report on Mutual Funds held JANUARY 9. which would be equal to the redemption obligations under these schemes. was unable to pay assured returns for the year 199697 and 1997-98 to the investors due to inadequacy of distributable profits. and the sponsor. The SEBI advised the Fund to meet the assurances and finally. voluntarily decided to meet the shortfall. the sponsor Bank of India met the shortfall that arose at the time of redemption of the scheme.

AMCs and trustee companies should not take undue advantage of price sensitive information about any company. Other employees who do not have such access will be required to report their transactions. the Committee approved a simplified format for the half -yearly unaudited results. performance in terms of dividend and rise/fall in NAV during the half-year period. Moreover. investment made in associate companies. The committee decided that access persons i. details of large holdings. The mutual funds would now be required to disclose unit capital.e. Any such violation and action taken by the mutual fund would be required to be reported to SEBI in the periodical reports 2. it has been observed that the reports are too cumbersome and as a result the investors may not be getting any meaningful information from the disclosures in the reports. percentage of management fees and recurring expenses to the net assets.e. in many cases the print of such advertisements is so small that it is not readable. From the half-yearly unaudited financial reports currently being published by the mutual funds. Thus the investors would get all relevant information in a concise format. 29 . The boards of AMC and trustee company will review the procedures concerning personal investments by the employees and any violations requiring remedial action. before the expiry of two months from the close of each half year i. Access persons will also be prohibited from making profits by selling securities within 60 days of buying them. In order to provide the investor with some meaningful information about the operations of the mutual fund. Simplifying the format for half-yearly unaudited results by mutual funds At present the mutual funds are required to publish unaudited financial results in the newspapers. A copy of the format is enclosed in the annexure. the employees who have access to investment decisions of the mutual fund should take prior approval before making any investments. reserves. on 31st March and on 30th September in the prescribed format. etc. payment made to associate companies.

imposing or enhancing entry or exit loads. they are not required to disclose the details of their purchase and sale transactions in securities during the course of the year. Reporting of securities transactions by directors of Asset Management Companies According to SEBI Regulations. As in the case of trustees. Considering the fact that the offer document or the memorandum containing key information is the main basis of reference for any investor who intends to invest in a scheme. addition of new plans in the existing scheme. The addendum will also be sent to the existing unitholders. The funds would also be required to publish the half-yearly results in at least 7 point font with proper spacing for easy readability. penalties imposed. Updating the offer document on a continuous basis by mutual funds It has been observed that the disclosures in the offer document of open ended schemes are not updated periodically and new investors have to refer the offer document prepared at the time of launch of the scheme for making an investment decision. the directors of the AMC are required to file a statement of holdings in securities with the trustees at the end of each financial year. change in the key personnel of the AMC especially the fund manager. The committee decided that the directors of AMC should be required to file the details of their purchase and sale transactions in securities on a quarterly basis. the committee decided that the offer document should be revised and updated at least once in two years. The addendum may be circulated to all the distributors/brokers so that the same can be attached to all offer documents and abridged offer documents already in stock. 4. 3.The mutual funds would now be required to publish the disclosures within one month of the close of each half-year. 30 . 1 lakh. Thus. etc. fresh adjudication cases referred by SEBI. an addendum giving details of the changes may be attached to offer documents and abridged offer documents. they may report only those transactions which exceed the value of Rs. there may be various changes of material nature like constitution of the AMC. Over a period of time. Till the time the offer document is revised and reprinted. change in management/controlling interest.

5. 6.5% of recurring expenses chargeable by a mutual fund scheme can be enhanced to a maximum of 3% for that part of investment which is made in overseas securities (whenever permitted by the Government). which have substantially different characteristics from the main scheme. The purpose of the above measures is that the investors get all material information before they take investment decisions. should not be launched as part of an on-going open ended scheme. Time frame for despatch of dividend warrants As per the provisions of Regulation 53 (A). Mutual funds investing abroad The committee decided that the present limit of 2. yearly. The applicability of loads will now be disclosed in the statements of accounts or in the covering letter issued to the unitholders. . These plans should be launched as separate schemes. all mutual funds are required to despatch dividend warrants to the unitholders within 42 days of the declaration of the dividend. The committee decided that such plans. These plans of different maturity periods .After completion of one year by any open ended scheme. etc. the condensed financial information of the scheme as per format specified in the standard offer document will be included in the offer document and this information will also be updated in the subsequent years in the form of addendum to the offer document till the time new revised offer document is printed. Serial Plans launched by mutual funds A number of mutual funds have launched serial plans under the existing gilt schemes. liquid/money market schemes and debt schemes. 8. Regulatory framework for distributors and intermediaries engaged in mutual funds and certification.are being launched as a part of main schemes. 7. half-yearly. 31 . The committee decided that the present requirement of 42 days should be reduced to 30 days so that the investor gets dividends within a shorter time period.quarterly.

Currently. its capital is only Rs 5 crore. Findings from Malegam Committee Report: Indian Express MUMBAI. 32 . Over a period of time. Of this. “I do not think just because private sector takes over the fund will start making money. GIC and other commercial banks and institutions. is in discussion with the Malegam Committee to adopt a different structure as part of the ongoing clean-up exercise at the mutual fund behemoth. Said UTI chief Damodaran: “UTI Act will be amended making several changes in the structure of the Trust. IDBI has four nominees on the 9-member board of trustees of UTI. SBI. AUG 5: TERM lending institution IDBI’s control over Unit Trust of India (UTI) will come to an end very soon.” Damodaran said the Malegam Committee is seized of the matter and the entire organisation would be restructured within a year’s time. Although UTI holds around Rs 57. such certification may be made mandatory. The Trust. UTI could be delinked from the IDBI. under the new management headed by M Damodaran. The chairman and executive trustee are appointed by the IDBI in consultation with the Central Government. We are waiting for Malegam Committee to suggest various proposals.”the Damodaran told the Indian Express. We will work out a suitable structure after that.The committee decided that the mutual funds should adopt the certification of agents and distributors for mutual fund schemes by the AMFI on a voluntary basis. “The restructuring of UTI is the necessity and the Malegam Committee will give us the roadmap about how to go about it. I hope it will be tabled in the winter session of Parliament. The UTI chairman also denied that the privatisation of the UTI will solve the problem of the organization. IDBI currently owns 50 per cent while the balance is held by LIC.000 crore assets.

A major argument of other mutual funds and financial experts is to bring UTI structure in line with other mutual funds. Net inflow of UTI in 2000-01 stood at Rs 323 crore as against Rs 4.92 crore in 1999-2000.21 per cent over the net outflow of Rs 744. 1963 as a corporate body. excluding UTI. executive trustee UTI’s net inflow falls by 93 pc in last fiscal Private mutual funds gain at the cost of UTI ENS Economic Bureau Report New Delhi. May 17: Unit Trust of India’s (UTI) cup of woes seems to be far from over. which is up by 40. There was also centralisation of power which was abused allegedly by former chairman PS Subramanyam who is now in jail along with two executive directors. was established by the government under a special Act—the Unit Trust of India Act. 33 . While the Joint Parliamentary Committee (JPC) on Thursday stated that the leading mutual fund can come under scrutiny for its role in the stock market scam. according to recently released data of Securities and Exchange Board of India (Sebi).044.5 crore.413 crore from the market while redeeming units worth Rs 12. which has a structure different from the three-tiered structure of other mutual funds in India. Public sector funds.548 crore in 19992000 UTI mopped up Rs 12. All the chairmen of UTI in the last 10 years were against coming under Sebi and changing the structure. The UTI Act stipulates that there would be an executive committee which shall consist of the chairman of the board.” UTI.There are numerous examples of private sector mutual fund failing to live up to the promises made to small investors. UTI’s net inflow in the fiscal 2000-01 has dipped by around 93 per cent compared to the inflow in the previous fiscal. saw a net outflow of funds worth Rs 1.090 crore leading to a net inflow of just Rs 323 crore in 2000-01.

72 crore as on March 31.797. The drop of almost 93 per cent net mobilization by UTI follows massive erosion in its performance in 1998-99 wherein.However.53 crore net outflow of funds. private sector mutual funds’ seems to have gained at the cost of UTI and their net mobilisation was Rs 9.64 per cent of the total net assets of the Rs 90.94 per cent in 1998-99. • Public sector funds.08 per cent over Rs 1.97 per cent in 1998-99.946.14 crore during the same period. share of UTI in total net assets has come down to 64.31 per cent increase to Rs 83. 2001.32 per cent in 1999-2000 and a meager 9.969.957. 2001. With their impressive performance. total mutual funds net assets were to the tune of Rs 90.586. have reduced their net assets from Rs 8. the share of public sector funds also has similarly gone down from 12.87 crore mutual fund industry as compared to 23.250.39 crore.09 per cent in 1998-99 to 9. on the other hand. On the other hand.586. the total net mobilisation by the industry for 2000-01 was Rs 9.737.88 crore the year before. On the other hand.628.016.68 per cent in 1999-00 and 7. which implies a drop of almost 52 per cent.128. private sector funds have increased their market share to 28.78 per cent to Rs 92.942.32 per cent in 2000-01. The dominance of private sector funds can be seen from the fact that while UTI has managed to increase its net assets from Rs 53.07 crore as against Rs 18. However.57 crore. the redemption’s saw a 98. 1999 to Rs 58.01 crore on March 31. 1999 to Rs 6. The fall in net mobilizations was due to the fact that while total mobilizations of the industry managed to grow by 51.829. which is over 30 times more that what UTI collected. As on March 31.1 crore the year before.849.87 crore which is a drop of 16. 2001 Findings from Tarapore Committee Report: Bar FIs. private sector funds have grown from Rs 6.32 crore as a result of which there was a fall of 52 per cent in net mobilizations.65 crore as on March 31.16 crore to Rs 25. COs from investing in US-64: Tarapore panel 34 . the leading MF saw a Rs 2.04 per cent from 67 per cent in 1999-00 and 77.145 crore as on March 31.07.

Indo Gulf Corporation. the committee found that large redemptions in May were made both by individuals and institutions. Punjab and Sind Bank.485. DCB. Britannia. Our Bureau The Tarapore Committee has found that there was no breach of confidential information leading to huge redemptions of almost Rs 4. Peerless at Rs 105 crore. those by institutions rose in the same period from Rs 232 crore to Rs 2.000 crore in April and May in US-64.New Delhi. It believes that as long as they are allowed to invest. and Bank of Maharashtra at Rs 64 crore. Karnataka Bank. Bank of India at Rs 74 crore. Bank of Baroda at Rs 150 crore. in its report. 2001 to Rs 1. 35 . Bharat Electronics. Bajaj Auto. Other large redemptions included those by National Housing Bank. Tata Power at Rs 256 crore. In its investigations. ICICI Bank at Rs 104 crore. The committee. Bombay Dyeing at Rs 191 crore. Nagarjuna Fertiliser Sahara India.6 crore in May 2001. 47 banks and 7 public sector units. There was a huge pubic outcry that big investors got out of US-64 in the nick of time with the help of privileged information.281 crore. The redemptions during April and May by institutions covered 183 entities which comprised 129 corporates. the scheme will continue to face volatility. The largest redemptions during the period were by State Bank of India at Rs 354 crore. has made a radical recommendation that institutions and corporates should be barred from investing in the scheme. SIDBI. Dena Bank. Telco at Rs 136 crore. Corporation Bank. The committee had been asked by finance Minister Yashwant Sinha to examine whether there was a breach of confidentiality behind the large-scale redemptions prior to the announcement of a freeze on redemptions. Union Bank of India. While redemptions by individuals rose from Rs 193 crore in April. IL&FS.

This was an attempt at evergreening which was not approved by the executive committee. The panel has also recommended that the UTI investments in Reliance Industries be referred straight to a pre-investigative body without an audit. Zee Tele NEW DELHI ET TEAM The Tarapore committee report has found prima facie discrepancies in the UTI investments made in Essar Steel. the reasons for accepting the condition of conversion into equity at par was not clear. Zee Telefilms. it says On the investment of Rs 25 crore in non-convertible debentures it says that while the earlier equity holding was stated to be have depreciated substantially. The panel has suggested a thorough on-site audit of these investments to investigate further. SSI. The committee has noted that an investment of Rs 300 crore in NCDs of Essar Steel was done at a time when the financial position of the company was deteriorating and the circumstances which weighed with the UTI in sanctioning a further investment of Rs 300 crore were not discussed in the internal office note in the memorandum placed before the executive committee. The usual 10 paise monthly repurchase price increase for US-64 was reduced to 5 paise in May 2001 and the closure was announced from June 2001. an exodus from the scheme was inevitable. 36 . The committee has noted that investments in all three were imprudent but UTI made profits in case of both RIL and RPL. It also suggested audits in case of Reliance Petroleum and Reliance Capital.The committee found that as the move to an NAV-based system was imminent. expectations of a lower redemption rate was common. and Global Telesystems. In the circumstance. Tarapore panel picks holes in UTI investments in Essar Steel. Visualsoft.

it did not pick up the market signals and did not conduct any study of the shares before augmenting its stock of the company. On the investments in Zee Telefilms. It says that the revised research report dated July 19. or cut losses in adverse circumstances. As a result. in the subsequent year. On Global Telesystems. 37 . On investments in Visual software. It is not clear as to who authorised the build up of these large positions. submitted to the UTI chairman was in fact a blanked permission to move along with the market even if the price was manipulated and not based on the realistic prices assessed on the financial strength of the company.Again the reasons which weighed with the UTI in making a further investment of Rs 25 crore when the company was in default and had even failed to repay the earlier investments under NCDs of Rs 300 crore are not clear. It facilitated a free play in the market for UTI’s fund managers. it not only booked a loss of Rs 11 crore but its holding at the end of June 2001 stood depreciated by Rs 658 crore. it has concluded. when the prices were favorable. the committee has noted that the build up of portfolio was not backed by any internal process notes or any regular delegation of powers to the fund managers for investment decisions in the stock market. do raise some doubts. 1999. the company has said that the transactions of sale purchase undertaken in the scrip were beyond the powers of the concerned functionaries. the Tarapore panel has reported that though the UTI’s portfolio held at the end of June 2000 had depreciated by Rs 294 crore. It has also said that the build up of a portfolio in Global Tele appears to have facilitated the upward trend in its prices and the decisions not to off-load the stock to book profits.

SOME MAJOR MUTUAL FUNDS IN INDIA: UTI-An Overview The mutual fund industry in India began with the setting up of the Unit Trust In India (UTI) in 1964 by the Government of India. In 1987 public sector banks and insurance companies were permitted to set up mutual funds and accordingly since 1987. 1963. which for the first time established a comprehensive regulatory framework for the mutual fund industry. Securities Exchange Board of India (SEBI) formulated the Mutual Fund (Regulation) 1993. 76. The UTI is governed by a special legislation. the Unit Trust of India Act. 2000. UTI has grown to be a dominant player in the industry with assets of over Rs. During the last 36 years.547 Crores as of March 31. 6 public sector banks have set up mutual funds. Since then several mutual funds have been set up by the private and joint sectors 38 . Also the two Insurance companies LIC and GIC established mutual funds.

2001) As per findings of the Tarapore committee the Unit Trust of India. TSK will enable the existing investors to obtain information on UTI 39 .2225. trustee and an asset management company just like any other mutual fund. Chola Gilt Savings Plan declares dividend (On Oct 31 . These investments were made in the form of equity or non-convertible debentures at a high premium. 2001 is Rs. The complied report is likely to submitted sometime this week. the largest mutual fund in India has introduced TSK.10. They would have a sponsor. The fund has decided to offload 60 percent stakes of the sponsoring company to a strategic partner and there is a possibility of roping in a foreign strategic partner. The institution would be restructured into a threetier organization. The Ex-dividend Nav as on Oct 29. 2001) The Unit trust of India has accepted the recommendations of the Malegam Committee. 10. has allegedly made investments in over 1000 unlisted companies in the last decade.080 per unit on a face value of Rs. The main aim of the fund is to generate returns from a portfolio which is free from credit risk. 2001) Chola Gilt Savings Plan has declared a dividend of 0.The portfolio will target an average maturity not exceeding 3 years. And among other things various other legislatures. Our honorable Finance minister set up the committee in July this year to initiate an independent inquiry into issue of insider trading and commercial decision of UTI. This is a move in the right direction. 2001. concentrated in the hands of a few top level officials. The open-ended Gilt fund was launched in Mar last year. a touch screen kiosk system. particularly the UTI Act may be amended. The committee. The record date for the dividend declaration has been set as Oct 26. 2001) Unit Trust of India. An independent valuer may value UTI. UTI holding stocks of 1000 unlisted firms (On Oct 30 .UTI takes a serious look at restructuring: accepts Malegam committee report (On Oct 31 . UTI introduces first Touch Screen Kiosk (On Oct 30 . which has been carrying out the inquiry for the last three months has highlighted the lack of a transparent decision making process.80 percent or Re.0.

UTI intends to make these kiosks transaction based. which will disseminate information on schemes.schemes. where the investor can buy or repurchase UTI Schemes. It would enable the investing public to do online financial transactions such as Sale. UTI is planning to introduce an interface. The TSK system has been structured to provide the information of pre and post sales services in three phases. Repurchase. At present. the State Bank of India launched SBI Mutual Fund. etc. of units using their personalized Smart Cards / Debit Cards / Credit Cards on various UTI schemes. making it the pioneer bank sponsored mutual fund in an untapped field with a huge potential. It further plans to provide customer centric account information on these Kiosks and information on the schemes on a real-time basis in future. Transfer. etc. the first phase will provide all the product details including the objective of the scheme and portfolios and would be displayed along with the UTI branch network details and contact numbers.Pioneer bank sponsored mutual fund In 1987. SBI MUTUAL FUNDS: SBIMF .return calculator. sensing the need for an investment alternative. The second phase will provide investors the facility for online query (including complaints and suggestions) for all investments made with UTI. In the third phase. with which investors can calculate returns for a chosen period of time. the best services. It will also provide a tool. taxation on investments in UTI schemes. Branch network. The fund house will also have the feature of a detailed portfolio information for investors. only the first phase development has been completed and tested. NRI investments. 40 . In order to offer investors. UTI plans to integrate the all the data information of all the schemes into the Generic System Database. For the matter. NAVs including the historical NAVs. which would connect investorbased databases on various schemes with the browser based query system or generic system.

SBI Mutual Fund is also the first bank sponsored mutual fund to launch an offshore fund. SBI Mutual Fund has launched 20 schemes. Pedigree SBI Mutual Fund draws strength from India's premier and largest bank. the fund manages over Rs. With a large network of collecting branches and investor service centers. the India Magnum Fund. it is the largest bank sponsored mutual fund with an investor base of 2.8 million. UK's leading insurance company and ICICI. (55%:45%) a joint venture between Prudential. of which 7 have been redeemed. with a corpus of $206 million. 41 . India's premier financial institution. SBI has grown into an instrument of social change.Today the Fund has an investor base of over 2. Establishment SBI Mutual Fund has grown tremendously in terms of corpus as well as number of investors. With the largest network (over 34 collecting branches and 21 Investor Service Centres) SBI Mutual Fund constantly endeavors to get closer to its growing family of investors. the State Bank of India. SBI Mutual Fund constantly endeavors to get closer to its growing family of investors.8 million spread over 23 schemes.500 crores. Set up on July 1. yielding handsome returns. Through years of commitment to service and national development. Today. Today. the State Bank of India is the largest banking operation in the country. it has 8691 branches in India (excluding over 3850 branches of banking subsidiaries) and 49 offices in 33 countries spread over all time zones PRUDENTIAL ICICI: Prudential ICICI Asset Management Company. 2. Today. 1955.

000* investors across a range of growth. 2000. Today. India's premier financial institution. 42 . The AMC has already launched a range of products to suit different risk and maturity profiles. KEY INDICATORS: Assets under Management Number of Funds Managed As of May 1998 Rs. UK's leading insurance company and ICICI.7022.2001 Rs. in October 1993. 1 out of 2 investors in open end equity funds chooses a Pioneer ITI scheme. (55%:45%) a joint venture between Prudential. The joint venture was formed with the key objective of providing the Indian investor mutual fund products to suit a variety of investment needs.The joint venture was formed with the key objective of providing the Indian investor mutual fund products to suit a variety of investment needs. income.3497 crores in assets for over 740.47 crores 13 Prudential ICICI Asset Management Company. In the open end equity funds category. we lead in terms of assets. we manage Rs. balanced. Click here to learn more about the products. 58. Both Prudential and ICICI have a strategic long-term commitment to the rapidly expanding financial services sector in India. 160 crore 2 As on November 30. Today.13 crore (1 crore = 10 million) as of March 31. Bluechip and Prima. KOTHARI PIONEER Pioneer ITI is India's first mutual fund in the private sector. we have been recognized as an innovative fund that provides superior investment results. and have emerged as the most preferred fund house in India. The AMC has already launched a range of products to suit different risk and maturity profiles. Ever since we launched our first two funds. liquid and tax saving funds. Prudential ICICI Asset Management Company Limited has a networth of about Rs.

say reports. Pioneer has recently become part of the UniCredito Italiano Group .exemplary service. one of India's established finance companies. Pioneer Global Asset Management. The Investment Trust of India was established in 1946 and is one of India's well-known and highly regarded financial services company. and has operations in several countries across the globe. Pioneer ITI is a joint venture between Pioneer. These include brokers. EXTRACTS AND PRESS RELEASES: PRUICICI MF : Monday. with a strong base in both the US and Europe and assets under management of over USD 100 billion(as on December 2000). custodians. Pioneer helped found the modern mutual fund industry in the US in 1928. November 19.one of Italy's largest banking companies with over USD 150 billion in assets and 3500 branches and formed a powerful global asset management company. 2001 PRUDENTIAL ICICI mutual fund has entered into talks with the Bombay Stock Exchange and the National Stock Exchange to streamline the process of data transfer between the various players in the mutual fund business. While brokers place orders for mutual funds through the 43 . The current process of data transfer is cumbersome and increases cost for mutual funds. stock exchanges and mutual funds. complete product choice and total transparency in the way we operate and invest. one of America’s oldest mutual funds and ITI.

Also. the same data is communicated to mutual funds in physical form. 2001 44 . September 20. thus increasing their costs. As this has to be released by 8 p. The scheme was open for subscription in the initial offer period on October 18 and 19. every day there is tremendous pressure on brokers to meet the requirements on mutual funds. This data is again converted into electronic form for verification and is used to calculate the daily NAV. as this data has to be keyed in again personnel have to be hired by mutual funds. At a later stage the fund has proposed that that all entities in the mutual fund business will exchange data on a shared system with each player adding value to the data placed by the previous player. Prudential ICICI mutual fund has therefore proposed that the details of the trades done on stock exchanges should be obtained in an electronic form thus doing away with the practice of verification of the physical contract notes. The plan is intended to offer investors a basket of debt products of various tenures. November 04. PRUICICI CLEARING THE WAY: Sunday. MARKET MECHANICS:Cashing in(PRUICICI) Thursday.m.screen-based system of the stock exchanges. The fund would invest in debt securities for the medium term with maturity of between three to six months with lower level of volatility. 2001 Prudential ICICI Mutual Fund has launched a short-term plan under its Income Plan.

One state-run mutual fund has liquidity worth 20 per cent. we have entered other sectors such as pharma and old economy stocks where we feel that the valuations are good and the potential bright.Should you invest in equity. through a change in the investment strategy. Given the fact that some equity prices have been touching all-time lows and some premium quality scrips are available at bargain basement prices. the Sensex showed a relief rally. booking losses and then investing the proceeds in safer sectors like pharma. consumer durables and the manufacturing sector. Pru-ICICI Mutual Fund has around 9 per cent cash in its income fund." IDBI Principal Growth Fund had 15 per cent in cash before the Manhattan tragedy. this is the biggest dilemma that mutual fund managers are facing. The scene has changed. At the same time." The cashing out is not described as "panic selling" to minimise further 45 . Most funds have been doing the same thing: cashing out of certain stocks. Some aggressive funds are even less liquid with around 5 to 7 per cent cash holdings at the moment. fund managers are also taking this opportunity to churn portfolios. Subsequently. when some of the funds had cash levels between 15 and 20 per cent. the BSE Sensex was plummeting since a section of the managers preferred to stay liquid (investing money in call market) and picking value stocks very selectively." says the chief of the fund. For instance. this has been reduced to around 9 per cent. But on Tuesday. debt or stay liquid at a time when every market instrument seems to be erratic? Today. The trend to stay in cash was more pronounced a week ago. "We are mostly investing in the call money market and selectively buying value stocks. till Monday. Says a fundmanager at IDBI Principal Mutual Fund: "Over the last one week we have exited sectors like IT which are sensitive to events happening in the global arena. as a fund manager puts it: "The mandate given to us is to manage equity (or debt) and not cash.

He exits booking a loss of Rs 20 and then enters again when the scrip price goes down further to Rs 60. The market has been expecting interest rates to rise. New UTI structure to result in lower returns (UTI) Economic Times November 06. points out that the decision whether to invest or exit debt or equity is a function of the corpus of the scheme (fund) as well as the kind of scheme it is and the fund's compulsions such as redemptions or dividend payments. it is better to exit when the NAVs are still high and put the money in low quoted scrips. This recent practice of funds exiting debt (becoming net sellers) and putting money in equity (becoming net buyers) is not as yet a trend. There's another dimension to this." he says. Fund managers also point out that it is almost impossible to have a uniform strategy when it comes to managing portfolios since they have to take into account not only the asset allocation and the sectoral allocation but also the individual scrips within each sector.losses but rather generating cash through strategic sales to invest in other scrips which would give them returns in the future. Imagine a scenario where a manager had entered a scrip at Rs 100. Considering the attractive valuations of equity. it makes sense for funds to cash out of debt. feel mutual fund analysts. Changing market dynamics could reverse the entire process in a day. In such a scenario. Sanjay Garodia. The fact that funds need to exit debt shows that not many of them are flush with cash. Fund managers are playing the game of selling at a loss with panache. "One cannot go by short-term movements and extrapolate a trend out of it. 2001 46 . make some profits in the process and put money into equity. the value has gone down to Rs 80. in which case the net asset values of income funds would take a beating. fund manager in Pru-ICICI.

schemes are charged a 0. This cost reimbursement is accomplished by way of a 0. 47 . ‘the income of the AMC after expenses and interest on the bonds issued to US-64 should be sufficient to service the share capital. Apart from this contribution to the DRF. as 60 per cent of its shares are to be offered to the public. Unit Trust of India to its schemes could see a quantum jump.’ This would imply that the return to unit-holders would decline by an amount equivalent to the rise in costs.25 per cent contribution schemes make to the Development Reserve Fund (DRF) of the Trust. The AMC will also have to plan for repayment and debt servicing on nearly Rs 850 crore of bonds it shall issue to Unit Scheme 1964 in return for the scheme transferring assets of its DRF to it. "UTI’s total expenses to assets ratio is currently one of the lowest in the world.535-crore DRF owns the infrastructure used by UTI in its operations. The Rs 1. This is because the asset management company which will manage the schemes of UTI. Expert’s estimate that the cost charged by UTI to its schemes would go up by about a per cent or so after privatization. will have to earn a reasonable return on the capital employed. The Malegam committee appointed by the UTI board to suggest changes required to enable UTI to compete in the 21st century have said that.1 per cent contribution to UTI staff welfare fund." said UTI chairman M Damodaran This is because UTI currently apportions only its fixed and recurring costs to the schemes managed by it and does not aim to make a profit. if the new avatar of UTI is adopted. unless the new management is able to provide superior returns to shareholders.THE FEES charged by the country’s largest mutual fund.

This would leave a net sum of Rs 160 crore as at the pre-tax level. would have to interest payments on bonds worth Rs 900 crore issued to US-64. it’s clear that the fees charged to the schemes would have to rise to ensure that investors are enticed to pick up shares in the asset management company’s proposed public issue of shares worth a face value of Rs 600 crore.000 crore of assets under management.5 per cent of assets managed by it on debt oriented schemes whose size exceeds Rs 700 crore. On equity oriented schemes it would be permitted by Sebi regulations to charge a trifle higher at 1. then it would generate a gross income of close to Rs 500 crore on Rs 50. Since a 10. 48 . Based on UTI’s current expenditure levels. For smaller schemes the level of expenses allowed is higher. about Rs 250 crore of expenses would have to be deducted from the gross income to arrive at the earnings before interest and taxation. Even if one assumes that the average fees charged by the proposed AMC are one per cent of assets managed.4 per cent return on equity may not be adequate to service such a large share capital investment and the public shareholders.75 per cent of assets under management for schemes with size above Rs 700 crore. UTI could charge total expenses of up to 1. the annual interest burden of Rs 90 crore would have to be met from earning before interest and tax. Assuming a 10 per cent interest rate.Based on its size. say industry watchers. The balance Rs 250 crore of earnings before interest and tax.

have left many mutual funds unable to offer promised returns. Ignorance of these facts.CONCLUSION: It will be noticed that Mutual funds in India have been wrongly promoted as an alternative to equity investing. There is an urgent need to promote professional and institutional fund distributors and placement agencies. thus driving away many first time investors. In a falling market these expectations have been belied. how does one find the right funds to invest in. coupled with aggressive selling . However a good starting point would be the historic returns. However individual investors could also decide independently the right funds to invest in after a detailed study in the trends of the Mutual Fund Market. So. Therefore. Only the pure equity schemes can be compared with the stock market index. Given a wide choice of over 300 funds the task can be pretty daunting. The success of mutual funds depends to a great extent on institutional efforts. returns from mutual funds cannot really be compared with the stock market index. While past 49 . thus creating very high expectations in the minds of investors.

70%. If an investor had invested Rs. equity funds are the best option as equity funds give best returns over long-term period. 85%. where the performance is more consistent. Liquid funds or money market funds can be used as substitute to your savings bank account as they offer superior returns with equal safety and liquidity. But we should not get lost in the glitter of equities. However. as in equity funds investment in sectoral funds will also bear fruits over a long period.61 lakhs.3. Again. For investors who are looking for long-term capital growth. The investment strategy suggested would be: Investment strategy can be divided into 3 times zones. while his investment under fund B would have grown to Rs. The degree of safety is higher in income fund and they can be good substitute to bank fixed deposits. The investment pattern could be as shown in the following table. 45%.3. 12%. But looking back at the last five years. If one is new to investing in equities then do not straight away jump to sectoral funds. he can invest in sectoral funds. 48%. For instance if there are two funds A and B and the yearly return for fund A for the last five years is: 45%. it is better to go in for funds. Short term. had he invested one year ago fund A would have definitely given better returns. which are less volatile. -12%. then fund A would have grown to Rs. -10%. one finds that it is fund B which is actually better. One should form a proper harmony between different fund classes like debt. For investment having duration of 1 to 2 years income fund are the best option. balanced and equities. 23%. If a person is interested in getting above average return and is not averse to taking higher risk. Medium term and long term. One should invest in accordance with one’s goals. The echo of boom in equity market is being felt in the returns being given by Mutual Funds. But then what if the investor had invested in the year for which the return was negative. or in other words.performance is no guarantee of the future returns but it can be a good starting point. The choice of the mutual fund would depend upon the time factor. Look for funds that have been more consistent in their performance. Then some one might just look at the last one-year’s performance and say that fund A is better.90 lakh. and that for fund B is 32%. One lakh in both funds five years ago. 50 . Since we cannot time the market. He would have lost some of his capital in the following year.

Stock market are expected to be stable over medium to long term. then it is the right fit for an investor. it is the time when you can invest more money because it is at this point that fund’s NAV would be low and its units will be cheaper to purchase. More important is the fact where is the return coming from. Similarly. This is the time not to put in more money but to book profit and get out of the fund. in a debt fund you need to look at the average maturity of the portfolio and the rating profile. If you have made one investment you should stick to it and should not change your investment mix due to change in flow of market. then it should be one. Some funds may be giving higher than average returns by investing in slightly higher risk paper. when market is moving southwards. as economic recovery will gain momentum. Systematic investment in a fund can do wonder for you even if you do not posses big amounts for making investments. one can take reasonable exposure in equity funds depending upon his risk profile. The most important aspect while chosing the right fund is to look inside the fund: Looking at the returns is just the starting block. In case the fund has a high concentration of its investment in one or two stocks or sectors. One should not get panicky with falling equity market. patience is the key word for investing in equities. More than that looking inside a funds portfolio actually tells 51 . But then one must be aware of the risks and willing enough to take them. The temptation to withdraw should be resisted. Alternatively. Among sectoral funds information technology is expected to be highly volatile but growth will be there. It means if market is going up and your fund is gaining. If one is investing in a general-purpose equity fund. Or else one might like to look at a sector fund. On the other hand if you are particularly bullish about a sector and the fund is also over-weight in that sector. which in effect will be lower than the average amount price. History has shown that only those investors have made profit in equity markets who have dared to go against the tide. One can average the cost of his units. Nothing wrong in that. then it might not be the right fund for you. Take a look at the portfolio of the fund and see where the fund manager has invested ones money. Basic industries is the sector having good prospects in future.The volatility is the way of life with equity markets. Hence. This is because market fluctuations will help the investor acquire units at different prices. Sectoral funds should be last among all options.

and 50 per cent stocks in common. ANNEXURE: LIST OF A FEW FUNDS ALONG WITH ITS FUND MANAGERS: Fund name Major Schemes Fund manager Alliance Capital Mutual Fund 1)Alliance ’95 Fund 2)Alliance Equity Fund 3) Alliance Liquid Income Fund Birla Mutual 1) Birla Advantage Fund 52 . Therefore. he should be prepared for the worst. If one diversify across three funds and each has the top five sectors as common. I would also like to conclude by saying that the Indian Mutual Funds should give up their complacent and defensive attitude and be ready to take a position in the global market. unless one is are very-very positive about this company.you whether one`s diversification across a group of funds was relevant or not. then probably the diversification is not good enough. the domestic Indian funds need to think from a competitive edge. This would lead to increased competition. Look at the top holdings within each funds portfolio. add the weights and see how much hit would one take if that one company were to go bust. Market trend shows that India beyond 2001 would become a major world market and foreign funds would continue to flow along with the flow of foreign mutual funds and fund managers. If this is more than 10 per cent of one`s portfolio. then you need to diversify. while hoping for the best. And even if one is.

2) Birla Income Plus Kothari Pioneer Mutual Fund 1)Kothari Pioneer Prima Plus 2)Kothari Pioneer Blue Chip SBI Mutual Fund 1)SBI Magnum Multiplier Scheme’90 2)SBI Magnum Taxgain Scheme 1993 3) SBI Magnum Bond Fund 4) SBI Rising Income Scheme Prudential .ICICI 1) Prudential ICICI Growth Plan 2) ICICI Premier DSP Merrill Lynch Fund DSP Merrill Lynch Equity Fund Morgan Stanley Morgan Stanley Growth Fund Tata Mutual Fund Tata Balanced Fund Market Trends HDFC Mutual Fund HDFE Gilt Fund long-term HDFC Gilt Fund Short-term HDFC Growth Fund Reliance Growth Fund Reliance Income Fund JM Balanced Fund Dividend JM Balanced Fund Growth Pioneer ITI FMCG Pioneer ITI Childrens Asset 53 .

Association of Mutual Funds in India AMC`s.Companies FI`s.Tempelton Frank India Tempelton Frank India Balanced Tempelton India Liquid Fund Tempelton India Balanced Fund UTI Equity Tax Savings Plan UTI Master Growth UTI Master Index Fund Zurich India Equity Fund Zurich India Prudent Zurich India Tax Saver Fund GLOSSARY: AMFI.Financial Institutions GIC.Initial Public Offerings IDBI.Asset Management Companies CO`s.Life Insurance Corporation of India MF`s.Mutual Funds 54 .General Insurance Corporation of India IPO`s.Industrial Development Bank of India LIC.

Reserve Bank of India SEBI. Sumita ans S. Sadhak Mutual Funds Fact Book.Public Sector Mutual Fund RBI. Investment Company Institute (1991).Net Asset Value PMF.C. Uma Also. newspapers and websites have been made: 55 . Washington A study on the Evaluation of the Peformance of Mutual Funds in India.Unit Trust of India SELECT BIBLIOGRAPHY: Association of Mutual Funds in India Compiled by D. Anjaria and Dhaivat Anjaria Mutual Funds in India `Marketing Strategies and Investment Practices by H. by Kale.NCD`sNAV. derivations from various journals.Securities Exchange Board of India UTI.Industry Trend and Statistics.

Business India.com etc. www.indiatimes.Economic Times.com. www. www.sebi.com. www. 56 .hometrade.com.amfiindia. Financial Times. Intelligent Investor.

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