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A

PROJECT REPORT
ON
MUTUAL FUND

Masters of Business Administration

Name of Candidate : Yogesh Naresh Kachchhawe

Registration :

Name of the specialization : Finance

Partner Institution : INTERNATIONAL INSTITUTE OF


BUSINESS STUDIES (IIBS),BANGALORE

Under the guidance of

Centre for Participatory Programmes


BHARATHIAR UNIVERSITY
Coimbatore-641046
November, 2018

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ACKNOWLEDGEMENT

At the outset i would like to express my Gratitude to my guide Prof.Suchitra for


her constant encouragement and helping me the topic of my project report and
for her ready and able guide Throughout the course of preparing the project
report.
I am grateful to The Director of INTERNATIONAL INSTITUTE OF BUSINESS
STUDIES DR K. Ramadas for providing the facilities that have made this project
success.

Yogesh Naresh Kachchhawe

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DECLARATION

I hereby declare that this Project work titled “Study on MUTUAL FUND” is a
record of original work done by me under the guidance of Prof Suchitra of IIBS
College and that this project work has not formed the basis for the award of any
Degree/Diploma/Associate ship/Fellowship or similar title to any candidate of
any university.

..............................

Yogesh Kachchhawe
Finance Student

Date.......................
Countersigned
Prof Suchitra

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CHAPTER.1 INTRODUCTION

1.1. GENERAL
1.2. WHAT IS MUTUAL FUND
1.3. BREAKING DOWN MUTUAL FUND
1.4. HOW MUTUAL FUND COMPANIES WORK
1.5. KINDS OF MUTUAL FUND
1.6. MUTUAL FUND FEES
1.7. CLEAN SHARE MUTUAL FUND
1.8. ADVANTAGES OF MUTUAL FUND
1.9. DISADVANTAGES OF MUTUAL FUND

IMPORTANCE OF MUTUAL FUNDS

1.10. IMPORTANCE OF MUTUAL FUND


1.11. OBJECTIVES OF MUTUAL FUND

CHAPTER. 2 EQUITY MUTUAL FUND

2.1 EQUITY MUTUAL FUND


2.2 SCOPE OF MUTUAL FUND
CHAPTER. 3 INDUSTRY PROFILE
3.1 EARLY HISTORY OF MUTUAL FUND

3.2 MUTUAL FUNDS TODAY

3.3 REGULATION AND OPERATION

3.4 FUND STRUCTURE

3.5 UNIT INVESTMENT TRUSTS

3.6 CLASSIFICATIONS

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3.7 BOND FUNDS

3.8 EXPENSES

3.9 DEFINITIONS OF KEY TERMS

3.10 CAPITAL MARKET:

(A)PRIVATE FUND

(B)PUBLIC FUND

3.11 FEES

CHAPTER. 4 COMPANY PROFILE

4.0 ABOUT SBI MUTUAL FUND

4.1 ABOUT KOTAK MUTUAL FUND

4.2 BEATING MARKET

4.3 BASIC MARKET

CHAPTER 5 ORGANISATION STRUCTURE

5.1 INTRODUCTION

5.2 KEY PLAYERS

CHAPTER 6 FUNCTION DEPARTMENT

6.0 COST INVOLVED

6.1 MARKETING DEPARTMENT

6.2 MUTUAL FUND MARKETING

6.3 FINANCE DEPARTMENT

6.4 INFORMATION TECHNOLOGY DEPARTMENT

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CHAPTER; 7. SWOT ANALYSES

7.1 STRENGTH

7.2 WEAKNESS

7.3 OPPORTUNITIES

7.4 THREATS

CHAPTER 8 PERFORMANCE ANALYSIS

CHAPTER 9 CONCLUSION, AND SUGGESTION

9.1 CONCLUSION

CHAPTER 10 BIBLIOGRAPHY

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CHAPTER: 1
INTRODUCTION

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1.1: GENERAL INTRODUCTION
A mutual fund is a professionally managed investment fund that pools
money from many investors to purchase securities. These investors may
be retail or institutional in nature. Mutual funds have advantages and
disadvantages compared to direct investing in individual securities. The
primary advantages of mutual funds are that they provide economies of
scale, a higher level of diversification, they provide liquidity, and they are
managed by professional investors. On the negative side, investors in a
mutual fund must pay various fees and expenses.
Primary structures of mutual funds include open-end funds, unit investment
trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end
funds or unit investment trusts that trade on an exchange. Mutual funds are
also classified by their principal investments as money market funds, bond
or fixed income funds, stock or equity funds, hybrid funds or other. Funds
may also be categorized as index funds, which are passively managed
funds that match the performance of an index, or actively managed
funds. Hedge funds are not mutual funds; hedge funds cannot be sold to
the general public and are subject to different government regulations.

1.2: What is a 'Mutual Fund?'


A mutual fund is an investment vehicle made up of a pool of
money collected from many investors for the purpose
of investing in securities such as stocks, bonds, money market instruments
and other assets. Mutual funds are operated by professional money
managers, who allocate the fund's investments and attempt to
produce capital gains and/or income for the fund's investors. A mutual
fund's portfolio is structured and maintained to match the investment
objectives stated in its prospectus.

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1.3: BREAKING DOWN 'Mutual Fund'
Mutual funds give small or individual investors access to professionally
managed portfolios of equities, bonds and other securities.
Each shareholder, therefore, participates proportionally in the gains or
losses of the fund. Mutual funds invest in a wide amount of securities, and
performance is usually tracked as the change in the total market cap of the
fund, derived by aggregating performance of the underlying investments.

Mutual fund units, or shares, can typically be purchased or redeemed as


needed at the fund's current net asset value (NAV) per share, which is
sometimes expressed as NAVPS. A fund's NAV is derived by dividing the
total value of the securities in the portfolio by the total amount of shares
outstanding.

A mutual fund is both an investment and an actual company. This may


seem strange, but it is actually no different than how a share of AAPL is a
representation of Apple, Inc. When an investor buys Apple stock, he is
buying part ownership of the company and its assets. Similarly, a mutual
fund investor is buying part ownership of the mutual fund company and its
assets. The difference is Apple is in the business of making smart phones
and tablets, while a mutual fund company is in the business of making
investments.

Mutual funds pool money from the investing public and use that money to
buy other securities, usually stocks and bonds. The value of the mutual
fund company depends on the performance of the securities it decides to
buy. So when you buy a share of a mutual fund, you are actually buying the
performance of its portfolio.

The average mutual fund holds hundreds of different securities, which


mean mutual fund shareholders, gain important diversification at a very low
price. Consider an investor who just buys Google stock before the
company has a bad quarter. They stand to lose a great deal of value
because all of their dollars are tied to one company. On the other hand, a
different investor may buy shares of a mutual fund that happens to own
some Google stock. When Google has a bad quarter, they only lose a
fraction as much because Google is just a small part of the fund's portfolio.

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1.4: How Mutual Fund Companies Work
Mutual funds are virtual companies that buy pools of stocks and/or bonds
as recommended by an investment advisor and fund manager. The fund
manager is hired by a board of directors and is legally obligated to work in
the best interest of mutual fund shareholders. Most fund managers are also
owners of the fund, though some are not.

There are very few other employees in a mutual fund company. The
investment advisor or fund manager may employ some analysts to help
pick investments or perform market research. A fund accountant is kept on
staff to calculate the fund's net asset value (NAV), or the daily value of the
mutual fund that determines if share prices go up or down. Mutual funds
need to have a compliance officer or two, and probably an attorney, to keep
up with government regulations.

Most mutual funds are part of a much larger investment


company apparatus; the biggest have hundreds of separate mutual funds.
Some of these fund companies are names familiar to the general public,
such as Fidelity Investments, the Vanguard Group, T. Rowe Price and
Oppenheimer Funds.

1.5: Kinds of Mutual Funds


Mutual funds are divided into several kinds of categories, representing the
kinds of securities the mutual fund manager invests in.

One of the largest is the fixed income category. A fixed income mutual fund
focuses on investments that pay a fixed rate of return, such as government
bonds, corporate bonds or other debt instruments. The idea is the fund
portfolio generates a lot of interest income, which can then be passed on to
shareholders.

Another group falls under the moniker "index funds." The investment
strategy is based on the belief that it is very hard, and often expensive, to
try to consistently beat the market. So the index fund manager simply buys
stocks that correspond with a major market index such as the S&P 500 or
the Dow Jones Industrial Average. This strategy requires less research
from analysts and advisors, so there are fewer expenses to eat up returns

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before they are passed on to shareholders. These funds are often designed
with cost-sensitive investors in mind.

If an investor seeks to gain diversified exposure to the Canadian equity


market, he can invest in the S&P/TSX Composite Index, which is a mutual
fund that covers 95% of the Canadian equity market. The index is designed
to provide investors with a broad benchmark index that has the liquidity
characteristics of a narrower index. The S&P/TSX Composite Index is
comprised largely of the financials, energy and materials sectors of the
Canadian stock market, with sector allocations of 35.54%, 20.15% and
14.16%, respectively. Performance of the fund is tracked as the percentage
change to its overall adjusted market cap.

Balanced funds invest in both stocks and bonds with the aim of reducing
risk of exposure to one asset class or another. Another name for this
type is "asset allocation fund." An investor may expect to find the allocation
of these funds among asset classes relatively unchanging, though it will
differ among funds. Though their goal is asset appreciation with lower risk,
these funds carry the same risk and are as subject to fluctuation as other
classifications of funds.

Other common types of mutual funds are money market funds, sector
funds, equity funds, alternative funds, smart-beta funds, target-date
funds and even funds-of-funds, or mutual funds that buy shares of other
mutual funds.

1.6: Mutual Fund Fees


In mutual funds, fees are classified into two categories: annual operating
fees and shareholder fees. The annual fund operating fees are charged as
an annual percentage of funds under management, usually ranging from 1-
3%. The shareholder fees, which come in the form
of commissions and redemption fees, are paid directly by shareholders
when purchasing or selling the funds.

Annual operating fees are collectively as the expense ratio. A fund's


expense ratio is the summation of its advisory fee or management fee and
its administrative costs. Additionally, sales charges or commissions can be
accessed on the front-end or back-end, known as the load of a mutual
fund. When a mutual fund has a front-end load, fees are assessed when

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shares are purchased. For a back-end load, mutual fund fees are assessed
when an investor sells his shares.

Sometimes, however, an investment company offers a no-load mutual


fund, which doesn't carry any commission or sales charge. These funds are
distributed directly by an investment company rather than through a
secondary party.

Some funds also charge fees and penalties for early withdrawals.

1.7: Clean Share Mutual Funds


If you want to get the biggest bang for your buck, you might consider
mutual funds with 'clean shares,' a relatively new class of mutual fund
shares developed in response to the U.S. Department of
Labor’s fiduciary rule. According to a recent Morningstar Inc. report, clean
shares could save investors at least 0.50% in returns as compared to other
mutual fund offerings. Even better, investors could enjoy an extra 0.20% in
savings, as their advisors will now be tasked with recommending funds that
are in investors' best interests, according to the report.

Clean shares were designed, along with low-load T shares and a handful of
other new share classes, to meet fiduciary-rule goals by addressing
problems of conflicts of interest and questionable behavior among financial
advisors. In the past some financial advisors have been tempted to
recommend more expensive fund options to clients to bring in bigger
commissions. Currently, most individual investors purchase mutual funds
with shares through a broker. This purchase includes a front-end load of up
to 5% or more, plus management fees and ongoing fees
for distributions, also known as 12b-1 fees. To top it off, loads on shares
vary quite a bit, which can create a conflict of interest. In other words,
advisors selling these products may encourage clients to buy the higher-
load offerings.

Clean shares and the other new classes eliminate this problem, by
standardizing fees and loads, enhancing transparency for mutual fund
investors. “As the Conflict-of-Interest Rule goes into effect, most advisors
will likely offer T shares of traditional mutual funds … in place of the A
shares they would have offered before,” write report co-authors Aaron
Shapiro, Morningstar director of policy research, and Paul Ellenbogen,

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head of global regulatory solutions. “This will likely save some investors
money immediately, and it helps align advisors’ interests with those of their
clients.”

For example, an investor who rolls $10,000 into an individual retirement


account (IRA) using a T share could earn nearly $1,800 more over a 30-
year period as compared to an average A-share fund, according to the
analysis. The report also states that the T shares and clean shares
compare favorably with “level load” C shares, which generally don’t have a
front-end load but carry a 1% 12b-1 annual distribution fee.

Good as the T shares are, clean shares are even better: They provide one
uniform price across the board and do not charge sales loads or annual
12b-1 fees for fund services. American Funds, Janus and MFS are all fund
companies currently offering clean shares.

1.8: Advantages of Mutual Funds


Diversification: Diversification, or the mixing of investments and assets
within a portfolio to reduce risk, is one of the advantages to investing in
mutual funds. Buying individual company stocks in retail and offsetting
them with industrial sector stocks, for example, offers some diversification.
But a truly diversified portfolio has securities with
different capitalizations and industries, and bonds with
varying maturities and issuers. Buying a mutual fund can achieve
diversification cheaper and faster than through buying individual securities.

Economies of Scale: Mutual funds also provide economies of scale.


Buying one spares the investor of the numerous commission charges
needed to create a diversified portfolio. Buying only one security at a time
leads to large transaction fees, which will eat up a good chunk of the
investment. Also, the $100 to $200 an individual investor might be able to
afford is usually not enough to buy a round lot of a stock, but it will buy
many mutual fund shares. The smaller denominations of mutual funds
allow investors to take advantage of dollar cost averaging.

Easy Access: Trading on the major stock exchanges, mutual funds can be
bought and sold with relative ease, making them highly liquid investments.
And, when it comes to certain types of assets, like foreign equities or

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exotic commodities, mutual funds are often the most feasible way – in fact,
sometimes the only way – for individual investors to participate.

Professional Management: Most private, non-institutional money


managers deal only with high net worth individuals – people with six figures
(at least) to invest. But mutual funds are run by managers, who spend their
days researching securities and devising investment strategies. So these
funds provide a low-cost way for individual investors to experience (and
hopefully benefit from) professional money management.

Individual-Oriented: All these factors make mutual funds an attractive


options for younger, novice and other individual investors who don't want to
actively manage their money: They offer high liquidity; they are relatively
easy to understand; good diversification even if you do not have a lot of
money to spread around; and the potential for good growth. In fact, many
Americans already invest in mutual funds through their 401(k) or 403(b)
plans. In fact, the overwhelming majority of money in employer-sponsored
retirement plans goes into mutual funds.

Style: Investors have the freedom to research and select from managers
with a variety of styles and management goals. For instance, a fund
manager may focus
on value investing, growth investing, developed markets, emerging markets
, income or macroeconomic investing, among many other styles. One
manager may also oversee funds that employ several different styles.

1.9: Disadvantages of Mutual Funds


Fluctuating Returns: Like many other investments without a guaranteed
return, there is always the possibility that the value of your mutual fund
will depreciate. Equity mutual funds experience price fluctuations, along
with the stocks that make up the fund. The Federal Deposit Insurance
Corporation (FDIC) does not back up mutual fund investments, and there is
no guarantee of performance with any fund. Of course, almost every
investment carries risk. But it's especially important for investors in money
market funds to know that, unlike their bank counterparts, these will not be
insured by the FDIC.

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Cash: As you know already, mutual funds pool money from thousands of
investors, so every day people are putting money into the fund as well as
withdrawing it. To maintain the capacity to accommodate withdrawals,
funds typically have to keep a large portion of their portfolios in cash.
Having ample cash is great for liquidity, but money sitting around as cash is
not working for you and thus is not very advantageous.

Costs: Mutual funds provide investors with professional management, but


it comes at a cost – those expense ratios mentioned earlier. These fees
reduce the fund's overall payout, and they're assessed to mutual fund
investors regardless of the performance of the fund. As you can imagine, in
years when the fund doesn't make money, these fees only magnify losses.

Diversification: Many mutual fund investors tend to overcomplicate


matters – that is, they acquire too many funds that are highly related and,
as a result, don't get the risk-reducing benefits of diversification; in fact,
they have made their portfolio more exposed, a syndrome called
diversification. At the other extreme, just because you own mutual funds
doesn't mean you are automatically diversified. For example, a fund that
invests only in a particular industry sector or region is still relatively risky.

Lack of Transparency: One thing that can lead to diversification is the fact
that a fund's purpose or makeup isn't always clear. Fund advertisements
can guide investors down the wrong path. The Securities and Exchange
Commission (SEC) requires that funds have at least 80% of assets in the
particular type of investment implied in their names; how the remaining
assets are invested is up to the fund manager. However, the different
categories that qualify for the required 80% of the assets may be vague
and wide-ranging. A fund can therefore manipulate prospective investors
via its title: A fund that focuses narrowly on Congo stocks, for example,
could be sold with the grander title "International High-Tech Fund."

Evaluating Funds: Researching and comparing funds can be difficult.


Unlike stocks, mutual funds do not offer investors the opportunity to
compare the P/E ratio, sales growth, earnings per share, etc. A mutual
fund's net asset value gives investors the total value of the fund's portfolio,
less liabilities, but how do you know if one fund is better than another?

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1.10: Importance of Mutual Funds
Ample Selection
You can choose from hundreds of mutual funds offered by dozens of mutual fund
companies. This wide selection gives you the flexibility to pick mutual funds that
suit your financial objectives and risk tolerance. For example, equity and growth
funds are suitable for aggressive investors who can tolerate periods of extreme
market volatility. Balanced funds could be suitable for a more moderate investor
looking for both capital gains and income, while bond funds would suit
conservative investors who want preservation of capital and regular income.

Portfolio Diversification:
Mutual funds are a cost-effective way to diversify your portfolio across different
asset categories and industry sectors. Instead of buying and monitoring potentially
dozens of stocks, you could buy a few mutual funds to achieve broad
diversification at a fraction of the cost. For example, equity funds offer an indirect
way to invest in dozens of companies in different industry sectors, while balanced
funds offer exposure to both stocks and bonds. Further diversification is possible
within each asset category. For example, you could buy mutual funds that
specialize in certain industries within equities, such as technology and energy.
Similarly, international funds and emerging market funds are convenient ways to
diversify geographically.

Professional Management:
Professional money management expertise at a reasonable cost is another
important attribute of mutual funds. Fund managers typically have postgraduate
finance degrees, and several years of stock analysis and investment management
experience. Mutual fund companies use a combination of in-house research staff
and the services of external research firms to determine the composition of fund
portfolios.
Low Costs:
Mutual funds have leveled the playing field by bringing the financial markets
closer to small investors. For about the price of an average stock, you can

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participate in the capital gains and dividend distributions of potentially dozens of
companies. Mutual fund companies are able to spread research, commissions, and
related expenses over a larger asset base, which reduces the cost for individual
fund investors. You can reduce the costs even further by holding index mutual
funds, which track major market and industry indexes. These funds have low
management fees and expenses because they do not have the research and trading
costs of actively managed funds.

1.11: Objectives of mutual fund


Growth Funds: The most common objective of investment is growth. The
primary objective of any growth fund is capital appreciation over the
medium to long term. Growth mutual funds are generally invested
primarily in small to large cap stocks.

Income Funds: Here the objective is current income in certain intervals


as opposed to capital appreciation. These funds are suitable for investors,
who are looking for cash flow to supplement their income. To ensure steady
income, major portion of the asset is invested in income instruments viz.
fixed interest debentures, bonds, preference stocks and dividend paying
stocks etc.

Sector/Industry Funds: These funds aim at investing only in specific


sectors or industries, such as real estate or healthcare. The main objective
behind these funds is to maximizing the return by exploiting the growth of
booming sectors.

Value Funds: This fund generally aims at investing in stocks that are
deemed to be undervalued in price because of some inherent inefficiencies
of the Market. It is expected that, once the market corrects these
inefficiencies, the stock price will rise thus benefitting the investor.
These funds are sometimes further classified with different level of risks.
The investment objective of a MF is not be confused with the investment
style. The fund manager may practice a particular investing style, to meet
the objective of a Fund. Two funds with growth objective might differ in
terms of investment style. One fund manager may choose to invest in Blue
chip funds while the other can choose to invest in undervalued securities or
even a blend of both.

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CHAPTER: 2
Equity Mutual Funds

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2.1: Need To Know About Equity Mutual Funds
Due to the massive gains over the past few years, the attractiveness of
equity mutual funds has increased. There is no doubt that mutual fund
investors are flooding the market. The quantum of growth in new
investments becomes clear when looking at the increase in mutual fund
folios over the past year.
Mutual Funds recorded an addition of 1.6 core investor accounts in
FY2017-18, taking the total tally to over 7 cores. This is more than double
the addition of over 67 lakh folios in FY2016-17 and 59 lakh in FY2015-16.
Retail investor accounts grew by over 1.5 cores to 5.94 cores during
FY2017-18.
The Mutual Fund “Sahi Hai” catchphrase seems to have encouraged a new
wave of investors. Apart from existing retail investors, there are new and
inexperienced investors that are parking their money into mutual funds.
Are the new flocks of investors acquainted with the volatility in the market?
Or will we see money flowing out as soon as the market goes through a
correction? If left to their behavioral biases, we may see an exodus of funds
from retail investors in the face of volatility.
If you are a newbie investor, don’t get lured by the performance of equity
mutual funds over the past few years. Instead, invest in lines with your
financial goals after drawing up a sound financial plan.
For those of you who are new world of mutual funds, there will be several
questions that cross your mind – Questions ranging from something basic
like what is a mutual fund and how does it work to something more
complex like what are the risks involved in equity mutual funds.
Thus, Personal has put together this guide to answer all questions, both
basic and advanced on Equity Mutual Funds.

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2.2: Scope of Mutual Fund in India

Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified
Undertaking of the Unit Trust of India effective from February 2003. The
Assets under management of the Specified Undertaking of the Unit Trust of
India has therefore been excluded from the total assets of the industry as a
whole from February 2003 onwards.Investement in Indian Mutual Market
The Indian mutual fund industry has significantly high ownership from the
institutional investors. Retail investors comprising 96.86 per cent in number
terms held approximately 37 per cent of the total industry AUM as at the
end of March 2008, significantly lower than the retail participation. Out of a
total population of 1.15 billion, the total number of mutual fund investor
accounts in India as of 31 March 2008 was 42 million (the actual number of
investors is estimated to be lower as investors hold multiple folios). As per
the Invest India Incomes and Savings Survey 2007 of individual wage
earners in the age group 18 to59 years conducted by IIMS Data works,
only 1.6 per cent invested in mutual funds. Ninety per cent of the savers
interviewed were not aware of mutual funds or of investing in mutual funds
through a Systematic Investment Plan (SIP). The mutual fund penetration
among the paid Indian workforce with annual household income less than
INR 90,000 was 0.1 per cent. Mutual Funds vs. Other Investment Options
the Indian mutual fund industry is in a relatively nascent stage in terms of
its product offerings, and tends to compete with products offered by the
Government providing fixed guaranteed returns. As of December 2008, the
total number of mutual fund schemes was 1,002. Debt products dominate
the product mix and comprised 49 per cent of the total industry AUM as of
FY 2009, while the equity and liquid funds comprised 26 per cent and 22
per cent respectively. Open-ended funds comprised 99 per cent of the total
industry AUM as of March 2009.While traditional vanilla products dominate
in India, new product categories viz. Exchange Traded Funds (ETFs), Gold
ETFs, Capital Protection and Overseas Funds have gradually been gaining
popularity. As of March 2009, India had a total of 16 ETFs (0.3 percent of
total AUM) while the US had a total of 728 ETFs as of December 2008.The
India Mutual Funds Industry – The Current State AUM Base and Growth
Relative To the Global Industry India has been amongst the fastest growing
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markets for mutual funds since 2004; in the five-year period from 2004 to
2008 (as of December) the Indian mutual fund industry grew at 29 per cent
CAGR as against the global average of 4 per cent. Over this period, the
mutual fund industry in mature markets like the US and France grew at 4
per cent, while some of the emerging markets viz. China and Brazil
exceeded the growth witnessed in the Indian market. However, despite
clocking growth rates that are amongst the highest in the world, the Indian
mutual fund industry continues to be a very small market; comprising 0.32
per cent share of the global AUM of USD 18.97 trillion as of December
2008.| AUM to GDP Ratio

The ratio of AUM to India’s GDP gradually increased from 6 per cent in
2005 to 11 per cent in 2009. Despite this however, this continues to be
significantly lower than the ratio in developed countries, where the AUM
accounts for 20-70 per cent of the GDP.

Share of Mutual Funds in Household Financial Savings


Investment in mutual funds in India comprised 7.7 per cent of the gross
household financial savings in FY 2008, a significant increase from 1.2 per
cent in FY 2004. The households in India continue to hold 55 per cent of
their savings in fixed deposits with banks, 18 per cent in insurance and 10
per cent in currency as of FY 2008.

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CHAPTER: 3
INDUSTRIAL PROFILE

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3.0: History of Mutual Fund:
3.1: Early History:
The first modern investment funds (the precursor of today's mutual funds)
were established in the Dutch Republic. In response to the financial
crisis of 1772–1773, Amsterdam-based businessman Abraham (or Adrian)
van Ketwich formed a trust named Eendragt Maakt Magt ("unity creates
strength"). His aim was to provide small investors with an opportunity to
diversify.[1] [2]
Mutual funds were introduced to the United States in the 1890s. Early U.S.
funds were generally closed-end funds with a fixed number of shares that
often traded at prices above the portfolio net asset value. The first open-
end mutual fund with redeemable shares was established on March 21,
1924 as the Massachusetts Investors Trust (it is still in existence today and
is now managed by MFS Investment Management).
In the United States, closed-end funds remained more popular than open-
end funds throughout the 1920s. In 1929, open-end funds accounted for
only 5% of the industry's $27 billion in total assets.
After the Wall Street Crash of 1929, the U.S. Congress passed a series of
acts regulating the securities markets in general and mutual funds in
particular.

 The Securities Act of 1933 requires that all investments sold to the
public, including mutual funds, be registered with the SEC and that they
provide prospective investors with a prospectus that discloses essential
facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of
securities, including mutual funds, report regularly to their investors.
This act also created the Securities and Exchange Commission, which
is the principal regulator of mutual funds.
 The Revenue Act of 1936 established guidelines for the taxation of
mutual funds.
 The Investment Company Act of 1940 established rules specifically
governing mutual funds.
These new regulations encouraged the development of open-end mutual
funds (as opposed to closed-end funds).

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Growth in the U.S. mutual fund industry remained limited until the 1950s,
when confidence in the stock market returned. By 1970, there were
approximately 360 funds with $48 billion in assets.[3]
The introduction of money market funds in the high interest rate
environment of the late 1970s boosted industry growth dramatically. The
first retail index fund, First Index Investment Trust, was formed in 1976
by The Vanguard Group, headed by John Bogle; it is now called the
"Vanguard 500 Index Fund" and is one of the world's largest mutual funds.
Fund industry growth continued into the 1980s and 1990s.
According to Pozen and Hamacher, growth was the result of three factors:

1. A bull market for both stocks and bonds,


2. New product introductions (including funds based on municipal
bonds, various industry sectors, international funds, and target date
funds) and
3. Wider distribution of fund shares, including through employee-
directed retirement accounts such as 401(k), other defined
contribution plans and individual retirement accounts (IRAs.) Among
the new distribution channels were retirement plans. Mutual funds
are now the preferred investment option in certain types of fast-
growing retirement plans, specifically in 401(k), other defined
contribution plans and in individual retirement accounts (IRAs), all of
which surged in popularity in the 1980s.[4]
In 2003, the mutual fund industry was involved in a scandal involving
unequal treatment of fund shareholders. Some fund management
companies allowed favored investors to engage in late trading, which is
illegal, or market timing, which is a practice prohibited by fund policy. The
scandal was initially discovered by former New York Attorney General Eliot
Spitzer and led to a significant increase in regulation. In a study about
German mutual funds Gomolka (2007) found statistical evidence of illegal
time zone arbitrage in trading of German mutual funds [5]. Though reported
to regulators BAFIN never commented on these results.
Total mutual fund assets fell in 2008 as a result of the financial crisis of
2007–2008.

24
3.2: Mutual funds today
At the end of 2016, mutual fund assets worldwide were $40.4 trillion,
according to the Investment Company Institute.[6] The countries with the
largest mutual fund industries are:

1. United States: $18.9 trillion


2. Luxembourg: $3.9 trillion
3. Ireland: $2.2 trillion
4. Germany: $1.9 trillion
5. France: $1.9 trillion
6. Australia: $1.6 trillion
7. United Kingdom: $1.5 trillion
8. Japan: $1.5 trillion
9. China: $1.3 trillion
10. Brazil: $1.1 trillion
In the United States, mutual funds play an important role in U.S. household
finances. At the end of 2016, 22% of household financial assets were held
in mutual funds. Their role in retirement savings was even more significant,
since mutual funds accounted for roughly half of the assets in individual
retirement accounts, 401(k) s and other similar retirement plans.[7] In total,
mutual funds are large investors in stocks and bonds.
Luxembourg and Ireland are the primary jurisdictions for the registration
of UCITS funds. These funds may be sold throughout the European Union
and in other countries that have adopted mutual recognition regimes.

25
3.3: Regulation and Operation
United States
 The Securities Act of 1933 requires that all investments sold to the
public, including mutual funds, be registered with the SEC and that they
provide potential investors with a prospectus that discloses essential
facts about the investment.
 The Securities and Exchange Act of 1934 requires that issuers of
securities, including mutual funds, report regularly to their investors; this
act also created the Securities and Exchange Commission, which is the
principal regulator of mutual funds.
 The Revenue Act of 1936 established guidelines for the taxation of
mutual funds. Mutual funds are not taxed on their income and profits if
they comply with certain requirements under the U.S. Internal Revenue
Code; instead, the taxable income is passed through to the investors in
the fund. Funds are required by the IRS to diversify their investments,
limit ownership of voting securities, distribute most of their income
(dividends, interest, and capital gains net of losses) to their investors
annually, and earn most of the income by investing in securities and
currencies.[10] The characterization of a fund's income is unchanged
when it is paid to shareholders. For example, when a mutual fund
distributes dividend income to its shareholders, fund investors will report
the distribution as dividend income on their tax return. As a result,
mutual funds are often called "pass-through" vehicles, because they
simply pass on income and related tax liabilities to their investors.
 The Investment Company Act of 1940 establishes rules specifically
governing mutual funds. The focus of this Act is on disclosure to the
investing public of information about the fund and its investment
objectives, as well as on investment company structure and
operations.[11]
 The Investment Advisers Act of 1940 establishes rules governing the
investment advisers. With certain exceptions, this Act requires that firms
or sole practitioners compensated for advising others about securities
investments must register with the SEC and conform to regulations
designed to protect investors.[12]
 The National Securities Markets Improvement Act of 1996 gave
rulemaking authority to the federal government, preempting state
regulators. However, states continue to have authority to investigate and
prosecute fraud involving mutual funds.
26
Open-end and closed-end funds are overseen by a board of directors, if
organized as a corporation, or by a board of trustees, if organized as a
trust. The Board must ensure that the fund is managed in the interests of
the fund's investors. The board hires the fund manager and other service
providers to the fund. The fund sponsors trades (buys and sells) the fund's
investments in accordance with the fund's investment objective. Funds that
are managed by the same company under the same brand are known as a
fund family or fund complex.
The sponsor or fund management company, often referred to as the fund
manager, trades (buys and sells) the fund's investments in accordance with
the fund's investment objective. A fund manager must be a registered
investment adviser. Funds that are managed by the same company under
the same brand are known as a fund family or fund complex.
European Union
In the European Union, funds are governed by laws and regulations
established by their home country. However, the European Union has
established a mutual recognition regime that allows funds regulated in one
country to be sold in all other countries in the European Union, but only if
they comply with certain requirements. The directive establishing this
regime is the Undertakings for Collective Investment in Transferable
Securities Directive 2009, and funds that comply with its requirements are
known as UCITS funds.
Canada
Regulation of mutual funds in Canada is primarily governed by National
Instrument 81-102 "Mutual Funds."[13] NI 81-102 is implemented separately
in each province or territory. The Canadian Securities Administrator works
to harmonize regulation across Canada.[14]
Hong Kong
In the Hong Kong market mutual funds are regulated by two authorities:

 The Securities and Futures Commission (SFC) develops rules that


apply to all mutual funds marketed in Hong Kong.[15]
 The Mandatory Provident Funds Schemes Authority (MPFA) rules apply
only to mutual funds that are marketed for use in the retirement
accounts of Hong Kong residents. The MPFA rules are generally more
restrictive than the SFC rules.

27
3.4: Fund Structure
There are three primary structures of mutual funds: open-end funds, unit
investment trusts, and closed-end funds. Exchange-traded funds (ETFs)
are open-end funds or unit investment trusts that trade on an exchange.
Open-end funds:
Open-end mutual funds must be willing to buy back ("redeem") their shares
from their investors at the net asset value (NAV) computed that day based
upon the prices of the securities owned by the fund. In the United States,
open-end funds must be willing to buy back shares at the end of every
business day. In other jurisdictions, open-funds may only be required to
buy back shares at longer intervals. For example, UCITS funds in Europe
are only required to accept redemptions twice each month (though most
UCITS accept redemptions daily).
Most open-end funds also sell shares to the public every business day;
these shares are priced at NAV.
Most mutual funds are open-end funds. In the United States at the end of
2016, there were 8,066 open-end mutual funds with combined assets of
$16.3 trillion, accounting for 86% of the U.S. industry.[7]
Closed-end funds:
Closed-end funds generally issue shares to the public only once, when they
are created through an initial public offering. Their shares are then listed for
trading on a stock exchange. Investors who want to sell their shares must
sell their shares to another investor in the market; they cannot sell their
shares back to the fund. The price that investors receive for their shares
may be significantly different from NAV; it may be at a "premium" to NAV
(i.e., higher than NAV) or, more commonly, at a "discount" to NAV (i.e.,
lower than NAV).
In the United States, at the end of 2016, there were 530 closed-end mutual
funds with combined assets of $300 billion, accounting for 1% of the U.S.
industry.

28
3.5: Unit investment trusts
Unit investment trusts (UITs) are issued to the public only once when they
are created. UITs generally have a limited life span, established at creation.
Investors can redeem shares directly with the fund at any time (similar to
an open-end fund) or wait to redeem them upon the trust's termination.
Less commonly, they can sell their shares in the open market.
Unlike other types of mutual funds, unit investment trusts do not have a
professional investment manager. Their portfolio of securities is established
at the creation of the UIT.
In the United States, at the end of 2016, there were 5,103 UITs with
combined assets of less than $0.1 trillion.[18]
Exchange-traded funds
Exchange-traded funds (ETFs) are structured as open-end investment
companies or UITs. ETFs combine characteristics of both closed-end funds
and open-end funds. ETFs are traded throughout the day on a stock
exchange. An arbitrage mechanism is used to keep the trading price close
to net asset value of the ETF holdings.
In the United States, at the end of 2016, there were 1,716 ETFs in the
United States with combined assets of $2.5 trillion, accounting for 13% of
the U.S. industry.
3.6: Classification of funds by types of underlying investments:
Mutual funds are normally classified by their principal investments, as
described in the prospectus and investment objective. The four main
categories of funds are money market funds, bond or fixed income funds,
stock or equity funds, and hybrid funds. Within these categories, funds may
be sub classified by investment objective, investment approach or specific
focus.
The types of securities that a particular fund may invest in are set forth in
the fund's prospectus, a legal document which describes the fund's
investment objective, investment approach and permitted investments. The
investment objective describes the type of income that the fund seeks. For
example, a capital appreciation fund generally looks to earn most of its
returns from increases in the prices of the securities it holds, rather than

29
from dividend or interest income. The investment approach describes the
criteria that the fund manager uses to select investments for the fund.
Bond, stock, and hybrid funds may be classified as either index (or
passively-managed) funds or actively managed funds.
Money market funds
Money market funds invest in money market instruments, which are fixed
income securities with a very short time to maturity and high credit quality.
Investors often use money market funds as a substitute for bank savings
accounts, though money market funds are not insured by the government,
unlike bank savings accounts.
In the United States, money market funds sold to retail investors and those
investing in government securities may maintain a stable net asset value of
$1 per share, when they comply with certain conditions (alternately, money
market funds must compute a net asset value based on the value of the
securities held in the funds).
In the United States, at the end of 2016, assets in money market funds
were $2.7 trillion, representing 14% of the industry.

3.7: Bond funds:


Bond funds invest in fixed income or debt securities. Bond funds can be
sub-classified according to:

 The specific types of bonds owned (such as high-yield or junk bonds,


investment-grade corporate bonds, government bonds or municipal
bonds)
 The maturity of the bonds held (i.e., short-, intermediate- or long-term)
 The country of issuance of the bonds (such as U.S., emerging market or
global)
 The tax treatment of the interest received (taxable or tax-exempt)
In the United States, at the end of 2016, assets in bond funds were $4.1
trillion, representing 22% of the industry.[19]
Stock funds
Stock, or equity, funds invest in common stocks. Stock funds may focus on
a particular area of the stock market, such as

30
 Stocks from only a certain industry
 Stocks from a specified country or region
 Stocks of companies experiencing strong growth
 Stocks that the portfolio managers deem to be a good value relative to
the value of the company's business
 Stocks paying high dividends that provide income
 Stocks within a certain market capitalization range
In the United States, at the end of 2016, assets in Stock funds were $10.6
trillion, representing 56% of the industry.[19]
Hybrid funds
Hybrid funds invest in both bonds and stocks or in convertible securities.
Balanced funds, asset allocation funds, target date or target risk funds, and
lifecycle or lifestyle funds are all types of hybrid funds.
Hybrid funds may be structured as funds of funds, meaning that they invest
by buying shares in other mutual funds that invest in securities. Many funds
of funds invest in affiliated funds (meaning mutual funds managed by the
same fund sponsor), although some invest in unaffiliated funds (i.e.,
managed by other fund sponsors) or some combination of the two.
In the United States, at the end of 2016, assets in hybrid funds were $1.4
trillion, representing 7% of the industry.[19]
Other funds
Funds may invest in commodities or other investments.
3.8: Expenses:
Investors in a mutual fund pay the fund's expenses. Some of these
expenses reduce the value of an investor's account; others are paid by the
fund and reduce net asset value.
These expenses fall into five categories:
Management fee:
The management fee is paid by the fund to the Management Company or
sponsor that organizes the fund, provides the portfolio management or
investment advisory services and normally lends its brand to the fund. The
fund manager may also provide other administrative services. The
management fee often has breakpoints, which means that it declines as
assets (in either the specific fund or in the fund family as a whole) increase.

31
The fund's board reviews the management fee annually. Fund
shareholders must vote on any proposed increase, but the fund manager or
sponsor can agree to waive some or the entire management fee in order to
lower the fund's expense ratio.
Index funds generally charge a lower management fee than actively-
managed funds.
Distribution charges:
Distribution charges pay for marketing, distribution of the fund's shares as
well as services to investors. There are three types of distribution charges.

 Front-end load or sales charge. A front-end load or sales charge is


a commission paid to a broker by a mutual fund when shares are
purchased. It is expressed as a percentage of the total amount invested
or the "public offering price", which equals the net asset value plus the
front-end load per share. The front-end load often declines as the
amount invested increases, through breakpoints. The front-end load is
paid by the investor; it is deducted from the amount invested.
 Back-end load. Some funds have a back-end load, which is paid by the
investor when shares are redeemed. If the back-end load declines the
longer the investor holds shares, it is called a contingent deferred sales
charges (CDSC). Like the front-end load, the back-end load is paid by
the investor; it is deducted from the redemption proceeds.
 Distribution and services fee. Some funds charge an annual fee to
compensate the distributor of fund shares for providing ongoing services
to fund shareholders. In the United States, this fee is sometimes called
a 12b-1 fee, after the SEC rule authorizing it. The distribution and
services fee is paid by the fund and reduces net asset value.
Distribution charges generally vary for each share class.
Securities transaction fees incurred by the fund
A mutual fund pays expenses related to buying or selling the securities in
its portfolio. These expenses may include brokerage commissions. These
costs are normally positively correlated with turnover.
Shareholder transaction fees:
Shareholders may be required to pay fees for certain transactions, such as
buying or selling shares of the fund. For example, a fund may charge a flat
fee for maintaining an individual retirement account for an investor. Some

32
funds charge redemption fees when an investor sells fund shares shortly
after buying them (usually defined as within 30, 60 or 90 days of purchase).
Redemption fees are computed as a percentage of the sale amount.
Shareholder transaction fees are not part of the expense ratio.
Fund services charges:
A mutual fund may pay for other services including:

 Board of directors or trustees fees and expenses


 Custody fee: paid to a custodian bank for holding the fund's portfolio in
safekeeping and collecting income owed on the securities
 Fund administration fee: for overseeing all administrative affairs such as
preparing financial statements and shareholder reports, SEC filings,
monitoring compliance, computing total returns and other performance
information, preparing/filing tax returns and all expenses of maintaining
compliance with state blue sky laws
 Fund accounting fee: for performing investment or securities accounting
services and computing the net asset value (usually every day the New
York Stock Exchange is open)
 Professional services fees: legal and auditing fees
 Registration fees: paid to the SEC and state securities regulators
 Shareholder communications expenses: printing and mailing required
documents to shareholders such as shareholder reports and
prospectuses
 Transfer agent service fees and expenses: for keeping shareholder
records, providing statements and tax forms to investors and providing
telephone, internet and or other investor support and servicing
 Other/miscellaneous fees
The fund manager or sponsor may agree to subsidize some of these
charges.
Expense ratio:
The expense ratio equals recurring fees and expenses charged to the fund
during the year divided by average net assets. The management fee and
fund services charges are ordinarily included in the expense ratio. Front-
end and back-end loads, securities transaction fees and shareholder
transaction fees are normally excluded.

33
To facilitate comparisons of expenses, regulators generally require that
funds use the same formula to compute the expense ratio and publish the
results.
No-load fund:
In the United States, a fund that calls itself "no-load" cannot charge a front-
end load or back-end load under any circumstances and cannot charge a
distribution and services fee greater than 0.25% of fund assets
Controversy regarding fees and expenses
Critics of the fund industry argue that fund expenses are too high. They
believe that the market for mutual funds is not competitive and that there
are many hidden fees, so that it is difficult for investors to reduce the fees
that they pay. They argue that the most effective way for investors to raise
the returns they earn from mutual funds is to invest in funds with low
expense ratios.
Fund managers counter that fees are determined by a highly competitive
market and, therefore, reflect the value that investors attribute to the
service provided. They also note that fees are clearly disclosed.
3.9: Definitions of key terms:
Average annual total return:
Mutual funds in the United States are required to report the average annual
compounded rates of return for one-, five-and ten year-periods using the
following formula:[20]
P (1+T) n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the one-, five-, or ten-year periods at the end of the one-,
five-, or ten-year periods (or fractional portion).

34
Market capitalization:
Market capitalization equals the number of a company's shares outstanding
multiplied by the market price of the stock. Market capitalization is an
indication of the size of a company. Typical ranges of market capitalizations
are:

 Mega cap - companies worth $200 billion or more


 Big/large cap - companies worth between $10 billion and $200 billion
 Mid cap - companies worth between $2 billion and $10 billion
 Small cap - companies worth between $300 million and $2 billion
 Micro cap - companies worth between $50 million and $300 million
 Nano cap - companies worth less than $50 million
Net asset value:
A fund's net asset value (NAV) equals the current market value of a fund's
holdings minus the fund's liabilities (this figure may also be referred to as
the fund's "net assets"). It is usually expressed as a per-share amount,
computed by dividing net assets by the number of fund shares outstanding.
Funds must compute their net asset value according to the rules set forth in
their prospectuses. Most compute their NAV at the end of each business
day.
Valuing the securities held in a fund's portfolio is often the most difficult part
of calculating net asset value. The fund's board typically oversees security
valuation.
Share classes:
A single mutual fund may give investors a choice of different combinations
of front-end loads, back-end loads and distribution and services fee, by
offering several different types of shares, known as share classes. All of
them invest in the same portfolio of securities, but each has different
expenses and, therefore, a different net asset value and different
performance results. Some of these share classes may be available only to
certain types of investors.
Typical share classes for funds sold through brokers or other intermediaries
in the United States are:

35
 Class A shares usually charge a front-end sales load together with a
small distribution and services fee.
 Class B shares usually do not have a front-end sales load; rather, they
have a high contingent deferred sales charge (CDSC) that gradually
declines over several years, combined with a high 12b-1 fee. Class B
shares usually convert automatically to Class A shares after they have
been held for a certain period.
 Class C shares usually have a high distribution and services fee and a
modest contingent deferred sales charge that is discontinued after one
or two years. Class C shares usually do not convert to another class.
They are often called "level load" shares.
 Class I are usually subject to very high minimum investment
requirements and is, therefore, known as "institutional" shares. They are
no-load shares.
 Class R are usually for use in retirement plans such as 401(k) plans.
They typically do not charge loads, but do charge a small distribution
and services fee.
No-load funds in the United States often have two classes of shares:

 Class I shares do not charge a distribution and services fee


 Class N shares charge a distribution and services fee of no more than
0.25% of fund assets
Neither class of shares typically charges a front-end or back-end load.
Turnover:
Turnover is a measure of the volume of a fund's securities trading. It is
expressed as a percentage of average market value of the portfolio's long-
term securities. Turnover is the lesser of a fund's purchases or sales during
a given year divided by average long-term securities market value for the
same period. If the period is less than a year, turnover is generally
annualized.

36
3.10: CAPITAL MARKET:
A rise in market value of a mutual fund's securities, reflected in its net asset
value per share. This is a specific long-term objective of many mutual
funds.
Two types of mutual fund in capital market:
(A) Private Fund
Private funds are mutual funds:

1. whose securities are owned or held by:


 not more than 50 investors where the first-time investment of each of such
investors is not less than RM250,000 or such other sum as may be
prescribed by Labuan FSA or the equivalent in any foreign currency; or
 any number of investors where the first-time investment of each of such
investors is not less than RM500,000 or such other sum as may be
prescribed by Labuan FSA or the equivalent in any foreign currency; or

2. Which is designated as a private fund under regulations made under the
Labuan Financial Services and Securities Act 2010?

Islamic private funds are private funds with similar definition to the above
and are in compliance with Shariah principles.
Notification Requirements
A private fund can carry on its affairs by giving notice in writing of its scope
and nature of business to Labuan FSA. The notification shall be
accompanied with an information memorandum or such other offering
document and should be lodged through a Labuan licensed entity. The
information memorandum or such other offering document will be deemed
as a prospectus and a lodgement fee of RM2,000 (USD600) is applicable.

37
Governing Legislation:
 Labuan Financial Services and Securities Act 2010
 Labuan Islamic Financial Services and Securities Act 2010
 Labuan Companies Act 1990
 Labuan Business Activity Tax Act 1990
 Labuan Limited Partnerships and Labuan Limited Liability Partnerships Act
2010
 Labuan Foundations Act 2010

(b) Public Fund:


Labuan public funds are those whose securities are offered for subscription
to any members of the general public.
Registration Requirements:
No public fund shall carry on business in or from within Labuan unless it
has been registered under Section 33(1)(a) of the Labuan Financial
Services and Securities Act 2010 (LFSSA) or in the case of an Islamic
public fund, Section 38(1)(a) of the Labuan Islamic Financial Services and
Securities Act 2010 (LIFSSA). The annual fee payable is RM2,000
(USD600).
Application Requirements:

1. A copy of the Memorandum and Articles of Association / Partnership


agreement / trust deed / charter / other constituent documents as the case
may be of the fund.
2. Names, addresses, profiles and relevant experience of the director /
general partner / designated partner / trustee / council members of the fund
(Board of the public fund), whichever applicable. The appointment of any
members of the Board of the public fund requires prior written approval
from Labuan FSA.
3. The profile of the promoter/custodian/trustee/fund manager, whichever
applicable.
4. An audited annual account of the promoter and fund manager, where
applicable, for the three years preceding the application.
38
5. The profile of the qualified person as its Shariah adviser in the case of a
Labuan Islamic public fund.
6. A signed declaration by the Board of the public fund on confidentiality and
secrecy with regard to the operation and administration of the fund.
7. A certificate from an expert as required under Section 11 of the LFSSA or
Section 16 of the LIFSSA that includes a statement certifying that the
Labuan public fund complies with the requirements under Part III of LFSSA
or Part IV of the LIFSSA and the Guidelines on the Establishment of
Labuan Mutual Funds Including Islamic Mutual Funds.
8. A copy of the prospectus of the Labuan public fund which should comply
with Section 35 of the LFSSA or Section 40 of the LIFSSA, either in draft or
final form.

Operational Requirements:
The applicant fund shall do the following:

1. Appoint a fund manager, trustee, administrator and custodian (service


provider) approved by Labuan FSA.
2. Ensure that the duties of the fund manager and custodian or trustee of the
Labuan public fund are independent from each other. The duties of the
fund manager for the public fund are provided under Sections 47, 48, 49
and 50 of the LFSSA and Sections 46, 47, 48 and 49 of the LIFSSA.
3. Maintain a registered office in Labuan. For a Labuan public fund which is
permitted to be managed by a non-Labuan licensed fund manager, at least
one of the service providers must be approved by Labuan FSA.
4. Ensure that all subscriptions are repaid immediately if the minimum level of
subscription required is not met within the stipulated time.
5. Conduct its business with due diligence and sound principles.
6. Ensure that the shareholder and every members of the Board of the public
fund including any other relevant person, are fit and proper persons in
accordance with the Guidelines on Fit and Proper Person Requirements
issued by Labuan FSA.
7. Maintain adequate and proper accounting and other records in line with the
Directive on Accounts and Record-Keeping Requirement for Labuan
Entities issued by Labuan FSA that will sufficiently explain its transaction

39
and financial position and indicate clearly its names and registration
number on its letterhead, stationery and other documents.
8. Appoint an approved auditor to carry out an annual audit of the accounts in
respect of the business operations and submit the audit report to the
investors and Labuan FSA pursuant to Section 174 of the LFSSA and
Section 135 of the LIFSSA within six months after the close of each
financial year.
9. Comply with the requirements of Section 53 of the LFSSA and Section 54
of the LIFSSA with regards to its accounts and audit requirements.
10. Provide half yearly reporting to the investors, which includes (but not
limited to) the following:
 Portfolio valuation report showing actual portfolio mix of the fund;

 The net asset value of the investment;


 Independent verification/confirmation of existence of the fund’s assets; and
 Other pertinent information to the investor with regard to the fund’s
performance.
11. Notify Labuan FSA of any amendment or alteration to any of its
constituent document within 30 days of the changes being effected
including its business plan.
12. Obtain approval from Labuan FSA for any change to the members of
the Board of the public fund.
13. Ensure fair and orderly winding down of the matured fund including
having an auditor to ensure that all assets have been properly returned to
investors.
14. Comply with the relevant laws and regulations of the jurisdictions
where it intends to operate including obtaining the necessary approval.
15. Ensure compliance with the Anti-Money Laundering and Anti-
Terrorism Financing Act 2001 and Guidelines on Anti-Money Laundering
and Counter Financing of Terrorism which is relevant to Labuan IBFC.
16. Ensure proper policies and procedures are in place to ensure a
sound compliance framework that safeguards clients’ interests.

40
3.11-Fees:
All licensees are required to pay to Labuan FSA annual license fees on or
before 15 January of each year. If any of the mutual funds uses a protected
cell company (PCC) structure, the annual fee would be as follows:

TYPE OF FEES AMOUNT

Annual Fees RM 2,000 USD 600

PCC STRUCTURE AMOUNT

CORE RM 5,000 USD 1500

EACH CELL RM 2,000 USD 600

Governing Legislation:
 Labuan Financial Services and Securities Act 2010
 Labuan Islamic Financial Services and Securities Act 2010
 Labuan Companies Act 1990
 Labuan Business Activity Tax Act 1990
 Labuan Limited Partnerships and Labuan Limited Liability Partnerships Act
2010
 Labuan Foundations Act 2010.

41
COMPANIES INCLUDED IN MUTUAL FUND MARKET:

42
43
CHAPTER: 4
COMPANY PROFILE

44
4.0:About Mutual Fund Research and Analysis on SBI Mutual Fund:
SBI Mutual Fund is a bank sponsored fund house with its corporate
headquarters in Mumbai, India. It is a joint venture between the State Bank
of India, an Indian multinational, Public Sector banking and financial
services company and Amundi, a European asset management company.

Key milestones
 1987 - Establishment of SBI Mutual Fund
 1991 - Launch of SBI Magnum Equity Fund
 1999 - Launch of sector funds, India's first contra fund: SBI Contra Fund[11]
 2004 - Joint Venture with Society General Asset Management
 2006 - Became the first bank-sponsored fund to launch an offshore fund – SBI
Resurgent India Opportunities Fund
 2011 - Stake Transfer from SGAM to Amundi Asset Management
 2013 - Acquisition of Daiwa Mutual Fund, part of the Tokyo-based Daiwa Securities
Group
 2013 - Launch of SBI Fund Guru, an investor education initiative
 2015 - Employees' Provident Fund Organization decided to invest in the equity
market for the first time by investing Rs. 5,000 core in the Nifty and Sensex ETFs
(Exchange Traded Fund) of SBI Mutual Fund
 2018 - First AMC in India to launch an Environment, Social and Governance (ESG)
fund viz Magnum Equity ESG Fund
 2018 - Signatory to the United Nations Principles for Responsible Investment (UN-
PRI)

Major competitors
Some of the major competitors for SBI Mutual Fund in the mutual fund
sector are Birla Sun Life Mutual Fund, HDFC Mutual Fund, ICICI Prudential
Mutual Fund, and Reliance Mutual Fund & UTI Mutual Fund.

45
4.1:About Mutual Fund Research and Analysis on Kotak Mutual Fund:

Kotak Mutual Fund:


Kotak Group is the first Indian non-banking financial company to be given
license by the Reserve Bank of India. It got the license in February 2003.[5]
It has current global partners like Old Mutual Life Insurance since 2001
and Sumitomo Mitsui Banking Corporation as the second
largest shareholder.
It has 1,362 branches where it offers banking services. It has 79 branches
offering mutual funds, 218 branches offering life insurance, 1,455 branches
offering securities, 81 branches offering car insurance, 12 branches
offering general insurance and 2 branches offering KM Inc. It has a total of
3,209 branches.
It has international offices in Abu Dhabi, Dubai, London, New York, Texas,
California and Singapore.

Major competitors
A few of the competitors for Kotak Mutual Fund in the mutual fund sector
are ICICI Prudential Mutual Fund, HDFC Mutual Fund, Birla Sun Life
Mutual Fund, Reliance Mutual Fund, and SBI Mutual Fund & UTI Mutual
Fund.

4.2:Beating Market:
Over the past five years, we have been exposed to the market's wild mood
swings—manic bull runs and nerve-wracking crashes, interspersed with
bouts of volatile, yet range-bound, movement. The patience of investors
has been stretched, while the skills of fund managers have been tested like
never before.

These extreme market conditions have also made it difficult to evaluate the
performance of equity mutual funds. After all, how can you judge whether a
fund has performed well when the market has been so volatile? One
cannot go by the most recent performance data.

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In this environment, it would be foolish to judge a fund based on a narrow
time frame.
Some investors would probably consider the annualized returns over the
past five years to gauge fund performance. However, this approach will not
reflect the ups and downs that the fund manager has had to navigate
during this period. To truly understand how your fund manager tackles
market cycles, you will have to categories the performance according to the
bull and bear periods.

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4.3:BASIC MARKET:
Net Asset Value or NAV
NAV is the total asset value (net of expenses) per unit of the fund and is
calculated by the AMC at the end of every business day.
How is NAV calculated?
The value of all the securities in the portfolio in calculated daily. From this,
all expenses are deducted and the resultant value divided by the number of
units in the fund is the fund’s NAV.
Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative
expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5%
expense ratio means the AMC charges Rs1.50 for every Rs100 in assets
under management.

A fund's expense ratio is typically to the size of the funds under


management and not to the returns earned. Normally, the costs of running
a fund grow slower than the growth in the fund size - so, the more assets in
the fund, the lower should be its expense ratio.
Loan
Some AMCs have sales charges, or loads, on their funds (entry load and/or
exit load) to compensate for distribution costs. Funds that can be
purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds
1) Open-Ended Funds
At any time during the scheme period, investors can enter and exit the fund
scheme (by buying/ selling fund units) at its NAV (net of any load charge).
Increasingly, AMCs are issuing mostly open-ended funds.
2) Close-Ended Funds
Redemption can take place only after the period of the scheme is over.
However, close-ended funds are listed on the stock exchanges and
investors can buy/ sell units in the secondary market (there is no load).

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CHAPTER NO: 5
ORGANIZATION

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5.1: The Organization of a Mutual Fund:
 Mutual Fund Shareholders: The Mutual Fund Shareholders, like the other
share holders have the right to vote. The voting rights include, the right to elect
directors during the directorial elections, voting right to approve the alterations
investment advisory contract pertaining to the fund and provide approval for
changing investment objectives or policies.
 Board of directors: The Board of directors supervises the functional activities,
which include approval of the contract Asset Management Company and other
various service providers.

 Investment management company or Asset Management Company: This


body handles the mutual fund portfolio as per the objectives and policies
mentioned in the prospectus of the mutual funds.
 Custodians: The custodians protect the portfolio securities. Mostly qualified bank
custodians are used for mutual funds.

 Transfer Agents: The transfer agent for the purpose of maintaining records and
similar functions. The maintenance of the shareholder's accounts, calculation of
dividends to the be disbursed, sending information to the shareholders about the
account statements, notices, and income tax information. Some of the transfer
agent sends information to the share holders about the shareholder transactions
and account balances. They also maintain customer service departments in order
the cater to the queries of the shareholders.

 SEBI: The primary aim of the Securities Exchange Board of India is to protect
the interest of the mutual fund investors. The SEBI has formulated several
policies for better functioning and controls the mutual funds. In the year 1993,
SEBI issued guidelines pertaining to the mutual funds. All mutual funds, private
sector and public sector are regulated by the guidelines of the SEBI. The Asset
Management Company managing the funds has to be approved by the SEBI.

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Organization, Structure, and Services of Mutual Funds

Mutual fund companies and fund families strive to perform well,


control risk, and create a portfolio of complementary services and
products. Funds are designed and organized around improving
efficiency, creating value for customers, and improving market
position in the face of increased competition from within and beyond
the mutual fund world. This chapter describes the structure and set up
of mutual funds and fund firms within the backdrop of industrial
organization performance. It also explains the linkages between
structure and performance, organization and fund services,
competition and performance, and strategic advantages of the many
shapes in which fund firms operate. Finally, the chapter discusses how
fund structures are likely to migrate going forward. Most notably, fund
companies are likely to see opportunities for growth in the areas of
integrated services, analytics that involve big data and funds that
specifically match client needs in terms of their investment horizons
or risk profiles.

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The flow chart below describes broadly the working of a
mutual fund:

A Mutual Fund is a trust that pools the savings of a number of investors who share
common financial goal; investments may be in shares, debt securities,
money market securities or a combination of these. Those securities are
professionally managed on behalf of the unit-holders, and each investor
holds a pro-rata share of the portfolio i.e. entitled to any profits when the
securities are sold, but subject to any losses in value as well.

The income earned through these investments and the capital


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

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5.2: KEY PLAYERS IN A MUTUAL FUND:
A mutual fund is set up either in the form of a trust or an investment company. The
trust is established by the Asset Management Company (AMC). The trustee holds
the property of the trust for the benefit of its unit holders. Whereas, under the
investment company structure, the mutual fund is established as a public listed
company. The AMC, as sponsor of the mutual fund, appoints its board of directors
to manage its affairs, and a custodian for holding all the assets of the investment
company. An AMC is licensed by the SECP and is eligible to operate the mutual
fund and manage its investments.

Asset Management Company:


An Asset Management Company is a Non-Banking Finance Company licensed by
the SECP for the management of mutual fund and for the benefit of the unit
holders.

Participants:
Participants are the ones investing in a mutual fund and anyone holding valid
Pakistani computerized national identity card is eligible to become participant to a
mutual fund.

Trustee:
A trustee in the case of Mutual funds is a holding service who has administrative
power for managing the money, property or assets used in mutual funds. The
trustee can be an individual person, member of the board of directors, a company
or a bank appointed with the approval of the SECP. They are trusted to make
decisions in the beneficiary’s best interest.

Custodian:
A custodian generally acts as a caretaker or watchdog mainly responsible for
monitoring the operations of the mutual fund and actions of the fund manager and
other parties related to the mutual fund. A custodian ensures that a mutual fund is
being managed in accordance with the requirements stipulated under the regulatory
framework and the constitutive documents of the mutual fund.

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Registrar:
A registrar of a mutual fund may be an individual or a firm / company. The AMC
may itself act as a registrar, or appoint the registrar to perform following functions:

1. Periodically maintaining and updating the Register of unit holders;


2. Dealing with requests for transfer, transmission, issue, and redemption of
units as well as keeping a record of changes in particulars/information/data
with regard to the unit holders;
3. Issuing account statements and certificates to unit holders;
4. Issuing income distribution warrants and units to unit holders over re-
investment of dividends;
5. Maintaining archives of lien/ pledge/ change on units, transfer/ switching of
units, Zakat; and
6. Keeping a record of changes of address/ other particulars of the unit holders.
Shariah Scholar:
Shariah scholar of a mutual fund is appointed by AMC and approved by Federal
Shariah Islamic Board His responsibilities are but not limited to:

1. Fool-proof management and smooth operation of the Mutual fund.


2. Compliance to Islamic Principles.
3. Periodic check and balance on all Shariah compliant products released by
the AMC.
4. Advising the AMC on any new development in Islamic Shariah as a result of
Ijtahad and recommending a corrective action plan to the AMC in order to
alter the terms and conditions as a result.

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CHAPTER NO: 6
FUNCTION DEPARTMENT

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6.0: Costs involved in mutual fund investing:
Before investing in mutual funds, it is very vital on the part of the investors to
know about the expenses levied by the Fund Houses. Read this space to know
everything about mutual funds expenses incurred by investors.

Mutual funds expenses are the charges levied by the Fund Houses and incurred by
the investors who hold mutual fund schemes. Before investing in mutual funds, it
is very vital on the part of the investors to know about these expenses as they can
substantially reduce an investor's earnings.

1. What are the expenses that mutual funds charge to


investors?

Asset management companies (AMCs) manage the assets of the mutual funds and
take the investment decisions. AMCs charge investors for professional fund
management and regular operational costs which include investment management
and advisory fees, sales/agent commissions and ongoing service fees, legal and
audit fees, registrar and transfer agent fees, fund administration expenses, and
marketing and selling expenses. All these expenses charged to an investor are
together called the 'total expense ratio' (TER); it is an annual charge on AUM in
percentage terms. According to the Securities and Exchange Board of India's
(SEBI's) guidelines, TER needs to be lower as AUM increases. The net asset value
(NAV) of a mutual fund scheme is net of all liabilities including TER, and hence a
lower TER results in higher returns and vice versa. In a recent circular, SEBI has
included service tax under 'cost to investors' (earlier paid by AMCs).

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2. How is total expense ratio calculated?

Total Expense Ratio (TER) is calculated as follows - TER = (Total expenses during an
accounting period) * 100 / Total net assets of the fund.

3. What are the recent changes introduced by SEBI under


TER?
SEBI has recently come out with a circular that AMCs would be allowed to charge
an additional 30 bps of TER on the condition that the new inflows from beyond top
15 cities are at least 30% of gross new inflows in the scheme or 15% of the
scheme's AUM (year-to-date), whichever is higher. In other words, TER may go
up to 2.8% instead of 2.5% for equity schemes. However, the additional TER will
be clawed back if inflows from beyond top 15 cities are redeemed within a period
of one year from the date of investment. The circular also stated that mutual funds
shall annually set apart at least 2 bps on daily net assets within maximum limit of
TER for investor education / awareness initiatives

4. What are mutual fund loads?


Loads are one time charges which are levied either at the time of investing in or at
the time of exiting a mutual fund scheme. These are over and above the TER.

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A Entry load: It is a front-end charge deducted from the NAV at the time of
investing in a mutual fund scheme. SEBI abolished entry loads in August 2009.
These charges were as high as 2.25% for equity funds prior to the abolition.

B. Transaction charge: Starting August 2011, SEBI has allowed AMCs to collect
a nominal amount as a one-time transaction fee. It ruled that for a first time
investor, AMCs can collect Rs 150 as a fee if the investment is more than Rs
10000 while the fee for an existing investor would be Rs.100; no fee can be
charged for any amount less than Rs.10000. In the case of Systematic Investment
Plans (SIPs), where the total commitment towards the SIP is more than Rs. 10000,
a transaction charge of Rs. 100 will be levied payable in four equal installments
starting from the second to the fifth installment.

C. Exit Load: It is a charge levied when an investor redeems / sells his units in a
short span of time since he made the investment. Mutual funds charge exit loads to
deter investors from leaving mutual fund schemes before holding them for a
sufficient period. Various categories charge exit loads depending on pre-defined
holding period cutoffs.

For instance, in a liquid fund, most schemes do not charge an exit load as investors
invest in these funds for a shorter duration. For most other categories, the exit load
ranges between 1-3% depending on the exit time frame specified by the fund.

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5. What are the other costs that need to be borne by mutual
fund investors?

There are also some indirect costs which an investor has to bear throughout the
investment tenure. For instance, in exchange traded funds (ETFs), an investor has
to pay for opening a demat account, for maintenance of the account, and brokerage
charges. Mutual funds are required to pay a security transaction tax while buying
and selling stocks, which is ultimately borne by investors.

6. Do all mutual funds have the same structure for expense


ratio?

Investors should note that different funds have different expense ratios. Passively
managed funds like index funds or exchange traded funds (ETFs) have lower
expense ratio than actively managed funds. This is because passively managed
funds track the underlying index and do not require a fund manager to take active
investment calls. SEBI recently asked mutual funds to launch schemes under a
single plan and ensure that all new investors are subject to a single expense
structure. Currently, TER varies according to the investment amount (which
depends on the plan - retail, institutional and super-institutional). SEBI also asked
mutual funds to provide a separate plan for direct investments (investments not
routed through a distributor) in existing as well as new schemes. These separate
plans shall have a lower expense ratio excluding distribution expenses and
commission, and no commission shall be paid from such plans.

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7. How do costs affect returns on mutual fund?
Lower costs reflect the operational efficiency of a mutual fund house. All other
factors remaining the same, an investor should ideally invest in a scheme which
charges a lower TER compared to peers as higher expenses reduce returns of the
fund.

6.1: MARKETING DEPARTMENT:

How to sell mutual funds to your clients:


Mutual funds can make excellent additions to your clients' portfolios, yet many
people – especially those new to investing – aren't familiar with mutual funds or
what they entail. Offering information on the benefits of mutual funds and the way
in which specific products can help your clients meet their investment goals will
help you sell mutual funds to even the most skeptical investors.

Automatic Diversification:
The first benefit of mutual funds that you should emphasize is the incredible
diversification they offer. Explain how diversification helps your clients avoid
catastrophic losses and protects portfolios during economic turmoil by spreading
out the total investment over several different types of assets in different industries.

To create optimally diversified portfolios on their own, your clients would need to
invest in a wide range of securities from different sectors. A sufficiently
diversified, self-managed portfolio requires an immense investment of research
time and capital. Even with your help in selecting profitable assets, your clients
would be looking at considerable costs in the form of trading commissions and
transaction fees. A mutual fund offers shareholders automatic diversification,
either across industries or within a single sector. Mutual funds also allow your
clients to pick a mixture of high-risk, high-reward securities and stable growth
assets, so as to spread their risk and to benefit from both investment types.

Mutual funds can represent a great way to get diversified exposure to just about
any asset class. For instance, many international markets, especially the emerging
ones, are just too difficult to invest in directly. A mutual fund can specialize
smaller markets and offer investment expertise that is worth paying an active
manager's fee for.
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Customization:
Besides diversification, the greatest advantage of mutual funds is their virtually
endless variety, which makes it relatively simple to find funds that fit your clients'
needs. As you discuss the benefits of mutual funds with your clients, ask about
specific investment goals and assess your clients' risk tolerances. A clear
understanding of these two factors determines which funds you recommend, and
can mean the difference between successful investments and very dissatisfied
clients.

If your clients want to preserve their initial investments and are comfortable with
modest fixed rates of return, point them toward money market funds or bond funds
that invest in highly rated long-term debt.

Desired Income:
Mutual funds generate two kinds of income: capital gains and dividends. Though
any net profits generated by a fund must be passed on to shareholders at least once
a year, the frequency with which different funds make distributions varies widely.

If your client is looking to grow her wealth over the long-term and is not concerned
with generating immediate income, funds that focus on growth stocks and use a
buy-and-hold strategy are best, because they generally incur lower expenses and
have a lower tax impact than other types of funds.

If regular investment income is your client's main goal, you'll discuss the benefits
of dividend funds that invest in dividend-bearing stocks and interest-bearing bonds.
Explain that a variety of funds can offer consistent annual income from different
sources, depending on your clients' risk tolerance.

If they are primarily focused on making big gains quickly, you'll talk about stock
funds that might offer the best chance of speedy profits. Discuss the increased risk
of loss that accompanies aggressively managed high-yield funds, so your clients
know that sky-high profits don't come without a price.

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Access to High-Value Assets:
Mutual funds pool the investments of thousands of shareholders, so they can invest
in stocks, bonds, and other securities that may be well out of the price range of
your clients if they invested in them individually. This allows your clients to
benefit from the growth and dividend payments of big-ticket assets, such as the
Coca-Cola Company and Costco Wholesale Corporation, without requiring the
massive amounts of capital necessary to purchase any substantial holding in either
company.

Affordability and Liquidity:


Mutual funds are far more affordable for the average investor than the assets in
which the mutual funds invest. Do the math, and show your clients how mutual
funds allow them to invest in the same assets as Warren Buffet without having his
net worth.

Open-ended funds allow your clients to liquidate their holdings at any time; your
clients can easily access those dollars when they need them. In addition, many
funds allow your clients to set up redemption schedules, so they can liquidate part
of their holdings on specified days each month, quarter or year, ensuring regular
investment income.

Professional Management:
Mutual funds are managed by professionals whose entire careers revolve around
turning profits for shareholders. While your role is still to help your clients choose
the right assets, investing in a mutual fund recruits a seasoned general to your
clients' investment armies. You help your clients select the mutual funds that best
suit their needs, and the fund manager ensures that your recommendation pays off.

Effortless Returns:
The benefit of professional management ties right in with the next advantage of
mutual funds: effortless returns. Initially, of course, there is some legwork that
goes into selecting the right fund. After making the investment, your clients can
essentially sit back and watch their returns roll in, knowing that the fund managers
are working to keep the funds profitable. Until they are ready to sell their shares,
there is little for you and your clients to do except monitor the funds' performance
and net profits.
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If your clients are inclined to self-manage their portfolios, you might point out the
amount of research and daily involvement that would be required to manage such a
wide range of assets on their own.

Tax Strategy:
When assessing the suitability of mutual funds, it is important to consider taxes.
Depending on an investor's current financial situation, income from mutual funds
can have a serious impact on her annual tax liability. The more income she earns in
a given year, the higher her ordinary income and capital gains tax brackets.

Dividend-bearing funds are a poor choice for those looking to minimize their tax
liability. Though funds that employ a long-term investment strategy may pay
qualified dividends, which are taxed at the lower capital gains rate, any dividend
payments increase an investor's taxable income for the year. The best choice is to
direct her to funds that focus more on long-term capital gains and avoid dividend
stocks or interest-bearing corporate bonds. Funds that invest in tax-free
government or municipal bonds generate interest that is not subject to federal
income tax, so these may be a good choice. Still, not all tax-free bonds are
completely tax-free, so make sure to check whether those earnings are subject to
state or local taxes.

Many funds offer products managed with the specific goal of tax-efficiency. These
funds employ a buy-and-hold strategy and eschew dividend- or interest-paying
securities. They come in a variety of forms, so it's important to consider risk
tolerance and investment goals when looking at a tax-efficient fund.

Honesty:
Even if you do not have a fiduciary duty to your clients, you should act as if you
did. Be honest with your clients about some of the less-attractive aspects of mutual
funds, so that they are fully informed when making their decision. Chief among
these disadvantages are the potentials for increased taxes and annual expenses.

Since you should already have a clear idea of what types of funds fit your clients'
needs, talk to them about the typical expenses incurred by those types of
investments. For example, if they are looking for high-yield funds with active fund
managers, explain that the increased trading activity will likely mean higher
expense ratios.

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Discuss the tax implications of their investment choices. While any type of
investment will impact your clients' tax liability to some degree, it's important to
outline the specific effects of the types of funds they're considering. If they are
looking into dividend funds, say, you could discuss the taxation of dividend
income, and how investing in funds that employ a buy-and-hold strategy can
reduce tax liability by paying qualified dividends that are taxed at the capital gains
rate rather than as ordinary income.

Avoid recommending products based on the promise of commissions or other


advantages. Always direct your clients to the products that are best-suited to their
specific needs, regardless of which firm offers them.

Know When to Say No


Being a financial advisor requires a delicate balance of ambition and realism.
While mutual funds are a great fit for a broad spectrum of investors, you should
heed the signs that this type of investment may not be well-suited to your clients'
investment style. If your clients enjoy playing an active role in how and when their
money is invested, mutual funds may not be for them. While the professional
management of mutual funds is a huge advantage, it also removes investors from
the day-to-day mechanics of security and market analysis and trading. Be sure your
clients are comfortable entrusting their investments to someone else, thus
forfeiting control over asset allocation and trading strategy.

In addition, mutual funds may not be the best choice for clients who are primarily
concerned with annual expenses. Unlike taking positions in individual stocks or
bonds, becoming an investor – in other words, a shareholder – in a mutual
fund presupposes paying annual fees equal to a percentage of the value of one's
investment. This means any mutual fund needs to generate annual returns greater
than its expense ratio in order for shareholders to profit.

High-yield funds require a very active management style, which can mean expense
ratios of 2%-3% in order to compensate for the fees generated by frequent trading
of assets.

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6.2:Mutual Fund Marketing:
Mutual fund shares are marketed according to the rules established by the
Investment Company Act of 1940.

Any mutual fund advertisement containing performance data must include a


legend that discloses these important facts:
The data represents past performance and is not an indication of future results
An investor's principal value will fluctuate and may be worth less than the original
amount invested.
Mutual fund advertisements are also required to state where a potential investor
may obtain a prospectus, and they must recommend that the investor read the
prospectus carefully before investing any money. No application to invest in the
investment company's fund may accompany any type of mutual fund
advertisement. You can find more detailed information on FINRA rules concerning
mutual fund marketing in the Marketing and Sales Presentation section.

6.3:FINANCE DEPARTMENT:
Understanding Mutual Funds Accounting:
Mutual funds accounting is a critical matter for the financial system, given the
increasing preference for mutual funds over direct holdings of securities such as
stocks and bonds by the investing public. In particular, many, if not most,
individual investors and retail clients have the majority of their savings
in employer-sponsored 401(k) plans, which typically offer a selection of mutual
funds as the investment choices. The end product of mutual funds accounting is
the accurate pricing of these investment vehicles and the correct assignment of
investment income to holders thereof.
These are thus major concerns for the chief financial officers, controllers and
operations managers of mutual fund companies.

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Aspects of Mutual Funds Accounting:
It encompasses a variety of basic tasks, which may be performed by in-house staff
or outsourced to other providers, such as custodian banks:
Calculating the value of its investment portfolio on a daily basis. See discussion of
net asset value (NAV) below.
Anticipating and recording all income, such as dividends and interest.
Properly accruing interest on bonds and other similar fixed income securities held
in the investment portfolio.
Properly amortizing the discount or premium on bond purchases. See detailed
explanation below.
Recording all securities transactions, such as buys and sells of portfolio
investments.
Recording all realized capital gains, both short-term, and long-term, that result
from securities transactions in the fund.
Recording all inflows and outflows of funds due to purchases and redemptions of
shares by investors.
Maintaining records of the shares owned, and transactions made, by each
shareholder in the fund.
Tracking distributions of income and capital gains made to shareholders in the
fund.
In the best mutual funds accounting departments, these activities will be highly
automated. However, some manual input, reviews, and adjustments still may be
necessary.

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Net Asset Value:
Often abbreviated NAV, it is the aggregate value of a mutual fund's investment
portfolio divided by the number of its shares outstanding. The standard
convention is to calculate NAV at the end of each trading day, based on the
closing prices of all securities held therein. NAV also takes account of other
activities listed above.
Orders to purchase or sell shares of a mutual fund are executed at the closing
NAV for the day if they are received before the market close. If not, they are
executed at the closing NAV for the next trading day.
Bond Amortization:
When bonds are purchased at a discount or premium to their par value (that is, at
a price lower or higher than the principal value that will be returned to the
investor holding it when the bond matures), the difference between the purchase
price and par value is recorded over time as an adjustment to the interest income
generated by the bond.
The interest income recognized on a bond bought at a discount will be higher
than the actual interest payments received. On a bond bought at a premium, it
will be lower. The net effect is that any discount or premium on the purchase of a
bond held to maturity will not be recognized as a capital gain or loss, but rather as
an adjustment to interest income. Bond amortization is calculated on a daily basis
by mutual funds.
Case Study:
It is also a prime example of the sorts of engagements that are encountered in the
field of operations consulting. A leading custodian bank offered mutual funds
accounting services to mutual fund companies that already utilized it for the
safekeeping of securities. Mutual funds accounting, in this context, primarily was
involved with the daily computation of net asset value (NAV). The bank and its
mutual fund clients were dissatisfied with the timeliness and accuracy of the NAV
calculations being done.
The bank engaged a team of consultants from a Big Four public accounting
firm to study the processes within the mutual funds accounting department and

68
to recommend changes to improve it. The consulting team from the Big Four firm
spent several days observing how the mutual funds accounting department
worked, by shadowing its employees as they performed their daily tasks. The
consultants also interviewed employees and their managers, to get a better
understanding of how they viewed their responsibilities, as well as to assess how
knowledgeable they were about the mutual funds accounting field.
Information Gathering:
The consulting team developed detailed flowcharts of processes in the
department and discussed these with management, pointing out where work
processes could be improved. The consultants also suggested improved
automation. After getting approval from bank management, the consultants
searched for software vendors that had packages appropriate to the bank's
situation. They then identified one that was willing to customize its existing
system to meet the specifications needed for the bank's unique situation and
its mix of clients.
Process Planning:
Next, the consultants drew up these specifications in detail, and conducted
extensive testing of the software as each module was completed, to be sure that
calculations were done properly, and the system was durable and reliable. The
user acceptance testing phase took a number of months and required extreme
attention to detail.
When the system was finally completed to specifications, the consulting team
oversaw its installation and implementation, and led the training of employees,
remaining on-site until the bank was comfortable that the new procedures were
working well. In all, the project lasted almost precisely one year, with a team of
three consultants on-site at the bank daily

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6.4:INFORMATION TECHNOLOGY:
Top 5 Best Performing Technology (IT) Sector Funds 2018
The technology sector is a category of equity sector fund that invest in
companies that are involved in technological businesses, such as
manufacturers producing computer software, computer hardware, or
electronics & technological service industry companies, such as those
providing information technology, etc. The greatest advantage of Investing
in technology Mutual Funds is that investors can gain access and exposure
to dozens of technology stocks in just one fund.
India's IT Services industry was born in Mumbai in 1967 with the
establishment of the Tata Group in partnership with Burroughs. The first
software export zone, SEEPZ, the precursor to the modern-day IT park, was
established in Mumbai in 1973. More than 80 percent of the country's software
exports were from SEEPZ in the 1980s.
Technology and IT Sector in India:
The technology sector in India is undergoing rapid evolution and is changing
the shape of Indian business standards. The global sourcing market in India
continues to grow at a higher pace. India remained the world’s top sourcing
destination in 2016-17 with a share of 55 per cent. Some of India’s leading IT
firms are Infosys, TCS, Wipro, Tech Mahindra, etc., that have immensely
created a mark in this sector... Read more at: https://www.fincash.com/l/best-
technology-sector-funds
Technology mutual funds in India have consistently provided an annualized
return of 15 percent to 19 percent over a five year period. With such a decent
performance in the past, these funds are believed to deliver good returns in
the future. Ideally, investors should invest in this fund for the purpose of
diversification. One should not solely depend on this fund for wealth creation.
Investors who are planning to invest in technology funds must closely watch
the funds’ past 3 years’ performances. One should have an in-depth
knowledge about the technology sector and its future market.

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1. Franklin India Technology Fund:
To provide long-term capital appreciation by predominantly investing in equity
and equity related securities of technology and technology related companies.
Franklin India Technology Fund is Equity - Sectoral fund was launched on 22
Aug 98. It is a fund with High risk and has given a CAGR/Annualized return of
18.4% since its launch. Ranked 41 in Sectoral category. Return for 2017 was
19.1%, 2016 was -2.6% and 2015 was 3.8%.

2. ICICI Prudential Technology Fund:


To generate long-term capital appreciation for you from a portfolio made up
predominantly of equity and equity-related securities of technology intensive
companies. ICICI Prudential Technology Fund is Equity - Sect oral fund was
launched on 3 Mar 00. It is a fund with High risk and has given a
CAGR/Annualized return of 9.6% since its launch. Ranked 37 in Sectoral
category. Return for 2017 was 19.8%, 2016 was -4% and 2015 was 3.9%.
3. SBI Technology Opportunities Fund:
(Erstwhile SBI IT Fund) To provide the investors maximum growth opportunity
through equity investments in stocks of growth oriented sectors of the
economy. SBI Technology Opportunities Fund is an Equity - Sectoral fund
was launched on 9 Jan 13. It is a fund with High risk and has given a
CAGR/Annualized return of 17.8% since its launch. Ranked 42 in Sectoral
category. Return for 2017 was 13%, 2016 was -3.3% and 2015 was 2.4%.
4. Aditya Birla Sun Life Digital India Fund:
(Erstwhile Aditya Birla Sun Life New Millennium Fund) A multi-sector open-
ended growth scheme with the objective of long term growth of capital,
through a portfolio with a target allocation of 100% equity, focusing on
investing in technology and technology dependent companies, hardware,
peripherals and components, software, telecom, media, internet and e-
commerce and other technology enabled companies. The secondary objective
is income generation and distribution of dividend. Aditya Birla Sun Life Digital
India Fund is Equity - Sectoral fund was launched on 15 Jan 00. It is a fund
with High risk and has given a CAGR/Annualized return of since its launch.
Ranked 33 in Sectoral category. Return for 2017 was 22.4%, 2016 was -
3.5% and 2015 was 11.2%.
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5. TATA Digital India Fund:
The investment objective of the scheme is to seek long term capital
appreciation by investing at least 80% of its net assets in equity/equity related
instruments of the companies in Information Technology Sector in India.
However, there is no assurance or guarantee that the investment objective of
the Scheme will be achieved. The Scheme does not assure or guarantee any
returns. TATA Digital India Fund is an Equity - Sectoral fund was launched on
28 Dec 15. It is a fund with High risk and has given a CAGR/Annualized return
of 12% since its launch. Return for 2017 was 19.6%, 2016 was -6%.

Who Should Invest in Technology and IT Mutual Funds:


As the technology fund belongs to the sector category of Equity Funds
they carry high-risk with them. Thus, investors who have the ability to
tolerate risk in their investment should only plan to invest in these funds.
Also, it is suggested that one should invest for a longer duration, more than
five years, to attain long-term benefits of the equity market.

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CHAPTER NO: 7
SWOT ANALYSIS

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7.0:Mutual Fund SWOT Analysis:

Mutual funds are among the financial products that benefit from conducting a
SWOT analysis. By reviewing their strengths, weaknesses, opportunities and
threats, an individual investor can be better informed on where to invest their
money, and be positioned to shift gears along with the market.

7.1:Strengths:
The most critical strength for a mutual fund is its performance. If a fund is
outperforming the market, and particularly if it is at the top of its benchmark, that
is a big selling point. If the fund is part of a well-established company with a track
record of success and a family of high-performing products, that brand name and
historical record may also be strength. A best-in-class research department or
methodology that has a track record of picking winners is a huge asset as well.
Different financial metrics may be key depending on your investment style and
the fund involved: dividend yield may be the key for one investor, total return
over a 10-year period for another.

7.2:Weaknesses:
One weakness to look at is your fund’s fees. A high expense ratio is a weakness
even if it pays for an active management currently beating the market with its
returns. Even in good times, expenses are a drag on investor return, and they will
be more difficult to accept if the performance declines. Size can be a weakness as
well, since bigger isn’t always better. As a small-cap fund gets bigger, for example,
it will have a hard time finding growth opportunities for all of its assets and may
have to close or expand outside of its stated objective. Risk may be a weakness
for some investors looking for a smaller beta or standard deviation.

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7.3:Opportunities:
It's not enough to look at the current numbers when evaluating prospective
mutual funds. You also need to look at the overall market and consider whether
the fund is best positioned to take advantage of trends. A lagging fund may offer
the best opportunity for growth if the combination of a management change and
economic trends prove beneficial.

7.4: Threats:
To some extent, many funds move along with general economic news. Some
types of funds do better in a recession while others track well in boom times --
those funds are particularly threatened by a sudden change in the unemployment
rate that undermines consumer confidence or a stimulus plan that gets people
spending again. In addition, if a fund is dependent on a superstar manager, make
sure you have a plan in place if that manager suddenly decides to leave.

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CHAPTER NO: 8
PERFORMANCE ANALYSIS

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8.0:Mutual Fund Performance Analysis:
When it comes to investing in mutual funds, you need to know how to analyze
and pick funds that are best suited for you. Most beginners look at returns,
riskiness or ratings of a fund before investing. Here are a few more performance
indicators that will help you take the right decisions:
1. Compare Fund Performance against a Benchmark
You may start by comparing the performance of a fund against the benchmark.
When you compare, use a fair and appropriate benchmark. It should always be an
apple-to-apple comparison. Using the wrong yardstick will only give misleading
data.
Let’s take the case of a Large-Cap Equity Fund. Compare its performance with a
broad-based index like Nifty 500. The fund returns for a period were 15%
whereas the benchmark returns were only around 12%. If your fund has
delivered such higher returns consistently, then it’s good to go fund.
2. Compare Fund history:
A mutual fund’s real worth can be understood only during difficult market phases,
and a fund history can validate that. Look for a fund which has a relatively longer
fund history say 5 to 10 years. Compare fund performance across different time
intervals and business cycles.
Suppose a fund has delivered performance in line with the expected returns
consistently during a market rally is a good one. Moreover, during a slump, if it
lost 8% returns while the benchmark lost 10% returns, then you can easily stick
around the fund.

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3. Compare Fund Expense Ratio:
Expense Ratio is the annual fee charged by the fund for managing your money. As
per SEBI guidelines, they cannot charge more than 2.5% of the fund’s
average asset under management (AUM). You need to check the expense ratio of
mutual funds before finalizing a fund.
Expense ratios are charged out of the fund returns. So, the higher the expense
ratio, the lower would be your take-home returns. Always look for a fund which
offers similar returns at relatively lower expense ratio.
The same mutual fund is available as a direct plan and a regular plan. Direct
plans of mutual funds come at a lower expense ratio; which translates into higher
returns. Investing in direct plans of mutual funds, instead of regular plans, can
save you loads on commissions.
If returns delivered by your expensive fund are not in line with the amount of fee
charged, you may try passive investing as well. Look for index funds that fit your
budget — these are relatively cheaper and deliver returns equal to the underlying
benchmark returns.
4. Compare Risk-Adjusted Returns:
Instead of looking at plain vanilla returns, look for risk-adjusted returns of the
fund. As per risk-return tradeoff, a higher degree of risk should be compensated
by a higher level of returns. The risk is measured with the help of standard
deviation.
Using Sharpe ratio helps to ascertain whether the fund is giving higher returns on
every additional unit of risk taken. The fund having Sharpe ratio higher than the
category average shows that the fund manager delivered higher returns for the
extra risk taken.
Consider two equity funds A and B having standard deviation i.e. 12% and 15%
respectively. If the Sharpe Ratio of A and B is 0.48 and 0.60, then go for fund B
because it’s a better bet for the risk taken. However, if B’s Sharpe ratio was
around 0.50, then you could even have gone for A. It is because a mere 0.02 extra
return isn’t worth it for assuming an extra 3% risk.

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5. Compare Average Maturity and Duration:
These are essentially used to evaluate debt funds. Average maturity relates to the
period after which the securities held by a debt fund will mature. The longer the
maturity, the higher is its sensitivity to interest rate movements. And higher are
chances of a fall in the fund NAV due to a rise in interest rates.
Duration means how long does each underlying security of the debt fund take to
reach a break-even point i.e. point of no profit no loss. The shorter the duration,
the quicker will it return your original investment. In such a scenario, you will be
able to accumulate money to reach your goals.
While investing in debt funds, the average maturity and duration of the fund
should match your investment horizon.
6. Compare fund’s Alpha and Beta:
Alpha measures the number of extra returns generated by the fund in excess of
the benchmark returns. Beta measures the riskiness of a fund. Moreover, it shows
whether the fund loses/gains more/less than the benchmark. If the beta value is
more than one, it shows that the fund gains/loses more than the benchmark. A
beta value of one indicates that the mutual fund’s returns move the same as the
benchmark. If the beta is less than one, then the fund gains/loses less than the
benchmark. Consider two funds A and B which have the same level of beta i.e. 2.
If alpha of A and B is 2 and 1.75 respectively, then you may go for fund A. It’s
because, for the same level of risk, the fund manager is able to generate higher
returns than the benchmark.
7. Compare Portfolio Turnover Ratio (PTR):
The portfolio turnover ratio tells you how often the fund manager buys/sells securities
in the portfolio. In case of equity funds, it shows the level of trading taking place
in the fund. You need to know that whenever an equity share is bought / sold, it
attracts transaction charges like the brokerage.
Frequent trading going on in a portfolio ultimately increases the expenses and is
reflected as a higher expense ratio. It might reduce your take-home returns from
the fund. Thus, PTR is an important criterion for fund selection.

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While choosing a fund, look for one with a lower PTR. If you want to go for a fund
with a high PTR, then check whether such high PTR is being justified by way of
higher returns.

8. How Clear Tax can help you:


Unless you are an active investor who closely follows the market trends and
related metrics, it can be difficult for you to choose a mutual fund according to
the above parameters. Clear Tax can help you here by handpicking the most
suitable and best-performing investment portfolios for you based on your
financial goals.

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CHAPTER NO: 9
CONCLUSION AND SUGGESTIONS

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9.1:CONCLUSION:
Let's recap what we've learned in this mutual fund tutorial:
A mutual fund brings together a large group of people and invests their
aggregated money in stocks, bonds, and other securities.
The advantages of mutual funds are professional
management, diversification, economies of scale, and wide range of offerings.
The disadvantages of mutuals are high costs, over-diversification, possible tax
consequences, liquidity concerns, and the inability of management to guarantee a
superior return.
There are many, many types of mutual funds. You can classify funds based on
asset class, investing strategy, region, etc.
Mutual funds have expenses that can be broken down generally into ongoing fees
(represented by the expense ratio) and transaction fees (loads).
Some funds carry no broker fee, known as no-load mutual funds.
One of the biggest problems with mutual funds is their costs and fees.
Mutual funds are easy to buy and sell. You can either buy them directly from the
fund company or through a third party.
Comparing fund returns across a number of metrics is important, such as over
time, compared to its benchmark, and compared to other funds in its peer group.

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CHAPTER NO: 10
BIBLIOGRAPHY AND REFERENCE

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https://en.wikipedia.org
https://www.investopedia.com
https://www.fincash.com

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Comparing Schemes SBI Magnum Multicap Fund - Regular Plan - Growth Vs. Aditya
Birla Sun Life Equity Fund - Growth

 Performance
 SBI Magnum Multicap Fund - Regular Plan - Growth
 Aditya Birla Sun Life Equity Fund - Growth
 1 Month
 3.11%
 3.33%
 3 Months
 -6.44%
 -4.66%
 6 Months
 -2.23%
 0.28%
 1 Year
 -2.09%
 0.62%
 3 Year
 12.00%
 14.49%
 5 Year
 19.20%
 19.95%
 Since Inception
 12.15%
 23.33%
 Risk and Volatility
 SBI Magnum Multicap Fund - Regular Plan - Growth
 Aditya Birla Sun Life Equity Fund - Growth
 Standard Deviation
 0.76
 0.76
 Sharpe
 N.A.
 N.A.
 Beta
 0.88
 0.97
 Dividend
 SBI Magnum Multicap Fund - Regular Plan - Growth
 Aditya Birla Sun Life Equity Fund - Growth
 Last Dividend
 N.A.
 N.A.
 Last Dividend Date
 N.A.
 N.A.
 Dividend Type
 N.A.

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 N.A.
 Portfolio Details
 SBI Magnum Multicap Fund - Regular Plan - Growth
 Aditya Birla Sun Life Equity Fund - Growth
 AUM(₹ Cr.)
 412418.75
 683493.39
 Exp Ratio
 2.35
 1.97
 Portfolio Asset Allocation
 SBI Magnum Multicap Fund - Regular Plan - Growth
 Aditya Birla Sun Life Equity Fund - Growth



 Equity (₹ Cr.)
 545405.09
 906915.85
 Debt (₹ Cr.)
 0.00
 0.00
 Others (₹ Cr.)
 28941.89
 44981.32
 Investment Details
 SBI Magnum Multicap Fund - Regular Plan - Growth
 Aditya Birla Sun Life Equity Fund - Growth
 Fund Type
 Open ended scheme
 Open ended scheme
 Fund Class
 Equity - Multi Cap Fund
 Equity - Multi Cap Fund
 Launch Date
 09-16-2005
 08-27-1998
 Min Investment(in ₹)
 1000
 500
 Portfolio Manager
 Anup Upadhyay
 Anil Shah

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SBI Magnum Multicap Fund -  Aditya Birla Sun Life Equity Fund -
Regular Plan - Growth Growth
 Sector Name  Sector Name
 %  %
 Bank - Private  Bank - Private
 20.22%  19.58%
 IT - Software  IT - Software
 7.74%  10.11%
 Other  Pharmaceuticals & Drugs
 4.64%  6.65%
 Cigarettes/Tobacco  Finance - NBFC
 4.25%  5.55%
 Pharmaceuticals & Drugs  Metal - Non Ferrous
 4.07%  4.60%

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