A PROJECT ON

INDIAN MUTUAL FUND

INDUSTRY

SUBMITTED BY-

SAHARA HANUMANT DEVKAR

 TABLE OF CONTENTS

CHAPTER 1

MUTUAL FUNDS: AN INTRODUCTION

1-Financial System: An Overview

2-Elements of Financial System

3-Mutual Funds and Financial Market

4- Relevance of Mutual Funds in Financial System

5- Pattern of Financial Savings in Household Sector in India

6-Concept of Mutual Fund

7- Operational Style

8 - Types of Mutual Funds

9 -The Origin and Development of Mutual Funds

10- Mutual Funds: Global Scenario

11- Milestones in the Journey of Mutual Funds: Global Scenario

12-Mutual Fund Growth: Global Perspective

13-Some basic Facts of Mutual Funds

14-Growth of Mutual Funds: Indian Perspective

15-Phases of Growth of Mutual Funds in India

16-Milestones in the Journey of Mutual Funds: Indian Experience

17-Changing face of the Mutual Funds

18-Structure of Mutual Fund Industry in India

19-Trends of Asset Under Management

20-Recent Trend in Mutual Fund Industry

21-Emerging issues in Mutual Funds in India

22-Future Scenario

23-Prospects of Mutual Funds in India

24-SWOT Analysis of Mutual Fund Industry

25-Legal & Regulatory environment of Mutual Funds

26-Regulations by SEBI

27-Self Regulatory Organization

28-Association ofMutual Funds In India

CHAPTER 2
OVERVIEW OF MUTUAL FUND INDUSTRY IN INDIA

1-Introduction

2-What is Mutual Fund?

3-Growth of Mutual Fund Industry

4-Worldwide Role of Mutual Fund

5-Organization Structure of Mutual fund

6-Origin of Mutual Fund In India

7-Growth of Mutual Funds in India

8-Types of Mutual Funds

9-Advantages of Mutual Funds

10-Disadvantage of Mutual Funds

11-Mutual Fund & Capital Market

12-Role of Security Exchange Board of India

13-Role of Association of Mutual Fund in India

14-Tax Planning & Mutual Fund

15-National Institute of Securities Market

16-National Institute of Capital Market

17-Guideline of Mutual Funds

18-Recent Trend of Mutual Fund

19-Conclusion

20-Reference
 Chapter I

MUTUAL FUNDS: AN INTRODUCTION

 Chapter -1

MUTUAL FUNDS: AN INTRODUCTION

1.1 Financial System: An Overview

The financial system of an economy plays an intermediary role in linking between

the seekers and the suppliers of money for productive activity. The savers of money
could invest in financial assets, which are issued by the seekers of money. The nature of
the financial system is determined by such variables as the nature and number of financial
assets, the volume of trading these assets etc. The efficiency of the functioning of
financial system of a country greatly influences its economic growth. The close
relationship between financial structure and economic development is reflected in the
prevailing institutional arrangement delivery system and intermediation process. Thus
the financial system is possibly the most important institutional and functional vehicle for
economic transformation'.

Financial system includes different markets, the institutions, instruments, services

and mechanisms, which influence the generation of savings, investment, capital
formation and growth. It is the financial system that facilitates to supply fimds to various
sectors and activities of the economy in ways that promote the fullest possible utilization
of resources without the destabilizing consequence of price level changes or unnecessary
interference with individual desires^.

Indian financial system has witnessed revolutionary changes, developments and

innovations since 1991 due to economic reforms undertaken by the government. With
the advent of liberalization, privatization and globalization, the financial services sector
has become more dynamic and vibrant. Many innovative methods of finance products,
services, business and regulatory bodies have emerged to make the Indian Capital Market
more liquid and strong to face the global challenges. Emergence of increasing role of
Mutual Fund industry in financial intermediation is one such development following the
structural reforms initiated in the Indian economy.
1.2 Elementsof Financial System

The financial system is the channel through which funds flow from one market
participants to another. There are four important elements in the financial system of an
economy. They are:
• Investors- who are investing their savings in various financial instruments
viz, Shares, Debentures, Mutual Fund units. Govt. Securities etc. The
investors attempt to accumulate wealth, to alter or smooth their consumption,
or to change the risks attached to their consumption or portfolios of assets.
• Institutions (Borrowers) - corporate bodies say Business Houses, Financial
institutions etc who are mobilizing capital by way of issuing various financial
instruments. Borrowers transact to gain investable funds, to consume or to
alter the risks attached to their liabilities
• Intermediaries- who act as conduits between the investors and institutions.
Financial intermediaries earn a return by packaging financial assets for
borrowers or lenders increasing the variety of securities directly available in
the market. They can act as brokers by arranging deals between borrowers
and lender.
• Regulatory bodies- which promote, regulates and monitoring the functioning
of the financial markets. Rules that insure the smooth functioning of the
markets are developed and enforced. In addition these agencies can develop
markets for new types of securities.
The efficiency of financial system may be determined depending upon the nature
of relationship and functional integrity among these elements of financial system.

1 3 Mutual Funds and Financial Market

Mutual Funds are dynamic financial institutions, which play a crucial role in an
economy by mobilizing savings and investing them in the capital market. Mutual Funds
have emerged as dynamic financial intermediaries between the suppliers and the users of
money. Mutual Funds thus assist the process of financial deepening and intermediation.
They on one hand, mobilize funds in the savings market. On the other hand at the same
time they also compete with the banks and other financial institutions. The stock market
activities are also significantly influenced by mutual funds. However, the scope and
efficiency of mutual funds are influenced by overall economic fundamentals, the inter-
relationship between the financial and real sector and the nature of development of the
savings and capital markets, market structure, institutional arrangements and overall
policy regimes'.

The mutual funds in India have emerged as strong financial intermediaries and are
playing a very important role in bringing stability to the financial system and efficiency
to resource allocation. In the process they have challenged the dominant role of
commercial banks in the financial market and national economy. By the very nature of
their activities, and by virtue of being knowledgeable and informed investors, they
influence the stock market and play an active role in promoting good corporate
governance, investor protection and the health of capital markets.

The active involvement of mutual funds can be seen in the money and capital
market also. The mutual funds increase liquidity in the money market. The asset holding
pattern of mutual funds all over the world indicates the dominant role of mutual funds in
Money and capital market. Mutual Funds have been id^tified as one of the important
factors pushing up market prices of securities.

The direct lending by mutual funds to the corporate sector has substantially
increased after the SEBI guidelines allowed the corporate sector to reserve 20% of public
issues for Indian mutual funds. Mutual funds have also widened the private placement
market for corporate securities. Mutual funds have enabled the corporate sector to raise
capital at reduced costs and have opened an avenue for alternate source of capital.
Indian mutual funds are thus playing a very crucial developmental role in allocating
resources in the emerging market economy.

1.4 Relevance of Mutual Funds in Financial System

A mutual fund is the ideal investment vehicle for today's complex and modern
financial scenario. Markets for equity shares, bonds and other fixed income instruments.
real estate, derivatives and other assets have become mature and information driven.
Price changes in these assets are driven by global events occurring in far away places.
After introduction of free pricing of shares, and with greater volatility in the stock
markets, many investors who bought over priced shares lost money and withdrew from
the markets altogether. Even those investors who continued as direct investors in the
stock markets realized that the key to successful investing in the capital markets lay in
building a diversified portfolio which in urn required substantial capital. Besides,
selecting securities with growth and income potential from the capital market involved
careful research and monitoring of the market, which was not possible for all investors.

A typical individual is unlikely to have knowledge, skills, inclination and time to

keep track of events, understand their implications and act speedily. An individual also
finds it difficult keep track of ownership of his assets, investment, brokerage dues and
bank transactions etc. The concept of mutual funds is more relevant in the present
context among the investment community as MFs is the ideal solutions to all these
situations. Hence the mutual funds have emerged as major financial intermediaries all
over the world. The MFs besides providing the expertise in stock market investing, these
funds allow investing in small amounts and yet holding a diversified portfolio to limit
risk, while providing the potential for income and growth associated with the debt and
equity instruments.

1.5 Pattern of Financial Savings in Household Sector in India

According to RBI annual report 2003-04, the individual household now invests
more in financial sector. The trend of past five years reveals growing importance of
financial savings. They reached 15.1% of GDP in 2003-04. Assuming the GDP for
2003-04 at Rs. 27,52,000 crore, it means an amount as high as Rs 4,15,000 crore was
available for investment in various financial instruments.
 Table 1.1
Year-wise Financial savings as percentage of GDP
Year Financial savings as % of GDP
1999-00 12.2
2000-01 11.9
2001-02 12.7
2002-03 13.5
2003-04 15.1
Source: RBI Annual Report 2003-04

1.6 Concept of Mutual Fund

Mutual Fund has been defined by different scholars as mentioned below:

"Mutual Funds are financial intermediaries which bring a wide variety of
securities within the reach of the most modest of investors"^.
As per Mutual Fact Book published by Investment Company Institute of USA, "a
mutual fund is a financial service organization that receives money from shareholders,
invests it, earns returns on it, attempts to make it grow and agrees to pay the shareholders
cash on demand for the current value of his investment".

Encyclopedia Britannica defines a mutual fund as "mutual fund - also called Unit
Trust or Open-ended Trust- Company that invests the fund of its subscriber in diversified
securities and in turn issues units representing shares in those holdings. They make
continuous offering of new shares at net asset value and redeem of shares on demand at
net asset value determined daily by the market value of the securities they hold".

A Mutual Fund is a trust that pools the saving of a number of investors who share
a common financial goal. The money thus collected is invested by the fund managers in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments. Thus, an Equity Fund
would buy equity assets namely ordinary shares, preference shares, warrants etc. A bond
fund would buy debt instruments such as debentures, bonds or government securities. It
is these assets, which are owned by the investors in the same proportion as their
contribution bears to the total contribution of all investors put together. The income
earned through these investments and the capital appreciation realized by the scheme is
shared by its unit holders in proportion to the number of units owned by them (on pro rata
basis). Thus a mutual fund is the most suitable investment for the common man as it
oflfers an opportunity to invest in a diversified, professionally managed portfolio at a
relatively low cost^.

When an investor buys into a mutual fund, he/she buys "shares" that is
recalculated at regular intervals. The fund calculates the value of all its investments
subtracts all the fund expenses (salaries, services and administrative costs) and divides by
the number of shares in the fund to arrive at the value of a single share called the Net
Asset Value or NAV.

Mutual funds charge for their services. Mutual funds charge a management fee,
paid to the managers of the mutual fund, to cover salaries and administrative expenses.
The annual fee may range from 0.5% to 1.5% of the all the assets in the fimd. These fees
are sometimes expressed as an expense ratio, or a percentage of the fund's assets that are
paid out in expenses. There are a variety of other fees that are used in various
cotibinations to compensate the fund's sales represent*tive or pay for the fund's
marketing program. Many funds charge a sales fee when one invests in the fund or a
redemption fee when money is taken out^.

1.7 Operational Style

A mutual fund invests the money received from investors in instruments which
are in line with the objectives of the respective schemes. Regular expenses like custodial
fees, cost of dividend warrant, registrar fee, and the asset management fee are borne by
respective schemes. These expenses however, cannot exceed 3% of the assets in the
respective schemes every year. The balance is given back to the investors in full.
1.8 Types of Mutual Funds

Mutual fund schemes may be classified on the basis of its structure and its
investment objective.
A. By Structure
a) Open-ended Funds
b) Closed-ended Funds
c) Interval Funds
B. By Investment Objective:
a) Growth Funds
b) Income Funds
c) Balanced Funds
d) Money Market Funds
e) Load Funds
f) No-Load Funds
C. Other Schemes
a) Tax Saving Schemes
b) Special Schemes
• Industry Specific Schemes
• Index Schemes
• Sectoral Schemes

1.9 The Origin and Development of Mutual Funds

The economic progress of a country is, to certain extent, linked with the growth of
the capital market. The growth Capital market depends on the savings of the nation. The
savings of common man can be diverted to capital market by the financial intermediaries
through financial instruments. The most of the general investors know that there is ample
scope for profitable investment opportunity in capital market both in short term and long
term time horizon. But still they refrain from this avenue of investment due to lack of
awareness and investment skills. Hence the savings of common man has been directed
towards only bank deposits, real estate, gold etc. till recently, which indeed restricted the
 growth of capital market and in turn economy too in India. The capital market can grow
fast only if the common man acquires necessary know-how himself to select appropriate
avenues of investment which will serve his needs. This is a Herculean task to a common
investor to analyze regularly the market movement for the sake of his investment due to
his routine busy schedule. The diversion of the part of the above savings into a new
sector is possible only if the common man is assured that there are organizations of
repute which have necessary expertise to select appropriate avenues of investment in
capital market where the yield is attractive enough with utmost security of the capital
invested. This sentiment of common investor has put the milestone for the evolution of
Mutual Fund in the economy. The evolution of Mutual Funds have not only catered the
needs of the different categories common investors but also increased in the depth in
capital market and in turn contributed to the sustained growth of the economy. In these
circumstances, there is enough scope for Mutual Funds to play in that capital market as a
dynamic intermediary to canalize the savings in to productive activities in the economy.

1.10 Mutual Funds: Global Scenario

Historically, mutual fund traces its origins to the early pioneering investments of
Scottish and English inA^estors in America West in the 1800's. Mutual Funds have been
around for a long time, at least since King William I, the first king of Netherlands,
created the first known investment company in 1822. He came up with a novel idea of
close-ended fimd. It was initially a simple idea. A group of investors, individuals, and
institutions with common investment goals, pooled their investment and placed them with
fund managers. These professional money managers then invested these funds in
securities, and distributed the profits among the fund members. The 'investment trust'
concept spread rapidly through Europe.

On the same line the idea of mutual fimd had its formal origin in Belgium
(Societe'Generale' D Belgique, 1822) as Investment Company to finance investments in
national industries with high associated risks. Later on similar agencies were formed in
Switzerland and France. This system expended steadily for twenty years and reached the
heights of its development in the boom period of 1880's^.
 In 1879, an enterprising Scot, Robert Fleming, set up the Scottish American
Investment Trust, the first international equity fund. This fund called the Foreign and
Colonial Government Trust was formed as a limited company to invest in a selection of
eighteen overseas Government Stocks at an average yield of 8% as compared to the yield
of 3% on British Government Securities. A sinking fund was created for taking care of
redemptions over a period of 24 years, with redemptions chosen by lots. This was
followed by a burst of activity and lull subsequent to a capital market crisis. By early
1900, there were 58 trusts in the U.K*.

The first American fund was created in 1893. And later on, this concept was
spread quickly around the world especially in industrialized countries^.
The stock market started to pick up steam in the 1950s. But it was during the
prosperous decade of the 1960s that mutual funds evolved from a stodgy investment for
the unimaginative to an exciting new investment vehicle with the opportunity for growth
rather than just preservation of capital. A "new breed" of money manager—people like
Gerry Tsai and Fred Carr—emerged as growth managers. Tsai's Capital Fund, which
focused on big glamour stocks, gained 50% in 1965. Carr's Enterprise Fund, which
looked for small, emerging growth companies, racked up a gain of over 117% in 1967^.

1.11 Milestones in tlie Journey of Mutual Funds: Global Scenario

The story of mutual fiind is full of twists and turns. Mutual funds went up on
rather a sharp learning curve before setting down to a steady performance they have
traversed the path of stunning growth as well as sudden reversals. It is interesting to
know funds' cycles of ups and downs before becoming widely popular.
Table 1.2
Mutual Fund Mile Stones in the Global Scenario
Year Milestones
1870 Robert Fleming establishes in Scotland, the first investment trust
1890 The Collapse of baring brothers in UK leaves a bitter experience for
the investment trust industry
1914 The first open-ended fund launched in USA by the Massachusetts
investment trust
1920 Collapse of the stock market imparts a second bitter shock for the
 industry
1930 The US securities exchange commission (SEC) came into existence
as a regulators
1940 Investment Companies Act passed in USA
1950 The name 'Mutual Fund' started becoming popular in developed
economy
1960 Mutual Fund mania unleashed
1969 Stock Markets' Crash
1972 The Money Market Fund was invented
1980 Financial product innovation, institutionalization of equity markets
leashing the most forceful bullishness in the market
1987 Severe correction takes place in the overheated markets, the stock
market crashes again
1990 A decade of enormous growth for the mutual funds industry
1999 Size of the industry's Global assets cross $5.5 trillion and surpass the
volume of the bank deposits
Source: Compiled from www.mutualfundsindia.com

The background for the growth of mutual funds throughout world has similar
characteristics. Mutual funds have emerged as rivals to banks in savings mobilization.
Individual investors over the years have developed keen interest in securities market and
changed their investment behaviour as witnessed in the shift in their preference from
bank deposits to acquire financial instruments for attaining higher returns and capital
gains accompanied with fiscal concessions. These phenomenons exist globally and
provide support to the growth of mutual fund industry.

1.12 Mutual Fund Growth: Global Perspective

• Mutual Funds in the USA

The USA is the pace-setter in the mutual funds industry. The first United States
open-ended fund was established in Boston in 1924, the Massachusetts Investors Trust.
But in the frenetic investment environment of the 1920s, open-ended funds were
overshadowed by closed-end funds, which were highly leveraged speculative accounts.
When the market collapsed in 1929, investors in closed-end funds suffered heavy losses.
The growth of mutual funds was retarded due to the stock market crash in 1929 and then

10
 again due to the great depression and outbreak of the Second World War. However the
period of boo for the industry has been the 1990s with the industry's assets crossing the
US $1 trillion mark.

Presently the total assets under the mutual funds in the USA exceed US $2.5
trillion. There are more than 7000 mutual funds (equivalent to schemes in India) in USA
commanding investment of 25% of the household and having over 5 crores shareholders
account. Mutual fund industry in USA occupied third position in financial sector after
banks and insurance companies. Annual sales of mutual fund account for approximately
$100 billions. The 1970s saw the emergence of innovative funds in USA. Bond funds
made their appearance in 1977 and the first tax exempt; money market fund appeared in
1979, The international bond fund appeared in 1986 and he latest addition to the
industry, arm funds appeared in 1990^ Mutual fund industry in USA serves about 50
million investors .

• Mutual Funds in the UK

In UK, Mutual Funds are called Investment trusts and Unit trusts. This industry
started blooming in the beginning of thirty's. Presently there are about 313 investment
trusts managing total assets of GB Pounds 50.14 billion. By the end of Decembei 1995,
the total assets of 1,132 unit trusts stood at GB Pounds 110.17 billion under 85,83,837
unit holders' account^

• Mutual Funds in the Japan

The Japanese mutual funds industry has certain unique structural features. Mutual
funds in Japan are known as investment trusts but they differ from investment trusts of
the UK and mutual funds of USA. The Japanese investment trusts were established 'to
meet the changing requirement of government policy' and as such the establishment of
investment trusts was a considered action rather than a spontaneous response to economic
market developments. The mutual fiind industry in Japan dates back to 1937. But an
investment trust modeled after unit trusts of the UK was established only in 1941.
Investment trusts in Japan are set up under the Securities Investment Law 1951.

11
 • Mutual Funds in other Countries
In many countries mutual funds had registered enormous growth. These
developed nations include Italy where mutual fund registered a growth of 200%, Japan
600%, UK 350%, and Germany 330%. Japan tops in number of mutual funds around
5400 whereas USA's total 3400 mutual funds command four times highest assets than
Japan. UK ranks third with 1400 mutual funds. France 950 mutual fiinds ranks second in
asset formation next to USA. Other European countries have the developed mutual fund
industry viz., Austria 307, Belgium 101, Denmark 117, Germany 388, Ireland 146, Italy
239, Luxembourg 770, Spain 373, Sweden 283, Netherlands 88, Portugal 91, Australia
and Canada have 549 and 482 mutual funds respectively. Besides above, third world
countries like Mexico, South Afirica, Indonesia and India have also witnessed significant
g

growth in mutual fund industry .

1.13 Some basic Facts of Mutual Funds

• The money market mutual fund segment has a total corpus of $ 1.48 trillion in the
U.S. against a corpus of $ 100 million in India.
• Out of the top 10 mutual fiinds worldwide, eight are bank- sponsored. Only
Fidelity and Capital are non-bank mutual funds in this group.
• In the U.S. the total number of schemes is higher than that of the listed companies
• Internationally, mutual funds are allowed to go short. In India fund managers do
not have such leeway.
• In the U.S. about 9.7 million households will manage their assets on-line by the
year 2003, such a facility is not yet of avail in India.
• On- line trading is a great idea to reduce management expenses from the current 2
% of total assets to about 0.75 % of the total assets.
• 72% of the core customer base of mutual funds in the top 50-broking firms in the
U.S. are expected to trade on-line by 2003^.

Internationally, on- line investing continues its meteoric rise. Many have debated
about the success of e- commerce and its breakthroughs, but it is true that this aspect of
technology could and will change the way financial sectors function. However, mutual

12
funds cannot be left far behind. They have realized the potential of the Internet and are
equipping themselves to perform better.

In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions
have already begun on the Net, while in India the Net is used as a source of Information.
Such changes could facilitate easy access, lower intermediation costs and better services
for all. A research agency that specializes in internet technology estimates that over the
next four years Mutual Fund Assets traded on- line will grow ten folds from $ 128 billion
to $ 1,227 billion ; whereas equity assets traded on-line will increase during the period
from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from
34% to 40% during the period.

1.14 Growth of Mutual Funds: Indian Perspective

In India mutual fund concept took root only in sixties, after a century old history
elsewhere in the world. Reacting to the needs for a more active mobilization of
household savings to provide investible resources to industry, the idea of introducing he
concept of mutual fund in India was coined by the far sighted vision of Sri T
Krishnamachari the then Finance Minister. Considering the need for an institution which
would serve as the conduit for these resources to the Indian capital market, he took the
initiative for the formation of Unit Trust of India as public sector financial institution by
an Act of Parliament in 1963, which in turn laid foundation for the mutual fund operation
in India.

The growth of the Mutual Fund industry in India was very slow till end of the
1980's, primarily due to government controls and over regulation of the financial service
industry. State planning and development objective of the economic policy meant that
financial institutions assisted the government in development activities through
mobilization of domestic savings. Sever entry barriers restricted the growth of the mutual
fund industry in terras of number of players, mobilization of savings and creation of
assets. This was the scenario till 1986-87 when the mutual fund market in India, such as
it was, solely controlled by a single institution, namely Unit Trust of India. UTI
commenced operations in July 1964 "with a view to encouraging savings and investment

13
and participation in the income, profits and gains accruing to the corporation from the
acquisition, holding, management and disposal of securities"^

1.15 Phases of Growth of Mutual Funds in India

The Mutual Fund industry in India started in 1963 with the formation of UTI at
the initiative of RBI and Government of India. The objective then was to attract the small
investors and introduce them to market investments. Since the, the history of mutual
funds in India can be broadly divided into four distinct phases.

• Phase 1:1964-1987 (Monopoly of UTI)

This spans from 1964 to 1987. In 1963, UTI was established by an Act of
Parliament and given a monopoly. Operationally, UTI was set up by the Reserve Bank of
India, but was later de-linked from the RBI and entrusted main holding to IDBI. The first
and still one of the largest schemes, launched by UTI was Unit Scheme 1964. Over the
years, US-64 attracted the largest number of investors in any single investment scheme.
It was also at least partially the first open-ended scheme in the country, now moving
towards becoming fully open-ended. In absolute terms, the investible funds corpus of
even UTI was stUl relatively small till 1984. But, at the end of this Phase I, UTI had
grown large as evidence by the following statistics.

Table 1 3
Trends and Growth Rate of AUM of UTI
Year 1965 1975 1987
Investible Funds 0.25 1.7 45.0
(Rs. in Billion)
CAGR % 21% 25%
Source: AMFI Work Book 2000

• Phase H: 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non-UTI, Public Sector mutual Funds, brining in
competition. With the opening up of the economy, many public sector banks and
financial institution were allowed to establish mutual funds. During 1987-92, six public

14
sector banks and two financial institutions set up mutual funds. The State Bank of India
established the first non-UTI mutual fund, SBI Mutual Fund in November 1987. This
was followed by Canbank Mutual Fund (launched in December, 1987), LIC Mutual Fund
(launched in 1989) and Indian Bank Mutual Fund (launched in 1990) followed by Bank
of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual funds
helped enlarge the investor community and the investible funds as seen in the following.
Table 1.4
Trends and Growth Rate of AUM of UTI and PSU MFs
Investible Funds (Market Share)
(Rs. in Billion as on March)
Year 1986-87 1988-89 1991-92
UTI Rs.46 Rs. 118 Rs.318
(88%) (85%)
Public Sector Mutual Funds *** Rs. 16 Rs.57
(12%) (15%)
Total Rs.46 Rs.134 Rs.375
CAGR % *** *** 71%
Source: AMFI Work Book 2000

• Phase m : 1993-1996 (Emergence of Private Sector Funds)

A new era in the mutual fiind industry began with permission granted for the entry
of private sector funds in 1993, giving the Indian investors a broader choice of 'funds
families' and increasing competition for the existing public sector funds. Quite
significantly, Foreign funds management companies were also allowed to operate
mutual funds, most of them coming into India through their joint ventures with India
promoters. These private funds have brought in with them the latest product
innovations, investment management techniques and investor servicing technology
that makes the India mutual fund industry today a vibrant and growth financial
intermediary. The following table indicates the evidence of growing popularity
of private mutual funds among the Indian investors in recent times.

15
 Table 1.5
Trends and Growth Rate of AUM of UTI, PSU and Private MFs
Investible Funds (Market Share)
(Rs. in Billion as on March)
Year 1994 2002
(upto October)
UTI 520 447
(85%) (40%)
Public Sector Mutual Funds 84 104
(14%) (9%)
Private Sector Mutual Funds 9 580
(1%) (51%)
Total 613 1131
Source: AMFI Work Book 2000
• Phase IV: 1996 (SEBI Regulation for Mutual Funds)
The entire mutual fund industry in India, despite initial hiccups has since scaled
new heights in terms of mobilization of funds and number of players. Deregulation and
liberalization of the Indian economy has introduced competition and provided impetus to
the growth of the industry. Finally, most of the investors (both small and large) have
started shifting towards mutual fiinds as opposed to banks or direct market investments.

More investor friendly regulatory measures have been taken both by SEBI to
protect the investors and by the Government to enhance investors' returns through tax
benefits. A comprehensive set of regulations for all mutual funds operating in India has
been accomplished with SEBI (Mutual Fund) Regulation 1996^.

1.16 Milestones in the Journey of Mutual Funds: Indian Experience

It is quite interesting to know the path of historical developments of Mutual Fund

industry in India. It can be understood from the following historical events that the MFs
industry has taken almost three decades to reach from infancy to adolescent stage in
India.

16
 Table 1.6
Milestones of Mutual Funds: Indian Scenario
Year Milestones
1963 The UTI Act enacted
1964 The first Mutual Fund scheme US 64 was launched
1978 Rs. 100 crores mobilized by UTI
1985 Rs. 1000 crores mobilized by UTI
1987 End of UTI monopoly and allowing public sector banks to start
Mutual Funds
1990 Mutual Funds by LIC and GIC
1990 Rs. 5000 crores mobilized by UTI and Rs. 3000 crores mobilized by
other PSU mutual funds
1992 Stock market gets into bull frenzy. Overheated markets crash as the
magnitude of the stock market scam unfolds.
1993 Mutual Funds book heavy losses. And allowing Private sector
participation in mutual funds
1994 Entry of Foreign Mutual Fund Morgan Stanly; Allowing the entry of
FIIs to participate in Stock market investment; 20 new mutual funds
registered with SEBI; Total corpus of all mutual funds reached
Rs. 72,000 crores; UTI alone accounts for Rs. 55,000 crores
1995 Annual sales of mutual funds total Rs. 15,000 crores, representing
around 7% of all household savings
1996 Stock markets crash, Fresh fiinds inflow reduced to a trickle. Mutual
funds as a derivative of equity market reflect poor performance
1997 Mutual fund 2000 vision documents from SEBI, new guidelines
introduced, government announces tax sops, fund with proven
performance attract steady subscriptions.
1998 Funds riding on it, Pharma , FMCG and IT wave whip up spectacular
performances
1999 Budget announces further concessions and the bull run for mutual
funds' begin all over again.
2000 Establishment of the Association of Mutual Funds of India (AMFI)
2003 Splitting of UTI into UTI -1 and UTI - II
Source: Compiled from www.mutualfundsindia.com

1.17 Changing face of the Mutual Funds

By 1989-90, mutual funds started emerging as major mobilizers of savings.

Mutual funds were able to give higher returns than those available from bank deposits by
investing a large proportion of their funds in the equity market. Further, as the funds were

17
sponsored by banks themselves, there existed a perception amongst investors that their
investments in these flinds were as safe as the bank deposits. The announcement of tax
concessions for equity linked savings schemes in 1990 proved to be a shot in the arm for
the industry. By 1994, the percentage of Indian middle class households holding
investments in UTI and MF jumped from 37% in 1992 to 65%. Over 25% of this increase
included middle class households who became mutual fund investors for the first time^.

There are 30.8 million investor accounts in the mutual fund industry in India of
which 98% are individuals and about 2% are held by corporates and institutional. In
terms of assets, individual investors contributed to 55% of the total assets while
corporates and institutions held the rest. Dependence on institutional money may create
instability in the size of asset under management for the fund houses as this money is
considered 'hot money'.

Combined with the entry of private sector mutual funds, the shift in focus from
the individual to the institutional investors has led to the surge in mutual fund operation
during last one decade. This unprecedented growth of the mutual funds necessitated the
Securities and Exchange Board of India (SEBI) to frame guidelines for the mutual funds
regulation in 1993. The entry of private sector mutual funds imparted oompetitive
efficiency in the industry and has helped investors to choose from funds with different
maturity periods and offered different risk-return-trade-offs. The Indian mutual fund
industry has started opening up many of the exciting investment opportunities to Indian
investors. This industry has started witnessing the phenomenon of more savings now
being entrusted to the funds than to the banks. The mutual funds are growing
continuously as new financial intermediary in Indian financial market.

1.27 Structure of Mutual Fund Industry in India

a) Sponsor
b) Trustees
c) Asset Management Company (AMC)
d) Custodian and Depositories
e) Transfer Agent

18
 f) Bankers
g) Distributors

1.19 Trends of Asset Under Management

Starting with an asset base of Rs. 0.25 billion in 1964, the industry has grown at a
compounded average growth rate of 26.34% to its current size (March, 2003) of Rs. 1130
billion. Of the total 33 players, 8 are in the public sector including UTI, while remaining
25 are in private sector and MNC sector. There are about 382 schemes offered by all the
Funds, of which around 53 are close-ended 9 (including assured return) and the
remaining are open-ended in 2002-03. Several innovative schemes, viz income, growth,
balanced, money market, gilt, tax saving, sector specific, etc have been designed to suit
the needs of the different types of investors. In India the activities of this fast growing
industry is regulated by the norms of Securities Exchange Board of India. Table 1.7
presents year-wise overall growth of mutual funds in terms of cumulative AUM during
the sample period. The above table reveals that the the cumulative resources of UTI and
Bank sponsored mutual funds has declined considerably while the magnitude of funds
mobilized by the private and MNC sector funds went up drastically during study period.
Table: 1.7
Year-wise Assets Under Management of Mutual Fu«ds (as on 31^^ March)
(Rs. in Crores)
Mutual Funds 2000 2001 2002 2003
A) Unit Trust of India 76547 58017 51434 43351®
B) Bank Sponsored (4) 7842 3333 3970 4491
C) Institution (4) 3570 3507 4234 5935
D) Private Sector
1. Indian (7) 2331 3370 5177 10180
2.JointVentures:Predominantly Indian (6) 9724 8620 15502 15459
3.JointVentures:PredominantlyForeign(ll) 12991 13740 20277 29883
Total (1+2+3) 25046 25730 40956 55522
Grand Grand Total (A+B+C+D) 113005 90587 100594 109299
@ UTI Mutual Fund Rsl3516 crore and the Unit Trust of India Rs.29835 crores.
Source: www.amfiindia.com

19
 The industry giant UTI has lost the corpus base about 43% (between 1999-00 and
2002-03) followed by Bank sponsored Funds at 43% (between 1999-00 and 2002-03).
The private sector (337%) funds and Indian and Foreign joint venture funds (100%) have
emerged as the biggest gainers despite the market crash. The overall trend of cumulative
collection of the funds shows a volatile trend during the sample period.
Table: 1.8
Type and category wise yearly assets under management
Rs. in crores
1999-00 2000-01 2001-02 2002-03
Income 48004 48863 55788 47564
Growth 30611 13483 13852 9887
Balanced 26757 19273 16954 3141
Liquid/Money Market 2227 4128 8069 13734
Gilt 2370 2317 4163 3910
ELSS 3036 2523 1768 1228
Total 113005 90587 100594 79464@
@UTI schemes excluded
Source: www.amfi.india.com
The above table shows that the cumulative AMU all the sectors except
Liquid/Money Market and Gilt funds went down significantly during study period. The
cumulative AUM of growth, Balanced and ELSS has witnessed fall by 68%, 88% and
60% respectively between the sample periods.
Table: 1.9
Scheme-wise yeariy Assets Under Management
(Rs. in Crores)
Year Open Ended Closed-ended Assured Return Total
68833 21608 22564 113005
1999-00 (19.12%)
(60.91%) (19.97%)
57293 13613 19681 90587
2000-01 (15.03%)
(63.25%) (21.73%)
71938 10977 17679 100594
2001-02 (10.91%)
(71.51%) (17.57%)
75071 4033 360
2002-03 79464@
(94.47%) (5.08%) (0.45%)
Source: www.amfiindia.com @UTI schemes excluded

20
 It can be witnessed from the above table that the open-ended schemes account
higher proportion in the total AUM over the years while the share of closed-ended and
assured return schemes in the total AUM has reduced drastically during study period.
Table 1.10
Type and category wise schemes launched
1999-00 2000-01 2002-02 2002-03
Income 114 126 146 117
Growth 108 110 114 120
Balanced 24 32 34 35
Liquid /Money Market 19 26 31 32
Gilt 14 19 29 31
ELSS 65 80 63 47
Total 344 393 417 382
Source: www.amfiindia.com
The funds have been trying to reach different segment of investors by introducing
most innovative schemes to suit the needs of the investors. It is evident from the above
table that only the number of ELSS has reduced from 65 to 47 while the number of rest of
the schemes has increased considerably during the sample period.
Table 1.11
AUM for Top 10 Mutual Funds (as on March 31,2003)
Asset Under
SI. No. Name of the Asset Management Company Management
(Rs. in Crores)
1. Unit Trust of India 43351
2. Prudential ICICI Asset Management Co. Ltd. 9068
3. Templeton Asset Management (India) Pvt. Ltd. 8792
4. HDFC Asset Management Co. Ltd. 6482
5. Birla Sun Life Asset Management Co. Ltd. 5488
6. Standard Chartered Asset Mgmt Co. Pvt. Ltd. 4163
7. SBI Funds Management Ltd. 3220
8. Kotak Mahindra Asset Management Co. Ltd. 2987

21
 9. Jeevan Bima Sahayog Asset Management Co. Ltd. 2939
10. Zurich Asset Management Co. (India) Pvt. Ltd. 2686
Source: www.amfiindia.com

The above table indicates the top ten Asset Management Companies in terms of
AUM as on 31^' March 2003. In spite of drastic fall in the total AUM of UTI over the
years, still it stood at the top in terms of magnitude of asset under management.

The assets under management of Indian mutual funds over the last four years have
more or less stagnated at around Rs 1,00,000 crore. The industry has seen shifting of
assets from one asset to another and one fund house to another without any significant
aggregate growth in total assets. This is possibly the greatest challenge facing the
industry today.

There are three important reasons for this phenomenon.

1. The mutual fund industry presently sells in the major metros and mini metres.
Outside these areas, there is little awareness for mutual ftinds. Thus, a large
potential section remains outside the reach of the industry.
2. The mutual fund products are seen to be reasonably complex and are not
understood by the common middle class person. While attempts have been
made by the industry in the recent past to enhance the awareness of mutual
fund, there is still a long way to go. As a result of this, savings are
channelized into the more traditional and trusted avenues.
3. The melt down of equity markets has had a negative rub-off on mutual funds.
Many investors still associate mutual funds with equity-oriented products
whereas potentially there is a very large opportunity and investor base for debt
oriented products as well.
4. Lack of investors' confidence, poor fund performance etc., which also
constrained the growth of the industry.

22
1.20 Recent Trends in Mutual Fund Industry
The most important trend in the mutual fund industry is the aggressive expansion
of the foreign-owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players. Private players have been largely
dependent upon big customers and have generally failed to get retail. Many nationalized
banks got into the mutual fiind business in the early nineties and got off to a good start
due to the stock market boom prevailing then. These banks did not really understand the
mutual fiind business and they just viewed it as another kind of banking activity. Few
hired specialized staff and generally chose to transfer staff from the parent organizations.
The performance of most of the schemes floated by these funds was not good. Some
schemes had offered guaranteed returns and their parent organizations had to bail out
these AMCs by paying large amounts of money as the difference between the guaranteed
and actual returns. The service levels were also very poor. Most of these AMCs have not
been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few
exceptions, they have serious plans of continuing the activity in a major way. The
experience of some of the AMCs floated by private sector Indian companies was also
very similar. They quickly realized that the AMC business is a business, which makes
money in the long term and requires deep-pocketed support in the intermediate years.
Some have sold out to foreign owned companies, some have merged with others and
there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and disclosure,
usage of technology, broker education and support etc. In fact, they have forced the
industry to upgrade itself and service levels of organizations like UTI have improved
dramatically in the last few years in response to the competition provided by them.
Those directly associated with the fund management industry like distributors, registrars
and transfer agents and even the regulators have become more mature and responsible.
Considering the changing trend in the capital market, the funds have shifted their focus to
the recession-free sector like Pharma, FMCG etc. Mutual fiinds are now also competing

23
 with commercial banks in the race to retain investors savings and corporate float money.
Recent figures indicate that mutual fund assets went up by 115% where as bank deposits
rose by only 17%. It is just that mutual funds are going to change the way banks do
business in the future .

1.21 Emei^ng issues in Mutual Funds in India

a. Rating of Mutual Fund schemes

Total return has been the criteria for measuring the performance of Mutual Funds.
Often in this methodology, factors like volatility, liquidity and portfolio composition are
ignored, which then may not give the right picture of performance. Hence the CRISIL
has developed Composite Performance Ranking, which measures performance for each
of the open-ended schemes - equity, debt and balance funds. There are four parameters
considered in this measure viz, Risk-adjusted returns of the scheme's NAV,
Diversification of the portfolio. Liquidity, and Asset size. Then ranks are assigned to the
schemes compared to the performance of the competing scheme within the category.
According to CRISIL, this measure is applicable only to those schemes, which are at least
two years old and are disclosing 100% of their portfolio.

b. Changes in MF industry due to the advent of Net

As per SEBI regulations, bond funds and equity fiinds can charge a maximum of
2.25% and 2.5% as administrative fees respectively. The Mutual Funds could bring
down their administrative cost to 0.75% if trading is done on-line and consequently
improves the return potential of the schemes. Mutual funds could provide better advice or
service to their investors through the Net. Mutual funds can target investors who are
young and net savvy, since servicing them would be easier on the net. There will be
more sites viz. www.indiainfoUn.com, www.indiafn.com etc involved in advertisement
and promotion of mutual funds.

c. New Norms on NPA classification

The Malegam committee has made important recommendations regarding norms
on classification of NPAs in debt securities and norms for valuation of illiquid securities

24
in a mutual fund scheme. The committee has recommended that debt securities held by
mutual funds in their portfolio be classified as NPA if the principal or interest is not
received for six months. The MFs will have to disclose the NPAs to unit holders on a
half yearly basis. New norms on valuation of illiquid securities would increase
transparency and put in place uniform accounting standards for all funds.

d. Influence of Technology
Majority of the mutual funds have their own website providing basic information
relating to the schemes. Some of the mutual funds enable purchase and redemption of
units online for clients in select locations. Mutual funds have begun to use electronic
fund transfer method to remit the dividends and redemption proceeds. Mutual funds have
been asked to electronically integrate the back office work relating to fund management.
U n is the first mutual fund to have integrated all these functions across in all its schemes
in a comprehensive manner.

However, the most significant influence of technology is seen in servicing

investors. In particular, agencies such as UTI Investor Services Ltd, Karvy Securities,
Computer Age Management Services, Datamatics have made huge investments to cope
with the volume of investor servicing transactions at acceptable speed and quality.
Beside the investments in technology, these processing centres boast of advanced
methods of quality control in investor services. Recognizing the risk of system failure in
the automated environment many mutual funds and service providers have established
disaster management back up systems in alternate locations.

Mutual funds need to use technology in reaching out the investors. This
technology can bridge the gap in investor education and product positioning.

e. Product Innovation
Product innovation is the emerging feature in the mutual fund industry in India.
This has enabled to cater the varied need of investors' preference. This in turn enhanced
the depth of mutual fiind activities. Most of the products offered by mutual funds can be
divided among three classes of cash funds, income funds and equity funds. The private

25
sector mutual fund entered the scene in early 1990s and introduced better service
standards and wider product choices. Schemes with systematic investment plan,
automatic redemption plan and linking current account to Money Market Mutual Funds,
Cheque writing facility etc., are attempts to create diversity with in the homogeneity of
fund operations. Products such as index funds, international funds sectoral funds and
ETFs have begun to make appearances. These various funds seem to offer a wide choice
for investment to the retail investors. Serial plans and a few liquid plans have essentially
attempted to manage funds for corporate treasuries. Many mutual funds actively pursue
the segment of institutions, charitable organizations, trusts and highly net worth
individual investors by offering customized products.

It is evident from the past experience that most of the products are introduced in
the head of the market. No careful analysis is done to estimate the appetite of the
investor. Some of the products, which can help attract money on its features, are
Principal Protected Funds, Floating Interest Rate Funds, High Yield Bonds/Equity Funds,
Real Estate Mutual Funds etc. The mutual fund industry can also introduce international
products under the newly permitted guidelines by SEBI and the RBI.

The year 2002 was different in that the products offered were for more innovative.
Templeton India launched a debt fund that would invest predominantly in floating rate
bonds. Benchmark Mutual Fund launched India's first exchange-traded fund (ETF),
Nifty BeEs, during the year; Prudential ICICI soon followed with SPICE, another ETF
based the Sensex.

f. Mergers & Acquisitions

The consolidation process in the industry, which was started by Birla Mutual
Mund with the take over of Apple Mutual Fund, has since gathered momentum. The Rs.
275 crore takeover of Pioneer ITI by Templeton in August 2002 made it the biggest ever
merger in the Indian mutual fund industry and turned Templeton into India's largest
private sector fund, with asset under management of Rs. 9,444 crore on 31*' December
2002. Sun F&C's acquisition of Jardine Flemming schemes was the other notable
consolidation move.

26
 Table 1.12
Merger Moves
Buyers Sellers Date
Zurich Twentieth Century Feb. 99
Taurus HBMF Mar. 99
Birla Apple* Nov. 99
Zurich rrC Thread needle Dec. 99
Tata Ind Bank * Nov. 01
Taurus Bank of India* Feb. 02
Templeton Pioneer ITI Aug. 02
Sun F & C Jardine Fleming* Aug. 02
Prinicipal MF Sun & F«&C July '03
* Only schemes (assets and unitholders) were taken over,
not the employees or infrastructure.
Source: 'Portfolio Organizer' March, 2004.
g. Restructuring of UTI
The most important development affecting the maximum number of investors was
the repeal of the UTI Act, 1963, and the spitting of the ailing colossus into two separate
asset management compames: UTI-I administering the assured return schemes and UTI-
II called UTI Mutual Fund (sponsored by LIC, SBI, BOB and PNB) managing NAV
based schemes in February 2003. UTI's flagship scheme US-64, was also split with the
NAV linked portion renamed US 2002.

h. Indices for Mutual Funds

The AMFI has recently launched four indices for gilt funds and another set of
indices for balanced funds, bond funds, monthly income plans and liquid funds. The
indices, which have been developed and will be maintained by ICICI securities &
Finance Company and Crisil.com respectively, will be mandated for use by MFs to
enable comparison of performance. The Mutual Funds are required to review the
performance of the schemes on a periodical basis with reference to these indices.

27
 i. Funds of Funds
The SEBI has permitted the mutual funds to float a new category of funds called
'fund of funds' which will invest in other MF schemes. These schemes will enable
people to invest in different MF schemes through a single fund. Instead of putting money
in different schemes of a mutual fund, this scheme will allow investor to buy different
types of mutual funds like diversified equity funds or income funds.

1.22 Future Scenario

There is an immense potential in this sector in India. The MF industry is moving

from infancy to adolescence stage, and the industry is maturing and the investors and
funds are frankly and openly discussing difficulties, opportunities and compulsions. The
following may be the future trends in MFs in India^.
> The asset base will continue to grow at an annual rate of about 30% to 35% over
the next few years as investors are shifting their assets from banks and other
traditional avenues.
> The industry can witness closure or take over of some of the weak, older public
and private sector players by the stronger players in next three to five years. In
the private sector this trend has already started with tiree mergers and one take
over.
> Open ended funds are becoming more popular than close ended funds among the
investors at present.
> The market will also witness a flow of new players entering the arena. There will
be large number of offers from various strong Asset Management Companies in
the coming years who are looking at Indian Market seriously.
> In the U.S. about 9.7 million households are managing their assets on-line. Such
facility is just introduced in India by few players. In future most of the players
will introduce on-line trading system in India which as a result reduces
management expenses from the current 2% to 0.75% of the total assets.
> In the near future in India, Mutual funds will concentrate even on physical funds
like bullion funds, precious metal funds and real estate funds etc. .

28
1.23 Prospects of Mutual Funds in India

The increasing rate of fund mobilization by the mutual funds under various
innovative schemes indicates the growing popularity of mutual funds in India. The entry
of private and foreign mutual funds in the market has provided environment for
competitiveness and more freedom of choice to investors. The frequent fall in the
interest rate and high level of volatility in the stock market has created more
complications in the investment environment both in retail and corporate segment. This
may give further boost to investments in the mutual fiind schemes. The future prospect
of mutual funds is considered to be very bright in view of expanding investors support
and Government's favourable outlook towards mutual funds. Till recently, in our country
mutual funds are only urban oriented. At present, the commercial banks in India have
started playing the role of distributor for mutual fund schemes. And also few designated
post offices are also joined the network of distribution of mutual fund schemes of few
public and private sector mutual funds. This will help in building a mutual fund culture
among the rural investors. The benefit of an enhanced activity level in the India mutual
fund industry is evident in the industry structure. The industry is beginning to show signs
of moving towards maturity.

Opportunities for the mutual fund industry in India are huge and barely the
surface of the potential opportunity has been scratched. However, the need is for greater
investor education, simplification of product communication and enhancement of the foot
print behind the metros and mini metros. These are key challenges.

1.24 SWOT Analysis of Mutual Fund Industry

In the light of present scenario and future outlook, the prospects of MF industry in
India can be analyzed briefly as mentioned below.

29
 STRENGTH
Large number of potential customer
base.
Government support by way of tax
concessions for MF investors.
> Sophisticated capital market
> Limited number of players at
present as compared to advanced
countries.
> Instability in Bank interest rate
> Vital Source of Capital formation
> Ensures steady returns at the
calculated risk.
Better scope for accessing market
information
Offer Liquidity to the investors at
any time
30
WEAKNESS
>^ Low rate of awareness among
investors about MF concept
> Poor participation of retail investors
> No assured return and no protection
of capital
> Load on NAVs (front or back)
affect the return of investors
> Performance is depending upon
market condition of capital market
> Poor service conditions
>• Distribution Network in most of the
cases restricted to Metro cities only
> Lack of professional investment
management especially in case of
PSU MFs.
> High level of impact cost
> Increasing NPAs in the portfolios
> Simultaneous joint action of all
mutual funds in the same direction
will shaken the stock market
 OPPORTUNITIES
> Failures of NBFCs operations.
> Huge untapped market in Semi-
Urban and Rural areas.
High level of Savings habits among
the people
> Free fall in Bank rate of interest
> Well established Self and Legal
regulatory body
Scope for products innovation to
suit the need of large base of
Customers.
> Liberalized business environment
> Increasing investors interest toward
money market instruments ofMFs.
Fast growth of Asset Base of MFs.
Widening of Distribution Channel
through Franchisees.
Aggressive investors' education
campaign by AMFI and other MFs.
Using on-line mode of trading
system.
Relaxation on restriction of
oversees investment upto Rs. 500
million crores under Capital
Account convertibility norms
THREAT
Increasing competition among the
players.
> High level of volatility in the Stock
market.
Dominance of multi national
investment companies.
NAVs are highly sensitive to
internal and market factors.
> Possibility of more stringent
regulation by SEBI, RBI, AMFI
etc. in future.
Retail trading in G-Sec market
> Possible withdrawal of tax sops
offered to mutual fund investors as
per Kelkar committee
recommendation.

There is no doubt that Mutual Funds have clearly emerged as a new and favoured
investment vehicle in the recent past both in retail and corporate segment. The mutual
fund industry will witness the growth similar to what was experienced in late 1980s in the
U.S. Spread of mutual fund cult to the smaller towns and rural areas will be a key
constituent to achieve high growth. Distribution and reach, as in the consumer goods
market, will be the key to success. Product innovation, focus, service and above all
performance will determine the winners in future.

1.25 Legal & Regulatory environment of Mutual Funds

The working of MFs is governed by UTI Act 1963; Indian Trust Act 1882;
relevant provisions of the Companies Act 1956; and various tax laws. The overall
regulation, overseeing and supervision of MF industry is done by the Ministry of Finance

31
of Government of India, the RBI and the SEBI. Initially the RBI had issued guidelines
for bank-sponsored MFs in 1987. Then followed the guidelines from Ministry of Finance
in 1991. Thereafter, the SEBI issued guideline in 1992 and a comprehensive set of
regulations in 1993. With the growth of Mutual Fund industry, it became necessary that
all MFs follow uniform norms for valuation of investments and accounting practices so
that any once could judge their performance on a comparable basis. Therefore, the SEBI
issued new mutual fiind regulations in December 1996, based on the recommendations of
the Mutual Fund 2000 Report prepared by it.

The new SEBI regulations (1996) are uniformly applicable to all the existing
mutual funds in all the sectors, including the UTI. Offshore funds are governed by the
Ministry of Finance, Government of India and the RBI. MMMFs are governed by the
RBI. The regulations aim at improving investor protection, facilitating competition,
imparting a greater degree of flexibility, and promoting innovation .

1.26 Regulations by SEBI

The Government of India constituted Securities and Exchange Board of India, by

an Act of Parliament in 1992, as the apex regulator of all entities that either raise funds in
the capital markets or invest in capital market securities such as shares and debentures
listed on stock exchanges. MFs have emerged as an important institutional investor in
capital market securities. Hence they come under the purview of SEBI. The SEBI
requires all mutual funds to be registered with them. It issues guidelines for all mutual
fund operations including where they can invest, what investment limits and restrictions
must be complied with, how hey should account for income and expenses, how they
should make disclosures of information to the investors and generally acts in he interest
of investor protection. Other entities that SEBI also regulates are companies when they
issue equity or debt, share registrars, custodian, bankers in the primary markets, stock
exchanges and brokers in the secondary markets, and foreign and institutional investors
such as FIIs, offshore mutual funds with dedicated Indian MFs or venture capital
investors.

32
 Some of the salient features of these regulations are as under:
1. The MFs are required to be formed a trusts and managed by separately formed
AMCs. The minimum net worth of AMC is Rs 10 crores, of which the
minimum contribution of the sponsor should be 40%
2. AMCs can have cross trusteeship and directorship provided there is no
conflict of interest.
3. AMCs can undertake other fund-based business such as providing investment
management services and they can also diversify into management of pension
funds, offshore funds, and Venture Capital funds.
4. MFs cannot deal in option trading, short selling or carrying forward
transactions in securities.
5. They can invest only in transferable securities in the money and capital market
or any privately placed debenture or debt securities.
6. Restrictions to ensure that investments under an individual scheme do not
exceed 5% of the corpus of any company's share, and investments under all
schemes do not exceed 10% of the funds in the shares, debentures or securities
of a single company.
7. Investments under all the schemes cannot exceed 15% of the funds in the
shares and debentures of a single company.
8. The advertisement code or marketing schemes of the mutual funds, the
contents of the trust deed, investment management agreement and the scheme-
wise balance sheet have to be in prescribed form.
9. The MP should have a custodian, not associated in any way with the AMC
and registered with the Board.
10. The minimum amount to be raised with each closed-ended scheme should be
Rs. 20 crores and for the open-ended scheme Rs. 50 crores.
11. In case the amount collected falls short of the minimum prescribed, the entire
amount should be refunded not later than six weeks from the date of closure of
the scheme otherwise the amount should be refunded with a penalty of interest
at the rate of 15% p.a.

33
 12. The mutual funds are obliged to maintain books of accounts, expenses,
appropriation of expenses, among the individual schemes, the limit of
expenses of the AMC that can be charged to the MF, provision for
depreciation and bad debt.
13. SEBI is empowered to appoint one or more persons as inspecting authority to
inspect the MF. And also empowered to appoint an auditor to investigate into
the books of accounts or the affairs of the MF
14. SEBI can impose suspension of registration in case of violation of the
provisions of the SEBI Act 1992 or the regulations.
15. The consent of investors must be obtained by MFs for making any change in
the 'fundamental attributes' of a scheme on the basis of which the unit-holders
had made initial investments.
16. MFs can mention, while floating different schemes, indicative but not assured
return on those schemes.
17. MFs must follow common or uniform methods of valuation of securities,
accounting, reporting and calculating NAVs. The valuation of investments
munt be made on a mark-to-raarket basis. The dates when the security has to
be treated as ex-dividend, ex-rights, and ex-bonus have been brought on par
with international practices.
18. MFs are now free to determine their portfolio composition.
19. MFs can not make any investment in privately placed (unlisted) securities
issued by associate or group companies of the sponsor.
20. The aggregate investments of MFs in the listed and or to be listed securities of
group companies of the sponsor should not exceed 25% of the net asset of all
their schemes^".
1.27 Self Regulatory Oi^anization

A Self Regulatory Organization is an association representing a group of market

participants, which is specially empowered by the apex regulatory authority to exercise
pre-defined authority over the regulation of their members. Normally, SRO s are given
powers to regulate the criteria and procedures for admission of its members, set a code of

34
conduct fro their members' market activities, determine the professional rules and bylaws
of the association, and so on. SROs facilitate decentralization in the regulatory structure,
involve the market players in the regulatory process and ensure that the regulatory
policies and procedures do not become uaacceptable to the market participants or
unmanageable for the apex regulatory body. It has to be noted that every body
representing a group of market participants does not automatically become a SRO; it has
to be granted specific powers and approval to become a SRO by the government,
appropriate laws and recognition by the regulatory authority.

While Stock Exchanges have a definite role as SROs in India, in other sectors of
the capital markets, SROs have yet to emerge as a potent force.

1.28 Association of Mutual Funds in India

As in the USA, where the Investment Company Institute plays a role as an

industry association for the MF industry, the AMFI plays a similar role in India. AMFI is
not a SRO, though it is conceivable that it may choose to apply for that status and become
one in the future.

• To define and maintain high professional and ethical standards in all areas
of operation of mutual fund industry
• To recommend and promote best business practices and code of conduct to
be followed by members and others engaged in the activities of mutual fund
and asset management including agencies connected or involved in the field
of capital markets and financial services.
• To interact with the Securities and Exchange Board of India (SEBl) and to
represent to SEBI on all matters concerning the mutual fund industry.
• To represent to the Government, Reserve Bank of India and other bodies on
all matters relating to the Mutual Fund Industry.
• To develop a cadre of well trained Agent distributors and to implement a
programme of training and certification for all intermediaries and others
engaged in the industry.

35
 • To undertake nation wide investor awareness programme so as to promote
proper understanding of the concept and working of mutual funds.
• To disseminate information on Mutual Fund Industry and to undertake
studies and research directly and/or in association with other bodies.
(www.amfiindia.com)

Various AMFI committees are today involved with establishing standards for the
MF industries on different aspects like determining the NAV, Advertisement Code and
Investor relations etc. AMFI also takes up the taxation issues or ideas on regulatory
changes required for the MFs and their investors in India.

Mutual Funds have clearly emerged as a new and favoured investment vehicle in
the recent past both in retail and corporate segment. The mutual fund industry will
witness the growth similar to what was experienced in late 1980s in the U.S. Spread of
mutual fund cult to the smaller towns and rural areas will be a key constituent to achieve
high growth. Distribution and reach, as in the consumer goods market, will be the key to
success. Product innovation, focus, service and above all performance will determine the
winners in future. At this transition period, the Indian mutual fund industry needs to
develop better products, demonstrate robust investment processes and ensure better
service standards to gain and retain investor confidence. This retention of investor trust
and confidence will ultimately translate in to higher assets under management on
sustained basis. Indian mutual fund industry has to garner investor trust by way of better
products, better process and better services.

* ^ U at* ^ U
*Jm ^m ^ ^
^>
^^

36
Reference
1. H Sadak 1997, Mutual Funds India, Response Books, New Delhi. Pp 22-25,40-
47, 57-59, 68-109,120-145
2. Vasant Desai,1999, The Indian Financial System, pOl, Himalaya Publishing
House, Mumbai pp549-550
3. K G Sahadevan & M Thirupal Raju, Mutual Funds Data, interpretation and
Analysis pp 1-12, Prentice Hall India Pvt Ltd, New Delhi 1997.
4. Reilly K Frank, Investments, CBS College Publishing, 1982, p. 526-28
5. Work book for Distributor and Employees of Mutual Funds 2000 - pp 4-5, AMFI
Mumbai, 40-42
6. www.ignouraeids.co.in
7. Lalit K Bansal 1997, Mutual Funds: Management & Workings, Deep & Deep
Publications, New Delhi pp 23-30
8. Dr. J C Verma 1997, p 16-18, Guide to Mutual Funds & Investment Portfolio,
Bharat Publishing House, New Delhi, 40-48
9. www.indiainfoline.com
10. Manual of SEBI guidelines on Capital Issue, Euro Issues, Merchant Banking,
Mutual Funds, NABHI Publications, New Delhi, p 1287-88
11. www.sebi.gov.in
12. L M Bhole, Financial Institutions & Markets, Tata McGraw-Hill Publishing Co
Ltd, 1999, pp 237

37
 CHAPTER 2

OVERVIEW OF MUTUAL FUND INDUSTRY

IN INDIA
1.1 INTRODUCTION:

The Indian financial system based on four basic components like Financial Market,
Financial Institutions, Financial Service, Financial Instruments. All are play important role
for smooth activities for the transfer of the funds and allocation of the funds. The main aim
of the Indian financial system is that providing the efficiently services to the capital market.
The Indian capital market has been increasing tremendously during the second generation
reforms. The first generation reforms started in 1991 the concept of LPG. (Liberalization,
privatization, Globalization)

Then after 1997 second generation reforms was started, still the it’s going on, its include
reforms of industrial investment, reforms of fiscal policy, reforms of ex- imp policy, reforms
of public sector, reforms of financial sector, reforms of foreign investment through the
institutional investors, reforms banking sectors. The economic development model adopted
by India in the post independence era has been characterized by mixed economy with the
public sector playing a dominating role and the activities in private industrial sector control
measures emaciated form time to time. The last two decades have been a phenomenal
expansion in the geographical coverage and the financial spread of our financial system.

The spared of the banking system has been a major factor in promoting financial
intermediation in the economy and in the growth of financial savings with progressive
liberalization of economic policies, there has been a rapid growth of capital market, money
market and financial services industry including merchant banking, leasing and venture
capital, leasing, hire purchasing. Consistent with the growth of financial sector and second
generation reforms its need to fruition of the financial sector. Its also need to providing the
efficient service to the investor mostly if the investors are supply small amount, in that point
of view the mutual fund play vital for better service to the small investors. The main vision
for the analysis for this study is to scrutinize the performance of five star rated mutual funds,
given the weight of risk, return, and assets under management, net assets value, book value
and price earnings ratio.

2
1.2 WHAT IS A MUTUAL FUND?
Mutual fund is the pool of the money, based on the trust who invests the savings of a
number of investors who shares a common financial goal, like the capital appreciation and
dividend earning. The money thus collect is then invested in capital market instruments such
as shares, debenture, and foreign market. Investors invest money and get the units as per the
unit value which we called as NAV (net assets value). Mutual fund is the most suitable
investment for the common man as it offers an opportunity to invest in diversified portfolio
management, good research team, professionally managed Indian stock as well as the
foreign market, the main aim of the fund manager is to taking the scrip that have under value
and future will rising, then fund manager sell out the stock. Fund manager concentration on
risk – return trade off, where minimize the risk and maximize the return through
diversification of the portfolio. The most common features of the mutual fund unit are low
cost. The below I mention the how the transactions will done or working with mutual fund

1.3 GROWTH OF MUTUAL FUND INDUSTRY:

The history of mutual funds dates support to 19th century when it was introduced in Europe,
in particular, Great Britain. Robert Fleming set up in 1868 the first investment trust called
Foreign and colonial investment trust which promised to manage the finances of the
moneyed classes of Scotland by scattering the investment over a number of different stocks.
This investment trust and other investment trusts which were afterward set up in Britain and
the U.S., resembled today’s close – ended mutual funds. The first mutual fund in the U.S.,
Massachusetts investor’s trust, was set up in March 1924. This was the open – ended mutual
fund.

The stock market crash in 1929, the Great Depression, and the outbreak of the Second
World War slackened the pace of growth of the mutual fund industry. Innovations in
products and services increased the popularity of mutual funds in the 1950s and 1960s. The
first international stock mutual fund was introduced in the US in 1940. In 1976, the first tax
– exempt municipal bond funds emerged and in 1979, the first money market mutual funds

3
were created. The latest additions are the international bond fund in 1986 arm funds in 1990.
This industry witnessed substantial growth in the eighties and nineties when there was a
significant increase in the number of mutual funds, schemes, assets, and shareholders. In the
US the mutual fund industry registered s ten – fold growth the eighties. Since 1996, mutual
fund assets have exceeds bank deposits. The mutual fund industry and the banking industry
virtually rival each other in size.

A Mutual fund is type of Investment Company that gathers assets form investors and
collectively invests in stocks, bonds, or money market instruments. The investment
company concepts date to Europe in the late 1700s, according to K. Geert Rouwenhost in
the Origins Mutual Funds, when “a Dutch Merchant and Broker Invited subscriptions from
investor with limited means.” The materialization of “investment Pooling“ in England in the
1800s brought the concept closer to U.S. shores. The enactment of two British Laws, the
Joint Stock Companies Acts of 1862 and 1867, permitted investors to share in the profits of
an investment enterprise, and limited investor liability to the amount of investment capital
devoted to the enterprise.

May be more outstandingly, the British fund model established a direct link with U.S.
Securities markets, serving finance the development of the post – Civil War U.S. economy.
The Scottish American Investment Trust, Formed on February1, 1873 by fund pioneer
Robert Fleming, invested in the economic potential of the United States, Chiefly through
American railroad bonds. Many other trusts followed that not only targeted investment in
America, but led to the introduction of the fund investing concept on U.S. shores in the late
1800 and early 1900s.

Nov. 1925. All these funds were open – ended having redemption feature. Similarly, they
had almost all the features of a good modern Mutual Funds – like sound investment policies
and restrictions, open end ness, self – liquidating features, a publicized portfolio, simple
capital structure, excellent and professional fund management and diversification
etc…….and hence they are the honored grand – parents of today’s funds. Prior to these

4
funds all the initial investment companies were closed – ended companies. Therefore, it can
be said that although the basic concept of diversification and professional fund management,
were picked by U.S.A. from England Investment Companies “The Mutual Fund is an
American Creation.”

Because of their exclusive feature, open – ended Mutual Funds rapidly became very popular.
By 1929, there were 19 open – ended Mutual Funds in USA with total assets of $ 140
millions. But the 1929 Stock Market crash followed by great depression of 1930 ravaged the
U.S. Financial Market as well as the Mutual Fund Industry. This necessitated stricter
regulation for mutual funds and for Financial Sectors. Hence, to protect the interest of the
common investors, U.S. Government passed various Acts, such a Securities Act 1933,
Securities Exchange Act 1934 and the Investment Companies Act 1940. A committee called
the National Committee of Investment Company (Now, Investment Company Institute), was
also formed to co – operate with the Federal Regulatory Agency and to keep informed of
trends in Mutual Fund Legislation.

As a result of these measure, the Mutual Fund Industry began to develop speedily and the
total net assets of the Mutual Funds Industry increased form $ 448 million in 1940 to $ 2.5
billion in 1950. The number of shareholder’s accounts increased from 296000, to more than
one Million during 1940 – 1951. “As a result of renewed interest in Mutual Fund Industry
they grew at 18% annual compound rate reaching peak of their rapid growth curve in the
late 1960s.”

1.4 WORLDWIDE ROLE OF MUTUAL FUND

2007
26.20 croers

2006
21.82 croers

2005
17.77 croers

5
1.5 ORGANIZATION STRUCTURE OF MUTUAL FUNDS
Mutual funds have organization straucture as per ther Security Exchange Board of India
guideline, Security Exchange Board of India specified authority and responsibility of
Trustee and Aeest Management Companies. The objectives is to controlling, to promoted, to
regulate, to protected the investors right and efficient trading of units. Operation of Mutual
fund start with investors save their money on mutual fund, than Mutual Fund manager
handling the funds and strategic investment on scrip. As per the objectives of particular
scheme manager selected scrips. Unit value will become high when fund manager
investment policy generate the return on capital market. Unit return depends on fund return
and efficient capital market. Also affects international capital market, liquidity and at last
economic policy. Below the graph indicates how the process was going on to investors to
earn returns. Mutual fund manager having high responsibility inside of return and how to
minimize the risk. When fund provided high return with high risk, investors attract to invest
more fund for same scheme.

Operation of
mutual fund

Return investors

Fund
Securities
Manager

6
The Mutual fund organization as per the SEBI formation and necessary formation is needed
for sooth activities of the companies and achieved the desire objectives. Transfer agent and
custodian play role for dematerialization of the fund and unit holders hold the account
statement, but custody of the unit is on particular Asset Management Company. Custodian
holds all the fund units on dematerialization form. Sponsor had decided the responsibility of
custodian when investor to purchase the fund and to sell the unit. Application forms,
transaction slip and other requests received by transfer agent, middle men between investors
and Assts Management Companies.

•TRUSTEES •UNIT
HOLDERS

THEMUTUAL
SPONSROS
FUNDS

TRANSFER
CUSTODIAN
AGENT

•SEBI •AMC

1.6 ORIGIN OF MUTUAL FUND IN INDIA

The history of mutual funds dates backs to 19th century when it was introduced in Europe, in
particular, Great Britain. Robert Fleming set up in 1968 the first investment trust called
Foreign and Colonial Investment Trust which promised to manage the finances of the
moneyed classes of Scotland by spreading the investment over a number of different stocks.
This investment trust and other investments trusts which were subsequently set up in Britain
and the US, resembled today’s close – ended mutual funds. The first mutual in the U.S.,
Massachustsettes investor’s Trust, was set up in March 1924. This was the open – ended
mutual fund.

7
The stock market crash in 1929, the Great Depression, and the outbreak of the Second
World War slackened the pace of mutual fund industry, innovations in products and services
increased the popularity of mutual funds in the 1990s and 1960s. The first international
stock mutual fund was introduced in the U.S. in 1940. In 1976, the first tax – exempt
municipal bond funds emerged and in 1979, the first money market mutual funds were
created. The latest additions are the international bond fund in 1986 and arm funds in 1990.
This industry witnessed substantial growth in the eighties and nineties when there was a
significant increase in the number of mutual funds, schemes, assets, and shareholders. In the
US, the mutual fund industry registered a ten – fold growth the eighties. Since 1996, mutual
fund assets have exceeded bank deposits. The mutual fund industry and the banking industry
virtually rival each other in size.

1.7 GROWTH OF MUTUAL FUNDS IN INDIA

By the year 1970, the industry had 361 Funds with combined total assets of 47.6 billion
dollars in 10.7 million shareholder’s account. However, from 1970 and on wards rising
interest rates, stock market stagnation, inflation and investors some other reservations about
the profitability of Mutual Funds, Adversely affected the growth of mutual funds. Hence
Mutual Funds realized the need to introduce new types of Mutual Funds, which were in tune
with changing requirements and interests of the investors. The 1970’s saw a new kind of
fund innovation; Funds with no sales commissions called “ no load “ funds. The largest and
most successful no load family of funds is the Vanguard Funds, created by John Bogle in
1977.

In the series of new product, the First Money Market Mutual Fund (MMMF) i.g. The
Reserve Fund” was started in November 1971. This new concept signaled a dramatic change
in Mutual Fund Industry. Most importantly, it attracted new small and individual investors
to mutual fund concept and sparked a surge of creativity in the industry.

8
1.8 TYPES OF MUTUAL FUNDS
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position,
risk tolerance and return expectations etc. The table below gives an overview into the
existing types of schemes in the Industry.

By Structure Open Ended Funds

Close Ended Funds
Interval Funds

By Investment Objectives Growth Funds

Income Funds
Balanced Funds
Money Market Funds

Other Schemes Tax Saving Funds

Special Funds
Index Funds
Sector Specific Funds

1.9 ADVANTAGES OF MUTUAL FUNDS

Mutual funds have designed to provide maximum benefits to investors, and fund manager
have research team to achieve schemes objective. Assets Management Company has
different type of sector funds, which need to proper planning for strategic investment and to
achieve the market return.

Portfolio Diversification

Mutual Funds invest in a well-diversified portfolio of securities which enables investor to

hold a diversified investment portfolio (whether the amount of investment is big or small).

9
Professional Management

Fund manager undergoes through various research works and has better investment
management skills which ensure higher returns to the investor than what he can manage on
his own.

Less Risk
Investors acquire a diversified portfolio of securities even with a small investment in a
Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3
securities.

Low Transaction Costs

Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser
transaction costs. These benefits are passed on to the investors.

Liquidity
An investor may not be able to sell some of the shares held by him very easily and quickly,
whereas units of a mutual fund are far more liquid.

Choice of Schemes
Mutual funds provide investors with various schemes with different investment objectives.
Investors have the option of investing in a scheme having a correlation between its
investment objectives and their own financial goals. These schemes further have different
plans/options

Transparency

Funds provide investors with updated information pertaining to the markets and the
schemes. All material facts are disclosed to investors as required by the regulator.

10
Flexibility

Investors also benefit from the convenience and flexibility offered by Mutual Funds.
Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa.
Option of systematic (at regular intervals) investment and withdrawal is also offered to the
investors in most open-end schemes.

Safety

Mutual Fund industry is part of a well-regulated investment environment where the interests
of the investors are protected by the regulator. All funds are registered with SEBI and
complete transparency is forced.

1.10 DISADVANTAGES OF MUTUAL FUNS

The mutual fund not just advantage of investor but also has disadvantages for the funds. The
fund manager not always made profits but might creates loss for not properly managed. The
fund have own strategy for investment to hold, to sell, to purchase unit at particular time
period.

Costs Control Not in the Hands of an Investor

Investor has to pay investment management fees and fund distribution costs as a percentage
of the value of his investments (as long as he holds the units), irrespective of the
performance of the fund

No Customized Portfolios
The portfolio of securities in which a fund invests is a decision taken by the fund manager.
Investors have no right to interfere in the decision making process of a fund manager, which
some investors find as a constraint in achieving their financial objectives.

11
Difficulty in Selecting a Suitable Fund Scheme
Many investors find it difficult to select one option from the plethora of funds/schemes/plans
available. For this, they may have to take advice from financial planners in order to invest in
the right fund to achieve their objectives.

1.11 MUTUAL FUND & CAPITAL MARKET

Indian institute of capital market (IICM) aims is to educate and develop professionals for the
securities industry in India and other developing countries, other objectives like to function
on a centre for creating investors awareness through research & turning and to provide
specialized consultancy related to the securities industry.

Capital market play vital role for the growth of Mutual fund in India, capital market divided
into the two parts one is the primary market and another is secondary market, primary
market concern with issue management, as per the mutual fund concern the primary called
as the NFO New Fund Offer, all the AMC (Assets Management Company) are issuing all
the funds all the way through the NFO, Every NFO came with particularly investment
objectives, style of investment and allocation of the funds all that thing depend on the fund
manager style of investment. The other portion of the capital market is secondary market, as
we have a discussion with reference with mutual fund secondary market means when the
market bull stage the investors sole the units. Opposite when the bear stage the investor buy
or some of the investor time wait for sale.

1.12 Role of SEBI

A index fund scheme’ means a mutual fund scheme that invests in securities in the same
proportion as an index of securities;” A mutual fund may lend and borrow securities in
accordance with the framework relating to short selling and securities lending and
borrowing specified by the Board.”A mutual fund may enter into short selling transactions
on a recognized stock exchange, subject to the framework relating to short selling and
securities lending and borrowing specified by the Board.” “Provided that in case of an index

12
fund scheme, the investment and advisory fees shall not exceed three fourths of one percent
(0.75%) of the weekly average net assets.“

“Provided further that in case of an index fund scheme, the total expenses of the scheme
including the investment and advisory fees shall not exceed one and one half percent (1.5%)
of the weekly average net assets.” Every mutual fund shall buy and sell securities on the
basis of deliveries and shall in all cases of purchases, take delivery of relevant securities and
in all cases of sale, deliver the securities: Provided that a mutual fund may engage in short
selling of securities in accordance with the framework relating to short selling and securities
lending and borrowing specified by the Board: Provided further that a mutual fund may
enter into derivatives transactions in a recognized stock exchange, subject to the framework
specified by the Board.”

1.13 Role of AMFI

(Association Mutual Fund in India)

The Association of Mutual Funds in India (AMFI) is dedicated to developing the
Indian Mutual Fund Industry on professional, healthy and ethical lines and to
enhance and maintain standards in all areas with a view to protecting and promoting
the interests of mutual funds and their unit holders.

AMFI working group on Best Practices for sales and marketing of Mutual Funds under the
Chairmanship of Shri B. G. Daga, Former Executive Director of Unit Trust of India with
Shri Vivek Reddy of Pioneer ITI, Shri Alok Vajpeyi of DSP Merrill Lynch, Shri Nikhil
Khattau of Sun F & C and Shri Chandrashekhar Sathe, Formerly of Kotak Mahindra Mutual
Fund has suggested formulation of guidelines and code of conduct for intermediaries and
this work has been ably done by a sub-group consisting of Shri B. G. Daga and Shri Vivek
Reddy.

13
Following are Assets Management Companies under India

Name of the Asset Management Company Website

AEGON Asset Management Company Pvt. Ltd. N/A

AIG Global Asset Management Company (India) Pvt. Ltd. www.aiginvestments.co.in

Axis Asset Management Company Ltd. www.axismf.com

Baroda Pioneer Asset Management Company Limited www.barodapioneer.in
Benchmark Asset Management Company Pvt. Ltd. www.benchmarkfunds.com
Bharti AXA Investment Managers Private Limited www.bhartiaxa-im.com
Birla Sun Life Asset Management Company Limited www.birlasunlife.com
Canara Robeco Asset Management Company Limited www.canararobeco.com
DBS Cholamandalam Asset Management Ltd. www.dbscholamutualfund.com
Deutsche Asset Management (India) Pvt. Ltd. www.dws-india.com
DSP Black Rock Investment Managers Private Limited www.dspblackrock.com
Edelweiss Asset Management Limited www.edelweissmf.com
Escorts Asset Management Limited www.escortsmutual.com
FIL Fund Management Private Limited fidelity.co.in
Fortis Investment Management (India) Pvt. Ltd. www.fortisinvestments.in
Franklin Templeton Asset Management (India) Private
www.franklintempletonindia.com
Limited
Goldman Sachs Asset Management (India) Private
www.gsam.in
Limited
HDFC Asset Management Company Limited www.hdfcfund.com
HSBC Asset Management (India) Private Ltd. www.assetmanagement.hsbc.com/in
ICICI Prudential Asset Mgmt.Company Limited www.icicipruamc.com
IDFC Asset Management Company Private Limited www.idfcmf.com
ING Investment Management (India) Pvt. Ltd. www.ingim.co.in
JM Financial Asset Management Private Limited www.JMFinancialmf.com
JPMorgan Asset Management India Pvt. Ltd. www.jpmorganmf.com
Kotak Mahindra Asset Management Company
www.kotakmutual.com
Limited(KMAMCL)
LIC Mutual Fund Asset Management Company Limited www.licmutual.com
Mirae Asset Global Investments (India) Pvt. Ltd. www.miraeassetmf.co.in
Morgan Stanley Investment Management Pvt. Ltd. www.morganstanley.com/indiamf
Peerless Funds Management Co. Ltd. www.peerlessmf.co.in
Principal Pnb Asset Management Co. Pvt. Ltd. www.principalindia.com
Quantum Asset Management Co. Private Ltd. www.QuantumAMC.com

14
Reliance Capital Asset Management Ltd. www.reliancemutual.com
Religare Asset Management Company Limited www.religaremf.com
Sahara Asset Management Company Private Limited www.saharamutual.com
SBI Funds Management Private Limited www.sbimf.com
Shinsei Asset Management (India) Pvt. Ltd. www.shinseifunds.com
Sundaram BNP Paribas Asset Management Company
www.sundarambnpparibas.in
Limited
Tata Asset Management Limited www.tatamutualfund.com
Taurus Asset Management Company Limited www.taurusmutualfund.com
UTI Asset Management Company Ltd www.utimf.com

1.14 Tax Planning and Mutual Fund

Investors in India opt for the tax-saving mutual fund schemes for the simple reason that it
helps them to save money. The tax-saving mutual funds or the equity-linked savings
schemes (ELSS) receive certain tax exemptions under Section 88 of the Income Tax Act.
That is one of the reasons why the investors in India add the tax-saving mutual fund
schemes to their portfolio. The tax-saving mutual fund schemes are one of the important
types of mutual funds in India that investors can option for. There are several companies in
India that offer – tax – saving mutual fund schemes in the country.

1.15 NISM (National Institute of Securities Market)

NISM has the sub – part of national stock exchange. National stock exchange established
one branch who handling the activities which have been related with the capital market and
security market. Here the national institute market has six constitutes of securities markets

1) Investors
2) Regulation
3) Intermediaries
4) Opinion Market
5) Knowledge Generate
6) Issuer

15
NISM organized six types of school which are as under

1. School of certificate of Intermediaries (SCI)

2. School of Regulatory Studies and Supervision (SRSS)

3. School of Corporate Governance (SCG)

4. School of Investors Education & Financial Literacy (SIEFL)

5. School of Securities Education (SSE)

6. School of Securities Information and Research (SSIR)

1.16 NICM (National Institute of Capital Market)

National Institution of Capital Market also sub division of National Stock Exchange, NSE
have seven Subsidiaries, which included necessary for growth of capital market. Institute
provided education which related with capital market transaction. Seminar and workshop
related with transparency for trading activities develop technology on trading and doing
market research.

1.17 SEBI Guideline of Mutual Fund

SEBI Regulation Act 1996

Establishment of a Mutual Fund:

In India mutual fund play the role as investment with trust, some of the formalities laid
down by the SEBI to be establishment for setting up a mutual fund. As the part of trustee
sponsor the mutual fund, under the Indian Trust Act, 1882, under the trustee company are
represented by a board of directors. Board of Directors is appoints the AMC and custodians.
The board of trustees made relevant agreement with AMC and custodian. The launch of
each scheme involves inviting the public to invest in it, through an offer documents.
16
Depending on the particular objective of scheme, it may open for further sale and repurchase
of units, again in accordance with the particular of the scheme, the scheme may be wound
up after the particular time period.

1. The sponsor has to register the mutual fund with SEBI

2. To be eligible to be a sponsor, the body corporate should have a sound track record and a
general reputation of fairness and integrity in all his business transactions.

Means of Sound Track Records

 The body corporate being in the financial services business for at least five years

 Having a positive net worth in the five years immediately preceding the
application of registration.

 Net worth in the immediately preceding year more than its contribution to the
capital of the AMC.

 Earning a profit in the three out of the five preceding years, including the fifth
year.

3. The sponsor should hold at least 40% of the net worth of the AMC.

4. A party which is not eligible to be a sponsor shall not hold 40% or more of the net worth
of the AMC.

5. The sponsor has to appoint the trustees, the AMC and the custodian.

6. The trust deed and the appointment of the trustees have to be approved by SEBI.

7. An AMC or its officers or employees can not be appointed as trustees of the mutual fund.

17
8. At least two thirds of the business should be independent of the sponsor.

9. Only an independent trustee can be appointed as a trustee of more than one mutual fund,
such appointment can be made only with the prior approval of the fund of which the
person is already acting as a trustees.

LAUNCHING OF A SCHEMES

Before its launch, a scheme has to be approved by the trustees and a copy of its offer
documents filed with the SEBI.

1. Every application form for units of a scheme is to be accompanies by a memorandum

containing key information about the scheme.

2. The offer document needs to contain adequate information to enable the investors to
make informed investments decisions.
3. All advertisements for a scheme have to be submitted to SEBI within seven days from
the issue date.

4. The advertisements for a scheme have to disclose its investment objective.

5. The offer documents and advertisements should not contain any misleading information
or any incorrect statement or opinion.

6. The initial offering period for any mutual fund schemes should not exceed 45 days, the
only exception being the equity linked saving schemes.

7. No advertisements can contain information whose accuracy is dependent on

assumption.

18
8. An advertisement cannot carry a comparison between two schemes unless the schemes
are comparable and all the relevant information about the schemes is given.

9. All advertisements need to carry the name of the sponsor, the trustees, the AMC of the
fund.

10. All advertisements need to disclose the risk factors.

11. All advertisements shall clarify that investment in mutual funds is subject to market risk
and the achievement of the fund’s objectives can not be assured.

12. When a scheme is open for subscription, no advertisement can be issued stating that the
scheme has been subscribed or over subscription.

1.18 Recent Trend of Mutual Fund

India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts
of an Asset base that is much higher than its bank deposits. In India, mutual fund assets are
not even 10% of the bank deposits, but this trend is beginning to change. Recent figures
indicate that in the first quarter of the current fiscal year mutual fund assets went up by
115% whereas bank deposits rose by only 17%. (Source: Thinktank, the Financial Express
September, 99) This is forcing a large number of banks to adopt the concept of narrow
banking wherein the deposits are kept in Gilts and some other assets which improves
liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not
close down completely. Their role as intermediaries cannot be ignored. It is just that Mutual
Funds are going to change the way banks do business in the future.

19
Comparison of investment in Banks V/S Mutual Funds

PARTICULAR BANKS MUTUAL FUNDS

Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation Minimum balance between 10th. Everyday
& 30th. Of every month
Guarantee Maximum Rs.1 lakh on deposits None

1.19 Conclusion
The Indian economy is second largest economy in the world, but on 2008 and first quart of
2009 was international financial liquidity and global fund crisis. USA economy affect by
sub- prime crisis that creates problem of international financial market, commodity market
and foreign exchange market. But Indian economy less affects due to fast moving for
consumer durable, growth of capital expenditure projects and service sector, Indian
government easily attract foreign investors. Foreign Institutional Investors invest on Indian
capital market, it is continuous growing.

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Reference:

1) Chandra Prasanna, “The Investment Game” Tata Mc- Graw Hill Publishing, New Delhi.

2) Dave, S. A. ,”Mutual Funds: Growth and Development” The Journal of the Indian
Institute of Bankers, Jan – March, 1992.

3) Desai Vasant , “Indian Financial System” Himalaya Publishing House, New Delhi.

4) Fisher Donald E. and Jordan Ronald J., “Security Analysis and Portfolio Management”
Prntice Hall of India, Pvt. Ltd. Sixth Edition, New Delhi.

5) Pathak Bharati V., “Indian Financial System” Pearson Education Publishing, New Delhi.

6) Ramola K.S., “Mutual Fund and the Indian Capital Market’ Yojana, Vol. 36, No.11, June
30, 1992.

7) Vyas ,B.A.”Mutual Funds- Boon to the Common Investors” Fortune India, July 16, 1990.

8) www.amfiindia.com
9) www.cic.com
10) www.indiainfoline.com
11) www.mutualfundindia.com
12) www.rbi.com
13) www.sebi.com
14) www.moneycontrol.com
15) www.prudentialchannel.com
16) www.icraindia.com
17) www.camsonlime.com

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