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We would significantly like to thank Mr. Bhavesh Patel, Deputy Manager-

Corporate Sales, Reliance Capital Asset Management, for guiding us throughout
this process and assisting us with necessary information and material whenever

We would also like to acknowledge Mr. Neeraj Amarnani, placement coordinator,

NRIBM, for his thoughtful suggestions on the process of our project formation.


The objective of carrying out this proposal is concerned with the

Indian financial market and the role of mutual fund in these financial market. It
also includes the enhancement of mutual fund investing, investors &
comparision with mutual fund in developed countries. It would also cover
growth & performance of mutual fund which will include the structure,
types, growth & operational highlights of mutual fund & its schemes. Also
the invest management of mutual fund & investor protection will be
studied with the help of mutual fund regulation.


By identifying & examining the recent growth & performance of

mutual fund in India & also examining the constraints in their development
this study would serve the purpose of identifying the importance of
financial intermediaries & asset allocators. By addressing the major
structural, regulatory & operational issues pertaining to Indian mutual fund
it could help in identifying changing perceptions of investors & emerging
market structure. Another important objective enables us to know the
growing globalization of Indian financial markets & their integration with
world market with the help of valuable data relating to mutual funds in
India & in an foreign countries. Overall, the objective of this research
focuses on strategic desicions for mutual fund with regard to investment
to enable them cope with emerging challenges in the fast changing
savings & capital market in India.


A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is invested by the fund
manager in different types of securities depending upon the objective of the
scheme. These could range from shares to debentures to money market
instruments. The 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 (pro rata). Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed portfolio at a relatively low cost. Anybody with
an inventible surplus of as little as a few thousand rupees can invest in Mutual
Funds. Each Mutual Fund scheme has a defined investment objective and

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 faraway places. A typical individual is unlikely to have the
knowledge, skills, inclination and time to keep track of events, understand their
implications and act speedily. An individual also finds it difficult to keep track of
ownership of his assets, investments, brokerage dues and bank transactions etc.

Mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as
disclosed in offer document.

Investments in securities are spread across a wide cross-section of industries

and sectors and thus the risk is reduced. Diversification reduces the risk because
all stocks may not move in the same direction in the same proportion at the same
time. Mutual fund issues units to the investors in accordance with quantum of
money invested by them. Investors of mutual funds are known as unit holders.

The investors in proportion to their investments share the profits or losses. The
mutual funds normally come out with a number of schemes with different
investment objectives that are launched from time to time. A mutual fund is
required to be registered with Securities and Exchange Board of India (SEBI),
which regulates securities markets before it can collect funds from the public.

A mutual fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full
time basis. The large pool of money collected in the fund allows it to hire such
staff at a very low cost to each investor. In effect, the mutual fund vehicle exploits
economies of scale in all three areas - research, investments and transaction
processing. While the concept of individuals coming together to invest money
collectively is not new, the mutual fund in its present form is a 20th century
phenomenon. In fact, mutual funds gained popularity only after the Second World
War. Globally, there are thousands of firms offering tens of thousands of mutual
funds with different investment objectives. Today, mutual funds collectively
manage almost as much as or more money as compared to banks.

A draft offer document is to be prepared at the time of launching the fund.

Typically, it pre specifies the investment objectives of the fund, the risk
associated, the costs involved in the process and the broad rules for entry into
and exit from the fund and other areas of operation. In India, as in most
countries, these sponsors need approval from a regulator, SEBI (Securities
exchange Board of India) in our case. SEBI looks at track records of the sponsor
and its financial strength in granting approval to the fund for commencing

A sponsor then hires an asset management company to invest the funds

according to the investment objective. It also hires another entity to be the
custodian of the assets of the fund and perhaps a third one to handle registry
work for the unit holders (subscribers) of the fund.

In the Indian context, the sponsors promote the Asset Management Company
also, in which it holds a majority stake. In many cases a sponsor can hold a
100% stake in the Asset Management Company (AMC). E.g. Birla Global
Finance is the sponsor of the Birla Sun Life Asset Management Company Ltd.,
which has floated different mutual funds schemes and also acts as an asset
manager for the funds collected under the schemes.

The following are some of the more popular definitions of a Mutual Fund
A Mutual Fund are an investment tool that allows small investors access to a

well-diversified portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Units are issued and can be redeemed
as needed. The fund's Net Asset Value (NAV) is determined each day.

Mutual Funds are financial intermediaries. They are companies set up to receive
your money, and then having received it, make investments with the money Via
an AMC. It is an ideal tool for people who want to invest but don't want to be
bothered with deciphering the numbers and deciding whether the stock is a good
buy or not. A mutual fund manager proceeds to buy a number of stocks from
various markets and industries. Depending on the amount you invest, you own
part of the overall fund.
The beauty of mutual funds is that anyone with an investible surplus of a few
hundred rupees can invest and reap returns as high as those provided by the

Equity markets or have a steady and comparatively secure investment as offered

by debt instruments.

Investment Options: Mutual Funds stand out

Savings form an important part of the economy of any nation. With the savings
invested in various options available to the people, the money acts as the driver
for growth of the country. Indian financial scene too presents a plethora of
avenues to the investors. Though certainly not the best or deepest of markets in
the world, it has reasonable options for an ordinary man to invest his savings. Let
us examine several of them:

Considered as the safest of all options, banks have been the roots of the financial
systems in India. Promoted as the means to social development, banks in India
have indeed played an important role in the rural upliftment. For an ordinary
person though, they have acted as the safest investment avenue wherein a
person deposits money and earns interest on it. The two main modes of
investment in banks, savings accounts and fixed deposits have been effectively

used by one and all. However, today the interest rate structure in the country is
headed southwards, keeping in line with global trends. With the banks offering
little above 9 percent in their fixed deposits for one year, the yields have come
down substantially in recent times. Add to this, the inflationary pressures in
economy and you have a position where the savings are not earning. The
inflation is creeping up, to almost 8 percent at times, and this means that the
value of money saved goes down instead of going up. This effectively mars any
chance of gaining from the investments in banks.

Post Office schemes

Just like banks, post offices in India have a wide network. Spread across the
nation, they offer financial assistance as well as serving the basic requirements
of communication. Among all saving options, Post office schemes have been
offering the highest rates. Added to it is the fact that the investments are safe
with the department being a Government of India entity. So the two basic and
most sought for features, those of return safety and quantum of returns were
being handsomely taken care of. Though certainly not the most efficient systems
in terms of service standards and liquidity, these have still managed to attract the
attention of small, retail investors. However, with the government announcing its
intention of reducing the interest rates in small savings options, this avenue is
expected to lose some of the investors. Public Provident Funds act as options to
save for the post retirement period for most people and have been considered
good option largely due to the fact that returns were higher than most other
options and also helped people gain from tax benefits under various sections.
This option too is likely to lose some of its sheen on account of reduction in the
rates offered.

Company Fixed Deposits

Another oft-used route to invest has been the fixed deposit schemes floated by
companies. Companies have used fixed deposit schemes as a means of
mobilizing funds for their operations and have paid interest on them. The safer a
company is rated, the lesser the return offered has been the thumb rule.
However, there are several potential roadblocks in these. First of all, the danger
of financial position of the company not being understood by the investor lurks.
The investors rely on intermediaries who more often than not, don’t reveal the
entire truth. Secondly, liquidity is a major problem with the amount being received
months after the due dates. Premature redemption is generally not entertained
without cuts in the returns offered and though they present a reasonable option to
counter interest rate risk (especially when the economy is headed for a low
interest regime), the safety of principal amount has been found lacking. Many
cases like the Kuber Group and DCM Group fiascoes have resulted in low
confidence in this option.

The options discussed above are essentially for the risk-averse, people who think
of safety and then quantum of return, in that order. For the brave, it is dabbling in
the stock market. Stock markets provide an option to invest in a high risk, high
return game. While the potential return is much more than 10-11 percent any of
the options discussed above can generally generate, the risk is undoubtedly of
the highest order. But then, the general principle of encountering greater risks
and uncertainty when one seeks higher returns holds true. However, as enticing
as it might appear, people generally are clueless as to how the stock market
functions and in the process can endanger the hard-earned money.

For those who are not adept at understanding the stock market, the task of
generating superior returns at similar levels of risk is arduous to say the least.
This is where Mutual Funds come into picture.

Mutual Funds are essentially investment vehicles where people with similar
investment objective come together to pool their money and then invest
accordingly. Each unit of any scheme represents the proportion of pool owned by
the unit holder (investor). Appreciation or reduction in value of investments is
reflected in net asset value (NAV) of the concerned scheme, which is declared by
the fund from time to time. Respective Asset Management Companies (AMC)
manages mutual fund schemes. Different business groups/ financial institutions/
banks have sponsored these AMCs, either alone or in collaboration with reputed
international firms. Several international funds like Alliance and Templeton are
also operating independently in India. Many more international Mutual Fund
giants are expected to come into Indian markets in the near future. The benefits
on offer are many with good post-tax returns and reasonable safety being the
hallmark that we normally associate with them. Some of the other major benefits
of investing in them are:

Number of available options

Mutual funds invest according to the underlying investment objective as specified
at the time of launching a scheme. So, we have equity funds, debt funds, gilt
funds and many others that cater to the different needs of the investor. The
availability of these options makes them a good option. While equity funds can be
as risky as the stock markets themselves, debt funds offer the kind of security
that is aimed for at the time of making investments. Money market funds offer the
liquidity that is desired by big investors who wish to park surplus funds for very
short-term periods. Balance Funds acter to the investors having an appetite for
risk greater than the debt funds but less than the equity funds. The only pertinent
factor here is that the fund has to be selected keeping the risk profile of the
investor in mind because the products listed above have different risks

associated with them. So, while equity funds are a good bet for a long term, they
may not find favour with corporates or High Net worth Individuals (HNIs) who
have short-term needs.

Investments are spread across a wide cross-section of industries and sectors
and so the risk is reduced. Diversification reduces the risk because all stocks
don’t move in the same direction at the same time. One can achieve this
diversification through a Mutual Fund with far less money than one can on his

Professional Management

Mutual Funds employ the services of skilled professionals who have years of
experience to back them up. They use intensive research techniques to analyze
each investment option for the potential of returns along with their risk levels to
come up with the figures for performance that determine the suitability of any
potential investment.

Potential of Returns
Returns in the mutual funds are generally better than any other option in any
other avenue over a reasonable period of time. People can pick their investment
horizon and stay put in the chosen fund for the duration. Equity funds can
outperform most other investments over long periods by placing long-term calls
on fundamentally good stocks. The debt funds too will outperform other options
such as banks. Though they are affected by the interest rate risk in general, the
returns generated are more as they pick securities with different duration that
have different yields and so are able to increase the overall returns from the

Fixed deposits with companies or in banks are usually not withdrawn premature
because there is a penal clause attached to it. The investors can withdraw or
redeem money at the Net Asset Value related prices in the open-end schemes.
In closed-end schemes, the units can be transacted at the prevailing market price
on a stock exchange. Mutual funds also provide the facility of direct repurchase
at NAV related prices. The market prices of these schemes are dependent on the
NAVs of funds and may trade at more than NAV (known as Premium) or less
than NAV (known as Discount) depending on the expected future trend of NAV
which in turn is linked to general market conditions. Bullish market may result in
schemes trading at Premium while in bearish markets the funds usually trade at
Discount. This means that the money can be withdrawn anytime, without much
reduction in yield.

Besides these important features, mutual funds also offer several other key traits.
Important among them are:

Well Regulated
Unlike the company fixed deposits, where there is little control with the
investment being considered as unsecured debt from the legal point of view, the
Mutual Fund industry is very well regulated. All investments have to be
accounted for, decisions judiciously taken. SEBI acts as a true watchdog in this
case and can impose penalties on the AMCs at fault. The regulations, designed
to protect the investors’ interests are also implemented effectively.

Being under a regulatory framework, mutual funds have to disclose their
holdings, investment pattern and all the information that can be considered as
material, before all investors. This means that the investment strategy, outlooks
of the market and scheme related details are disclosed with reasonable
frequency to ensure that transparency exists in the system. This is unlike any
other investment option in India where the investor knows nothing as nothing is

Flexible, Affordable and a Low Cost affair
Mutual Funds offer a relatively less expensive way to invest when compared to
other avenues such as capital market operations. The fee in terms of brokerages,
custodial fees and other management fees are substantially lower than other
options and are directly linked to the performance of the scheme. Investment in
mutual funds also offers a lot of flexibility with features such as regular
investment plans, regular withdrawal plans and dividend reinvestment plans
enabling systematic investment or withdrawal of funds. Even the investors, who
could otherwise not enter stock markets with low investible funds, can benefit
from a portfolio comprising of high-priced stocks because they are purchased
from pooled funds.

As has been discussed, mutual funds offer several benefits that are unmatched
by other investment options. Post liberalization, the industry has been growing at
a rapid pace and has crossed Rs. 100000 crore size in terms of its assets under
management. However, due to the low key investor awareness, the inflow under
the industry is yet to overtake the inflows in banks. Rising inflation, falling interest
rates and a volatile equity market make a deadly cocktail for the investor for
whom mutual funds offer a route out of the impasse. The investments in mutual
funds are not without risks because the same forces such as regulatory
frameworks, government policies, interest rate structures, performance of
companies etc. that rattle the equity and debt markets, act on mutual funds too.
But it is the skill of the managing risks that investment managers seek to
implement in order to strive and generate superior returns than otherwise
possible that makes them a better option than many others.

Different investment avenues are available to investors. Mutual funds also offer
good investment opportunities to the investors. Like all investments, they also
carry certain risks. The investors should compare the risks and expected yields
after adjustment of tax on various instruments while taking investment decisions.
The investors may seek advice from experts and consultants including agents
and distributors of mutual funds schemes while making investment decisions.

With an objective to make the investors aware of functioning of mutual funds, an

attempt has been made to provide information in question-answer format that
may help the investors in taking investment decisions

Reliance Mutual Fund

Reliance Capital Asset Management Ltd. is a part of the Reliance Group - India's
largest private sector company founded by Dhirubhai H. Ambani (1932-2002) and
has total revenues of over Rs 99,000 crore (US$ 22.6 billion), with activities
spanning oil and gas, refining and marketing, petrochemicals, textiles, financial
services and insurance, power, telecom and infocom initiatives. The Group
contributes nearly 10% of the country’s indirect tax revenues and over 6% of
India’s exports.

Reliance Mutual Fund was established as a Trust in 1995 with Reliance Capital
Asset Management Ltd as the Investment Manager. With total Assets Under
Management of Rs.10,806 crores (as on 31st. May '04) we're amongst the
fastest growing mutual fund companies in India. Our vision is to be India's largest
and most trusted wealth creator.


Mutual fund schemes may be classified on the basis of its structure and its
investment objective.

By Structure:

Open-ended Funds
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units
at Net Asset Value ("NAV") related prices. The key feature of open-end schemes
is liquidity.

Closed-ended Funds
A closed-end fund has a stipulated maturity period which generally ranging from
3 to 15 years. The fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial public issue and
thereafter they can buy or sell the units of the scheme on the stock exchanges
where they are listed. In order to provide an exit route to the investors, some
close-ended funds give an option of selling back the units to the Mutual Fund
through periodic repurchase at NAV related prices. SEBI Regulations stipulate
that at least one of the two exit routes is provided to the investor.

Interval Funds
Interval funds combine the features of open-ended and close-ended schemes.
They are open for sale or redemption during pre-determined intervals at NAV
related prices.

By Investment Objective:

Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a majority of their corpus in equities. It
has been proven that returns from stocks, have outperformed most other kind of
investments held over the long term. Growth schemes are ideal for investors
having a long-term outlook seeking growth over a period of time.

Income Funds
The aim of income funds is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds,
corporate debentures and Government securities. Income Funds are ideal for
capital stability and regular income.

Balanced Funds

The aim of balanced funds is to provide both growth and regular income. Such
schemes periodically distribute a part of their earning and invest both in equities
and fixed income securities in the proportion indicated in their offer documents. In
a rising stock market, the NAV of these schemes may not normally keep pace, or
fall equally when the market falls. These are ideal for investors looking for a
combination of income and moderate growth.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer short-
term instruments such as treasury bills, certificates of deposit, commercial paper
and inter-bank call money. Returns on these schemes may fluctuate depending
upon the interest rates prevailing in the market. These are ideal for Corporate
and individual investors as a means to park their surplus funds for short periods.

Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each
time you buy or sell units in the fund, a commission will be payable. Typically
entry and exit loads range from 1% to 2%. It could be worth paying the load, if the
fund has a good performance history.

No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That
is, no commission is payable on purchase or sale of units in the fund. The
advantage of a no load fund is that the entire corpus is put to work.


Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the Government offers tax incentives for investment in
specified avenues. Investments made in Equity Linked Savings Schemes (ELSS)
and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act,

1961. The Act also provides opportunities to investors to save capital gains u/s
54EA and 54EB by investing in Mutual Funds.

Special Schemes :

Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like
InfoTech, FMCG, and Pharmaceuticals etc.

• Index Schemes
Index Funds attempt to replicate the performance of a particular index such as
the BSE Sensex or the NSE 50

• Sectoral Schemes
Sectoral Funds are those, which invest exclusively in a specified industry or a
group of industries or various segments such as 'A' Group shares or initial public

Types of schemes: - Reliance Mutual Fund

Debt Scheme:-

• Reliance Monthly Income Plan

• Reliance Income Fund

• Reliance Medium Term Fund

• Reliance Liquid Fund

• Reliance Short Term Fund

• Reliance Guilt Securities Fund

• Reliance Fixed Term Scheme

Equity Scheme:-

• Reliance Growth Fund

• Reliance Vision Fund

Sector Specific Schemes :-

• Reliance Banking Fund

• Reliance Diversified Power Sector Fund

• Reliance Pharma Fund

What are Mutual Funds?

Considered to be one of the better investment options as reflected by the high

returns that it generates, Mutual Funds are the best schemes for investors to
place their savings in. Depending upon the scheme, these savings are then
invested by the Mutual Fund company in numerous securities such as shares,
stocks, bonds, debentures and other money market instruments.

Role of people :-

Reliance play a role that directly impinges upon the welfare and
competitiveness of a large number of households and businesses in India.
They have made the pursuit of productivity the most important corporate goal.

Their pursuit of gains in productivity is predicated on people working in and

for their organisations because all measures of productivity reflect the
ability of human resources to put to use financial capital, technology and
technology-embodied assets in order to serve customers.

Financial engineering heightens a company's need to serve its customers and
hastens its extinction if it fails to serve its customers. A company's human
resources lose the most when it fails; they gain when it succeeds.

This explains why financial structuring spurs people to produce an impact on

economic performance. From such a perspective, it is important to determine
if the recent changes in monetary policy prod companies and government
towards greater total factor productivity.

Structure of Reliance Mutual Fund:-

Reliance Vision Fund `Dividend Plan (RVF-DP) an Open End Equity -Growth
scheme of Reliance Mutual Fund (RMF) has declared yet another dividend of
30 per cent (i.e. a dividend of Rs. 3.00/- per unit on a face value of Rs.
10/- per unit), in the dividend plan option.

Reliance Vision Fund has the highest ranking from CRISIL Limited. It has been
ranked CRISIL CPR 1. CRISIL CPR 1 indicates very good performance in the
category (Top 10 per cent of the Universe) while CRISIL CPR 2 indicates good
performance in the category (Next Top 20 per cent), January 2002-December

Reliance Vision Fund has a progressive dividend declaration record as follows:

24-Feb-03(30.00 per cent), 25-Jun-03 (25.00 per cent), 23-Sep-03 (25.00 per
cent), 03-Dec-03 (45.00 per cent), 05-Feb-04 (100.00 per cent) and 04-Jun-04
(30.00 per cent).

Reliance Mutual Fund on Monday said it has collected over Rs 147 crore thorugh
initial public offer of its Pharma Fund, an open-ended pharma sector scheme.

The fund would be available at Net Asset Value-based prices from Tuesday, the
company said in a release.
The fund received over 24,000 applications which has led the RMF to cross the
investor base of 2.25 lakh.

It can invest up to 100 per cent in equity and equity-related securities in the pharma
sector and shift its focus to fixed income securities of the sector and money market
instruments up to 100 per cent in extreme cases of bearish equity market.
The Fund managed by Reliance Capital Asset Management Ltd (RCAM) offers both
dividend and growth plans.
The dividend plan offers dividend payout and reinvestment options while growth plan
offers a bonus and growth option.

Phases of development:-

Reliance Energy (REL), formerly BSES, has invested Rs 525 crore in various mutual
funds (MFs) operated by the group during ’03-04, against Rs 59 crore in the previous
During the past fiscal, the Mumbai-based power utility cut exposure in the equity
market by selling all the equity shares of Tata Power, Larsen and Toubro (L&T), Digital
Globalsoft, ITC, GE Shipping and Surat Electricity Company (SEC) in ’02-03 that it
was holding, while retaining Rs 1.5-crore worth of Hindustan Lever (HLL) shares. The
MF schemes that have attracted major investments from REL include the Reliance
Short-Term Fund Growth Plan (Rs 403.5 crore), Reliance Liquid Fund Treasury Plan -
Institutional (Rs 120.2 crore) and Reliance Liquid Fund Treasury Plan - Growth Option
(Rs 1.3 crore). During the previous year, REL invested Rs 59.3 crore in group mutual
fund schemes and cut its investments in other MFs including the Tata Gilt Securities
Fund, LICMF Bond Fund and Prudential ICICI Gilt Fund.

Net Asset Value (NAV)

The net asset value of the fund is the cumulative market value of the assets fund
net of its liabilities. In other words, if the fund is dissolved or liquidated, by selling
off all the assets in the fund, this is the amount that the shareholders would
collectively own. This gives rise to the concept of net asset value per unit, which
is the value, represented by the ownership of one unit in the fund. It is calculated
simply by dividing the net asset value of the fund by the number of units.
However, most people refer loosely to the NAV per unit as NAV, ignoring the "per
unit". We also abide by the same convention.

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by
the fund. Once it is calculated, the NAV is simply the net value of assets divided
by the number of units outstanding. The detailed methodology for the calculation
of the asset value is given below.

Net Asset Value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any
+ Dividends/interest accrued
Amount due on unpaid assets
Expenses accrued but not paid
Details on the above items

For liquid shares/debentures, valuation is done on the basis of the last or closing
market price on the principal exchange where the security is traded

For illiquid and unlisted and/or thinly traded shares/debentures, the value has to
be estimated. For shares, this could be the book value per share or an estimated
market price if suitable benchmarks are available. For debentures and bonds,
value is estimated on the basis of yields of comparable liquid securities after
adjusting for illiquidity. The value of fixed interest bearing securities moves in a

direction opposite to interest rate changes Valuation of debentures and bonds is
a big problem since most of them are unlisted and thinly traded. This gives
considerable leeway to the AMCs on valuation and some of the AMCs are
believed to take advantage of this and adopt flexible valuation policies depending
on the situation.

Interest is payable on debentures/bonds on a periodic basis say every 6 months.

But, with every passing day, interest is said to be accrued, at the daily interest
rate, which is calculated by dividing the periodic interest payment with the
number of days in each period. Thus, accrued interest on a particular day is
equal to the daily interest rate multiplied by the number of days since the last
interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and
become due on the record date. There is a gap between the dates on which it
becomes due and the actual payment date. In the intermediate period, it is
deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a

daily basis.

Net Asset Value (NAV) is the actual value of one unit of a given scheme on any
given business day. The NAV reflects the liquidation value of the fund's
investments on that particular day after accounting for all expenses. It is
calculated by deducting all liabilities (except unit capital) of the fund from the
realisable value of all assets and dividing it by number of units outstanding.

Benefits of Investing In Mutual Funds

Professional Management
Mutual Funds provide the services of experienced and skilled professionals,
backed by a dedicated investment research team that analyses the performance
and prospects of companies and selects suitable investments to achieve the
objectives of the scheme.


Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversification reduces the risk because seldom do
all stocks decline at the same time and in the same proportion. You achieve this
diversification through a Mutual Fund with far less money than you can do on
your own.

Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and follow up with brokers
and companies. Mutual Funds save your time and make investing easy and

Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide a higher
return as they invest in a diversified basket of selected securities.

Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly
investing in the capital markets because the benefits of scale in brokerage,
custodial and other fees translate into lower costs for investors.


In open-end schemes, the investor gets the money back promptly at net asset
value related prices from the Mutual Fund. In closed-end schemes, the units can

be sold on a stock exchange at the prevailing market price or the investor can
avail of the facility of direct repurchase at NAV related prices by the Mutual Fund.


One gets regular information on the value of your investment in addition to

disclosure on the specific investments made by your scheme, the proportion
invested in each class of assets and the fund manager's investment strategy and


Through features such as regular investment plans, regular withdrawal plans and
dividend reinvestment plans, you can systematically invest or withdraw funds
according to your needs and convenience.


Investors individually may lack sufficient funds to invest in high-grade stocks. A

mutual fund because of its large corpus allows even a small investor to take the
benefit of its investment strategy.

Choice of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions
of strict regulations designed to protect the interests of investors. The operations
of Mutual Funds are regularly monitored by SEBI.

Basic Mutual Fund FAQs

Mutual Fund Operation Flow Chart

What is the history of Mutual Funds in India and role of SEBI in mutual
funds industry?

Unit Trust of India was the first mutual fund set up in India in the year 1963. In
early 1990s, Government allowed public sector banks and institutions to set up
mutual funds.

In the year 1992, Securities and exchange Board of India (SEBI) Act was passed.
The objectives of SEBI are - to protect the interest of investors in securities and
to promote the development of and to regulate the securities market.

As far as mutual funds are concerned, SEBI formulates policies and regulates the
mutual funds to protect the interest of the investors. SEBI notified regulations for
the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector
entities were allowed to enter the capital market. The regulations were fully
revised in 1996 and have been amended thereafter from time to time. SEBI has
also issued guidelines to the mutual funds from time to time to protect the
interests of investors.

All mutual funds whether promoted by public sector or private sector entities
including those promoted by foreign entities are governed by the same set of
Regulations. There is no distinction in regulatory requirements for these mutual
funds and all are subject to monitoring and inspections by SEBI. The risks
associated with the schemes launched by the mutual funds sponsored by these
entities are of similar type. It may be mentioned here that Unit Trust of India (UTI)
is not registered with SEBI as a mutual fund (as on January 15, 2002).

How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset
Management Company (AMC) and custodian. The trust is established by a
sponsor or more than one sponsor who is like promoter of a company. The
trustees of the mutual fund hold its property for the benefit of the unit holders.
Asset Management Company (AMC) approved by SEBI manages the funds by
making investments in various types of securities. Custodian, who is registered
with SEBI, holds the securities of various schemes of the fund in its custody. The
trustees are vested with the general power of superintendence and direction over
AMC. They monitor the performance and compliance of SEBI Regulations by the
mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e. they should not be
associated with the sponsors. Also, 50% of the directors of AMC must be
independent. All mutual funds are required to be registered with SEBI before they
launch any scheme. However, Unit Trust of India (UTI) is not registered with
SEBI (as on January 15, 2002).

What does a Mutual Fund do with investor's money?

Anybody with an investible surplus of as little as a few hundred rupees can invest
in mutual funds. The investors buy units of a fund that best suit their investment
objectives and future needs. A Mutual Fund invests the pool of money collected
from the investors in a range of securities comprising equities, debt, money
market instruments etc. after charging for the AMC fees. The income earned and
the capital appreciation realized by the scheme, are shared by the investors in
same proportion as the number of units owned by them.

How are mutual funds different from portfolio management schemes?
In case of mutual funds, the investments of different investors are pooled to form
a common investible corpus and gain/loss to all investors during a given period
are same for all investors while in case of portfolio management scheme, the
investments of a particular investor remains identifiable to him. Here the gain or
loss of all the investors will be different from each other.

How is investment in a Mutual Fund Different from a Bank Deposit?

When you deposit money with the bank, the bank promises to pay you a certain
rate of interest for the period you specify. On the date of maturity, the bank is
supposed to return the principal amount and interest to you. Whereas, in a
mutual fund, the money you invest, is in turn invested by the manager, on your
behalf, as per the investment strategy specified for the scheme. The profit, if any,
less expenses of the manager, is reflected in the NAV or distributed as income.
Likewise, loss, if any, with the expenses, is to be borne by you.

What are the types of returns one can expect from a Mutual Fund?
Mutual Funds give returns in two ways - Capital Appreciation or Dividend

• Capital Appreciation: An increase in the value of the units of the fund is

known as capital appreciation. As the value of individual securities in the
fund increases, the fund's unit price increases. An investor can book a
profit by selling the units at prices higher than the price at which he bought
the units.

• Dividend Distribution: The profit earned by the fund is distributed among

unit holders in the form of dividends. Dividend distribution again is of two
types. It can either be re-invested in the fund or can be on paid to the

Two types of Dividend Plans are:

a. Recurring Investment Plan (RIP): An existing unitholder can benefit
under this plan of the Scheme by investing specified amounts for a
minimum period of 12 months, on a monthly or quarterly basis.
b. Regular Withdrawal Plan (RWP): Unitholders may utilize the RWP to
receive regular monthly / quarterly payments in their account.

Why do Mutual Funds come out with different schemes?
A Mutual Fund may not, through just one portfolio, be able to meet the
investment objectives of all their Unit holders. Some Unit holders may want to
invest in risk-bearing securities such as equity and some others may want to
invest in safer securities such as bonds or government securities. Hence, the
Mutual Fund comes out with different schemes, each with a different investment

Does investing in Mutual Funds mean investing in equities only?

Mutual funds can be divided into various types depending on asset classes. They
can also invest in debt instruments such as bonds, debentures, commercial
paper and government securities apart from equity.
Every mutual fund scheme is bound by the investment objectives outlined by it in
its prospectus. The investment objectives specify the class of securities a mutual
fund can invest in. Based on the investment objective, the following types of
mutual funds currently operate in the country.

Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes

To they are inherently risky. However, different funds have different risk profile
that is stated in its objective. Funds that categorize themselves as low risk, invest
generally in debt that is less risky than equity. Anyway, as mutual funds have
access to services of expert fund managers, they are always safer than direct
investment in the stock markets, they also have an ideal balance of debt and
equity to counter risk, and hence mutual funds have more control over the risk.
Anyway, as mutual funds have access to services of expert fund managers, they
are usually safer than direct investment in the stock markets.

What are sector funds?

These are specialty mutual funds that invest in stocks that fall into a certain
sector of the economy. Here the portfolio is dispersed or spread across the
stocks in a particular sector. This type of scheme is ideal for the investor who has
already made up his mind to confine his risk and return to one particular sector.
Thus, a FMCG fund would invest in companies that manufacture fast moving
consumer goods.

What is the difference between Growth Plan and Dividend Reinvestment
Under the Growth Plan, the investor realizes the capital appreciation of his/her
investments while under the Dividend Reinvestment Plan; the dividends declared
are reinvested automatically in the scheme. This gives the investor the benefit of
earning tax-free dividends without giving up on capital appreciation since
currently the dividends are tax free in the hands of the investor.

What is a Portfolio?
A portfolio of a mutual fund scheme is the basket of financial assets held by that
scheme. It comprises of investments in a variety of securities and asset classes.
This diversification helps reduces the overall risk. A mutual fund scheme states
the kind of portfolio it seeks to construct as well as the risks involved under each
asset class.

What is a Load or no-load Fund?

A Load Fund is one that charges a percentage of NAV for entry or exit. That is,
each time one buys or sells units in the fund, a charge will be payable. This
charge is used by the mutual fund for marketing and distribution expenses.
Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is
1%, then the investors who buy would be required to pay Rs.10.10 and those
who offer their units for repurchase to the mutual fund will get only Rs.9.90 per
unit. The investors should take the loads into consideration while making
investment as these affect their yields/returns. However, the investors should
also consider the performance track record and service standards of the mutual
fund that are more important. Efficient funds may give higher returns in spite of

A no-load fund is one that does not charge for entry or exit. It means the
investors can enter the fund/scheme at NAV and no additional charges are
payable on purchase or sale of units.

Can a mutual fund impose fresh load or increase the load beyond the level
mentioned in the offer documents?
Mutual funds cannot increase the load beyond the level mentioned in the offer
document. Any change in the load will be applicable only to prospective
investments and not to the original investments. In case of imposition of fresh
loads or increase in existing loads, the mutual funds are required to amend their
offer documents so that the new investors are aware of loads at the time of

What is a sales or repurchase/redemption price?

The price or NAV a unit holder is charged while investing in an open-ended
scheme is called sales price. It may include sales load, if applicable.
Repurchase or redemption price is the price or NAV at which an open-ended
scheme purchases or redeems its units from the unit holders. It may include exit
load, if applicable.

What is an assured return scheme?

Assured return schemes are those schemes that assure a specific return to the
unit holders irrespective of performance of the scheme.
A scheme cannot promise returns unless such returns are fully guaranteed by the
sponsor or AMC and this is required to be disclosed in the offer document.
Investors should carefully read the offer document whether return is assured for
the entire period of the scheme or only for a certain period. Some schemes
assure returns one year at a time and they review and change it at the beginning
of the next year.

Can a mutual fund change the asset allocation while deploying funds of
Considering the market trends, any prudent fund managers can change the asset
allocation i.e. he can invest higher or lower percentage of the fund in equity or

debt instruments compared to what is disclosed in the offer document. It can be
done on a short term basis on defensive considerations i.e. to protect the NAV.
Hence the fund managers are allowed certain flexibility in altering the asset
allocation considering the interest of the investors. In case the mutual fund wants
to change the asset allocation on a permanent basis, they are required to inform
the unitholders and giving them option to exit the scheme at prevailing NAV
without any load.

How to invest in a scheme of a mutual fund?

Mutual funds normally come out with an advertisement in newspapers publishing
the date of launch of the new schemes. Investors can also contact the agents
and distributors of mutual funds who are spread all over the country for
necessary information and application forms. Forms can be deposited with
mutual funds through the agents and distributors who provide such services.
Nowadays, the post offices and banks also distribute the units of mutual funds.
However, the investors may please note that the mutual funds schemes being
marketed by banks and post offices should not be taken as their own schemes
and they give no assurance of returns. The only role of banks and post offices is
to help in distribution of mutual funds schemes to the investors.

Investors should not be carried away by commission/gifts given by

agents/distributors for investing in a particular scheme. On the other hand they
must consider the track record of the mutual fund and should take objective

Can non-resident Indians (NRIs) invest in mutual funds?

Yes, non-resident Indians can also invest in mutual funds. Necessary details in
this respect are given in the offer documents of the schemes.

How much should one invest in debt or equity oriented schemes?

An investor should take into account his risk taking capacity, age factor, financial
position, etc. As already mentioned, the schemes invest in different type of
securities as disclosed in the offer documents and offer different returns and
risks. Investors may also consult financial experts before taking decisions.
Agents and distributors may also help in this regard.

How to fill up the application form of a mutual fund scheme?
An investor must mention clearly his name, address, number of units applied for
and such other information as required in the application form. He must give his
bank account number so as to avoid any fraudulent encashment of any
cheque/draft issued by the mutual fund at a later date for the purpose of dividend
or repurchase. Any changes in the address, bank account number, etc at a later
date should be informed to the mutual fund immediately.

What should an investor look into an offer document?

An abridged offer document, which contains very useful information, is required
to be given to the prospective investor by the mutual fund. The application form
for subscription to a scheme is an integral part of the offer document. SEBI has
prescribed minimum disclosures in the offer document. An investor, before
investing in a scheme, should carefully read the offer document. Due care must
be given to portions relating to main features of the scheme, risk factors, initial
issue expenses and recurring expenses to be charged to the scheme, entry or
exit loads, sponsor's track record, educational qualification and work experience
of key personnel including fund managers, performance of other schemes
launched by the mutual fund in the past, pending litigations and penalties
imposed, etc.

When will the investor get certificate or statement of account after

investing in a mutual fund?
Mutual funds are required to dispatch certificates or statements of accounts
within six weeks from the date of closure of the initial subscription of the scheme.
In case of close-ended schemes, the investors would get either a demat account
statement or unit certificates as these are traded in the stock exchanges. In case
of open-ended schemes, a statement of account is issued by the mutual fund
within 30 days from the date of closure of initial public offer of the scheme. The
procedure of repurchase is mentioned in the offer document.

How long will it take for transfer of units after purchase from stock markets
in case of close-ended schemes?
According to SEBI Regulations, transfer of units is required to be done within
thirty days from the date of lodgment of certificates with the mutual fund.

As a unitholder, how much time will it take to receive dividends/repurchase

A mutual fund is required to dispatch to the unitholders the dividend warrants
within 30 days of the declaration of the dividend and the redemption or
repurchase proceeds within 10 working days from the date of redemption or
repurchase request made by the unitholder.
In case of failures to dispatch the redemption/repurchase proceeds within the
stipulated time period, Asset Management Company is liable to pay interest as
specified by SEBI from time to time (15% at present).

Can a mutual fund change the nature of the scheme from the one specified
in the offer document?
Yes. However, no change in the nature or terms of the scheme, known as
fundamental attributes of the scheme e.g. structure, investment pattern, etc. can
be carried out unless a written communication is sent to each unitholder and an
advertisement is given in one English daily having nationwide circulation and in a
newspaper published in the language of the region where the head office of the
mutual fund is situated. The unitholders have the right to exit the scheme at the
prevailing NAV without any exit load if they do not want to continue with the
scheme. The mutual funds are also required to follow similar procedure while
converting the scheme form close-ended to open-ended scheme and in case of
change in sponsor.

How will an investor come to know about the changes, if any, which may
occur in the mutual fund?
There may be changes from time to time in a mutual fund. The mutual funds are
required to inform any material changes to their unitholders. Apart from it, many
mutual funds send quarterly newsletters to their investors.

At present, offer documents are required to be revised and updated at least once
in two years. In the meantime, new investors are informed about the material
changes by way of addendum to the offer document till the time offer document is
revised and reprinted.

How to know the performance of a mutual fund scheme?

The performance of a scheme is reflected in its net asset value (NAV), which is
disclosed on daily basis in case of open-ended schemes and on weekly basis in
case of close-ended schemes. The NAVs of mutual funds are required to be
published in newspapers. The NAVs are also available on the web sites of
mutual funds. All mutual funds are also required to put their NAVs on the web site
of Association of Mutual Funds in India (AMFI) and thus the investors can access
NAVs of all mutual funds at one place

The mutual funds are also required to publish their performance in the form of
half-yearly results that also include their returns/yields over a period of time i.e.
last six months, 1 year, 3 years, 5 years and since inception of schemes.
Investors can also look into other details like percentage of expenses of total
assets as these have an affect on the yield and other useful information in the
same half-yearly format.

The mutual funds are also required to send annual report or abridged annual
report to the unit holders at the end of the year.

The financial newspapers on a weekly basis are publishing various studies on

mutual fund schemes including yields of different schemes. Apart from these,
many research agencies also publish research reports on performance of mutual
funds including the ranking of various schemes in terms of their performance.
Investors should study these reports and keep themselves informed about the
performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other
mutual funds under the same category. They can also compare the performance
of equity-oriented schemes with the benchmarks like BSE Sensitive Index, S&P
CNX Nifty, etc.

On the basis of performance of the mutual funds, the investors should decide
when to enter or exit from a mutual fund scheme.

How to know where the mutual fund scheme has invested money mobilized
from the investors?
The mutual funds are required to disclose full portfolios of all of their schemes on
half-yearly basis that are published in the newspapers. Some mutual funds send
the portfolios to their unit holders.

The scheme portfolio shows investment made in each security i.e. equity,
debentures, money market instruments, government securities, etc. and their
quantity, market value and % to NAV. These portfolio statements also required to
disclose illiquid securities in the portfolio, investment made in rated and unrated
debt securities, non-performing assets (NPAs), etc.

Some of the mutual funds send newsletters to the unit holders on quarterly basis
that also contain portfolios of the schemes.

Is there any difference between investing in a mutual fund and in an initial

public offering (IPO) of a company?
Yes, there is a difference. IPOs of companies may open at lower or higher price
than the issue price depending on market sentiment and perception of investors.
However, in the case of mutual funds, the par value of the units may not rise or
fall immediately after allotment. A mutual fund scheme takes some time to make
investment in securities. NAV of the scheme depends on the value of securities
in which the funds have been deployed.

If schemes in the same category of different mutual funds are available,

should one choose a scheme with lower NAV?
Some of the investors have the tendency to prefer a scheme that is available at
lower NAV compared to the one available at higher NAV. Sometimes; they prefer
a new scheme that is issuing units at Rs. 10 whereas the existing schemes in the
same category are available at much higher NAVs. Investors may please note
that in case of mutual funds schemes, lower or higher NAVs of similar type
schemes of different mutual funds have no relevance. On the other hand,
investors should choose a scheme based on its merit considering performance
track record of the mutual fund, service standards, professional management,
etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at
Rs.90. Both schemes are diversified equity oriented schemes. Investor has put
Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in
scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go
up by 10 per cent and both the schemes perform equally good and it is reflected
in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B
to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600*
16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B
(100*99). The investor would get the same return of 10% on his investment in
each of the schemes. Thus, lower or higher NAV of the schemes and allotment of
higher or lower number of units within the amount an investor is willing to invest,
should not be the factors for making investment decision. Likewise, if a new
equity oriented scheme is being offered at Rs.10 and an existing scheme is
available for Rs. 90, should not be a factor for decision making by the investor.
Similar is the case with income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV
may give higher returns compared to a scheme which is available at lower NAV
but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently
managed scheme at higher NAV may not fall as much as inefficiently managed
scheme with lower NAV. Therefore, the investor should give more weightage to
the professional management of a scheme instead of lower NAV of any scheme.
He may get much higher number of units at lower NAV, but the scheme may not
give higher returns if it is not managed efficiently.

How to choose a scheme for investment from a number of schemes

As already mentioned, the investors must read the offer document of the mutual
fund scheme very carefully. They may also look into the past track record of
performance of the scheme or other schemes of the same mutual fund. They
may also compare the performance with other schemes having similar
investment objectives. Though past performance of a scheme is not an indicator
of its future performance and good performance in the past may or may not be
sustained in the future, this is one of the important factors for making investment
decision. In case of debt-oriented schemes, apart from looking into past returns,
the investors should also see the quality of debt instruments that is reflected in
their rating. A scheme with lower rate of return but having investments in better-
rated instruments may be safer. Similarly, in equities schemes also, investors
may look for quality of portfolio. They may also seek advice of experts.

Are the companies having names like mutual benefit the same as mutual
funds schemes?
Investors should not assume some companies having the name "mutual benefit"
as mutual funds. These companies do not come under the purview of SEBI. On
the other hand, mutual funds can mobilize funds from the investors by launching
schemes only after getting registered with SEBI as mutual funds.

Is the higher net worth of the sponsor a guarantee for better returns?
In the offer document of any mutual fund scheme, financial performance
including the net worth of the sponsor for a period of three years is required to be
given. The only purpose is that the investors should know the track record of the
company that has sponsored the mutual fund. However, higher net worth of the
sponsor does not mean that the scheme would give better returns or the sponsor
would compensate in case the NAV falls.


The financial system of a country greatly influences its economy. The

close relationship between financial structure and economic development is
reflected in the prevailing institutional arrangement, delivery system and
intermediation process.

Guerly and Shaw view the role of financial institutions as one of

helping to realize the opportunities for savings and real investment in an
economy. A certain level of financial development also denotes a more mature
way of mobilization of funds—a shift from self financing, indirect financing is
where financial companies come in the picture and mediate between savers and
borrowers of funds. Financial intermediaries also play a very important role in
eliminating market imperfections that arise out of non-dissemination of
information about borrowers. According to Kaizuka distortions in the market can
be eliminated or mitigated by several institutional devices and it is in this respect
that financial arrangements such as an issuing market for securities and financial
intermediaries play their roles. According to Kaufman financial institutions “are
expected to embody the essence of integrity and their entrepreneurial drive is
well balanced by a strong sense of fiduciary responsibility and that is why
financial regulations have always been a part of economic development.”

Mutual funds are dynamic financial institutions, which play a crucial

role in an economy by mobilizing savings and investing them in the capital
market, thus establishing a link between savings and the capital market.
Therefore, the activities of mutual funds have both short term and long-term
impact on the savings and capital markets, and the national economy. Mutual
funds, thus, assist the process of financial deepening and intermediation. They
mobilize funds in the savings market and act as complementary to banking; at
the same time they also compete with banks and other financial institutions. In
the process stock market activities are also significantly influenced by mutual
funds. There is thus hardly any segment of the financial market which is not
(directly or indirectly) influenced by the existence and operation of mutual funds.
However, the scope and efficiency of mutual funds are influenced by overall
economic fundamentals: the interrelationship between the financial and the real
sector, the nature of development of the savings and capital markets, market
structure, institutional arrangements and overall policy regime. So these special
issues are discussed in brief while attempting to refer it to the Indian financial

Changes in Economic Policy

There has been a change in economic policy in India, from a state

controlled to a market economy. Centralized planning and state control which
had outlived their utility in the wake of changes in the international economic
environment, made way for structural adjustment programmes and economic
liberalization. The objectives of the reforms were to remove the entry barriers for
domestic private sector institutions (banks, mutual funds, etc.) and foreign
institutions increase transparency in market operations of financial intermediaries
and promote an environment of healthy competition. The market regulators have
been empowered to play their role as a watchdog, and supervisory structures
have been strengthened to prevent market failures, and protect the interests of

Returns in the financial sector have also enhanced the scope of

India’s access to international capital markets, and the flow of international
savings into India has thus cleared the path for integrating the Indian market with
global capital markets. Globalization has increased the scope of competition,
technological change and investor friendly research, which in course of time
should increase the efficiency of Indian institutions, reduce cost of operations and
encourage better resource allocation.

Institutional Arrangements

The Indian financial sector has two broad segments - organized and
unorganized. The organized segment includes commercial banks, development
financial institutions, insurance companies, and other non-bank financial
institutions, including mutual funds, unit trusts, etc. An important characteristic of
the Indian financial system is the predominant presence of public sector
institutions and a very high degree of public ownership and control, in keeping
with the policy of planned development in force since 1951. the public sector
financial institutions in the organized sector can be grouped itn the following
broad categories:

Commercial Banks: With a wide network of branches, they primarily collect

deposits and lend to industry on the cash credit basis, besides priority sector
lending. They are subject to several restrictive norms.

Term Lending Development Institutions: These are Industrial Development
Bank Of India (IDBI), Industrial Finance Corporation (IFCI) and Industrial Credit
and Investment Corporation of India (ICICI). They cater to the needs of long-term
finance for the corporate sector.

Insurance Institutions: These are the government owned Life Insurance

Corporation (LIC), General Insurance Corporation (GIC) and its subsidiaries.
They provide life and general insurance, mobilize funds and invest in capital
markets. They are important institutional investors in India.

UTI and Mutual Funds: There are 35 mutual funds in India. The three
categories of mutual funds are public sector mutual funds, domestic private
sector mutual funds and foreign mutual funds. they have emerged as dynamic
financial intermediaries and are very important institutional investors in India. In
the savings market, mutual funds compete with the banks and in the capital
markeyt they are the most influential players to influence market movements.

Pension and Provident Fund Trusts: These are also important savings
institutions that are subject to strict regulatory provisions. There are several other
specialized financial institutions, namely, Export Import Bank, National Bank for
Agriculture and Rural Development, Industrial Reconstruction Bank of India,
State Financial Corporations, State Industrial Development Corporations and
Technology Finance Corporation of India. These institutions operate specialized
financial packages for industrial and agricultural enterprises.

Reforms in the financial sector have markedly influenced the

institutional arrangement and operational philosophy of financial institutions.
Many of the traditional development finance institutions like IDBI, IFCI, ICICI,
have extended their operations in areas like capital markets, operate on
commercial lines and resort to market operations for the required resources and
profits. Many financial institutions have given up the traditional outlook and
ventured into areas like commercial banking, stock broking, and mutual funds.
IDBI, ICICI, LIC, GIC, State Bank of India, Punjab National Bank, Canara Bank,
Bank of India and Bank of Baroda are among those, which have entered the
mutual funds business. The entry of these well-established, well-managed and
financially sound organizations in the mutual funds industry has strengthened the
foundations of the mutual funds industry in India.

Flow of Funds Accounts

An analysis of the flow of funds is necessary to determine the level of maturity,

degree of intermediation and depth of financial markets in an economy. The flow
of funds accounts reveals the financial activities of banks, other financial
institutions (OF Is), government, households, private corporate sector and rest of
the world (ROW), in the Indian economy. These sectors participate in the
economy by borrowing or lending. Financial claims are of broadly two types-
primary issues (securities) issued by the non-financial sector; secondary issues
(debt and claims) issued by the financial sector. The total flow of funds in the
economy is the aggregate amount raised by the primary and secondary issues.

The developments and structural changes in the financial system can be

assessed from various financial ratios constructed from flow of funds statistics.
The financial ratio (FR) is the total financial issues expressed as a percentage of
national income. The FR indicates the extent of financial deepening in the
economy. Financial interrelation ratio (FIR) is the ratio of financial issues to
investment. This ratio indicates the proportion of financial issues with respect to
capital formation. The new issue ratio (NIR) is the proportion of primary claims
issued by the non-financial institutions to the net capital formation. The
intermediary ratio (IR) is defined as the proportion of secondary claims to the
primary issues. IR indicates the importance of financial intermediaries in
channelising financial resources.

The Savings Market

Statistically funds flow analyses indicate a changing trend in the relative

importance of financial institutions, and house holds preference of financial
institutions and instruments. The change becomes clearer if we examine the
growth and development of the savings market over a period of time.

India is one of the few countries today to maintain a steady growth rate in
domestic savings. Savings being the prime mover of economic development,
Indian planners have always focused on this aspect of economic development. A
significant trend in savings has been the decline of public sector savings over
time. Institutional developments in the financial market influenced the savings
patterns, particularly in the household sector. Financial intermediaries assist the
transfer of savings to the real sector of the economy through the formation of
financial assets. The changing patterns of household savings in India indicate
this trend. The household savings in gross financial assets went up significantly,
from 39.41 percent in 1980-81 to 64.19 percent in 1993-94, though they declined

to 59.56 percent in 1994-95. This indicates growing financial intermediation in the
Indian economy.

With the growth of capital markets, bank deposits have lost their charm. The
statistical data shows that the share of bank deposits in gross household financial
assets declined from 45.8 percent in 1980-81 to 33.3 percent in 1993-94, and
then rose to 42.2 percent in 1995-96. With the growth of capital markets and the
emergence of alternative saving instruments, investors are tending to move
towards more liquid, short term instruments like units, shares, debentures, etc.
the percentage share of corporate equity and debentures, together with UTI units
increased from 3.7 percent in 1980-81 to 17.2 percent in 1992-93, while the
share of less liquid investment like LIC, PF and pension increased marginally
from 25.1 percent to 27.2 percent during the same period. However, depressed
conditions in the stock market affected mutual funds mobilization along with the
other capital market instruments, and in 1995-96, the share of the former was 0.2
percent, and the latter 4.7 percent, indicating a change in favour of less risky,
less liquid and more assured returns.

The Capital Market

An analysis of structural changes in the savings market indicates the growing

importance of capital market instruments like shares, debentures and units in
household financial assets. Growth and stability in the capital market are vital for
efficient resource allocation, i.e., the transfer of resources from the savings
market to the real sector of the economy.

Two important constituents of the capital market are primary market (or new
issue market) and secondary market. The primary market helps both corporates
and the government to raise funds by issuing securities. The secondary market,
through continuous trading activities, provides liquidity in the system. The
secondary market is also a reflection of the changing mood and perception of
investors. As can be imagined, stability and growth in the capital market depend
on the efficient functioning of both the markets since they are closely
interdependent. Mutual funds play as all-important role in both the markets and
strengthen the transfer mechanism.

The Securities and Exchange Board of India (SEBI) has brought out several
regulations to improve the efficiency and quality of the capital market. The SEBI
Act promulgated in Jan 1992 encompasses the entire gamut of securities
industries in India. There are several other regulations of respected activities
based upon which the transparency, quality and competition is improved in the
capital market. Several steps have been initiated to improve the activities in the
secondary markets.

India has emerged as one of the important stock markets of the world. The
opening up of the economy and the introduction of reforms as part of the
structural adjustment programme have made the Indian capital market one of the
Most attractive emerging markets in the world, as evident from the flow and entry
of foreign brokers and financial institutions into India.

The Primary Market

Changes in economic policy involving opening up of the Indian economy,

freedom to corporate sector to approach capital markets to fix prices and
premiums and public sector disinvestments programmes have given a much
needed boost to the primary market. The total amount of capital issues in the
market went up significantly during the period 1992 to 1995. the same, however,
declined during 1996. Capital issue also decreased marginally from 13.9 percent
in 1992-93 to 13 percent in 1994-95 but later drastically to 8.16 percent in 1995-

The reforms in the primary market, with respect to the relaxing of public issue
norms, have induced the corporate sector to approach capital markets for
cheaper funds.

The total amounts raised by the private sector increased from Rs. 4312.2 crores
in 1990-91 to Rs. 26416.7 crores in 1994-95, i.e., by 512.6 percent. However, the
period 1990-91 to 1995-96 witnessed a radical shift in corporate public issues.
While the share of equities in the total amount raised by the corporate sector
from the markets increased from 29.8 percent in 1990-91 to 65.9 percent in
1994-95, the share of debentures – certificate of deposits (CDs) and non-
convertible debentures (NCDs) in the total amount raised declined from 69.9
percent to 33.5 percent in 1994-95 and further to 24.6 percent in 1995-96.

Another important trend in the primary market has been the increase in the
amount of public subscription to capital issues during the post-reform period,
though the share of public subscription to private capital issue declined from 66.7
percent in 1980-81 to 43.11 percent in 1991-95. Another notable feature was that
the percentage of public issues underwritten went up significantly from 56.8
percent in 1980-81 to 113.2 percent in 1993-94 owing to market uncertainties
that induced lack of confidence among promoters/issues.

The Secondary Market

The growth of the primary market in the post-reform period has also boosted the
activities of the secondary market in terms of growth of stock exchanges, listed
capital, market capitalization, etc. the number of stock exchanges in India
increased substantially over the period of time. There has also been significant
increase in the number of companies listed with the stock exchanges particularly
during 1990-96 (an increase of 31.4 percent). An equally significant increase is
noted in respect of market capitalization. During the period from 1980 to 1990,
market capitalization increased by 944.7 percent, while the same in the five-year
period from 1990 to 1995 increased by 806.9 percent. Market capitalization as a
percentage of GNP is an important indicator to measure the importance of the
capital market in the economy. Market capitalization as percentage of GNP was
only 6.6 percent in 1979-80 but reached 40.8 percent in 1992-93. Liberalization
of the economy further boosted this ratio and market capitalization went up to
75.8 percent in 1994-95.

Stock market indices indicate the changing sentiment and direction of economy.
In the post-reform period, particularly1992, the market witnessed a bullish phase
and the 30-share Sensex reached a peak of 4467 on 22nd April 1992. However
the movement of indices was moderated subsequently in 1993-94. 0ne of the
significant happenings during the period was also a moderation in P\E ratios,
considered to be the most important determinant of investment decision. The P\E
ratio which reached its peak in 1994 gradually came down and in December
1996 it touched its lowest when Sensex P\E was 16.57 and Natex P\E 12.20.The
lower P\E ratio was an attraction to foreign investors.

The Debt Market

The debt market is considered to be the pulse of macroeconomic development,

and the future direction of the economy can be forecasted by monitoring the
movements of the debt market. The Indian debt market, although it has
expanded considerably in terms of volume and instruments, is still lagging behind
many countries in terms of depth. Moreover, the secondary debt market is
virtually non-existent, which has restricted the healthy growth of the debt market
in India.

The debt market comprises of bond instruments (central and state government
bonds, public sector undertaking (PSU) bonds and corporate debentures) and
money market instruments (treasury bills, certificate of deposits, commercial
papers, etc.). The total outstanding value of the debt market was estimated to be
a little under Rs 300000 crore in 1995. Between 1990 and 1995 the total
outstanding value increased by 78.5 percent. The Indian bond market in terms of
outstanding value ranked next to Japan and South Korea, in Asia

The bond market accounted for 89.1 percent of the total value of the debt market
in 1995, while money market instruments accounted for the rest. The size of the
bond and money markets (in 1995) increased by 19.5 times and 5.5 times
respectively, since 1976. The reforms under way since 1991 are expected to
further develop the secondary market improve the depth of the debt market so as
to substantially boost market activities. The proposed money market mutual
funds and gilt-edged bond funds are further likely to attract small investors to the
debt market.

Inflow of foreign funds

The inflow of foreign portfolio investments through foreign institutional investors

(FIIs) and Euro issues in the form of issue of GDR and foreign currency
convertible bonds (FCCBs) have had a strong impact on the Indian securities
market. In fact, in the last few years (1992-95), FIIs have influenced market
movements to the maximum extent. According to SEBI Annual Report (1995-96),
the cumulative net investments of FIIs in the Indian market stood at US $ 5202.3
million by 31 March 1996.

Reforms pertaining to the capital market and the increase in the activities of the
primary and secondary markets in India have significantly influenced the
development of equity culture. the number of shareholders and investors in
mutual funds in India has increased from 0.2 crore in 1980 to 4 crore in 1994,
making the Indian population the second largest shareholding one of the world,
next to the USA. The growth in equity culture particularly among the middle class
has greatly influenced the growth of mutual funds in India.

Mutual Funds and Corporate Finance

The private corporate sector in India is a deficit sector and the gap between
demand and supply of financial resources is met by funds raised through loans,
advances and issuance of securities. However, the buoyancy in the capital
market has increased the reliance of the corporate sector on security financing.
The share of this instrument in financing the resource gap of the corporate sector
has more than doubled between 1988-89 and 1991-92 i.e. from 16.72 percent in
1988-89 to 36.28 percent in 1991-92. The changing pattern of corporate
financing indicates that the banking sector is losing its importance vis-à-vis the
“other financial sector” (including mutual funds). According to the flow of funds
statistics published by the RBI, the share of the banking sector in filling the
resource gap of the corporate sector has declined from 54.52 percent in 1988-89
to 2.3 percent in 1991-92, while that of the “other financial sector” (including
mutual funds) has increased from 39.9 percent to 102.58 percent during the
same period. RBI has noted “The rapid growth of mutual funds and increase in
term lending by OFIs (other financial institutions) appear to have contributed to
this trend.” Direct financing by 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.

Mutual funds in India have emerged as a critical institutional linkage among

various financial segments like savings, capital markets and the corporate sector.
They provide much needed impetus to the money market and stock markets, in
addition to direct and indirect support to the corporate sector. Above all, mutual
funds have given a new direction to the flow of personal savings and enabled
small and medium investors in remote rural and semi-urban areas to reap the
benefits of stock market investments. Indian mutual funds are thus playing a very
crucial development role in allocating resources in the merging market economy.


Mutual Funds and securities investments are subject to market risks and there is
no assurance or guarantee that the objectives of the Scheme will be achieved.

As with any investment in securities, the NAV of the Units issued under the
Scheme can go up or down depending on the factors and forces affecting the
capital markets.

Past performance of the Sponsor/AMC/Mutual Fund is not indicative of the future

performance of the Scheme. Reliance Short Term Fund is only the name of the
Scheme and does not in any manner indicate either the quality of the Scheme;
it’s future prospects or returns.

The Sponsor is not responsible or liable for any loss resulting from the operation
of the Scheme beyond their initial contribution of Rs.1 lakh towards the setting up
of the Mutual Fund and such other accretions and additions to the corpus.

The NAV of the Scheme may be affected, inter-alia, by changes in the market
conditions, interest rates, trading volumes, settlement periods and transfer

Trading volumes, settlement periods and transfer procedures may inherently

restrict the liquidity of the Scheme’s investments. In the event of an inordinately
large number of redemption requests, or of a re-structuring of the Scheme’s
investment portfolio, these periods may become significant. Please read the
Sections of this Offer Document entitled “Special Considerations” and “Right to
Limit Redemptions”.

The Mutual Fund is not guaranteeing or assuring any dividend. The Mutual Fund
is also not assuring that it will make periodical dividend distributions, though it
has every intention of doing so. All dividend distributions are subject to the
investment performance of the Scheme.

Similarly, RCAM, in consultation with the Trustees, reserve the right to modify the
dividend date(s)/ periodicity for declaration of dividends.


Some basic facts:

• 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 funds 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 while in India we have just 277 schemes
• 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. is expected to trade on-line by 2003.

(Source: The Financial Express September 99)

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 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

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.
(Source: The Financial Express September 99)
Such increases in volumes are expected to bring about large changes in the way
Mutual Funds conduct their business.

Here are some of the basic changes that have taken place since the advent of
the Net.

• Lower Costs: Distribution of funds will fall in the online trading regime by
2003. Mutual funds could bring down their administrative costs to 0.75% if
trading is done on- line. As per SEBI regulations, bond funds can charge a
maximum of 2.25% and equity funds can charge 2.5% as administrative
fees. Therefore if the administrative costs are low, the benefits are passed
down and hence Mutual Funds are able to attract mire investors and
increase their asset base.
• Better advice: Mutual funds could provide better advice to their investors
through the Net rather than through the traditional investment routes
where there is an additional channel to deal with the Brokers. Direct
dealing with the fund could help the investor with their financial planning.
• In India, brokers could get more Net savvy than investors and could help
the investors with the knowledge through get from the Net.
• New investors would prefer online: Mutual funds can target investors who
are young individuals and who are Net savvy, since servicing them would
be easier on the Net.
• India has around 1.6 million net users who are prime target for these funds
and this could just be the beginning. The Internet users are going to
increase dramatically and mutual funds are going to be the best
beneficiary. With smaller administrative costs more funds would be
mobilized .A fund manager must be ready to tackle the volatility and will
have to maintain sufficient amount of investments which are high liquidity
and low yielding investments to honor redemption.
• Net based advertisements: There will be more sites involved in ads and
promotion of mutual funds. In the U.S. sites like AOL offer detailed
research and financial details about the functioning of different funds and
their performance statistics. a is witnessing a genesis in this area.

The asset base will continue to grow at an annual rate of about 30 to 35 % over
the next few years as investor’s shift their assets from banks and other traditional
avenues. Some of the older public and private sector players will either close
shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with
stronger players in three to four years. In the private sector this trend has already
started with two mergers and one takeover. Here too some of them will down
their shutters in the near future to come.

But this does not mean there is no room for other players. The market will
witness a flurry of new players entering the arena. There will be a large number
of offers from various asset management companies in the time to come. Some
big names like Fidelity, Principal, and Old Mutual etc. are looking at Indian
market seriously. One important reason for it is that most major players already
have presence here and hence these big names would hardly like to get left

In the U.S. most mutual funds concentrate only on financial funds like equity and
debt. Some like real estate funds and commodity funds also take an exposure to
physical assets. The latter type of funds is preferred by corporates who want to
hedge their exposure to the commodities they deal with.

For instance, a cable manufacturer who needs 100 tons of Copper in the month
of January could buy an equivalent amount of copper by investing in a copper
fund. For Example, Permanent Portfolio Fund, a conservative U.S. based fund
invests a fixed percentage of it’s corpus in Gold, Silver, Swiss francs, specific
stocks on various bourses around the world, short –term and long-term U.S.
treasuries etc.

In U.S.A. apart from bullion funds there are copper funds, precious metal funds
and real estate funds (investing in real estate and other related assets as well.).In
India, the Canada based Dundee mutual fund is planning to launch gold and a
real estate fund before the year-end.

In developed countries like the U.S.A there are funds to satisfy everybody’s
requirement, but in India only the tip of the iceberg has been explored. In the
near future India too will concentrate on financial as well as physical funds.

The mutual fund industry is awaiting the introduction of DERIVATIVES in the

country as this would enable it to hedge its risk and this in turn would be reflected
in its Net Asset Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to
trade in Derivatives. Importantly, many market players have called on the
Regulator to initiate the process immediately, so that the mutual funds can
implement the changes that are required to trade in Derivatives.


Over the past ten years, the Indian mutual fund industry has been one of the
fastest-growing sectors in the Indian capital and financial markets. From 1991 to
2002, the industry’s compound annual growth rate averaged around 20%. The
rapid growth has led to considerable changes in regulation, the structure of funds
available and the composition of net assets across various industry segments, as
well as in the portfolio of investment funds

As the Indian mutual fund market has grown in size and number of funds, the
traditional prospectus-based mutual fund classification has steadily lost much of
its value as an explanatory tool. Over the past 18 months, Moody’s/ICRA has
identified 14 distinct management style categories, which indicates that
comparisons between mutual funds within the traditional categories are
problematic and, in certain cases, impossible.

The principal objective of mutual fund categorization and of performance-based
mutual fund indices is to offer the investor the opportunity to evaluate single fund
performance and risk characteristics in the context of objective peer groupings.
By analyzing the exposure of each fund to changes in the average return of the
category, accurate mutual fund categorization and the resulting benchmarks can
provide investors with appropriate information on funds’ over- or under-

In October 2002, Moody’s Investors Service and ICRA Ltd. launched a new
approach to Indian fund categorization and a series of 18 mutual fund indices
tracking the performance of equity and fixed income mutual funds.

However, unlike traditional classification and other major industry benchmarks,

the Moody’s/ICRA management style-based categories and indices are the result
of a new approach to the classification of mutual funds into performance-based

Moody’s/ICRA categorizes mutual funds into peer groups based exclusively on

similarity of past performance patterns, rather than according to local industry
classifications or as indicated by prospectuses. The benefits of this approach,

which uses a quantitative procedure called "cluster analysis", is that it offers a
view of the actual performance being delivered whereas traditional industry
classification does not always capture the evolving nature of investment
strategies. In other words, a fund, which has historically performed like a
balanced fund, should be grouped and monitored in relation to other balanced
funds even if the prospectus or the fund manager markets the fund as an equity
growth fund.


We believe our categories and indices can be used for the following purposes:

Tracking performance of the Indian mutual fund industry as a whole

Management style-based categories and indices capture the evolution of
investment strategies. As assets and the number of funds grow, increased
specialization and better definition of management styles are noted. The
Moody’s/ICRA approach offers investors a more detailed insight into how the
market is evolving and helps them profile the changes within a coherent

Tracking performance and evolution of major fund management styles

Each management style category and index is re-defined on a quarterly basis to
provide investors with an updated view of changing market dynamics and
evolving investment styles. Moody’s/ICRA categories do not rely on a fixed
number of funds per category and offer a clear picture of how management styles
evolve in terms of style drift, number of funds and assets under management.

Tracking winners/losers within fund management styles

Moody’s/ICRA categories are the result of a purely quantitatively determined

classification system. Funds can therefore be coherently ranked inside each
category and Moody’s/ICRA indices can be used to construct relative rankings.

Tracking fund management style integrity on a quarterly basis

Empirical studies show that asset allocation or exposure to asset class accounts
for the majority of returns in actively managed portfolios. Because of the
quantitative nature of Moody’s/ICRA categories and indices, these can be used
as proxies of asset classes and help investors evaluate the evolution of individual
fund managers’ management style.

Reliance Growth Fund: Hold

The Reliance Growth Fund has comfortably outpaced the indices over five-,
three- and one-year periods. The fund also ranks among the top-performing
diversified equity funds, based on absolute returns generated over a five-year
period. But due to an unimpressive performance in the bear markets of 2000 and
2001, the five-year track record is less consistent than that of funds such as
HDFC Equity, Franklin Bluechip Fund or HDFC Tax saver. Investors can retain
exposures in the fund; but fresh exposures may be avoided now.

Suitability: One factor that may peg the risk profile of Reliance Growth Fund a
notch above that of a normal diversified equity fund is its investment style. It
relies on an aggressive churning of its portfolio to generate returns, which results
in substantial changes in its top holdings from month to month.

This may peg up transaction costs and increase the number of right calls to be
made by the manager. However, it has so far outperformed the market
significantly, and this has helped compensate for such risks.

Performance: Reliance Growth Fund has delivered a 31 per cent compound

annual return over the past five years, against the 8 per cent return on its
benchmark the BSE 100 index.

In terms of absolute returns earned over this period, the fund has done as well as
peers such as HDFC Taxsaver, HDFC Equity or the Franklin Bluechip Fund.
However, the returns have been earned less consistently than some of these

For instance, while Reliance Growth Fund fared very well in each of bull markets
since 1997; it has had a less consistent track record of outpacing the indices in
the bear phases. The fund beat the indices by a big margin in 1997, 1998, 1999,
2002 and 2003; but trailed it in 2000 and 2001.

This pattern has, however, been reversed in the latest market correction. Since
December 2003, the fund has generated a negative return of 14.7 per cent, faring
much better than the Nifty, which has declined 20 per cent in value.

There have been some changes in the fund's portfolio strategy over the past

In June 2003, the top three sectors made up 36 per cent of its portfolio. But by
May 2004, this was down to 27 per cent and the portfolio weights differed
significantly from the benchmark index it tracks — the BSE-100.


1. The Sponsor of the Fund is Reliance Capital Limited (RCL) having a net worth
of over Rs. 1,336.33 crores as on March 31, 2003 and is a member of the
Reliance Group.

2. Choice of Investment Plans:

Reliance Pharma Fund offers the following plans:

Growth Plan: The Growth Plan is designed for investors interested in capital
appreciation on their investment and not in regular income. Accordingly, the Fund
will not declare dividends under the Growth Plan. The income earned on the
Growth Plan’s corpus will remain invested in the Growth Plan.

• Growth Option: The Growth Plan has a Growth Option. Under this
Option, there will be no distribution of income and the returns to the
investor is only by way of capital gains/ appreciation, if any, through
redemption at applicable NAV of the units held by them.

• Bonus Option: The Growth Plan has a Bonus Option. Guided by the
philosophy of value-oriented returns, the Trustees may decide to
periodically capitalize the sums from reserves including the amount of
distributable surpluses of the scheme by way of allotment/ credit of bonus
units to the unitholders accounts, the intent being to enhance the
unitholders interests.

Dividend Plan: The Dividend Plan has been designed for investors who require
regular income in the form of dividends. Under the Dividend Plan, the Fund will
endeavor to make regular dividend payments to the unitholders though the fund
endeavors to pay within three working days.
Dividend will be distributed from the available distributable surplus after the
deduction of TDS and applicable surcharge, if any.

• Dividend Payout Option: Under this option the Dividend declared under
the Dividend Plan will be paid to the unitholders within 30 days from the
declaration of the dividend though the fund endeavors to pay the dividend
proceeds within three working days.
• Reinvestment Option: The Dividend Plan has a Reinvestment Option
whereby the dividend distributed under the plan will be automatically
reinvested at the ex-dividend NAV on the transaction day following the
date of declaration of dividend and additional units will be allotted
accordingly. Investors desirous of opting for the same should indicate the
same in the space provided in the application form.

The Fund, however, does not assure any targeted annual return/ income nor any
capitalization ratio. Accumulation of earnings and/ or capitalization of bonus units
and the consequent determination of NAV, may be suspended temporarily or
indefinitely under any of the circumstances as stated under the Para on
‘Suspension of Purchases and/or Redemption of units’ of the Offer Document.

Please note that if no Plan is mentioned / indicated in the Application form, the
units will, by default, be allotted under the Growth Plan. Similarly, under the
Dividend Plan, if no choice (payout or reinvestment) is indicated, the applicant
will be deemed to have applied for the dividend reinvestment option under the
plan. If no Option is indicated under the Growth Plan, the applicant will be
deemed to have applied for the Growth Option under the Growth Plan. The
unitholder is subsequently free to switch the units from the default plan / option to
any other eligible plans / options of the Scheme, at the applicable NAV.

3. Investment Objective
The primary investment objective of the Scheme is to seek to generate consistent
returns by investing in equity / equity related or fixed income securities of
pharma and other associated companies.

4. Transparency
The AMC will calculate and disclose the first NAV not later than 30 days from the
closure of Initial Offer Period. Subsequently, the NAV will be calculated and
disclosed at the close of every Working Day which shall be published in at least
two daily newspapers and also uploaded on the AMFI site and Reliance Capital
Mutual Fund site i.e.

• Publication of Abridged Half-yearly Financial Extracts in the Publications

or as may be prescribed under the Regulations from time to time.
• Communication of Portfolio on a half-yearly basis to the Unitholders
directly or through the Publications or as may be prescribed under the
Regulations from time to time.
• Despatch of the Annual Reports of the respective Schemes within the
stipulated period as required under the Regulations.

5. Liquidity

The Scheme will offer for Sale / Switch-in and Redemption / Switch-out of Units
on every Working Day on an ongoing basis, commencing not later than 30 days
from the closure of Initial Offer Period.

As per SEBI Regulations, the Mutual Fund shall despatch Redemption proceeds
within 10 Working Days of receiving a valid Redemption request. A penal interest
of 15% per annum or such other rate as may be prescribed by SEBI from time to
time will be paid in case the Redemption proceeds are not made within 10
Working Days of the date of receipt of a valid redemption request. However,
under normal circumstances, the Mutual Fund will endeavor to despatch the
redemption cheque within 3 Working Days from the receipt of a valid redemption

6. Flexibility

Unitholders will have the flexibility to alter the allocation of their investments
among the scheme(s) offered by the Mutual Fund, in order to suit their changing
investment needs, by easily switching between the scheme(s) / plans of the
Mutual Fund.

Tax Benefits (as per Finance Act, 2003)

• Under Section 10(35) of the Income Tax Act, introduced by Finance Bill,
2003, income received in respect of units of Fund specified under clause
10(23D) on or after 01.04.2003 is exempt from tax in the hands of
• Section 115R of the Act provides that any amount of income distributed by
a Mutual Fund to its unitholders shall be Chargeable to tax and such
Mutual Fund shall be liable to pay additional income-tax at the rate of 12.5
percent w.e.f. 01.04.2003. A surcharge as applicable on this additional tax
would be payable.
• However, these provisions will not be applicable in respect of any income
distributed to a unitholder of an open ended equity oriented fund in respect
of any distribution made from such fund for a period of one-year
commencing from 01.04. 2003.
• Benefits of concessional long-term capital gains tax under Section 112 of
the Income Tax Act, 1961 for units held for more than 12 months.
• Units of the Scheme(s) are not subject to Wealth Tax.
• The disclosures made hereinabove with respect to the tax benefits
available to the Mutual Fund and the Unitholders is in accordance with
prevailing tax laws.
• The tax benefits described in this Offer Document, are as available under
the present taxation laws and are available subject to relevant conditions.
The information given is included only for general purpose and is based on
advise received by the AMC regarding the law and practice currently in
force in India and the Unitholders should be aware that the relevant fiscal
rules or their interpretation may change. As is the case with any
investment, there can be no guarantee that the tax position or the
proposed tax position prevailing at the time of an investment in the
Scheme will endure indefinitely. In view of the individual nature of tax
consequences, each Unit holder is advised to consult his / her own
professional tax advisor.

Performance of Growth Schemes

According of the data available with the Sebi, there has been a net inflow of
Rs1,076 crore into open-ended schemes despite market volatility during April-
May. While the gross inflows were Rs 5,028 crore the gross outflows were Rs
3,952 crore.

The investment into equities has mainly come from investors who wanted to
increase their exposure whenever there has been a fall in the market.
Though the returns generated by the equity funds ranged between 37.12 per cent
and 108.27 per cent for the last one-year period, the recent market crash has
dented the performance of the Growth funds.

Over the last one month only two schemes, namely the Principal Global
Opportunities (G) fund and Tata Growth Fund Bonus, managed to give positive
returns of 4.84 per cent and 2.63 per cent respectively.

But the situation is showing some signs of improvement over the last one week
as the schemes of 32 funds has returned to the positive territory. Though these
schemes have managed to return to the positive region, the returns have been
meager ranging between 0.04 per cent and 2.5 per cent.

Index Funds and Sectoral Funds

The performance of the index funds over the last one-month period has been
very poor and not even one scheme has managed to give positive return. The
same has been the case with basic, FMCG, Pharma and other sectoral funds.
Among the sectoral Fund of Funds (FoFs) only Pru ICICI Very Cautious Plan
managed to give a positive return of 0.30 per cent over the last one month

MIPs: Caught on the wrong foot?

In recent months, monthly income plans (MIPs) generated a lot of interest among
investors, and it attracted huge inflows. The total corpus of these schemes
crossed Rs 15,193 crore.
MIPs, which were providing returns between 4 -12 per cent even in poor market
conditions, have attracted a large number of debt investors who moved to hybrid
funds like MIP. These huge returns were possible only due to the high exposure
of the MIPs to the equities.

The MIPs, which were traditionally investing just 10-15 per cent of their schemes
money in the equities, have now increased their exposure to the extent of 20-25
per cent. The MIPs that increased their exposure to equities to generate more
returns are now caught on the wrong foot. MIPs that have invested a major
portion of corpus in debt papers and part of it in equities have taken the hit on
both the fronts. MIPs have given the worst performance among all available debt-
oriented mutual fund products.

The debacle in the stock market has made most of the MIPs to skip their dividend
payments and their average return is quoting in negative. Over the last one-
month period almost all the schemes have given negative return except the
Magnum NRI Investment STP (G) and ING VYSYA MIP A (G) that have
delivered the positive returns of 0.18 per cent and 0.09 per cent respectively.

Gilt Funds and Income Funds

Among the long time Gilt funds only five schemes managed to give positive
returns in the last one month. And their returns ranged between 0.16 per cent
and 0.41 per cent. In the short time gilts, seven schemes managed to give
positive returns ranging between 0.05 per cent and 0.56 per cent.

Among the long-term Income funds 17 schemes managed to give positive returns
between 0.03 per cent and 0.39 per cent. As many as 27 short-term income
funds schemes are in the positive region with their returns raging between 0.07
per cent and 0.39 per cent.
Balanced Schemes

All balanced fund schemes showed negative returns for the last one-month
period except Pru ICICI STP INST. (G) scheme, that has given a positive return
of 0.22 per cent. The negative returns of the balanced funds in the last one-
month ranges between -0.94 per cent and -9.16 per cent. But in the last one-
week the balanced schemes have recovered to some extent and the schemes of
17 funds have turned positive.

The performance of the balanced funds over the last one-year has been quite
impressive and they have delivered returns ranging from 5.33 to 65.57 per cent.
The good performance of balanced funds were due to their high exposure in
major old economy stocks like RIL, Mahindra & Mahindra,Tata Power, ACC and
Grasim Industries.

The share price of RIL increased by 42.0 per cent to Rs 444.8 on June 7, 2004
from Rs 313.2 on June 6, 2003. The price of another heavyweight company,
M&M rose by 244.5 per cent during the same period.

Performance Outlook

The fund managers expect the market to be choppy for another 3-6 months time.
They add that even if the markets stabilize by then, they caution that the returns
would not be comparable to that of the previous years in equity, hybrid and debt

Apart from the outcome of elections, the other factors like slowdown of Chinese
economy and possibility of hike in interest rate in the US are also affecting the
Indian equity market. However the next trigger now appears to be the budget.
Till then the volumes may be low and the markets are likely to drift and settle at
lower levels.
A Performance Review of Equity Oriented Mutual Funds

The three months of January to March 2001 were one of the most testing times
for investors in equity oriented mutual fund schemes. In the first three months of
2001, the BSE Sensex declined by 9.3% while the S & P CNX Nifty declined by
9.1%. The movement of the Sensex has been like a see-saw in the first quarter
of 2001. In January, BSE Sensex gained 8.9% followed by a marginal decline of
1.8% in February, and thereafter dropped sharply by 15.1% in March. To
understand how various equity oriented mutual funds including balanced funds
fared, we undertook a detailed performance analysis of different schemes of
certain leading mutual fund houses for the period January 2001 to March 2001.

We arrived at the following conclusions: -

• Balanced Funds category has shown lower decline than BSE Sensex
largely because at least 25% asset allocated to debt instruments. However
Alliance '95 Fund reported a sharp decline of 16.3% in its NAV on account
of high asset allocation to equity (about 70%) during most of the period.
• All the schemes in the Growth Funds category have reported a higher
decline compared to decline of 9.3% in the BSE Sensex and 9.1% in the S
& P CNX Nifty. Interestingly all equity funds have underperformed the BSE
Sensex and S & P CNX Nifty in both the times during the rise and the fall
in the value of the indices. The only exception has been Kothari Pioneer
Bluechip Fund, which reported a marginally lower decline of 14.4% in NAV
compared to 15.1% decline in BSE Sensex in the month of March 2001.
• There is sharp variation in the performance of the equity schemes with
negative returns varying between 9.7% and 24.6% in the first quarter of
2001. The performance of various equity funds clearly indicated that there
over exposure in certain sectors/ stocks and lack of diversification.
• The performance of the technology sector funds has been uniform across
all the funds. This category of sector funds has shown largest decline
among all the schemes declining between 30% to 34% in this period. The
steep fall is largely on account of steep decline in the IT stock prices in the
month of March 2001. In the month of March 2001, IIL Information
Technology Index declined by 43.4% compared to decline of 15.0% in the
S & P CNX Nifty in this period.
• The performance of the FMCG Sector Funds has also been uniform
across the different mutual funds showing negative returns between
11.3% and 11.6% in this period. The performance of the FMCG funds has
been also poor in comparison to the IIL FMCG Index, which declined by
10.7% in this three month period.
• Pharmaceuticals Sector Fund has been one of the top outperformer in this
quarter. Kothari Pioneer Pharma Fund declined by only 10.8% compared
to a steep decline of 15.3% in IIL Pharmaceutical Index in this period.
Among the first three months of 2001 IIL Pharmaceutical Index reported a
sharp decline of 13% in March 2001.
• The performance of various other sector funds has been poor in
comparison to BSE Sensex and S & P CNX Nifty in the absence of any
specific benchmark. Among these sector funds Kothari Pioneer Internet
Opportunities Fund has reported a largest decline of 21.2% in NAV on
account of sharp decline in prices of technology stocks in March 2001.
Whereas Alliance Basic Industries has shown the lowest decline of 11.6%
as investments mainly comprise companies in the old economy across
various sectors.

The performance of Equity Funds has revealed that many of them were able to
ride the boom but
were unable to get off at the right time thereby reporting underperformance vis a
vis the benchmark indices

The performance of the Sector Funds in this quarter has confirmed that investing
in sector funds involves high risk. Unless the sector is in the limelight and is a
clear favourite of the markets, investors in these schemes are unlikely to get any
abnormal gains from this sector. On the contrary it is likely that investors will
suffer higher in the process compared to a diversified equity fund.

Investors that had chosen to invest in Balanced Funds have also suffered in this
period. This is because Balanced Funds are generally supposed to increase
asset allocation to debt and reduce equity allocation during high volatility in the
stock markets or when the BSE Sensex shows a continuous downward trend.
This was not the case during the first three months of the current year as can be
seen from the performance of all the balanced funds.

Unless the fund managers of various fund houses are able to beat the
benchmark indices in the near future, investor interest and inflows into these
schemes will remain lackluster.


Investment must be rewarding for people to invest. People save

and defer consumption in the present if they can expect to improve their
consumption in future through additional returns on their present savings.
However, expectation and actual returns are not risk-free.

Studies have shown that usually the extent of reward is

directly proportionate to the degree of risk. For example, the reward from
long-term stock investment is higher than from long-term bond investment.
Further the reward from long-term bond investment is higher than from
long-term cash investment. Higher rewards are thus associated with greater
risks. Stock investment is riskier than bond investment while bond
investment is riskier than cash investment.Investors, therefore, are more
than ever popen to taking risks in order to be rewarded in the future.

Apart from the risk of inflation which reduces real returns over
a period of time, total returns, principal and even income are influenced by
other factors.

Real returns are reduced due to price inflation which reduces

the purchasing power. Total return risk arises due to volatility in the
portfolio, particularly during the short period of holding. Over a long period,
a diversified portfolio achieves satisfactory returns. Principal risk arises due
to the possibility of losing the capital. Income risk arises if dividend (in the
case of common stocks) declines.

Investment risks (market and residual risks) are often

measured in terms of market movement (often called beta). Market risk is
caused by fluctuations in the market. The price of a conservative stock
usually follows the market movement- its price goes up or down as much
as the market goes up or down, while the price of a volatile stock may
not correspond to this pattern and the price movement may be erratic.
Residual risk arises when price fluctuations are caused by factors unique
to the company, rather than market movement.
However, all risks can be controlled or reduced. Market risks
can be controlled by diversifying the portfolio. Risks may not be totally
eliminated but their impact can be minimised with a balanced and
judiciously selected portfolio.

The selection of a structured portfolio comprising different types

of securities is often not possible for an individual investor, owing to
paucity of time, experience and information. But investing through mutual
funds could take care of these problems. Mutual funds are managed by
experienced professionals who invest in a diversified portfolio after
thorough research. Therefore, while the market risk is considerably reduced
due to diversification of portfolio, residual risk is minimised through analysis
and research.

It has been already indicated that the operations of mutual

funds are regulated with a view to protect the interests of investors. The
SEBI regulations, 1996, states that, 'The Asset Management Company shall
take all reasonable steps and exercise all due diligence and ensure that
the investment of funds pertaining to any scheme is not contrary to the
provisions of the regulations and the Trust Deeds'.

In order to manage the investment of funds the trustee must

enter into an agreement with the AMC which must be approved by SEBI.

 The AMC shall manage the funds in accordance with the provision
of the trust deed and regulations.

 The AMC shall not acquire any assets out of scheme property
which may involve unlimited liability, or may result in encumbrance of
the scheme property in any way.

 The AMC shall disclose the basis of calculation of NAV and

repurchase price of the schemes and disclose the same to

 The AMC shall not undertake any business other than management
of mutual funds and activites specified in regulation 23 but may
take up financial services consultancy, research analysis on
commercial basis with prior approval of trustees and the boards, as
long as these are not in conflict with the fund management activity
 Funds shall be invested as per trust deed and regulations.

Mutual funds in India are allowed to invest moneys(collected

under any scheme) only in transferable securities in the money market or
in the capital market or in privately placed debentures or securitised debt.
SEBI regulations of 1996 contain the following strictures:

 Debt instruments must be rated as investment grade by a credit

rating agency. (In case it is not rated, specific approval of the board
of AMC is necessary.)

 A scheme may invest in any other scheme under the same AMC or
any other mutual fund without charging fees, provided that aggregate
interim investment by all schemes under the same management or
in schemes under any other AMC shall not exceed 5 per cent of
the NAV of the mutual fund.

 No mutual fund under all its schemes should own more than 10 per
cent of any company's paid-up capital carrying voting rights.

 The initial issue expenses in respect of any scheme may not

exceed 6 per cent of the funds raised under the schemes.

 Every mutual fund shall buy and sell securities on the basis of


In its report, Mutual Fund 2000, SEBI initiated steps to remove

the constrains arising out of investment restrictions imposed on mutual
funds. These measures were regularised in SEBI (Mutual Funds) regulations,
1996. Some of the new initiatives are:

 An AMC can undertake management and advisory services to

offshore funds, pension funds, provident funds, venture capital funds,
insurance funds, financial consultancy and exchange of research on
commercial basis (If any such activities are not in conflict with the
activities of the mutual fund)

 As per SEBI Regulations, 1996, mutual funds are allowed to provide

guaranteed returns if such returns are guaranteed by the sponsor or
AMC and a statement is made in the offer document indicating the
name of the person who will guarantee the returns and the manner
in which the guarantee is to be met.
 The industry-wise exposure limit of 15 per cent contained in SEBI
(Mutual Funds) Regulations, 1993, has been done away with.

 The earlier restrictions that no mutual fund under an individual

scheme should invest more than 5 per cent of its corpus under any
one company's share, and under all the schemes put together own
more than 5 per cent of the voting rights of the company, as well
as the limit of aggregate exposure limit of 10 per cent for all
investments in a single company, have been relaxed.

 According to the 1996 Regulations, the percentage of exposure limit

will be in terms of paid-up capital of the company carrying voting
rights. Any mutual fund under all its schemes can own up to 10 per
cent of any company's paid-up capital carrying voting rights.

 A mutual fund scheme can invest up to a maximum of 5 per cent

of its net assets in any other scheme of the same mutual fund or
any other mutual fund, without charging any fees.

 SEBI has also removed certain restrictions regarding money market

securities. The SEBI guidelines of 28 March 1994 regarding
investment in money market instruments prescribed a limit varying
from 25 per cent to 100 per cent of the total resources mobilised
under a scheme. These restrictions have been removed and fund
managers allowed complete freedom to determine the prtfolio
composition and invest in money market instruments.

 The regulations also contain an important provision allowing mutual

funds to borrow to meet temporary liquidity needs for the purpose
of repurchase, redemption of units or payment of interest of dividend
to unitholders. However, such borrowing is to be restricted to a
maximum 20 per cent of the net asset of the scheme and the
duration of such borrowing is not to exceed a period of six months.

The regulations have provided enough scope for flexibility in

investment management and widened the scope of mutual funds.It is now
up to the funds and fund managers to take the benefits of the extended

A suitable investment plan for maximisation of returns under

any investment portfolio calls for integration of several elements. A fund
manager for a mutual fund scheme would first of all formulate an
investment goal. The primary objective, usually, is the maximisation of
returns. This can be achieved through income or capital appreciation or a
combination of both. The investment goal, however, is influenced by factors
like total assets at the command of the fund manager, basic expectations
of investors, income and capital appreciation, expected rate of inflation,
taxes and costs. Therefore, unless the goals of the investment are
determined in relation to these factors no effective strategy of investment
can be formulated.


Once the investment goals are identified, it may be

necessary to indentify the character of the portfolio. This would help in
deciding the asset allocation strategy. In this respect we can refer to Bogle
who has characterised portfolios as:

 Complex managed

 Basic managed

 Tax-minimising

 Simple managed

 Basic index

 Readymade convenience

While a complex portfolio may consist of growth, aggressive

growth stocks and long and short term bonds, a readymade portfolio may
consist of index securities. A basic managed portfolio may include a higher
percentage of value-added stocks and bonds. A simple managed portfolio
may consist of highly graded blue chips.

Since mutual funds directly compete with stock market returns,

fund managers try to beat market returns. The important objective, however,
is to maximise net returns, i.e., returns net of inflation.


Long-term investment objectives confront the basic risks of

appreciation or depreciation of the value of stock-equity, bond and
corporate debentures. However, once the class of portfolio is identified it
will be easier for the fund manager to plan for risk management.
Therefore, while selecting and holding stocks it is necessary to foresee the
possible risks associated with them.

Rated debentures and government bonds are no doubt less

risky but their liquidity and appreciation are also restricted by the
underdevelopment of the secondary market for these instruments in India.
Common stocks and equities provide scope for capital appreciation and
continuous income growth. However, there is an equal possibility of
depreciation and decline. A careful analysis of the instruments as well as
of the history of management practices and growth plan of the company
may enlighten the fund managers, so that they may take precautionary
steps to minimise unforeseen risks.

One of the most widely used methods to reduce the element of

risks is diversification of portfolios.Diversification can take care of falling
income, depreciation of capital and the liquidity problem of the fund as a
whole. However, while a properly balanced and diversified portfolio is a
good strategy, overdiversification may raise the cost of funds and cause a
decline in the rate of returns. In this regard, Carter has suggested that a
high-grade stock portfolio should have 10 to 15 stocks. He further suggests
buying a new stock if a fund sells an existing one.

A diversified portfolio further calls for holding a variety of

stocks. To reduce risks due to fluctuation in economic growth rate and
market sensitivity, a fund should contain stocks of different industries. A
necessary and suitable mix of different kinds of stock on the basis of the
characteristics and inherent investment objectives may be planned.

 Blue-chip stocks

 Emerging growth stocks

 Cyclical stocks

 Interest-sensitive stocks

 Special situation stocks

Blue-chip stocks are stocks of the highest quality with a long

record of earnings and dividend growth. Usually they are industry leaders.
Stocks of FERA companies and other established Indian companies like
Telco,ACC and reliance would come under this category. The growth of
returns may not be high but there is safety and low risk.

Emerging growth stocks are the stocks of small companies

engaged in developing new products, new technology or new service, which
have the potential to emerge as large profitable enterprises. In India,
emerging stocks are in the areas of biotechnlogy, pollution control,
alternative energy, telecommunications, power and so on. Emerging stocks
are riskier than blue chips but they can offer tremendous returns. A growth
oriented fund manager cannot ignore them.

Cyclical companies, which are economy-dependent, are

automobiles, air transport, real estate, housing, steel and so on. The fortunes
of these industries are closely linked to the economy. They are profitable,
subject to accuracy in buying and selling them.

Interest-sensitive stocks are basically related to banking, finance,

leasing and savings. When interest rates rise they lose and when interest
rates fall they gain. The accurate forecasting of the movement of interest
rate and analysis of the implications of financial policy of the government
are necessary in order to make gains out of these stocks.

Utility stocks are often called defensive stocks because they

are not much influenced by economic fluctuations. Utility stocks are good
for reasonable rates of return and are comparable to bonds. Stocks of
industries relating to healthcare, power, telecommunications, and so on fall
in this category. Returns from utility stocks are quite accurately predictable.


The overall investment goals and risk-minimised returns can be

achieved by selecting an appropriate asset allocation strategy. Once the
basic investment goals are formulated, the portfolio character is identified
and risk-minimisation objectives are established, fund managers have to
devise an appropriate strategy for asset allocation. The important allocation
strategies are, strategic asset allocation, tactical asset allocation, and
dynamic asset allocation.
Strategic asset allocation is a long-term investment policy
designed to select the appropriate investment mix to achieve the
investment goal. According to Frank J. Fabozzi, the policy is determined
more by the needs of the liabilities of the investment entity rather than
the state of the market. The performance of a portfolio under SAA is
measured by its ability to satisfy the liability not relative to a market index
or even an absolute rate of return. The success of SAA is to a great
extent influenced by periodic portfolio correction or rebalancing, depending
on the changes in the market situation and/or changes in the investment
goals. There are two basic SAA approaches: The fixed ratio strategy calls
for an interchange among different asset class at a fixed percentage: say
5 per cent equities for 5 per cent bonds. Under the no-fix rebalancing
strategy, funds are allowed to grow with no particular attempt to reshuffle
the portfolio.

Under the tactical asset allocation (TAA) strategy the returns

from various classes are objectively estimated and the asset proportion
changed depending on the changes in the market conditions. The TAA
strategy depends on the ability of a fund manager to forecast and predict
future trends in the economy and market.

Under the dynamic asset allocation (DAA) strategy the asset mix
is mechanically shifted in response to changing market conditions. Portfolio
insurance is the best known variant of this strategy. According to Fabozzi
dynamic strategies enable investors to reshape the entire returns
distribution. By dynamically shifting the asset mix, investors can control the
downside risk and surplus volatility or can directly build a shortfall
constraint into their stratregy.

Strategic asset allocation and tactical asset allocation are both

widely practised. Under SAA the policy of 'no fix rebalancing' is often used
for income schemes. TAA is often used for growth schemes. However, since
the utilisation of TAA requires a high level of accuracy in forecasting it is
used with caution in order to avoid risks. The distinct advantage of SAA
as compared to TAA is that the former is less risky and market risks are
absorbed over a period of time. However, TAA can provide much better
returns if used successfully.
In practice, none of the strategies described above can be useful
in its pure form. Market prices have more than often failed to absorb new
information and even systematic research has not been able to remove

An area of controversy among investment experts and managers

relates to the investment approach. There are two types of investment
approaches practised by investment managers: top-down approach and
bottom-up approach.

The top-down approach begins by analysing the international

and national market environment through quantitative forecasting or
scenario planning. The bottom-up approach begins with an analysis of the
concerned company. The top-down approach helps in long-term investment
goals, whereas the bottom-up approach is utilised for short-term or
speculative gains

Institutions like mutual funds would benefit by using the top-

down approach because they have long-term investment goals and their
portfolios include a variety of assets with different degrees of risks.
However, in India mutual funds are more inclined towards the bottom-up
rather than the top-down approach. There is a need to reconsider this in
the interests of better fund management.
Investor Protection and Mutual Fund Regulation

The changes in the economic policy in India and the role of the state In managing
the financial services of the country, are taking place in an environment of a near
unanimous opinion that freedom of individual economic action is more effective
for economic growth and development of a country than the interventionist policy
of the government. It is being increasingly believed that the role of the
government should be restricted in the financial sector, and that the liberalization
of the financial sector is necessary for allocative efficiency.

The liberalization of the financial market ensures competition in the market place.
But the most important condition for a competitive market is the free flow of
correct information. In a perfect market buyers and sellers of any financial service
should be able to receive the same information, at the same time and the same
cost. However, in reality, this does not happen, because although ‘information’ is
considered to be a public good, a competitive market does not provide sufficient
quantity of the good. Moreover, financial information is a high value added good
and its cost is often beyond the reach of individual investors. Therefore, there is
always the chance of market collapse in a free economy due to the flow of
imperfect information. Mutual funds, or any other investment management
business, operating in such a market are exposed to this imperfection of the
market condition and carry great risks in transacting their business.

All types of investment activity involve considerable risk, whether undertaken by

individual of institutional investors. These risks are associated with losing capital
or receiving lower than expected returns. There are several factors that increase
the element of risk. These can be broadly classified into three categories:

• Economic performance related risks – which include the risks of changes

in the economy, money supply, inflation, interest rates and international
and trade relations.
• Securities related risks – which are related to the nature, efficiency and
performance of organizations issuing securities.
• Other risks – which include marketability of the securities (in the
secondary market), changes in tax laws, etc.

While the above-mentioned risks are common to all investors, individuals as well
as institutions, when an investor invests through an investment management firm
(e.g., a mutual fund) he/she faces three important classes of risks, namely:
• Portfolio selection risk
• Organizational (investment firm) risk
• Management process risk

Portfolio selection risk arises due to adverse portfolio selection. This could occur
if an investment manager of an investment firm/mutual fund, who selects the
portfolio on behalf of investors, is incapable of judging future market conditions,
or intentionally selects securities with the possibility of negative returns, of
indiscriminately selects high risk securities.

Organizational risk or failure of the firm arises due to several factors related to
the firm. These important factors are:

• Fraud committed by employees

• Theft of misuse of clients funds
• Reckless dealing of funds, including non-contractual transfer of funds,
portfolio manipulation, reckless churning of funds, etc.

Failure of the firm may also occur due to a general collapse of the market. A
stock market crash may lead to a bank crash, which may cause the breakdown of
the transaction machinery. These factors may put an investment management
firm on the path of insolvency. Unless an investment manager is sufficiently alert
to the situation and can take action to reverse the process, investors may suffer
huge losses.

Management process risks are related to errors in the execution of transactions,

delays in settlement and losses due to counter-party default. These risks are
often associated with the financial transactions of the investment manager.

While mutual funds as organized and well-regulated institutions do no face undue

problems of transaction, delays in settlement, or risks related to intangible and
tangible assets, a major source of risk confronted by them is market failure which
occur when prices and incentives do not fully reflect the costs and benefits of
goods and services provided. A market failure may occur when the failure of one
kind of institution jeopardizes the smooth functioning of the other (systematic
risk). For example, a bank strike may jeopardize the operations of the securities
market, or disturbances in the clearing system may affect market liquidity.
Market failure may also result from asymmetric information. According to Mayer
(1995) there are three types of risks to which uniformed investors are exposed:
Uncompensated wealth transfers (in particular fraud and theft), incompetence
and negligence. Risks arising out of asymmetric information have greater bearing
on mutual funds and are a matter of serious concern for mutual fund investors.

The Need for Regulation

The prevalence of risk associated with investment activity necessitates regulation

of the financial market in general, and the activities of investment management
firms in particular. Regulatory measures, whatever may be their form and
structure, are designed to attain the twin objectives of correcting market failures
and protecting investors from potential loss. The principles of regulation are
based on the following premises:

• To correct identified market imperfections and failures in order to improve

the market and enhance competition
• To increase the benefit to investors from economies of scale
• To improve the confidence of investors in the market by introducing
minimum standards of quality

Regulatory measures broadly classified into five categories:

• Imposing capital requirement for investment management firms

• Monitoring and auditing the operations of investment management firms
• Disclosure, and rating of management firms
• Providing insurance
• Setting up minimum standards for investment management firms

Though a capital requirement is considered to be an important prerequisite for

the healthy operation of a financial institution, this form of control cannot
effectively check the failure of investment management firms. Because the
problem of investment management relates to asymmetric information, the
capital structure of such firms cannot prevent potential failures. This form of
regulation does not exert any effective influence on investor protection in
investment management business.
Screening, monitoring and auditing are considered to be very effective systems
of control and have been adopted by many countries including the USA, UK,
Japan. Screening is an ex-ante assessment of the firm, conducted before
allowing it to start operation, while monitoring the performance of the firm is an
ex-post evaluation. While screening through a ‘fit and proper’ test is given more
importance tin the UK, US regulations attach greater importance to ex-post
evaluation. Auditing is also an ex-post assessment that helps to detect fraud and
identify the quality of management. Auditing is often done by a public agency.

The disclosure of material facts is considered to be an important method of

regulation to prevent market failure, and reduce the risks of adverse selection
and moral hazards. Full disclosure is effective in dealing with problems arising
out of asymmetric information. Two important methods are:

• Compulsory dissemination of information by investment management

• Rating by a credit rating agency

The provision of insurance against financial loss is effective in the case of firm-
specific risks, but may not cover the loss arising out of general market failure.
However, for systematic risks, insurance can be available to the extent that risks
can be internationally diversified. Insurance is considered to be an incomplete
form of protection, effective in the case of fraud due to wealth transfer.

Since management professionals play a very important role in providing

investment service, the integrity of managers is very vital for preventing frauds.
Therefore, the regulation of the ‘profession’ is considered to be very important for
ensuring protection to investors. The formulation of minimum standards for
professionals would compel managers to undergo professional training to
enhance their efficiency and integrity.

There is considerable debate about the appropriate structure of regulation to be

adopted by a country to regulate its financial services in general, and investment
business in particular. However no one solution can be suggested. The most
suitable solution can be found out through trial and error. The regulatory
structure, however, can be classified either as statutory (or legislative as in the
USA) of self-regulatory (as in the UK). Each of these forms of regulation has
some limitation. For example self-regulation may not create enough public
confidence, although it is a less bureaucratic and more collective and
practitioner-oriented mechanism. Statutory regulation may create more public
confidence, but it is bureaucratic and may be unrealistic and costly. A suitable
regulatory structure would be one that is backed by legislative action and
supported by industry practitioners. In order to formulate a workable and
acceptable regulatory structure, the following points must be noted:

• A close interlinkage between industry and regulatory body must be

• Though the basis of such a structure may be legislative, it should be
flexible, adaptive and less bureaucratic.
• Regulators should possess a degree of high perception and market
• Regulators should have enough authority to enforce the regulatory
• Regulators should not indiscriminately change their views that may create
instability in the market and loss of public confidence.
• An effective regulatory structure should promote a respected self-
regulatory organization (SRO) along with a legislative regulatory body.
• Persons of vision, knowledge and experience should manage the SRO.
• The SRO should function to protect and enhance the economic interests
of members and investors and should steer clear of group of individual
• The structure of regulation should create enough space for investors, for
whom the regulatory system is developed. Regulators should treat
investors as facilitators in the smooth functioning of the system.

Effective regulation should take into account both the cost of regulation and value
addition. Tow types of costs are usually associated with any regulatory
measures: Direct and Indirect.

Direct cost is the cost of administration and implementation, and indirect cost is
the loss of welfare due to restrictions on competition. It is essential that any
regulation must be formulated after taking into account the total cost and implicit
benefits. This is more so in a developing country and emerging market in India,
where regulatory expenditure is an additional burden on the public exchequer
and expenses are incurred at the cost of development expenditure. Moreover, in
an emerging and semi0efficient market like India, investors are exposed to more
volatility and risks, therefore, regulation should be effective, be able to protect
investor interests, and the direct benefits must be more than the indirect benefits
and costs of regulation.
Regulation and Investor Protection in India

Securities market regulation in India is in the process of evolution and cannot be

identified either with the UK or the US type of regulation. In India, under present
framework, the regulation of all participants in the securities market is the
responsibility of SEBI, with the exception of issuers of capital.

Though the system of SRO has not yet taken root in India, once SEBI is judicially
fully empowered as the main regulator of all aspects of the securities market and
investor protection in India, it would become possible to promote various SROs
responsible for various segments of the security industry, these SROs would
function under the overall supervision and jurisdiction of SEBI.

SEBI’s basic objective as the prime regulator of capital market activities in India
is to protect the interests of investors. This objective has been stated in the
preamble of the Securities and Exchange Board of India Act, 1991. Accordingly
all the capital market activities, including that of mutual funds, are covered under
the above objective so far as investor protection is concerned.

The Securities and Exchange Board of India (mutual funds) Regulations, 1993,
was the first attempt to bring mutual funds under a regulatory framework and to
give direction to its functioning. However, it was observed in the course of time
that the industry needed a more flexible work environment. Therefore SEBI came
out with new regulations in 1996 which eliminated many of the rigidities contained
in the 1993 regulations, and at the same time introduced new provisions as
regards disclosure, transparency and obligations on the part of mutual funds,
AMCs, trustees and key personnel. The Securities and Exchange Board of India
(mutual funds) Regulations,1996, (hereafter regulations) has many similarities
with the Investment Company Act, 1940, of the USA so far as mutual fund
regulation and investor protection are concerned. The regulatory and supervisory
powers of SEBI also stand strengthened by the Securities Law (Amendment)
Ordinance, 1995, which empowers SEBI to impose penalty for violation of SEBI
regulations. Under this amendment SEBI is allowed to file complaints in the
courts without prior approval of the central government. SEBI has thus emerged
as an autonomous and powerful regulator of mutual funds in India. The
regulations lay down many measures to protect mutual fund investors. Some of
these measures are discussed below.

SEBI has incorporated several provisions to check mutual funds at the entry level
similar to the provision of ‘fit and proper’ test in the UK. Every mutual fund shall
be registered with SEBI and the registration will be granted on fulfillment of
certain conditions laid down in the regulations for efficient and orderly conduct of
the affairs of a mutual fund’. The regulations further speculate that the sponsor
must have a sound track record and experience in the relevant field of financial
services for a minimum period of five years, professional competence, financial
soundness and general reputation of fairness and integrity in all business

SEBI has laid down conditions of appointment and obligations of trustees and
detailed guidelines on trust deed. The Asset Management Company (AMC) to
mange the assets of mutual funds are to be approved by SEBI. SEBI also lays
down the terms and conditions for the approval of the AMC, one of the conditions
for approval being that the AMC has a net worth of not less than Rs10 crore. The
directors of the AMC are to be persons having adequate professional experience
in finance and financial services related fields. The key personnel of the AMC
should not have been working for any AMC or mutual fund or any intermediary
whose registration has been suspended or cancelled at any time by the board.

Mutual funds must have a custodian to be approved by SEBI and one of the
preconditions for approval is the ‘sound track record, general reputation and
fairness in transaction’.

SEBI has laid down several provisions for pre-launch and post-launch disclosure
to ensure that investors can take informed decision on the basis of factual
information supplied by a mutual fund.

No new scheme can be launched by any mutual fund unless the trustees
approve the same and a copy of the document has been filed with the board.
SEBI has also stipulated that the AMC should stipulate the minimum amount it
seeks to raise under the scheme and the extent of oversubscription to be
retained. There are clear regulatory provisions regarding listing of close-ended
schemes, refunds, transfer and sending of unit certificates to investors. There is
also provision for disclosing the names of trustees of mutual funds and directors
of AMC in the prospectus of the funds, as also investment objectives and
strategy, and approximate percentage share of investment to be made in various
instruments. No guarantee of returns can be given unless it is fully guaranteed by
the sponsor of AMC and a statement indicating the manner of guarantee and the
name of the person who will guarantee the returns is made in the offer document.

SEBI has outlined the advertisement code to be followed by a mutual fund in

making any publicity regarding a scheme and its performance.
All mutual funds are bound to publish a scheme-wise annual report or an
abridged summary through an advertisement within six months of the closure of
financial year. The trustees of a mutual fund are bound to convey to investors
any information having adverse bearing on investment. A mutual fund is also to
publish half-yearly unaudited financial results through an advertisement.

SEBI has prescribed norms for investment management with a view to

minimize/reduce undue investment risks. There are also certain restrictions that
are aimed at ensuring transparency and prohibiting mutual funds from excessive
risk exposure. These restrictions and limitations have strong similarities with such
provisions in the USA and the UK mutual.

SEBI can inspect the books of accounts, records and documents of a mutual
fund, trustees, AMC and custodian.

In addition, Securities Law (Amendment) Ordinance, 1995, further empowers

SEBI with certain penal actions for violations of regulations. SEBI can impose
monetary penalty under the following situations.

• If any mutual fund violates terms and conditions of certificate of

registration, SEBI can impose penalty not exceeding Rs 10000 for each
day during which failure continues or Rs 1000000, whichever is higher.
• If a mutual fund fails to comply with listing conditions a penalty not
exceeding Rs 5000 for each day or Rs 500000, whichever is higher, can
be imposed.
• If a mutual fund fails to dispatch unit certificate in the manner provided it
shall be liable for penalty not exceeding Rs 5000 per day for each day
during which such failure continues.
• A mutual fund is also liable for penalty if it fails to refund application money
(specified in the regulations), not exceeding Rs 1000 per day during which
such failures continues.
• A mutual fund can be penalized if it fails to invest the money collected
under a scheme in the manner, or within the period, prescribed in the
regulations. Such penalty will not exceed Rs 500000 for each failure.
• A penalty of Rs 500000 for each failure of the AMC can be imposed if it
fails to comply with any restrictions provided in the regulations.

As we can see, the regulatory framework as discussed above indicates that SEBI
is a highly powerful regulator. The Indian regulatory mechanism is centered on
statutory provisions. There is a strong emphasis on ex-post investigation and
disciplining of mutual funds through financial penalty for violation of regulation.
The implicit tone of regulation is correction through control. There are enough
provisions for disclosure. Thus, the regulatory mechanism and supervisory
control are both strong enough for protecting can be strengthened further by
including a few more elements like SRO, investors protection fund and credit

SROs should be an integral part of the regulatory mechanism in a financial

service industry. The establishment of a strong SRO for mutual funds in India
becomes imperative, particularly in view of the imperfections of the market
system in the current period of economic transaction. Economic transaction is
often characterized by market volatility, speculation and fraudulent activities that
may lead to market failures and exposes investors to great risks. Statutory
regulations and ex-post investigation could well fail to prevent market failures
unless the explicit and implicit implications of provisions are understood and
implemented. An SRO can play an important role in disciplining members and
assist the regulatory authority in protecting investor’s interest. Further, an SRO
can be effective in the following ways:

• It can help the mutual fund industry to grow on sound business principles
by helping member organizations to overcome environmental,
organizational and procedural constraints.
• It can develop an internal code of conduct to be followed by members to
prevent them from adopting unethical business practices.
• It can also conduct periodic checks on the activities of member funds. This
will increase the chances of fair business, prevent frauds and increase the
confidence of investors.
• It can undertake investor education through publications and seminars.
• An SRO can also develop a code of conduct for associates like registrars,
custodians, brokers and agents. A uniform code of conduct can also be
formulated for brokers, sub-brokers and agents who are involved in selling
mutual fund products.
• SROs can actively undertake research studies and training for members
as well as investors. SROs can play an active role in promoting the mutual
fund culture by conducting research and producing literature.
• Business growth and development require efficient and trained managers.
The association can undertake the training activities to develop a band of
competent managers for mutual funds.
SROs can be very effective if given certain authority under the regulatory system
to ensure that members do accept the mandate of the SRO. For example, the
Investment Trust Association of Japan that acts as a SRO has a statutory status
as a ‘juridical person’ under the Securities Investment Trust Law amended in
August 1967. This amendment gives the SRO power to adopt rules that would
strengthen its supervisory authority. In the UK SROs are ‘certified clubs’ and no
designated investment business can be conducted unless on e is a member of
the respective club (SRO). Although these clubs do not have any direct power,
the system of self-regulation has been so developed that two SROs (FIMBRA
and IMRO) regulate the investment management business. India does need to
have a strong SRO for the mutual fund industry. The Japanese model of a self-
regulatory organization, which plays a balancing role in regulating the mutual
fund industry, would be suitable for India.

The Association of Mutual Funds in India (AMFI) was formed in August 1995 by
the Indian mutual funds with a view to ‘promoting and protecting the interest of
mutual funds and their unitholders, increasing public awareness of mutual funds,
and serving the investors interest by defining and maintaining high ethical and
professional standards in the mutual funds industry’. To achieve this goal, AMFI
has undertaken investor’s awareness programmes and is also working to bring
out a comprehensive code of ethics for mutual funds. By the end of March 1996,
26 mutual funds were members of AMFI.

Notwithstanding the many problems, Indian mutual fund industry has, within
a short period, emerged as a significant financial intermediary, assisting
efficient resource allocation, providing strong support to capital markets and
helping investors to realize the benefits of stock market investing. The
growing importance of Indian mutual funds in the marketplace may be
noted in term of increased mobilization of funds and growing number of
investor accounts with Indian mutual funds.

However, in spite of market reforms, inducements to competition, increased

operational transparency, well-framed regulatory norms and an expanding
savings market, Indian mutual funds, after an initial euphoria, have shown
sluggish growth. The overall macroeconomic uncertainties, particularly the
fluctuating stock markets, have had an adverse impact on mutual fund
mobilization. However, several structural and policy-related factors have also
impeded the growth of the mutual fund industry in India.

Mutual funds in India have been quite wrongly promoted as an alternative

to equity investing, thus creating very high expectations in the minds of
investors. In a falling market, these expectations have been belied. Only the
pure equity schemes can be compared with the stock market index.
However, pure equity schemes are few in India; further, investment is not
purely linked to a particular index. Therefore, returns from mutual funds
cannot really be compared with the stock market index. Ignorance of these
facts, coupled with aggressive selling, have left many mutual funds unable
to offer promised returns, thus driving away many first time investors.

Indian mutual funds have remained cent red around a limited product
range-basically income, income-cum-growth and tax-saving schemes. Efforts
to develop and expand the market through innovative new products have
been negligible. This has happened due to the tendency to avoid risk,
inability to understand future market developments, and changes in investor
preference. While therefore, the extent of the mutual funds market has
remained limited, there have been innovations even in debt instruments,
resulting in the mobilization of a significant amount of resources by the
financial institutions. Probably the introduction and implementation of new
regulatory norms has contributed in some measure to market sluggishness,
as the emerging market was, initially, not able to respond to the regulatory
The absence of product diversification and a confused market situation has
been made worse by the absence of an innovative marketing network for
mutual funds. The agent-oriented network has largely been a failure
because most of the agents have not been specifically trained to sell
mutual fund products. This has led to a significant communication gap
which has come in the way of market expansion.

The passive approach of some mutual funds in managing investors' funds

is compounded by the lack of an adequate research infrastructure.
Consequently, returns commensurate with the market movement could not
be realised by many schemes, which has tended to show up Indian mutual
funds in a bad light.

Management is considered to be a key factor for the operational efficiency

of any business venture. This factor becomes even more crucial for service
ventures such as mutual funds. What mutual funds require are managers
who have a clear understanding of the prevailing and emerging market
potential, investor preference and macro-economic fundamentals.

The market success of any new product, particularly a financial product,

depends largely on its acceptance by consumers, in this case investors.
Mutual funds must undertake a well-designed and comprehensive
programme of investor education, especially aimed at investors in rural and
semi-urban areas. However, this has been mostly neglected in India.

In the light of the problems identified above, corrective actions are called
for, for the sustained growth of the industry. A training programme for
those directly associated with the industry should be the first objective.
Well-informed managers/agents/brokers would then be able to educate
investors. The association of mutual funds of India should take the initiative
to produce standard training literature, as well as establish an institute for
trainning and research.

Investor education is the key to the growth and survival of mutual funds.
While some efforts are being made by individual mutual funds in this
direction, no coordinated efforts have been made so far. Investor
understanding about mutual fund product, especially the risk-absorption
ability of, and capital protection through, mutual funds must be increased
not only by the efforts of individual mutual funds, but also jointly with
AMFI through structured programmes, commissioned writings, seminars,
conferences, meetings and so on.

Positive media support is also required and mutual funds need to be

media friendly. There should be a closer coordination between AMFI, mutual
funds and the media to promote investor education in India.

The product range offered by mutual funds needs to be redesigned

keeping in view the short-term, medium-term, and long-term changes in the
savings and investment markets. Indian mutual funds need to design
innovative products not only for the conventional risk-averse type of
investors, but also for the emerging risk-talking type of investors. There is
definite potential for sector funds, specialist funds and asset allocation
funds. Indian mutual funds can launch exclusive bond mutual funds to
draw small investors in the bond market, who are otherwise unable to
participate in the bond market due to certain restrictions. Money market
mutual funds would also be an excellent avenue to attract small investors,
who cannot otherwise operate in the money market. The future of the
Indian economy belongs to the debt market, and the mutual fund industry
must take early initiatives to launch bond funds and MMMFs to safeguard
their future interests.

The success of mutual fund marketing depends to a great extent on

institutionalized efforts. There is an urgent need to promote professional
and institutional fund distributors and placement agencies. Mutual funds
should encourage the development of independent institutional distributors,
and through institutionalized distributors the system of underwriting of
mutual fund schemes. Underwriting would increase the investor confidence.

Indian mutual funds should shift from fund-based marketing to scheme-

based marketing, to reach specific target groups. Scheme-based target-
oriented marketing calls for a huge database and identification of investor
expectations and changing preferences according to the changes in the
socioeconomic environment. This would, however only be possible if serious
market research is conducted. So, mutual funds must strengthen market
research and market analysis activities.
Important consumer considerations for investing in mutual funds are their
past performance and reputation. If schemes are rated by an independent
rating agency, investor confidence in mutual fund would increase.

The fund management strategy in India should change from passive to

active, based on trained analytical and forecasting ability to identify
fundamental changes in the macroeconomic and market environment.
Economic fundamentals should from the basis of investment decisions.

Over-emphasis on asset management has often ignored the crucial

importance of liability management in mutual funds, leading many Indian
funds into a liquidity trap at the time of redemption. A more scientific
approach towards liability management needs to be adopted by the funds.

Derivatives have been widely used by the mutual funds as a measure of

risk management in a complex and competitive market place. Further, the
practice of stock lending, used widely in the Western market, has induced
efficiency in Funds management. A regulatory environment for mutual funds
needs to encourage these practices in India.

SEBI has been playing a significant role in the regulation of the mutual
fund industry, to increase investor confidence and steer the industry on a
structured development path. But considering the prevailing investor
psychology and indifferent health of the mutual fund industry, a more
supportive role is called for.

Since SROs play a very significant role in assisting regulators and in

promoting healthy practices in mutual funds industry, India needs a strong
and responsible SRO system, which should form a part of the regulatory
mechanism. With some juridical authority, AMFI can be a legally authorized
SRO and emerge as an efficient link between SEBI and the mutual funds.

Indian mutual funds should give up their complacent and defensive attitude
and be ready to take a position in the global market. According to
Micropal data, 45 per cent of the assets of unit trusts in the UK, 16 per
cent of the assets of Japanese investment trusts, 6.9 per cent of the
assets of US mutual funds and 4.7 per cent of the assets of German
mutual funds are being invested abroad. It is further estimated that by the
year 2010 about US $ 1.5 trillion, or 20 per cent of the total assets of US
mutual funds will be invested abroad.

India beyond 2000 would become a major world market and foreign funds
would continue to flow along with the flow of foreign mutual funds and
fund managers. This would lead to increased competition. Therefore, the
domestic Indian funds need to think in terms of competitive edge.

In the global marketplace no industry can afford to be struck by inertia. In

order to increase India's share in the global savings, Indian mutual funds
need to rapidly expand their overseas operations. In the final analysis it is
the management which is crucial to success of any business operation.
Indian mutual funds wanting to survive in the global market must develop
a dynamic management style based on flexibility, adaptability and

The recent reforms and globalization process have offered tremendous

opportunities to Indian mutual funds. While liberalization by itself does not
produce any guarantee for growth, but institutionalization of liberalization
through changes in managerial mindsets can definitely produce the desired
results. In a global capital market environment, Indian mutual fund industry
can emerge as one of the strongest players by absorbing investment
technology and modified managerial practices in the regional context, while
thinking and acting with a global vision.

Sadhak, H. (1997) 'Mutual Funds In India' - Marketing Strategies &

Investment Practices

Friedman, A.G. (1992) 'How Mutual Fund Works' - Management & Working

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