2009

MUTUAL FUND
ANALYSIS & TRENDS

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF POST

GRADUATE DIPLOMA IN MANAGEMENT.

AT SHAREKHAN MUTUAL FUND LTD.

DEVKI NANDAN YADAYA

GRADUATE SCHOOL OF BUSINESS & ADMINISTRATION
8/15/2009
 TABLE OF CONTENTS

PREFACE
ACKNOWLEDGEMENT
OBJECTIVE OF PROJECT
 OBJECTIVE OF STUDY…………………………………………………….6
 SCOPE OF STUDY…………………………………………………………..7
 LIMITATIONS……………………….............................................................7
 JOB DESCRIPTION………………………………………………………….9
METHODOLOGY OF WORK
RESEARCH DESIGN………………………………………………………………10

INTRODUCATION
 COMPANY OVERVIEW ABOUT SHAREHKAN 11-15
MUTUAL FUND
 Introduction to Mutual Funds…………………………………...17
 ORGANISATION OF A MUTUAL FUND……………………………. …18
 IMPORTANT CHARACTERISTICS OF A MUTUAL FUND……………18
 OBJECTIVES OF A MUTUAL FUND……………………………………18-19
 ADVANTAGES OF MUTUAL FUNDS………………………………….19-20
INVESTORS PROFILE…………………………………………………………… 21
TYPES OF MUTUAL FUNDS………………………………………………… ..22-28
Investment norms…………………………………………………… 29-36
RISKS ASSOCIATED WITH MUTUAL FUNDS………………………………..37
MUTUAL FUND INDUSTRY PHASES……………………………………… 38-41
PERFORMANCE MEASURES OF MUTUAL FUNDS……………………….42-46

MUTUAL FUND INDUSTRY ANALYSIS…………………………………… 47-53

NEW TRENDS OF MUTUAL FUND INDUSTRY……………………………. 54-59

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QUESTIONNAIRE……………………………………………………………….. 60-64

DATA REPRESENTATION……………………………………………………… 65-73

MAJOR FINDING…………………………………………………………………… 75

RECOMMEDATIONDS……………………………………………………………76

Emergence of new business models…………………………………… 77

Global Practice……………………………………………………….. 76-77

CONCLUSION…………………………………………………………………….. 78

BIBLIOGRAPHY…………………………………………………………………. 79

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 ACKNOWLEDGMENT

“Knowledge is an experience gained in life, it is the choicest

possession, which should not be shelved but should be happily shared with
others”.

I express my gratitude to my esteemed guide, Faculty guide Dr.

Vivekanand Singh, NIMBUS ACADEMY OF MANAGEMENT for their
valuable critiques, assistance and encouragement, which enabled me to carry
on the project successfully. They gave me a wonderful opportunity to work
on this project. Their time-to-time guidance and incessant support helped me
to broaden my outlook on the project I am highly obliged for their support
throughout the Training.

I would like to express my deep sense of gratitude to my Industry guide,

Mr. Rakesh Kunwar, Asst. Manager Sales– Sharekhan Ltd., Greater
Kailash Branch, New Delhi, who spent his valuable time and guided
me. I have benefited a great deal from his incisive analysis and erudite
suggestions. The atmosphere of a learning organization that he has
created along with his peers in Greater Kailash Branch has not only
helped me but all the other trainees.

I would like to thanks to all for give their valuable inputs and time.

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PREFACE

5
OBJECTIVE OF PROJECT

6
OBJECTIVE OF PROJECT

The Broad objective of the project is to make clients and let them know about the
different services offered by the Sharekhan. Also to convince them about how Sharekhan
services out score their rivals. And how in future they will be benefited from the services
offered by Sharekhan.

This project will accomplish to understand the problem faced by the existing client and
find ways to solve their queries at your level otherwise let the above level know about
their problem.

Trainees have to be in regular contacts with their clients so they we come to know about
the problem client are facing. This also helps them to multiply their clients by getting the
further references.

By this trainees are able to make a chain of the customers which expands as they satisfy
their needs.

1. To study about the competitive position of Sharekhan Ltd in Competitive Market.

2. To study about the effectiveness & efficiency of Sharekhan Ltd in relation to its
competitors

3. To study about whether people are satisfied with Sharekhan Services & Management
System or not

4. To study about the difficulties faced by people while Trading at Sharekhan.

5. To project Mutual Fund as the ‘productive avenue’ for investing activities.

6. To show the wide range of investment options available in Mutual Funds by
explaining its various schemes

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SCOPE OF STUDY

 To make analysis of. Mutual funds and their performance

 To make a comparative analysis of public sector & private sector.
 To serve Retail investor’s concern about the risk factor.
 To explain the Scope and methodology of mutual funds.
 Find out the growing investment opportunity for the investor in mutual funds
 The study will help the organization to formulate marketing strategies so that they
can attract more customers/potential investors towards the company.

 To help the investors in getting out the most of their holdings in the stock market

 To help the analyst to know the effectiveness of the stock ideas provided by the
organization.

LIMITATION OF STUDY

1. The study is limited only to the analysis of different schemes and its suitability
to different investors according to their risk-taking ability.

2. The study is based on secondary data available from monthly fact sheets,
websites and other books, as primary data was not accessible.

3. The study is limited by the detailed study of various schemes of different Asset
Management Company.

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 4. Some respondents either do not have time or willing does not respond as they are
quite annoyed with the phone call

5. Size of the research may not be substantial.

6. There was lack of time on the part of respondents.

7. There may be biasness in information by market participant.

JOB DESCRIPTION
The company placed me as a Summer Trainee. I have been handling the

Following responsibilities:

 My job profile was to sale the products of the organization.

 My job profile was to coordinate the team and also help them to sale the
product and also help them in field.
 My job profile was to generate the leads by cold calling.
 My job profile was to understand customers’ needs and advising them to make
a portfolio as per their investment.
 My job profile was to do sales promotion through e-mails, canopies, making
cold calling, distributing pamphlets and etc.

AREA ASSIGNED

I covered areas like Delhi, Ghaziabad and NCR.

TARGET ASSIGNED

 To sell 10 accounts per month.

TARGET MARKET
 Different properties dealers.
 Charted accountants.

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  Lawyers
 Travel agencies
 Transport business
 House wives
 Businessmen
 Corporate Employees etc.

DAY TO DAY JOB DESCRIPTION

 Reporting time: 9.30 AM

 Fixing appointment with clients.
 Visit clients place.
 Demonstrate the product on Internet to the client.
 Completing the formalities like filling the application form and documentation.
 Cold calling.

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RESEARCH DESIGN

RESEARCH METHODOLOGY:

The research methodology applied will be basically descriptive study.

DATA COLLECTION:

Data has been collected through literature survey and departmental opinion.
The part of data is collected from various primary sources and secondary sources.

DATA COLLECTION METHOD:

The data is collected through both primary and secondary methods

PRIMARY METHOD:

Information gathered by feedback forms filled by and interview and

discussions with the customer of various our area.

SECONDARY METHOD:

Secondary data is being collected through following methods;

It will be collected through internal and external sources under internal source through
the sharekhan site i.e. www.sharekhan.com and under external sources through use of
canopies, advertisements, printed material of the company, brochures analysis is carried
out.

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COMPANY PROFILE

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ABOUT SHAREKHAN LIMITED
Sharekhan Ltd. is one of the leading retail stock broking house of SSKI Group which is
running successfully since 1922 in the country. It is the retail broking arm of the
Mumbai-based SSKI Group, which has over eight decades of experience in the stock
broking business. Sharekhan offers its customers a wide range of equity related services
including trade execution on BSE, NSE, Derivatives, depository services, online trading,
investment advice etc.

The firm’s online trading and investment site - www.sharekhan.com - was launched on
Feb 8, 2000. The site gives access to superior content and transaction facility to retail
customers across the country. Known for its jargon-free, investor friendly language and
high quality research, the site has a registered base of over one lakh customers. The
content-rich and research oriented portal has stood out among its contemporaries because
of its steadfast dedication to offering customers best-of-breed technology and superior
market information. The objective has been to let customers make informed decisions
and to simplify the process of investing in stocks.

On April 17, 2002 Sharekhan launched Speed Trade, a net-based executable application
that emulates the broker terminals along with host of other information relevant to the
Day Traders. This was for the first time that a net-based trading station of this caliber was
offered to the traders. In the last six months Speed Trade has become a de facto standard
for the Day Trading community over the net.

Sharekhan’s ground network includes over 640 centers in 280 cities in India which
provide a host of trading related services.

Sharekhan has always believed in investing in technology to build its business. The
company has used some of the best-known names in the IT industry, like Sun
Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette,
Verisign Financial Technologies India Ltd, Spider Software Pvt Ltd. to build its trading
engine and content. The Morakhiya family holds a majority stake in the company. HSBC,
Intel & Carlyle are the other investors.

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With a legacy of more than 80 years in the stock markets, the SSKI group ventured into
institutional broking and corporate finance 18 years ago. Presently SSKI is one of the
leading players in institutional broking and corporate finance activities. SSKI holds a
sizeable portion of the market in each of these segments. SSKI’s institutional broking arm
accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all
Domestic Institutional portfolio investment in the country. It has 60 institutional clients
spread over India, Far East, UK and US. Foreign Institutional Investors generate about
65% of the organization’s revenue, with a daily turnover of over US$ 2 million. The
Corporate Finance section has a list of very prestigious clients and has many ‘firsts’ to its
credit, in terms of the size of deal, sector tapped etc. The group has placed over US$ 1
billion in private equity deals. Some of the clients include BPL Cellular Holding, Gujarat
Pipavav, Essar, Hutchison, Planetasia, and Shopper’s Stop.

PROFILE OF THE COMPANY

Name of the company: Sharekhan ltd.

Year of Establishment: 1925

Headquarter : ShareKhan SSKI

A-206 Phoenix House
Phoenix Mills Compound
Lower Parel
Mumbai - Maharashtra, INDIA- 400013

Nature of Business : Service Provider

Services : Depository Services, Online Services and

Technical Research.

Number of Employees : Over 3500

Revenue : Data Not Available

Website : www.sharekhan.com

Slogan : Your Guide to The Financial Jungle.

Vision

To be the best retail brokering Brand in the retail business of stock market.

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Mission

To educate and empower the individual investor to make better investment

decisions through quality advice and superior service.

Sharekhan is infact-
• Among the top 3 branded retail service providers
• No. 1 player in online business
• Largest network of branded broking outlets in the country serving more than
7,00,000 clients.

REASON TO CHOOSE SHAREKHAN LIMITED

Experience

SSKI has more than eight decades of trust and credibility in the Indian stock market. In
the Asia Money broker's poll held recently, SSKI won the 'India's Best Broking House
for 2004' award. Ever since it launched Sharekhan as its retail broking division in
February 2000, it has been providing institutional-level research and broking services to
individual investors.

Technology

With its online trading account one can buy and sell shares in an instant from any PC
with an internet connection. One can get access to its powerful online trading tools that
will help him take complete control over his investment in shares.

Accessibility

Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for

investors. These services are accessible through its centers across the country over the
internet (through the website www.sharekhan.com) as well as over the Voice Tool.

Knowledge

In a business where the right information at the right time can translate into direct profits,
one can get access to a wide range of information on Sharekhan limited’s content-rich
portal. One can also get a useful set of knowledge-based tools that will empower him to
take informed decisions.

Convenience

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One can call its Dial-N-Trade number to get investment advice and execute his
transactions. Sharekhan ltd. have a dedicated call-centre to provide this service via a Toll
Free Number 1800-22-7500 & 1800-22-7050 from anywhere in India.

Customer Service

Sharekhan limited’s customer service team will assist one for any help that one may
require relating to transactions, billing, demat and other queries. Its customer service can
be contacted via a toll-free number, email or live chat on www.sharekhan.com.

Investment Advice

Sharekhan has dedicated research teams of more than 30 people for fundamental and
technical researches. Its analysts constantly track the pulse of the market and provide
timely investment advice to its clients in the form of daily research emails, online chat,
printed reports and SMS on their mobile phone.

PRODUCTS AND SERVICES OF SHAREKHAN LIMITED

The different types of products and services offered by Sharekhan Ltd. are as follows:

 Equity and derivatives trading

 Depository services
 Online services
 Commodities trading
 Dial-n-trade
 Portfolio management
 Share shops
 Fundamental research
 Technical research

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MUTUAL FUND

17
 Introduction to Mutual Funds

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 then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciations realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a Mutual Fund.

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A Mutual Fund is a body corporate registered with the Securities and Exchange Board
of India (SEBI) that pools up the money from individual/corporate investors and invests
the same on behalf of the investors/unit holders, in Equity shares, Government
securities, Bonds, Call Money Markets etc, and distributes the profits. In the other
words, a Mutual Fund allows investors to indirectly take a position in a basket of assets.

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 among a wide cross-section of industries
and sectors thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at same time. 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 which are launched from time to time. A Mutual Fund is required to be
registered with Securities Exchange Board of India (SEBI) which regulates securities
markets before it can collect funds from the public.

ORGANISATION OF A MUTUAL FUND:

There are many entities involved and the diagram below illustrates the organizational
set up of a Mutual Fund:

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 (For detailed definitions in the above chart refer to annexure 1)

Mutual Funds diversify their risk by holding a portfolio of instead of only one asset.
This is because by holding all your money in just one asset, the entire fortunes of your
portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk
is substantially reduced.

Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds
contains the same risk as investing in the markets, the only difference being that due to
professional management of funds the controllable risks are substantially reduced. A
very important risk involved in Mutual Fund investments is the market risk. However,
the company specific risks are largely eliminated due to professional fund management.

IMPORTANT CHARACTERISTICS OF A MUTUAL FUND

 A Mutual Fund actually belongs to the investors who have pooled their

Funds. The ownership of the mutual fund is in the hands of the Investors.

 A Mutual Fund is managed by investment professional and other

Service providers, who earns a fee for their services, from the funds.

 The pool of Funds is invested in a portfolio of marketable investments.

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  The value of the portfolio is updated every day.

 The investor’s share in the fund is denominated by “units”. The value

of the units changes with change in the portfolio value, every day. The

value of one unit of investment is called net asset value (NAV).

 The investment portfolio of the mutual fund is created according to The stated

Investment objectives of the Fund.

OBJECTIVES OF A MUTUAL FUND:

 To Provide an opportunity for lower income groups to acquire without
Much difficulty, property in the form of shares.
 To Cater mainly of the need of individual investors, whose means are small?
 To Manage investors portfolio that provides regular income, growth,
Safety, liquidity, tax advantage, professional management and diversification.

ADVANTAGES OF MUTUAL FUNDS:

 Reduced Risk.
 Diversified investment.
 Botheration free investment.
 Revolving type of investment (Reinvestment).
 Selection and timings of investment.
 Wide investment opportunities.
 Investments care.
 Tax benefits.

STRUCTURE OF A MUTUAL FUND

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 Sponsor

Trustee Mutual
s fund

ASSET
MANAGEMENT
COMPANY

Custodia Registra
n r

INVESTORS PROFILE:
An investor normally prioritizes his investment needs before undertaking an
investment. So different goals will be allocated to different proportions of the total
disposable amount. Investments for specific goals normally find their way into the debt
market as risk reduction is of prime importance, this is the area for the risk-averse
investors and here, Mutual Funds are generally the best option. One can avail of the
benefits of better returns with added benefits of anytime liquidity by investing in open-
ended debt funds at lower risk, this risk of default by any company that one has chosen
to invest in, can be minimized by investing in Mutual Funds as the fund managers
analyze the companies financials more minutely than an individual can do as they have
the expertise to do so.

Moving up the risk spectrum, there are people who would like to take some risk and
invest in equity funds/capital market. However, since their appetite for risk is also

22
limited, they would rather have some exposure to debt as well. For these investors,
balanced funds provide an easy route of investment, armed with expertise of investment
techniques, they can invest in equity as well as good quality debt thereby reducing risks
and providing the investor with better returns than he could otherwise manage. Since
they can reshuffle their portfolio as per market conditions, they are likely to generate
moderate returns even in pessimistic market conditions.

Next comes the risk takers, risk takers by their nature, would not be averse to investing
in high-risk avenues. Capital markets find their fancy more often than not, because they
have historically generated better returns than any other avenue, provided, the money
was judiciously invested. Though the risk associated is generally on the higher side of
the spectrum, the return-potential compensates for the risk attached.

TYPES OF MUTUAL FUNDS:

Schemes By Structure
 Open-ended Fund/ Scheme
 Close-ended Fund/ Scheme

Schemes by investment Objective

 Growth / Equity Oriented Scheme
 Income / Debt Oriented Scheme
 Balanced Scheme
 Money Market or Liquid Fund Scheme

Other Objective
 Gilt Fund
 Index Funds
 Load AND no-load Fund
 Tax Saving Schemes

Schemes By Structure In Detail

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A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period

a. Open-ended Fund/ Scheme

The holders of the shares in the Fund can resell them to the issuing Mutual Fund
company at the time. They receive in turn the net assets value (NAV) of the shares at
the time of re-sale. Such Mutual Fund Companies place their funds in the secondary
securities market. They do not participate in new issue market as do pension funds or
life insurance companies. Thus they influence market price of corporate securities.
Open-end investment companies can sell an unlimited number of Shares and thus keep
going larger. The open-end Mutual Fund Company Buys or sells their shares. These
companies sell new shares NAV plus a Loading or management fees and redeem shares
at NAV.In other words, the target amount and the period both are indefinite in such
funds
An open-ended fund or scheme is one that is available for subscription and repurchase on
a continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value (NAV) related prices which are
declared on a daily basis. The key feature of open-end schemes is liquidity.

b. Close-ended Fund/ Scheme

A closed–end Fund is open for sale to investors for a specific period, after which
further sales are closed. Any further transaction for buying the units or
repurchasing them, Happen in the secondary markets, where closed end Funds
are listed. Therefore new investors buy from the existing investors, and existing
investors can liquidate their units by selling them to other willing buyers. In a
closed end Funds, thus the pool of Funds can technically be kept constant. The
asset management company (AMC) however, can buy out the units from the
investors, in the secondary markets, thus reducing the amount of funds held by
outside investors. The price at which units can be sold or redeemed Depends on
the market prices, which are fundamentally linked to the NAV. Investors in
closed end Funds receive either certificates or Depository receipts, for their
holdings in a closed end mutual Fund.
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The
fund is open for subscription only during a specified period at the time of launch of the

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scheme. 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 the
units 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 i.e. either repurchase facility or through listing on stock
exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective In Detail

A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:

a. Growth / Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the
medium to long- term. Such schemes normally invest a major part of their corpus in
equities. Such funds have comparatively high risks. These schemes provide different
options to the investors like dividend option, capital appreciation, etc. and the investors
may choose an option depending on their preferences. The investors must indicate the
option in the application form. The mutual funds also allow the investors to change the
options at a later date. Growth schemes are good for investors having a long-term outlook
seeking appreciation over a period of time.

b. Income / Debt Oriented Scheme

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, Government securities and money market instruments.
Such funds are less risky compared to equity schemes. These funds are not
affected because of fluctuations in equity markets. However, opportunities of capital
appreciation are also limited in such funds. The NAVs of such funds are affected
because of change in interest rates in the country. If the interest rates fall, NAVs of such
funds are likely to increase in the short run and vice versa. However, long term
investors may not bother about these fluctuations.

c. Balanced Scheme
The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion indicated
in their offer documents. These are appropriate for investors looking for moderate
growth. They generally invest 40-60% in equity and debt instruments. These funds are
also affected because of fluctuations in share prices in the stock markets. However,
NAVs of such funds are likely to be less volatile compared to pure equity funds.

d. Money Market or Liquid Fund Schemes

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 These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money, government securities, etc. Returns on these
schemes fluctuate much less compared to other funds. These funds are appropriate for
corporate and individual investors as a means to park their surplus funds for short
periods.

Other Schemes In Detail

a. Gilt Funds
These funds invest exclusively in government securities. Government
securities have no default risk. NAVs of these schemes also fluctuate due to
change in interest rates and other economic factors as is the case with income or debt
oriented schemes.

b. Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the
securities in the same weightage comprising of an index. NAVs of such schemes would
rise or fall in accordance with the rise or fall in the index, though not exactly by the
same percentage due to some factors known as "tracking error" in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual fund
scheme.
There are also exchange traded index funds launched by the mutual funds which
are traded on the stock exchanges.

c. Load And 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 which are more important.
Efficient funds may give higher returns in spite of loads.

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.

d. Tax Saving Schemes

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 These schemes offer tax rebates to the investors under specific provisions of the
Income Tax Act, 1961 as the Government offers tax incentives for investment in
specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes
launched by the mutual funds also offer tax benefits. These schemes are growth oriented
and invest pre-dominantly in equities. Their growth opportunities and risks associated
are like any equity-oriented scheme.

ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS:-

In India Mutual Fund usually formed as trusts, three parties are generally involved viz.
 Settler of the trust or the sponsoring organization.
 The trust formed under the Indian trust act, 1982 or the trust company
registered under the Indian companies act, 1956
 Fund mangers or The merchant-banking unit
 Custodians.

MUTUAL FUNDS TRUST:-

Mutual fund trust is created by the sponsors under the Indian trust act, 1982
Which is the main body in the creation of Mutual Fund trust
The main functions of Mutual Fund trust are as follows:
 Planning and formulating Mutual Funds schemes.
 Seeking SEBI’s approval and authorization to these schemes.
 Marketing the schemes for public subscription.
 Seeking RBI approval in case NRI’s subscription to Mutual Fund is Invited
 Attending to trusteeship function. This function as per guidelines can be
assigned to separately established trust companies too. Trustees are required to
submit a consolidated report six monthly to SEBI to ensure that the guidelines
are fully being complied with trusted are also required to submit an annual
report to the investors in the fund.

FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY

(AMC)

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AMC has to discharge mainly three functions as under:
I. Taking investment decisions and making investments of the funds through
market dealer/brokers in the secondary market securities or directly in the
primary capital market or money market instruments

II. Realize fund position by taking account of all receivables and realizations,
moving corporate actions involving declaration of dividends,etc to compensate
investors for their investments in units; and

III. Maintaining proper accounting and information for pricing the units and arriving
at net asset value (NAV), the information about the listed schemes and the
transactions of units in the secondary market. AMC has to feed back the trustees
about its fund management operations and has to maintain a perfect information
system.

CUSTODIANS OF MUTUAL FUNDS:-

Mutual funds run by the subsidiaries of the nationalized banks had their respective
sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign banks with
higher degree of automation in handling the securities have assumed the role of
custodians for mutual funds. With the establishment of stock Holding Corporation
of India the work of custodian for mutual funds is now being handled by it for
various mutual funds. Besides, industrial investment trust company acts as sub-
custodian for stock Holding Corporation of India for domestic schemes of UTI,
BOI MF, LIC MF, etc

Fee structure:-
Custodian charges range between 0.15% to 0.20% on the net value of the
customer’s holding for custodian services space is one important factor which has
fixed cost element.

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 RESPONSIBILITY OF CUSTODIANS: -
 Receipt and delivery of securities
 Holding of securities.
 Collecting income
 Holding and processing cost
 Corporate actions etc

FUNCTIONS OF CUSTOMERS
 Safe custody
 Trade settlement
 Corporate action
 Transfer agents

RATE OF RETURN ON MUTUAL FUNDS:-

An investor in mutual fund earns return from two sources:
 Income from dividend paid by the mutual fund.
 Capital gains arising out of selling the units at a price higher than the
acquisition price

Formation and regulations:

1. Mutual funds are to be established in the form of trusts under the Indian trusts
act and are to be operated by separate asset management companies (AMC s)
2. AMC’s shall have a minimum Net worth of Rs. 5 crores;
3. AMC’s and Trustees of Mutual Funds are to be two separate legal entities and
that an AMC or its affiliate cannot act as a manager in any other fund;
4. Mutual funds dealing exclusively with money market instruments are to be
regulated by the Reserve Bank Of India

29
 5. Mutual fund dealing primarily in the capital market and also partly money
market instruments are to be regulated by the Securities Exchange Board Of
India (SEBI)
6. All schemes floated by Mutual funds are to be registered with SEBI

Schemes:-
1. Mutual funds are allowed to start and operate both closed-end and open-end
schemes;
2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs 20
crore;
3. Each open-end scheme must have a Minimum corpus of Rs 50 crore
4. In the case of a Closed –End scheme if the Minimum amount of Rs 20 crore
or 60% of the target amount, which ever is higher is not raised then the entire
subscription has to be refunded to the investors;
5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50 crore
or 60 percent of the targeted amount, which ever is higher, is no raised then
the entire subscription has to be refunded to the investors.

Investment norms:-
1. No mutual fund, under all its schemes can own more than five percent of any
company’s paid up capital carrying voting rights;
2. No mutual fund, under all its schemes taken together can invest more than 10
percent of its funds in shares or debentures or other instruments of any single
company;
3. No mutual fund, under all its schemes taken together can invest more than 15
percent of its fund in the shares and debentures of any specific industry, except
those schemes which are specifically floated for investment in one or more
specified industries in respect to which a declaration has been made in the offer
letter.
4. No individual scheme of mutual funds can invest more than five percent of its
corpus in any one company’s share;

30
 5. Mutual funds can invest only in transferable securities either in the money or in
the capital market. Privately placed debentures, securitized debt, and other
unquoted debt, and other unquoted debt instruments holding cannot exceed 10
percent in the case of growth funds and 40 percent in the case of income funds.

Distribution:
Mutual funds are required to distribute at least 90 percent of their profits annually in
any given year. Besides these, there are guidelines governing the operations of mutual
funds in dealing with shares and also seeking to ensure greater investor protection
through detailed disclosure and reporting by the mutual funds. SEBI has also been
granted with powers to over see the constitution as well as the operations of mutual
funds, including a common advertising code. Besides, SEBI can impose penalties on
Mutual funds after due investigation for their failure to comply with the guidelines.

MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes

These schemes mainly invest in equity. They seek to achieve long-term capital
appreciation by responding to the dynamically changing Indian economy by moving
across sectors such as Lifestyle, Pharma, Cyclical, Technology, etc.

 Sector Schemes
These schemes focus on particular sector as IT, Banking, etc. They seek to generate
long-term capital appreciation by investing in equity and related securities of
companies in that particular sector.

 Index Schemes
These schemes aim to provide returns that closely correspond to the return of a
particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest

31
in all the stocks comprising the index in approximately the same weightage as they are
given in that index.

 Exchange Traded Funds (ETFs)

ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE
Sensex. They are similar to an index fund with one crucial difference. ETFs are listed
and traded on a stock exchange. In contrast, an index fund is bought and sold by the
fund and its distributors.

 Equity Tax Saving Schemes

These work on similar lines as diversified equity funds and seek to achieve long-term
capital appreciation by investing in the entire universe of stocks. The only difference
between these funds and equity-diversified funds is that they demand a lock-in of 3
years to gain tax benefits.

 Dynamic Funds
These schemes alter their exposure to different asset classes based on the market
scenario. Such funds typically try to book profits when the markets are overvalued and
remain fully invested in equities when the markets are undervalued. This is suitable for
investors who find it difficult to decide when to quit from equity.

 Balanced Schemes
These schemes seek to achieve long-term capital appreciation with stability of
investment and current income from a balanced portfolio of high quality equity and
fixed-income securities.

 Medium-Term Debt Schemes

These schemes have a portfolio of debt and money market instruments where the
average maturity of the underlying portfolio is in the range of five to seven years.

32
  Short-Term Debt Schemes
These schemes have a portfolio of debt and money market instruments where the
average maturity of the underlying portfolio is in the range of one to two years.

 Money Market Debt Schemes

These schemes invest in debt securities of a short-term nature, which generally means
securities of less than one-year maturity. The typical short-term interest-bearing
instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial
Paper and Inter-Bank Call Money Market.

 Medium-Term Gilt Schemes

These schemes invest in government securities. The average maturity of the securities
in the scheme is over three years.

 Short-Term Gilt Schemes

These schemes invest in government securities. The securities invested in are of short to
medium term maturities.

 Floating Rate Funds

They invest in debt securities with floating interest rates, which are generally linked to
some benchmark rate like MIBOR. Floating rate funds have a high relevance when
interest rates are on the rise helping investors to ride the interest rate rise.

 Monthly Income Plans (MIPS)

These are basically debt schemes, which make marginal investments in the range of 10-
25% in equity to boost the scheme’s returns. MIP schemes are ideal for investors who
seek slightly higher return that pure long-term debt schemes at marginally higher risk.

33
DIFFERENT MODES OF RECEIVING THE INCOME EARNED
FROM MUTUAL FUND INVESTMENTS
Mutual Funds offer three methods of receiving income:

 Growth Plan
In this plan, dividend is neither declared nor paid out to the investor but is built into the
value of the NAV. In other words, the NAV increases over time due to such incomes
and the investor realizes only the capital appreciation on redemption of his investment.

 Income Plan
In this plan, dividends are paid-out to the investor. In other words, the NAV only
reflects the capital appreciation or depreciation in market price of the underlying
portfolio.

 Dividend Re-investment Plan

In this case, dividend is declared but not paid out to the investor, instead, it is
reinvested back into the scheme at the then prevailing NAV. In other words, the
investor is given additional units and not cash as dividend.

MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs)
These are best suited for young people who have started their careers and need to build
their wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals
in the Mutual fund scheme the investor has chosen, an investor opting for SIP in xyz
Mutual Fund scheme will need to invest a certain sum on money every
month/quarter/half-year in the scheme.

2. Systematic Withdrawal Plans (SWPs)

34
These plans are best suited for people nearing retirement. In these plans, an investor
invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at
regular intervals to take care of his expenses

3. Systematic Transfer Plans (STPs)

They allow the investor to transfer on a periodic basis a specified amount from one
scheme to another within the same fund family – meaning two schemes belonging to
the same mutual fund. A transfer will be treated as redemption of units from the scheme
from which the transfer is made. Such redemption or investment will be at the
applicable NAV. This service allows the investor to manage his investments actively to
achieve his objectives. Many funds do not even charge any transaction fees for his
service – an added advantage for the active investor.

ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS :

There are several reasons that can be attributed to the growing popularity and suitability
of Mutual Funds as an investment vehicle especially for retail investors :

ASSET ALLOCATION
 Mutual Funds offer the investors a valuable tool – Asset Allocation. This is
explained by an example.
An investor investing Rs.1 lakh in a mutual fund scheme, which has collected Rs.100
crores and invested the money in various investment options, will have Rs.1 lakh
spread over a number of investment options as demonstrated below:

35
Investment Type Percentage of Total portfolio of Investors portfolio
Allocation (% of the Mutual Fund allocation (Rs.)
total portfolio) scheme (Rs. In
crores)
EQUITY: 57% 57 57,000
State Bank of India 15% 15 15,000
Infosys Technologies 12% 12 12,000
ABB 10% 10 10,000
Reliance Industries 9% 9 9,000
MICO 7% 7 7,000
Tata Power 4% 4 4,000
DEBT: 43% 43 43,000
Govt. Securities 20% 20 20,000
Company Debentures 10% 10 10,000
Institution Bonds 9% 9 9,000
Money Market 4% 4 4,000
Total 100% 100 1,00,000

Thus ‘Asset Allocation’ is allocating your investments in to different investment

options depending on your risk profile and return expectations.

 DIVERSIFICATION
Diversification is spreading your investment amount over a larger number of
investments in order to reduce risk. For instance, if you have Rs.10,000 to invest in
Information Technology (IT) stocks, this amount will only buy you a handful of
stocks of perhaps one or two companies. A fall in the market price of any of these
company stocks will significantly erode your investment amount instead it makes
sense to invest in an IT sector mutual fund scheme so that your Rs.10,000 is spread
across a larger number of stocks thereby reducing your risk.

 PROFESSIONALS AT WORK
Few investors have the time or expertise to manage their personal investments every
day, to efficiently reinvest interest or dividend income, or to investigate the

36
thousands of securities available in the financial markets. Fund managers are
professionals and experienced in tracking the finance markets, having access to
extensive research and market information, which enables them to decide which
securities to buy and sell for the fund. For an individual investor like you, this
professionalism is built in when you invest in the Mutual Fund.

 REDUCTION OF TRANSACTION COSTS

While investing directly in securities, all the costs of investing such as brokerage,
custodial services etc. Borne by you are at the highest rates due to small transaction
sizes. However, when going through a fund, you have the benefit of economies of
scale; the fund pays lesser costs because of larger volumes, a benefit passed on to its
investors like you.

 EASY ACCESS TO YOUR MONEY

This is one of the most important benefits of a Mutual Fund. Often you hold shares
or bonds that you cannot directly, easily and quickly sell. In such situations, it could
take several days or even longer before you are able to liquidate his Mutual Fund
investment by selling the units to the fund itself and receive his money within 3
working days.

 TRANSPARENCY
The investor gets regular information on the value of his investment in addition to
disclosure on the specific investments made by the fund, the proportion invested in
each class of assets and the fund manager’s investment strategy and outlook.

 SAVING TAXES
Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of
the Income Tax Act. Under this section, an investor can invest up to Rs.10,000 per
Financial year in a tax saving scheme. The rate of rebate under this section depends
on the investor’s total income.

37
  INVESTING IN STOCK MARKET INDEX
Index schemes of mutual funds give you the opportunity of investing in scrips that
make up a particular index in the same proportion of weightage that these scrips
have in the index. Thus, the return on your investment mirrors the movement of the
index.

 INVESTING IN GOVERNMENT SECURITIES

Gilt and Money Market Schemes of Mutual Funds also give you the opportunity to
invest in Government Securities and Money Markets (including the inter banking
call money market)

 WELL-REGULATED INDUSTRY
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.

 CONVENIENCE AND FLEXIBILITY

Mutual Funds offer their investors a number of facilities such as inter-fund transfers,
online checking of holding status etc, which direct investments don’t offer.

RISKS ASSOCIATED WITH MUTUAL FUNDS:-

Investing in Mutual Funds, as with any security, does not come without risk. One of the
most basic economic principles is that risk and reward are directly correlated. In other
words, the greater the potential risk the greater the potential return. The types of risk
commonly associated with Mutual Funds are:

1) MARKET RISK
Market risk relates to the market value of a security in the future. Market prices
fluctuate and are susceptible to economic and financial trends, supply and demand, and
many other factors that cannot be precisely predicted or controlled.

38
 2) POLITICAL RISK
Changes in the tax laws, trade regulations, administered prices, etc are some of the
many political factors that create market risk. Although collectively, as citizens, we
have indirect control through the power of our vote individually, as investors, we have
virtually no control.

3) INFLATION RISK
Interest rate risk relates to future changes in interest rates. For instance, if an investor
invests in a long-term debt Mutual Fund scheme and interest rates increase, the NAV of
the scheme will fall because the scheme will be end up holding debt offering lower
interest rates.

4) BUSINESS RISK
Business risk is the uncertainty concerning the future existence, stability, and
profitability of the issuer of the security. Business risk is inherent in all business
ventures. The future financial stability of a company cannot be predicted or guaranteed,
nor can the price of its securities. Adverse changes in business circumstances will
reduce the market price of the company’s equity resulting in proportionate fall in the
NAV of the Mutual Fund scheme, which has invested in the equity of such a company.

5) ECONOMIC RISK
Economic risk involves uncertainty in the economy, which, in turn, can have an adverse
effect on a company’s business. For instance, if monsoons fail in a year, equity stocks
of agriculture-based companies will fall and NAVs of Mutual Funds, which have
invested in such stocks, will fall proportionately.

MUTUAL FUND INDUSTRY PHASES

The Mutual Fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank of India. The
History of Mutual Funds in India can be broadly divided into four distinct phases.

39
 First Phase –(1964-87)
Unit Trust of India (UTI) was established on 1963 by an act of parliament. It was set up
by Reserve Bank of India and functioned under the regulatory and administrative
control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the
Industrial Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI was Unit
Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under
management.

 Second Phase- 1987-1993(Entry of Public Sector Funds)

1987 marked the entry of non-UTI, Public Sector Mutual Funds set up by Public Sector
Banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non -UTI Mutual Fund
established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National
Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun
90), Bank of Baroda Mutual Fund (Oct 92). LIC established its Mutual Fund in June
1989 while GIC had set up its Mutual Fund in June 1989 while GIC had set up its
Mutual Fund in December 1990.

At the end of 1993, the Mutual Fund industry had assets under management of
Rs.47,004 crores.

 Third Phase-1993-2003 (Entry of Private Sector funds)

With the entry of private sector funds in 1993, a new era started in the Indian Mutual
Fund industry, giving the Indian investors a wider choice of fund families. Also, 1993
was the year in which the first Mutual Fund Regulations came into being, under which
all Mutual Funds, except UTI were to be registered and governed. The erstwhile
Kothari pioneer (now merged with UTI were to be registered and governed. The
erstwhile Kothari pioneer (now merged with Franklin Templeton) was the first Private
Sector Mutual Fund registered in July 1993.

40
The 1993 SEBI (Mutual Fund) regulations were substituted by a more comprehensive
and revised Mutual Fund Regulations in 1996. The industry now functions under the
SEBI (Mutual Fund) regulations 1996.

The number of Mutual Fund houses went on increasing, with many foreign Mutual
Funds setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 Mutual Funds with total
assets of Rs.1,21,805 Crores. The Unit Trust of India with Rs.44,541 crores of assets
under management was way ahead of other Mutual Funds.

 Fourth Phase –(since February 2003)

In February 2003, following the repeal of the Unit Trust of India Act 1963. UTI was
bifurcated into two separate entities. One is the specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 crores As at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile.

UTI which had in March 2000 more than Rs. 76,000crores of assets under management
and with the setting up of a UTI Mutual Fund, confirming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private sector funds,
the Mutual Fund industry has entered its current phase of consolidation and growth. As
at the end of October 31, 2003, there were 31 funds, which manage assets of Rs.1,
26,726crores under 386 schemes.

41
Mutual Fund Industry
• AUM till FY 03: 79,464 crs
• No. Of Players :26
• CAGR till FY 03:19.55%
in 16 yrs (Mar87- Mar03)

42
 • AUM increase: 326388 crs
• No of players :32
• CAGR for period: 43% in 4yrs (2003-2007)

PERFORMANCE MEASURES OF MUTUAL FUNDS:

Mutual Fund industry today, with about 30 players and more than six hundred schemes,
is one of the most preferred investment avenues in India. However, with a plethora of
schemes to choose from, the retail investor faces problems in selecting funds. Factors

43
such as investment strategy and management style are qualitative, but the funds record
is an important indicator too.
Though past performance alone cannot be indicative of future performance, it is,
frankly, the only quantitative way to judge how good a fund is at present. Therefore,
there is a need to correctly assess the past performance of different Mutual Funds.
Worldwide, good Mutual Fund companies over are known by their AMC’s and this
fame is directly linked to their superior stock selection skills.

For Mutual Funds to grow, AMC’s must be held accountable for their selection of
stocks. In other words, there must be some performance indicator that will reveal the
quality of stock selection of various AMC’s.

Return alone should not be considered as the basis of measurement of the performance
of a Mutual Fund scheme, it should also include the risk taken by the fund manager
because different funds will have different levels of risk attached to them. Risk
associated with a fund, in a general, can be defined as Variability or fluctuations in the
returns generated by it. The higher the fluctuations in the returns of a fund during a
given period, higher will be the risk associated with it. These fluctuations in the returns
generated by a fund are resultant of two guiding forces. First, general market
fluctuations, which affect all the securities, present in the market, called Market risk or
Systematic risk and second, fluctuations due to specific securities present in the
portfolio of the fund, called Unsystematic risk. The Total Risk of a given fund is sum of
these two and is measured in terms of standard deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which represents
fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of
a Mutual Fund is to the changes in the market; higher will be its beta. Beta is calculated
by relating the returns on a Mutual Fund with the returns in the market. While
Unsystematic risk can be diversified through investments in a number of instruments,
systematic risk cannot. By using the risk return relationship, we try to assess the
competitive strength of the Mutual Funds one another in a better way. In order to

44
determine the risk-adjusted returns of investment portfolios, several eminent authors
have worked since 1960s to develop composite performance indices to evaluate a
portfolio by comparing alternative portfolios within a particular risk class.

The most important and widely used measures of performance are:

 The Treynor’Measure
 The Sharpe Measure
 Jenson Model
 Fama Model

1) The Treynor Measure:-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of
Treynor's Index.
This Index is a ratio of return generated by the fund over and above risk free rate of
return (generally taken to be the return on securities backed by the government, as there
is no credit risk associated), during a given period and systematic risk associated with it
(beta). Symbolically, it can be represented as:

Treynor's Index (Ti) = (Ri - Rf)/Bi.

Where,
Ri represents return on fund,
Rf is risk free rate of return, and
Bi is beta of the fund.

All risk-averse investors would like to maximize this value. While a high and positive
Treynor's Index shows a superior risk-adjusted performance of a fund, a low and
negative Treynor's Index is an indication of unfavorable performance.

2) The Sharpe Measure :-

45
In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is
a ratio of returns generated by the fund over and above risk free rate of return and the
total risk associated with it.
According to Sharpe, it is the total risk of the fund that the investors are concerned
about. So, the model evaluates funds on the basis of reward per unit of total risk.
Symbolically, it can be written as:

Sharpe Index (Si) = (Ri - Rf)/Si

Where,
Si is standard deviation of the fund,
Ri represents return on fund, and
Rf is risk free rate of return.

While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a
fund, a low and negative Sharpe Ratio is an indication of unfavorable performance.

Comparison of Sharpe and Treynor

Sharpe and Treynor measures are similar in a way, since they both divide the risk
premium by a numerical risk measure. The total risk is appropriate when we are
evaluating the risk return relationship for well-diversified portfolios. On the other hand,
the systematic risk is the relevant measure of risk when we are evaluating less than
fully diversified portfolios or individual stocks. For a well-diversified portfolio the total
risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and
systematic risk (Treynor measure) should be identical for a well-diversified portfolio,
as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that
ranks higher on Treynor measure, compared with another fund that is highly
diversified, will rank lower on Sharpe Measure.

3) Jenson Model:-

46
Jenson's model proposes another risk adjusted performance measure. This measure was
developed by Michael Jenson and is sometimes referred to as the differential Return
Method. This measure involves evaluation of the returns that the fund has generated vs.
the returns actually expected out of the fund1 given the level of its systematic risk. The
surplus between the two returns is called Alpha, which measures the performance of a
fund compared with the actual returns over the period. Required return of a fund at a
given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)
Where,
Ri represents return on fund, and
Rm is average market return during the given period,
Rf is risk free rate of return, and
Bi is Beta deviation of the fund.

After calculating it, Alpha can be obtained by subtracting required return from
the actual return of the fund.

Higher alpha represents superior performance of the fund and vice versa. Limitation of
this model is that it considers only systematic risk not the entire risk associated with the
fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of
market is primitive.

4) Fama Model:-
The Eugene Fama model is an extension of Jenson model. This model compares the
performance, measured in terms of returns, of a fund with the required return
commensurate with the total risk associated with it. The difference between these two is
taken as a measure of the performance of the fund and is called Net Selectivity.

The Net Selectivity represents the stock selection skill of the fund manager, as it is the
excess returns over and above the return required to compensate for the total risk taken

47
by the fund manager. Higher value of which indicates that fund manager has earned
returns well above the return commensurate with the level of risk taken by him.

Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf)

Where,
Ri represents return on fund,
Sm is standard deviation of market returns,
Rm is average market return during the given period, and
Rf is risk free rate of return.

The Net Selectivity is then calculated by subtracting this required return from
the actual return of the fund.

Among the above performance measures, two models namely, Treynor measure and
Jenson model use Systematic risk is based on the premise that the Unsystematic risk is
diversifiable. These models are suitable for large investors like institutional investors
with high risk taking capacities as they do not face paucity of funds and can invest in a
number of options to dilute some risks. For them, a portfolio can be spread across a
number of stocks and sectors. However, Sharpe measure and Fama model that consider
the entire risk associated with fund are suitable for small investors, as the ordinary
investor lacks the necessary skill and resources to diversify. Moreover, the selection of
the fund on the basis of superior stock selection ability of the fund manager will also
help in safeguarding the money invested to a great extent. The investment in funds that
have generated big returns at higher levels of risks leaves the money all the more prone
to risks of all kinds that may exceed the individual investors' risk appetite.

48
MUTUAL FUND INDUSTRY ANALYSIS

49
INDIAN MUTUAL FUND INDUSTRY

MARKET OF MUTUAL FUND

The Indian mutual funds industry is witnessing a rapid growth as a result of
infrastructural
development, increase in personal financial assets, and rise in foreign participation. With
the
growing risk appetite, rising income, and increasing awareness, mutual funds in India are
becoming a preferred investment option compared to other investment vehicles like Fixed
Deposits (FDs) and postal savings that are considered safe but give comparatively low
returns, according to “Indian Mutual Fund Industry”.

The Indian mutual fund industry has grown at an impressive pace in terms of Assets
under Management (AUM) over the past few years. This is well reflected in the fact that
AUM recorded a compounded annual growth rate of 35% during the last five year period
between FY 2005 to FY2009. Household financial savings in mutual funds has increased
from 1.2% to 7.7% between FY 2004 to FY2008. The number of retail customers
investing in mutual funds as also the number of distributors across Metros, Tier 2 & Tier
3 towns has also growing steadily.

 -The Indian mutual funds retail market, growing at a CAGR of about 30%, is
forecasted to reachUS$ 300 Billion by 2015.
 -Income and growth schemes made up for majority of Assets Under Management
(AUM) in thecountry.
 -At about 84% (as on March 31, 2008), private sector Asset Management
Companies account for majority of mutual fund sales in India.
 -Individual investors make up for 96.86% of the total number of investor accounts
and contribute36.9% of the net assets under management.

 The share of debt-oriented funds in industry assets increased to 73 per cent in

May 2009 from 66 per cent a year ago. In contrast, the share of equity-oriented
funds has reduced to 26 per cent in May 2009 from 33 per cent a year ago, largely
owing to mark to market losses in equity funds as the equity markets had been
performing weakly for a large part of this period. Fixed income funds, on the
other hand, have seen net cash inflows of close to Rs 750 billion, accounting for
around 95 per cent of net cash inflows, for year ending May 2009. The fixed
income AAUM for the industry stood at Rs 4.84 trillion in May 2009. Bank
investment in mutual funds, as per RBI data, topped Rs 1.23 trillion as on June
19, 2009, as compared to less than Rs 100 billion in October 2008.

COMPRETIVE ANALYISIS OF MUTUAL FUND INDUSTRY

50
we are taking to some company mutual fund scheme to understand to market.

Mutual fund industry has reported a decline in Assets Under Management (AUM)
snapping a three month incline in previous months. The AUM has decreased by 17.96%
to Rs 4,17,300 crore compared with Rs 5,08,670 crore in February 2009. The industry
recorded the sharpest fall in assets since October last year as income and liquid funds
collectively saw a net outflow of 99,372 crore. The decline in AUMs was primarily due
to huge redemptions from banks and institutional investors in liquid and money market
funds ahead of financial closure on March 31.

Reliance Mutual fund

 Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme.

 Reliance Equity Opportunities Fund is an aggressive diversified equity scheme
 Reliance Equity Opportunities is to seek to generate capital appreciation and provide
long term growth opportunities by investing in a portfolio constituted of equity
securities and equity related securities.
 The fund has a high portfolio turnover ratio.
It has Instrument type such as Equity & Equity related Instruments and Debt & Money
Market Instruments

Reliance Mutual fund continued to be in the first position to Rs 80,962.94 crore in its
AUM in March 2009. However, its AUM has dropped by 0.81% in March 2009 over
February 2009.

HDFC MUTUL FUND

 HDFC Core and Satellite Fund is an Open-Ended Equity Scheme.

 HDFC Core and Satellite Fund is an diversified equity scheme
 The Scheme may seek investment opportunity in the ADR / GDR / Foreign Equity
and Debt Securities, in accordance with guidelines stipulated in this regard by SEBI
and RBI from time to time.
 The net assets of the Scheme will be invested primarily in equity and equity related
instruments in a portfolio comprising of 'Core' group of companies and 'Satellite'
group of companies.

51
 The 'Satellite' group will comprise of predominantly small-mid cap companies that
offer higher potential returns but at the same time carry higher risk

HDFC MF retained second position with the average AUM of Rs 57,956.45 crore a rise
of 1.92% compared with the month of February 2009 followed by ICICI mutual fund.

ICICI Mutual Fund

ICICI Mutual Fund with an AUM of Rs 51,432.50 crore with a fall of 3.89% in March
2009 over February 2009.

RELIANCE EQUITY OPPORTUNITIES FUND:

 Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme.
 Reliance Equity Opportunities Fund is an aggressive diversified equity scheme
 Reliance Equity Opportunities is to seek to generate capital appreciation and provide
long term growth opportunities by investing in a portfolio constituted of equity
securities and equity related securities.
 The fund has a high portfolio turnover ratio.
 It has Instrument type such as Equity & Equity related Instruments and Debt &
Money Market Instruments.

Reliance-Anil Dhirubhai Ambani Group company Reliance Mutual Fund bought 5.23%
stake in Financial Technologies, the promoter of India’s largest commodity exchange,
Multi-Commodity bought from the Fidelity group at Rs 502.50 per share. The deal
values Financial Technologies at Rs 2,304 crore.
Fidelity, which held 10.65% in Financial Technologies, sold 8.20% of it in a block deal
for Rs 188.80 crore. Apart from Reliance Mutual Fund, several high net-worth individual
investors bought the balance 2.97%.

Baroda Pioneer Mutual Fund

Baroda Pioneer Mutual Fund has topped among others by recording AUM growth of
30.90% to 1,132.01 lakh crore in March 2009.

Religare Mutual FUND

Religare Mutual Fund followed it by posting a rise of 11.05% in its AUM. The other
mutual funds, in terms of AUM included UTI MF recording a fall of 0.96% to Rs
48,754.17 crore in March 2009.

52
Birla Sun Life MUTUAL FUND

Birla Sun Life MF has recorded a drop of 3.01% in its AUM to Rs 47,096.23 crore and
SBI MF also plunged 4.50% to Rs 26,382.68 crore.

 HDFC Mutual Fund recorded the highest inflow in AUM of Rs 1,092.06 crore,
while Tata MF recorded the highest outflow of Rs 2,269.87 crore in March 2009.

Assets under management as on March 31, 2009

53
Net Inflow/Outflow in Mutual Funds

Net Mutual Fund inflow in Financial Market

54
*Till 6th March, 2009

RESULT

 Assets Under Management (AUM) of mutual fund industry decreased by 17.96%

to Rs 4,17,300 crore for March over February.
 Reliance MF buys 5.23% stake in Finacial Technologies from Fidelity.
 Reliance Mutual Fund retained its top positions with AUM of Rs. 80,962.94 crore
till March.
 Net outflow in Mutual Funds was Rs. 98,697 crore.

55
NEW TRENDS OF MUTUAL FUND INDUSTRY

56
RECENT TRENDS IN INDIAN MUTUAL FUND INDUSTRY

RECENT TRENDS

Distribution Mix

 The equity AUMs have almost doubled over the last 2 years
 The global banks have grown in assets but have lost market share over the last
couple of years.
 Domestic and PSU banks have also gained market share
 National Distributors contribute 20% of industry assets
 With Indian stock markets booming, a lot of brokers are attempting to diversify
and build large distribution businesses
 IFAs contribute 44% of the industry assets
 There are over 65,000 AMFI Registered distributors in India

Future Trends
 Certification of Financial Advisors will be made mandatory.
 More no. of professional Financial Advisors to emerge
 Introduction of pension products will inculcate long term savings habit
 Penetration into rural areas
 Distributors‘shift of focus to other Financial products like Insurance & secondary
market.
 Limited distribution reach.
 After sales service might not be efficiently given to investors with direct
investments post initial investment.
 • Only people with internet access will be at advantage.



57
FUTURE OF MUTUAL FUND INDUSTRY

Industry Size

Comparison with other developed market reflects the lack of

penetration in Indian market –all point to a significant untapped
opportunityahead
Source: Journal of Financial Economics
India’s current industry size to GDP is approx 12%

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India managed assets to exceed ~$1 Trillion(40 lac crs.)
by 2015

Professionally managed assets (2005 –2015)

59
The Evolving Indian Mutual Fund Market

MF Retail Assets-USD 300 Billion (12 lac crs.) by 2015

60
Tremendous Opportunity across Categories

61
QUESTIONNAIRE

62
 QUESTIONNAIRE

Dear respondent,

I am the student of PGDM equivalent to MBA at Graduate school of

Business Administration Gr. Noida. I am doing my summer training from
SHARE KHAN LTD.and as a part of my curriculum, I have chosen a project
entitled MUTUAL FUND ANALYSIS & TRENDS
For this, I am interested to getting your valuable, frank, forthright response
to the questionnaire that follows.
There is no right or wrong to question/statement that
follows the questionnaire. Only the required for your valuable advice for this
project. The response will be used for academic purpose only.

Thanking you
Yours truly

63
INSTRUCTION FOR RESPONDENT
 Please tick the following options to your opinions & facts.

 Specify according to your decision

Fill the form…..

NAME & ADDRESS OF FIRM-
...........................................................................................................
………………………………………………………………………..
LOCATION-
………………………………………………………………………
NAME OF CONTACT PERSON -
……………………………………………………………………….
DESIGNATION-
………………………………………………………………………..
NAME OF CURRENT PROJECT-
…………………………………………………………………………

64
 QUESTIONNAIRE

1) Do you know about investment options available?

o YES NO

2) Most preferable investment scenario.

o BANK
o DERIVATIVES & SECURITES MARKET
o INSURANCE
o BONDS
o REAL ESTATE
o OTHERS
3) What is the basic purpose of your investment?

o Liquidity
o Returns
o Capital appreciation

o Tax benefits
o Risk covering

65
4) MOST IMPORTANT THINGS YOU TAKE INTO YOUR MIND
WHILE MAKING INVESTMENT,

o RISK
o RETURNS
o BOTH

6) Awareness related to security markets

o COMPLETE
o PARTIAL
o NIL

7)Do you have any de-mat & trading account?

o YES NO

8)In which company you have d-mat and trading account?

o SHAREKHAN
o INDIAINFOLINE
o ICICI DIRECT
o INDIA BULLS
o KARVY
o OTHERS

9)Specify the reason of satisfaction with the current broking house.

o OPERATING EXPENCESS
o SERVICE
o BROCKAGE

66
DATA REPRESENTATION

67
 1)Do you know about investment options available?

KNOWLEDGE %AGE

Yes 80%

No 20%

TOTAL 100

COMMENT

Only 80% people knows the exact meaning of investment. Because

of remaining 20% take his/her residential property as an
investment. According to law purpose this is not an investment
because of it is not create any profit for the owner.

68
2) Most preferable investment scenario.
INVESTMENT SCENARIO %AGE
Banks 24%
Derivatives & securities market 28%
Insurance 4%
Bonds 20%
Real estate 20%
Others 4%
TOTAL 100

COMMENT

Today scenario is changed so that most area covered by the

derivative and securities market. It is 28% of the total population.

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3) What is the basic purpose of your investment?

INVESTMENT PERCENTAGE
PURPOSE
Liquidity 30%
Returns 25%
Capital 10%
appreciation
Tax benefits 20%
Risk covering 5%
Others 10%
TOTAL 100

COMMENT:- 75% people are interested in liquidity, returns and

tax benefits. And remaining 25% are interested in capital
appreciations, risk covering, and others.

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 4)Most important things you take into your mind while making
investments?

FACTOR %AGE

Risk 8%

Returns 17%
Both 75%
TOTAL 100

COMMENT

75% people are considered the both factors risk as well as returns
but, only 25% considered the risk or returns factor.

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6) Awareness related to security markets

KNOWLEDGE PERCENTAGE
Complete 8%
Partial 75%
Nil 17%
TOTAL 100

COMMENT

On that basis, we conclude that 17% people know nothing about

the securities investments and 75% people have partial knowledge

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about it, so, some promotional activities are required for increasing
the awareness about security market.

7) Do you have any de-mat & trading account?

ACCOUNTS PERCENTAGE
Yes 60%
No 40%
TOTAL 100%

COMMENT

Only 75% respondents have de-mat and trading account and

remaining 25% says no because they don’t know why shares move
up and down.

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8)In which company you have d-mat and trading account?
COMPANY PERCENTAGE
SHAREKHAN 38%
INDIAINFOLINE 20%
ICICI DIRECT 14%
INDIA BULLS 12%
KARVY 9%
Others 7%
TOTAL 100

COMMENT
In Sharekhan Ltd 38% respondents have de-mat & trading account
because of better services and no annual maintenance and other
charges.

74
9) Specify the reason of satisfaction with the current broking
house.
SATISFACTION PERCENTAGE
Operating expenses 18%
Services 25%
Brokerage 57%
TOTAL 100

75
MAJOR FINDING, RECOMMEDATIONDS
& CONCLUSION

76
 MAJOR FINDING:

 Problem of low retention and consequently low profitability, which is one of the
problems plaguing the business.
 Equity did not find favor with investors since the market was lack-luster and
performances of funds, barring a few, were quite disappointing for investors.
 The industry did see spectacular growth in assets, particularly among the private
sector players, on the back of the continuing debt bull run.
 Unfair trade allocations: Another major issue haunting mutual funds relates to
allocation of trades. Industry sources say that most mutual funds do not have
adequate systems and processes to ensure “fair” trade allocations.
 Mutual funds are required to maintain separate records for portfolio transactions
relating to each fund scheme. So that they can have adequate systems and process
to ensure “fair” trade allocations.
 Retention of Mutual funds is to be increased. So that the MFs business can grow
with a rapid pace.
 The investors are to be motivated to invest in Equity Funds.
 More transparency should be exercised by the fund houses.

 According to the survey most of the customers of “Sharekhan Ltd” says that it is
pocket friendly.
 Coming to faith 70% say Sharekhan Ltd is better than others stock brokers due to
customers satisfaction.
 Lack of promotional activities undertaken by Sharekhan securities Ltd.
 Main purposes of investments are returns & liquidity.
 Investors take risk as well as returns into their mind while making the investment.
 Businessmen are more interested in the stock market than the others.
 Commodity market is less preferred by the investors.
 People want to invest their money in the security market but they haven’t the
proper knowledge.
 People are not aware of hedging in stock market.
 People pay more emphasis on brokerage than service provided by brokerage
houses.

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SUGGESTIONS:

 Commitment should be equalized for every person.

 Provide the facility of free demonstrations for all.
 Improvement in the opening of De-mat & contract notice procedure is required.
 There should be a limited number of clients under the relationship manger. So that
he can handle new as well as old customer properly.
 Some promotional activities are required for the awareness of the customer.
 People at young age should be encouraged to invest in stock market.
 Seminars should be held for providing information to prospective and present
customers.
 The Asset Management Company must design the portfolio in such a way, to
increase the returns.
 The Asset Management Company must design the portfolio in such a way, to
lessen the risk that is common in the market.
 The Asset Management Company must dedicate itself, because it motivates the
investors and potential investors to invest in Mutual Funds.

Emergence of new business models

 Discount brokers : Rebates , if legalized can be a way of reducing investors’
costs of buying a Mutual Fund. Entities in product selling will have to offer
rebates or charge lower entry load
 Fee based advisory model : Value-added advisors will charge fee
 Polarization : One pool of AMCs with direct interface with investors & other
continued with distributors.
 Advent of No-load funds in India
 Variable Pricing Model : A necessity

Global Practice:
Variable Pricing Model

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• Investors have many choices as to how they buy funds. Depending on the choices they
make, investors may encounter several different arrangements for paying distribution and
shareholder service expenses, (e.g. A shares (front-end load); B shares (12b-1 fee plus
back-end load), C shares (level load), and no-load.
 Rule 12b-1 Fees -- The SEC adopted Investment Company Act Rule 12b-1 in
1980, which permits fund assets to be used for distribution and shareholder
services.

NASD Rule 2830 establishes a general limit of 0.75% for distribution, 0.25% for
service fees. The fund distributor pays fees from fund assets to broker-dealers and
others who sell fund shares and/or provide ongoing services to fund shareholders.

• Class A Shares -- are typically subject to a front-end sales charge. The front-end
sales charge often has "breakpoints" for larger size investments. Funds often
establish waiver categories, disclosed in their prospectuses, so that particular
categories of investors are permitted to purchase shares with a reduced or waived
front-end sales charge. Class A shares also may have a Rule 12b-1 fee of 0.25-
0.50% of average annual net Class A assets.

• Class B Shares -- typically have no front-end sales charge, a relatively high Rule
12b-1 fee of up to 1.00%, and a contingent deferred sales charge. Because the fund
underwriter pays brokers a commission up-front for sales of Class B shares, the Rule
12b-1 fee is designed to pay the underwriter back for these advances. Class B shares
typically convert to Class A shares within a year or two after the CDSC disappears.

• Class C Shares -- Class C shares generally have no, or very low, front-end sales
charges or CDSC. They may have a Rule 12b-1 fee of up to 1.00%. Class C shares
typically do not convert to Class A shares.

Example of Variable Pricing Model

AXA Global Growth fund

Initial Charges

• Standard 5%
• Funds Network 2%
• Investor Save 3%

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CONCLUSION:
In India, mutual funds have a lot of potential to grow. Mutual funds companies have to
create and market innovative products and frame distinct marketing strategies. Product
innovation will be one of the key determinants of success. The mutual fund industry has
to bring many innovative concepts such as high yield bond funds, principal protected
funds, long short funds, arbitrate funds, dynamic funds, precious metal funds, and so on.
The penetration of mutual funds can be increased through investor’s education, providing
investor oriented value-added service, and innovative distribution channels.

Mutual funds have failed during the bearish market conditions. To sell successfully
during the bear market, there is a need to educate investors about risk-adjusted return and
total portfolio return to enable them to take informed decision. Mutual funds need to
develop a wide distribution network to increase its reach and tap investments from all
corners and segments. Increased use of Internet and development of alternative channels
such as financial advisors can play a vital role increasing the penetration of mutual funds.
Mutual funds have come a long way, but a lot more can be done.

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BIBLIOGRAPHY

Mutual Funds Primer By “ECONOMIC TIMES”

www.amfiindia.com
www.kotakmutual.com
www.reliancemutual.com
www.sharekhan.com

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