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Stock Holding Corporation of India Ltd

ACKNOWLEDGEMENT
The hard work, the tiresome work, the struggle and the efforts, I have put in for the project gives me an immense satisfaction when I am at the end of the project, this project is incomplete without thanking the people who helped and guided me through out this project. I acknowledge here my debt to those who have contributed significantly to my project, our Director sir Dr. M.M Bagali, K.L.E.Ss I.M.S.R, who gave me immense inspiration and guidance through our the project. I express my profound and sincere thanks to Mrs. Mona Agarwal, faculty in finance who acted as a mariners compass and steered me through out my project voyage through her excellent guidance and constant inspiration. A special note of thanks is to be conveyed to Ms, Kavita Kulkarni for giving me an opportunity to work in her esteemed organization and guiding me during the course of my project. I would also like to extend my gratitude towards the staff of Staff of SHCI Ltd, Hubli. who gave me enough support and encouragement to carry out my project in their esteemed organization. I also extend my hearty thanks to all faculty members of K.L.E.Ss, I.M.S.R for their eternal support and guidance. Last but not the least, I would like to thank my parents and specially my friends who have always stood by me in every walk during the development of the project, I regret any inadvertent omissions.

Place: Hubli

Anita R Patil

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

DECLARATION
I Anita Patil, II Semester student of MBA in K.L.E.S IMSR do hereby declare that the project report entitled PERFORMANCE EVALUATION OF MUTUAL FUND SCHEMES undertaken at Stock Holding Corporation of India Ltd, Hubli, has been submitted by me in partial fulfillment of requirement for the award of the degree in Master In Business Administration to Karnatak University, Dharwad for the academic year 2006-07. I further declare that the project is a result of my original work and t has not been submitted to any other University or Institute for the award of any Degree/ Diploma

Date:11/07/2007 Place: Hubli

Anita R. Patil M B A II Semester MBA06002003

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Stock Holding Corporation of India Ltd

CONTENTS
Topic
Executive Summary Chapter 1 .................... Company Profile About DP Introduction about SHCIL Operational Review Chapter 2 . Mutual Fund Industry Introduction to Mutual Funds Types of Mutual Funds Benefits of Mutual Funds History of Indian Mutual Fund Industry Structure of Mutual Funds in India The Financial Planning Process Chapter 3 . Methodology Introduction to the study Objectives Scope of Study Data Collection & Sampling Limitations of Study Chapter 4 . Analysis Findings Suggestions Conclusion Bibliography. 79 78-78 67- 77 65 66 21 64

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Stock Holding Corporation of India Ltd Annexure...

Executive Summary
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. Future growth prospects in mutual fund industry The major growth that drivers the Indian mutual fund industry is the huge demographic opportunity it offers on the platter. Apart from China, there is no other country in the world with such huge population and a large sum of investible money. India has a good 200-300 million people who fall in the lower-middle and middleclass bracket (also what you call the aspirers of mass affluence). The growth drivers of the industry would be demographic opportunity, global linkages, affluence opportunity and lifecycle opportunity. By 2015, there will be a working population of about 500 million people in India. As of now, Indian household savings is about Rs 10.5 lakh crore per annum. This savings pool is likely to grow at 38% annually at a GDP growth rate of 6% by 2015. India is already among the top five countries with the deepest savings pools. Market for niche Mutual Fund investment products are expected to hit in the coming years. The Innovative products are critically important for attracting investor interest. Fund houses will have to structure targeted value-added products for various classes of investors. There will be more beta offerings (as per risk), alpha instruments (actively-managed funds) and blended alpha-beta products in the days to come. The funds/instruments we

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Stock Holding Corporation of India Ltd now have in the market will be wiped out or become laggards. Real estate funds, infrastructure funds and gold ETF should do well in the years to come.

This study is related to the Performance Evaluation of Mutual Fund Schemes. A comparative analysis of the returns of different mutual funds has been made with a definite purpose to identify a better performing fund. The study focuses on the NAV (Net Asset Value) of some selected AMCs (Asset Management Company) so as to serve as a guide to the investing public to help them find out as to which mutual fund has registered superior performance among the selected mutual fund schemes.

This study will help SHCI Ltd to guide the clients to choose a scheme on the basis of performance evaluation of the schemes The schemes selected for the study are Equity Schemes and balanced schemes. The study was made with the help of secondary data. The statistical tools like regression analysis and standard deviation were used, and portfolio evaluation indices like Sharpes Index and Treynors Index were used for the performance evaluation. The calculations were made taking into account the daily NAVs of the mutual funds from their respective websites. The performance evaluation shows that among the schemes compared HDFC Mutual Fund and Templeton Fund have performed well in Equity Scheme and JM Fund and Prudential ICICI performed well in Balanced Fund scheme is performing well in terms of absolute returns in terms of Sharpes and Treynors indices.

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Stock Holding Corporation of India Ltd

FINDINGS
1. Returns of Equity scheme shows that most of Mutual Funds Company has outperformed the Nifty returns. 2. HDFC Mutual Fund has been out performed the nifty returns. 3. In the Balance Scheme Prudential ICICI has performed better in terms of absolute returns in 3yr. 4. According to Sharpes index in Equity Scheme, HDFC Mutual Fund is having the highest ratio of 0.509% in Equity scheme. 5. According to Treynor index Equity Scheme, HDFC Mutual Fund is having the average highest ratio of 44.969% in Equity scheme 6. And other AMC in Equity scheme that is Kotak Mahindra has been also performing well. According to Sharpes index and Treynor index. The funds Sharpe ratio is 0.4256% and Treynor index is 41.100% 7. According to Sharpes index in Balance Scheme, ICICI Mutual Fund is having the highest ratio of 0.298%. 8. According to Treynor index Balance Scheme, ICICI Mutual Fund is having the average highest ratio of 27.599% in Balance scheme 9. And other AMC in balanced scheme JM Fund has been performing well according to Sharpes index and Treynor index. The funds Sharpe ratio is 0.255 and Treynor index is 25.792

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Stock Holding Corporation of India Ltd

RECOMMENDATION SCHL has to educate its investor before investing in mutual funds. They can come up with investor awareness program SHCIL has to advertise about its service. The AMC should publish the Beta, Standard deviation, Sharpe Ratio Treynor Ratio so that it helps the investor in analyzing to with fund they can go for/invest.

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Stock Holding Corporation of India Ltd

ABOUT DEPOSITORY
Depository is an organization where the securities of a shareholder are held in the electronic form at the request of the shareholder through a medium of a Depository Participant (DP). The principal function of a Depository is to dematerialize securities and enables their transaction in book entry form electronically. Depository functions like a security bank, where the Dematerialised securities are traded and held in custody. This facilitates faster, risk-free and low cost settlement similar to bank. Following tables compares the two

BANK Hold funds in account Transfer funds between accounts Transfer without physically handling money Safekeeping of money

DEPOSITORY Hold securities in accounts Transfer securities between accounts Transfer without physically handling securities Safekeeping of securities

In India the Depository Act defines a Depository to mean a company formed and registered under the companies Act 1956 and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 Depositories in India There are two depositories in India which provide dematerialization of securities. The National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).

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Stock Holding Corporation of India Ltd

Benefits of participation in a depository

Immediate transfer of securities No stamp duty on transfer of securities Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc. Reduction in paperwork involved in transfer of securities Reduction in transaction cost Ease of nomination facility Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately Transmission of securities is done directly by the DP eliminating correspondence with companies Convenient method of consolidation of folios/accounts Holding investments in equity, debt instruments and Government securities in a single account; automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.

Depository Participant The Depository provides its services to investors through its agents called depository participants (DPs). These agents are appointed by the depository with the

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Stock Holding Corporation of India Ltd approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become DPs. The depository has not prescribed any minimum balance. You can have zero balance in your account.

Custodian A Custodian is basically an organisation, which helps register and safeguard the securities of its clients. Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients:

Maintaining a clients securities account Collecting the benefits or rights accruing to the client in respect of
securities

Keeping the client informed of the actions taken or to be taken by the


issue of securities, having a bearing on the benefits or rights accruing to the client. Dematerialisation of securities In order to dematerialise physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise. Separate DRF has to be filled for each ISIN number. Odd lot share certificates can also be dematerialised. Dematerialised shares do not have any distinctive numbers. These shares are fungible, which means that all the holdings of a particular security will be identical and interchangeable.

Rematerialisation. If one wishes to get back your securities in the physical form one has to fill in the Remat Request Form (RRF) and request your DP for rematerialisation of the balances in your securities account. One can dematerialise his debt instruments,

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Stock Holding Corporation of India Ltd mutual fund units, government securities in his single demat account.

Legal framework: The Depositories Act 1956 provides for regulation of depositories in securities and for a matter connected there with on incidental there to and came into from 20th of the September 1995. SEBI formulated the Depositories and participants Regulation Act, 1996 to Oversee the matter regarding admission and working of Depositories and its participant. The Depositories Act passed by parliament received the presidents assents on August 10, 1996. The Act enables the setting up of multiple depositories in the country. Only a company registered under the companies Act (1956) and sponsored by the specified categories of institution can setup depository in India. The Depository offers services relating to holding of securities and facility processing of transaction in such securities in book entry form. The transaction handled by depositories include settlement of market trades, settlement of off-market trades, securities lending and borrowing, pledge & hypothecations. Eligibility criteria for a Depository: Any of the following may be a Depository: A) A public financial institution as defined in section 4A of the companies Act, 1956. B) A bank include in the second schedule to the RBI Act, 1934. C) A foreign bank operating in India with the approval of the RBL. D) a recognized stock exchange E) An institution engaged in proving financial services where not less then 75% of the equity id held jointly or severally by this institution. F) A custodian of the securities approved by government of India.

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Stock Holding Corporation of India Ltd G) A foreign financial services institution approved by government of India. The promoters of Depository are also known as its sponsors. A depository company must have a minimum net worth of Rs 100 cr. The sponsor(s) of the depository have to hold at least 51% of the capital of the Depository Company.

Agreement between depository and issuers: If either the issuers (a company which has issued securities) or the investor opts to hold his securities in a demat form, the issuer enters into an agreement with the depository to enable the investors to dematerialize their securities No such agreement is necessary where the state or central government in the issuer of securities. Where a insurer has appointed a registrar to the issue of share transfer, the depository enters into a tripartite agreement with the insurer and (R&T) agent, the case may be, for the securities declared eligible for denaturalization.

Rights and obligation of Depositories: * Every depository should have adequate mechanism for reviewing monitoring and evaluating the controls, system, procedures and safeguards. * Annual inspections of the procedures and it should be reported to SEBI. * To ensure that the integrity of automatic data processor system is maintained to safeguards information. * Adequate measures, including insurance, to protect the interests of the beneficial owners against any risk. Function of Depository Participant Dematerialization: One of the primary functions of depository is to eliminate or minimize the movement of physical securities in the market. This is done through converting securities held in physical form in to holdings in to back entry form. Account Transfer: K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd The depository gives effects to all transfer resulting from the settlement of trade and other transaction between various beneficial owners by recording entries in the accounts of such beneficial owners by recording entries in the accounts of such beneficial owners.

Transfer & Registration: A transfer is a legal change of ownership of a security in the records of the insurer. Transfer of securities under demat occur merely by passing book entries in the records of the depositories, on the instruction of beneficial owners. Pledge and hypothecation: Depositories allow the securities with them to be used as collateral to secure loans and other credits. The securities pledged are transferred to a segregated or collateral account through book entries in the records of the depository. Linkage with clearing system: The clearing system performs the function of ascertainment in the pay in (sell) or payout (buy) of brokers who leave traded on the stock exchange. Actually delivery of securities from the clearing system from the selling brokers is and delivery of securities from the clearing system to the buying broker is done by depository. To achieve this depositories and the clearing system are linked electronically. To handle the securities in electronic form as per the Depositories Act 1996 two depositories are registered with SEBI. They are 1) NSDL -- National securities depository limited. 2) CDSL -- Central depository service (India) limited. NSDL India had a vibrant capital market, which is more than a century old, the paper-based settlement of trades caused substantial problems like bad delivery and K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd delayed transfer of title till recently. The enactment of Depositories Act in August 1996 paved the way for establishment of NSDL, the first depository in India. NSDL promoted by institutions of national stature responsible for economic development of the country has since established a national infrastructure of international standard that handles most of the trading and settlement in dematerialized form in Indian capital market. Using an innovative and flexible technology systems, NSDL works to support the investors and brokers in the capital market of the country. NSDL aims at ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimizing risk and reduce costs. At NSDL, play a quiet central role in developing products and services that will continue to nurture the growing needs of the financial service industry. In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates. CDSL CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. CDSL received the certificate of commencement of business from SEBI in February 1999. Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialization of his holdings and transferring securities.

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Stock Holding Corporation of India Ltd The balances in the investors account recorded and maintained with CDSL can be obtained through the DP. The DP is required to provide the investor, at regular intervals, a statement of account, which gives the details of the securities holdings and transactions. The depository system has effectively eliminated paperbased certificates, which were prone to be fake, forged, counterfeit resulting in bad deliveries. CDSL offers an efficient and instantaneous transfer of securities.

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Stock Holding Corporation of India Ltd

INTRODUCTION TO SHCIL
Stock Holding Corporation of India Limited (SHCIL) is promoted by the public financial institutions and insurance majors like IDBI, UTI, ICICI, LIC, GIC, the four public sector general insurance companies, IFCI and IIBI. SHCIL was incorporated as a public limited company on July 28, 1986 and provides custodial services to institutional investors and depository services to retail investors. SHCIL commenced operation in August 1988 and has been providing custodial and related services of international standards for nearly a decade, being a premier custodian, SHCIL holds client assets worthier Rs 210 million and reserves of Rs 630 million. Other auxiliary services provided by SHCIL include derivatives clearing, PF fund accounting, SGL constituent account services and distribution of mutual funds and other capital market instruments, besides distribution of life and non-life insurance policies. SHCIL works in a highly computerized environment and employs the state of the art technology to facilitate its business and to minimize risk. SHCIL has been awarded a citation by the Smithsonian Institution, Washington D.C. for the visionary use of IT and by the Computer Society of India for the Best IT usage. SCHCIL is the first Depository Participant to be registered with the National Securities Depository Limited (NSDL). SCHIL offers the facility of operating Beneficiary Account for individuals and corporate as well as clearing account for the brokers. The aim is to impart the Account Holders, knowledge about the working of depository system and facilitate a smooth transition from physical to electronic trading.

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Stock Holding Corporation of India Ltd

SERVICES OFFERED BY SCHIL


The Depository Participant services of SCHIL address the individual investment needs. With a parentage of leading financial institutions and insurance majors and a proven track record in the Custodian business, SCHIL has reiterated the past success by establishing itself as the first ever and largest Depository Participant in India. From a tentative foray in 1998 into the individual investor arena to servicing around seven lakh accounts, SCHIL has endeavored to constantly add and innovate to make business a pleasure. Over 100 of the networked branches ensure that they are available where the clients look out for. Across the country, fourteen Depository Participant Machines (DPMs) connected to NSDL and seven connected to CDSL ensure fast and direct processing of instructions. The customer-centric account schemes have been designed keeping in mind the investment psyche of clients. The DP account with SCHIL takes care of the Depository needs like dematerialization, re-materialization and pledging of shares. Matching of the scanned signature on every debit instruction with a digitally scanned original in system makes all the trading transactions absolutely secure. Proactive backup of the instructions prior to execution in the Depository makes SCHIL oblivious to system crashes. At SHCIL, a very high premium on client reporting is placed. Periodic statements are sent to clients to keep them informed of their account status. Dedicated Customer Care lines manned by trained staff answer queries on demat / trades / holdings. The latest in client response at SHCIL is Interactive Voice Response (IVR) system for round the clock information on the account. Registration on the website, SHCIL Interactive, enables one to check his/her account-related information, stock K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd market reports and statistics, Corporate benefits declared by companies, realtime quotes of scrips on BSE and NSE and so much more online.

DEPOSITORY SERVICE: SHCILS Depository participant services addresses individual investment needs. With a percentage of leading financial institutions and insurance majors and a proven track record in the custodian business, SHCIL has registered its past success by establishing itself as the first ever and largest Depository Participant in India. From a tentative foray in 1998 into the individual investor arena to servicing around seven lakh accounts, SHCIL has endeavored to constantly add and innovate to make bossiness a pleasure for its clients. Across the country, fourteen Depository Participant Machines (DPM s) connected to NSDL and seven connected to CDSL ensure fast and direct processing clients instruction. SHCIL s Depository Service includes: Creation of demat request based on client requirement Follow-up with Registrars/companies for pending demat cases. Accounting of securities received in dematerialization form. Opening and maintenance of client Demat accounts Electronic holding statement to clients. Lessoning with Depositories. Settlement of Trades in electronic form. Pledging. Reporting. Securities lending.

SHCILs Depository Offerings:

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Stock Holding Corporation of India Ltd SHCILs customer-centric account scheme has been designed keeping in mind the investment psyche of clients. A Depository Participants account with SHCIL takes care of clients Depository needs like dematerialization & rematerialization and pledging of shares. it also throws open a mix of value-added products like Stock direct ,Equi-buy, Add shares, Fund investment, 8.5% GOI Bonds. Matching of clients scanned signature on every debit instruction with a digitally scanned original in the system makes all their trading transactions absolutely secure. Proactive backup of their instruction prior to execution in the Depository makes SHCIL oblivious to system crashes. SHCIL places a very high premium on client reporting periodic statement sent to clients keeps them informed of their account status Dedicated Customer Care lines manned by trained staff answer their queries on demat, trades, holdings. The latest in client responses at SHCIL is Interactive Voice Responses (IVR) system for round the clock information on client account. Registration on our website, SHCIL interactive enables investor to check his accumulated information, Stock market reports and statistics, corporate benefits declared by companies, real time quotes and statistics, corporate benefits declared by companies, real time quotes of scripts on BSE, NSE and so much more online. Clearing Members SHCILs long standing association with Clearing Members has enabled it to develop services based on an understanding of their working and their requirement for timely and accurate information. Derivatives SHCIL provides Clearing Services for derivative segment of BSE/NSE and commodity segment of MCX/NCDEX. NRI SHCIL has grown to become a major player in the capital market. With a network of more than 120 offices operating across the country and franchisees

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Stock Holding Corporation of India Ltd operating abroad, SHCIL provides Depository Participant and related services close to 0.7 million satisfied investors out of which over 6000 are NRI Clientele. Custodial Since its commencement in 1998 as the first dedicated Custodian in the country, SHCIL has been providing Custodial services of international standards to Domestic Mutual Funds, Financial Institutions and Foreign Institutional Investors.

Infotech SHCIL-IT is the IT division of Stock Holding Corporation of India. SHCILIT is a pioneer in providing quality solutions and services based on proven technology and well established processes.

Mission and Objectives

Mission To provide quality customer service.

Objectives 1. 2. Maintain the market leader position.

Increase the stakeholders value while doing business with them.

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Stock Holding Corporation of India Ltd

Organization Design and Structure.

Board of Directors

Managing Director and CEO

Joint Managing Director

Sr. VP(Business Development)

Sr. VP (Finance)

VPs (Functional)

Assistant VPs

Divisional Managers

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Stock Holding Corporation of India Ltd

Products offered by SHCIL:

Add shares: Stock holding has tie up with reputed banks, which offer the most competitive interest rates in the market. The clients can use the shares in their free account as collateral and take a loan from any of an empanelled bank. SCHIL completes the documentation and processing and give the cheque to the customers. ADD shares is available at SHCIL centers in all the major cities..

Equibuy : As a depository participant, SHCIL assures a safe delivery of shares every time the client buys on the exchange. SHCIL has lined up a panel of reputed brokers who process orders on priority. As the clearing corporations of leading stock exchanges SCHIL ensures smooth and sure credits into an account. An initial advance and timely replenishments into the Purchase Advance account take care of the payment for your purchases.

Fund investment: Fund Invest is a basket of financial products, ranging from fixed income securities like fixed deposits, Infrastructure bonds and Capital Gain Bonds to variable income securities like Initial Public Offers (IPOs) of Equities and Mutual Funds. It

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Stock Holding Corporation of India Ltd is an attempt to offer financial products that cater to the various investments needs of esteemed clients of SHCIL. An effort to guide the investor to a product portfolio that best suits his risk- return profile. Applications for investments can be source from any of the SHCIL offices. Apart from guiding, investor to pick up the right combination of investment instruments, SHCIL help them 'after-sales' service, by acting as an interlocutor between the investor and the issuer of the securities. SHCIL is an AMFI Registered Mutual Fund Advisor (ARMFA). Features: At present, SHCIL are distributing schemes of 25 different Mutual Fund. All these Funds offer wide varieties of investment option depending on the risk appetite of the investor. Some of the major categories are: Debt Funds: The Debt Funds have the mandate of investing primarily in Debt papers Equity Funds: The Equity Funds have the mandate of investing primarily in Equities Balanced Funds: The Balanced Funds have the mandate of investing both in Equities as well as Debt papers.

GOI Bonds: Savings Bonds are issued by RBI on behalf of Government of India in the following series. 8.0% taxable bonds These Bonds are held in electronic form in an account called Bond Ledger Account (BLA). Bond Ledger Accounts can be opened and operated with RBI designated Receiving Offices. SHCIL has been designated as one of the Receiving Offices by

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Stock Holding Corporation of India Ltd RBI for this purpose. Subscriptions for Savings Bonds can be submitted at any of the branches. Savings Bonds being sovereign in nature are absolutely safe and an attractive investment option in the current volatile market situation.

Stock direct: The client can send instructions for buying/selling shares. A three-way handshake between leading brokers, national and international banks and SHCIL is the crux of Stock direct. Stock direct is India's first online trading platform which was launched in 1999. Today Stock direct is the most secure online trading platform which combines encryption technology / digital signature as well as Smart Card security features. A few clicks will seamlessly check clients funds and security positions, route the order to the broker of choice and do the necessary fund and share movements for the client. For people who are not inclined to trading on the net, SHCIL has Request Transmitting Machines (RTMs) placed at specified SHCIL centers. This is an electronic touch screen kiosk where client can insert smart card and trade effortlessly. Stock Broking Service Recently SHCIL has started the broking services which can be availed only by the existing clients and not the new clients. This will help the clients to do the trading easily than by the previous procedure where the client had to come through a broker for any market trade.

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Stock Holding Corporation of India Ltd

SWOT Analysis An attempt has been made to make an analysis of the strengths, weaknesses, opportunities and threats to SHCIL. Strengths These relate to the positive things that are inside the organization, which can be used by the company as a product differentiation tool. 1. Market leader in the industry (more than 50% Market Share) 2. First mover advantage 3. Large network of branches (120 branches) Weaknesses These relate o the negative things that are inside the organization and which can act as a hindrance to the business. 1. High cost of service Opportunities These relate to the options available for the organization to build upon, the favorable things that would help an organization. 1. The large network of branches can be used as a good distribution channel 2. Tap the ready source of investors for selling financial products. Threats These relate to the outside factors that might affect the future business prospects for the organization. 1. Competitors

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Stock Holding Corporation of India Ltd 2. Government policies 3. Market Conditions

INTRODUCTION TO MUTUAL FUNDS


A mutual fund is the ideal investment vehicle for todays complex & modern financial scenario. Markets for enquiry 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 this assets, investments, brokerage dues & bank transactions etc. 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 bases. 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, transaction processing. While the concept of individual coming together to invest the 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.

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Stock Holding Corporation of India Ltd To get a better understanding of mutual funds it is necessary to know the industry in detail. In the following sections a detailed descriptions of the mutual funds industry will be discussed.

MUTUAL FUND CONCEPT 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 appreciation 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:

Mutual Fund Operation Flow Chart Place of Mutual Fund in the Financial Market:

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Stock Holding Corporation of India Ltd Indian households started allocating more of their savings to the capital markets in 1980s, with investments following into equity and debt instruments, besides the conventional mode of bank deposits. Until 1992, primary market investors were effectively assured good returns, as the issue price of new equity issues was controlled and low. After introduction of free pricing of shares, new issues prices were higher and with greater volatility in the stick markets, many investors who bought highly priced shares lost money, and withdrew from the markets altogether. Even those investors who continued as direct investors in the stock market realized that the key to successful Investing in the capital market lay in building a diversified portfolio, which inurn required substantial capital. Besides, selecting securities with growth and income potential from the capital market involved careful research and monitoring of the market, which was not possible for all investors. Under similar circumstance in other countries, Mutual Fund has emerged as professional intermediates. Besides providing the expertise in stock market investing, these funds allow investing in small amounts and yet holding a diversified portfolio to limit risk, while providing the potential for income and growth that is associated with the debt and equity instruments. In India, Unit Trust of India occupied this place as the only capital markets intermediary from 1964 until late 1987, when the government started allowing other sponsors also set up Mutual Funs. With some ups and downs, this new class of intermediary institutions has emerged, India as else where, as a good alternative to direct investing in capital markets. Mutual Funds serves as a link between the saving public and capital markets, as they mobilize savings from investors and bring them to borrowers in the capital market by the very nature of their activities and by virtue of being knowledgeable and informed investors, they influence the stock markets and play an active role in promoting the good corporate governance, investors protection and health of the capital markets, Mutual funds have imparted much needed liquidity into the financial

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Stock Holding Corporation of India Ltd system and challenged the hitherto dominant role of banking and financial institutions in the capital markets.

Characteristics of a Mutual Fund

A Mutual fund actually belongs to the investors who have pooled their funds. The ownership of the mutual funds is in the hands of the investors. In case of mutual fund the contributors and the beneficiaries of the funds are the same class of people namely the investors. Investment professionals manage a mutual fund and other service providers, who earn a fee for their services provided, from the fund. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investors share in the fund is denominated by UNITS. The value of the units changes with the change in the portfolios value, everyday. The value of one unit of investment is called as the net asset value or NAV

HOW ARE THE MUTUAL FUNDS STRUCTURED?


Mutual funds can be structured in the following ways: Company form, in which investors hold shares of the mutual fund. In this structure, management of the fund is in the hands of an elected board, which in turn appoints investment managers to manage the fund. Trust form, in which the funds of the investors are held by a trust, on behalf of the investors. The trust appoints investment managers and monitors their functioning in the interest of investors.

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Stock Holding Corporation of India Ltd The company form of organization is very popular in the United States. In India, mutual funds are organized as trusts. The trust is created by sponsor, who is the actually the entity interested in creating the mutual fund business. The trust is either managed by a Board of trustees, or by a trustee company, formed for this purpose. The investors funds are held by the trust.

Types of Mutual Funds


Open-End Funds An open-ended fund is one that has units available foe sale and repurchase at all times. An investor can buy or redeem units from the fund itself at a price based on the Net Asset Value (NAV) per unit. NAV per unit is obtained by dividing the amount of the market value of the funds assets by the number of units outstanding. The number of outstanding goes up or down every time the fund issues new units or repurchase existing units. Closed-End Funds Unlike an open-end fund, the unit capital of a closed-ended fund is fixed, as it makes a one-time sale of a fixed number of units. Closed-ended funds do not allow investors but or redeem units directly from the funds. However, to provide the muchneeded liquidity to investors, any closed-end funds get themselves listed on stock exchanges. Trading through a stock exchange enables investors to buy or sell units of a closed-end mutual fund from each other. Load and No-Load Funds Marketing of a new mutual fund scheme involves initial expenses. These expenses may be recovered from the investors in different ways at different times. Three usual ways in which a fund's sales expenses may recover from the investors are: 1. At the time of investor's entry into the fund/scheme, by deducting a specific K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd amount from his Initial contribution, or 2. By charging the fund/scheme with a fixed amount each year, during the stated number of years, or 3. At the time of the investor's exit from the fund/scheme, by deducting a specified amount from the redemption proceeds payable to the investor. These charges made by the fund managers to the investors to cover distribution/sales/marketing expenses often called "loads". The load charged to the investor at the time of his entry into a scheme is called front-end or entry load". The load amount charged to the scheme over period of time is called a deferred load. The load that the investor pays at the time his exit is called a "back-end or exit load". Some funds may also charge different amounts of loads to the investors, depending upon how many years the investor is stayed with the fund; the longer the investor stays with the fund, less the amount of exit load" he charged. This is called contingent deferred sales charge". Tax Exempt and Non-Tax Exempt Funds Generally, when a fund invests in tax-exempt securities, it is called a taxexempt fund. In the U.S.A, For example, municipal bonds pay interest that is taxfree, while interest on corporate and other bonds is taxable. In India, after the 1999 Union Government Budget, all of the dividend income received from many of the Mutual funds is tax-free in the hands of the investor. While Indian Mutual funds currently offer tax-free income, any capital gains arising out of sale of fund nits are taxable. All these tax considerations are important in the decision on where to invest as the tax exemptions or concessions alter returns obtained from these investments. Hence, classification Of Mutual funds from the taxability perspective has great significance for investors. Broad Fund types by Nature of Investments Mutual funds may invest in equities, bonds or other fixed income securities,

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Stock Holding Corporation of India Ltd or short-term money market securities. So we have Equity, Bond and Money Market Funds. All of them invest in financial assets. But there are funds that invest in physical assets. For example, we may have Gold or other Precious Metals Funds, or Real Estate Funds.

Broad Fund Types by Investment Objective Investors and hence the mutual funds pursue different objectives while investing. Thus, Growth Funds invest for medium to long-term capital appreciation. Income Funds invest to generate regular income, and less for capital appreciation. Value Funds invest in equities that are considered under-valued today, whose value will be unlocked in the future. Broad Fund Types by Risk Profile The nature of a fund's portfolio and its investment objective imply different levels of risk undertaken. Funds are therefore often grouped in order of risk. Thus, Equity funds have a greater risk of capital loss than a Debt Fund that seeks to protect the capital while looking for income. Money Market Funds are exposed to less risk than even the Bond Funds,' since they invest in short-term fixed income securities, as compared to longer-term portfolios of Bond Funds. Money Market Funds Often considered the lowest rung order of risk level, Money Market Funds invest in 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 include Treasury Bills issued by governments. Certificates of Deposit issued by banks and Commercial Paper issued by companies. In India Money market Mutual funds also invest in the inter-bank call money market. The

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Stock Holding Corporation of India Ltd major strengths of money market funds are the liquidity and safety or principal that investors can normally expect from short-term investments. Gilt Funds Gilts are government securities with medium to long-term maturities, typically of over one year (under one-year instruments being money market securities). In India we have now seen the emergence of Government Securities or Gilt Funds that invest in government paper called dated securities (unlike Treasury Bills that mature less These funds have little risk of default and hence offer better protection of principal. Debt Funds (or Income Funds) Next in the order of risk level, we have the general category Debt Funds. Debt funds invest in debt instruments issued not only by governments, but also by private companies, banks and financial institutions and other entities such as infrastructure companies/utilities. By investing in debt, these funds target low risk and stable income for the investor as their key objectives. However, as compared to the money market funds, they do have a higher price fluctuation risk, since they invest longer-term securities. Similarly compared to Gilt Funds, general debt funds do have a higher risk of default by their borrowers. Diversified Debt Funds A debt fund that invests in all available types of debt securities, issued by entities across all industries and sectors is a properly diversified debt fund. While debt funds offer high income and less risk than equity funds, investors need to recognize that debt securities are subject to risk of default by the issuer on payment of interest or principal. A diversified debt fund has the benefit of risk reduction through diversification and sharing of any default-related losses by a large number of investors. Hence a diversified debt fund is less risky than a narrow-focus fund that

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Stock Holding Corporation of India Ltd invests in debt securities of a particular sector or industry.

Fixed Term Plans Fixed Term Plans are closed-end, but usually for shorter term-less than a year. Being of short duration, they are not listed on a stock exchange. However, there is a large variety of Equity Funds and all of them are not equally risk-prone. Investors and their advisors need to sort out and select the right equity fund that suits their risk appetite Growth Funds These funds invest in companies whose earnings are expected to rise at an above average rate. These companies may be operating in sectors like technology considered having a growth potential, but not entirely unproven and speculative. The primary objective of Growth Funds is capital appreciation over a three to five year span. Growth funds are therefore less volatile than funds that target aggressive growth. Sector Funds Sector funds' portfolios consist of investments in only one industry or sector of the market such as Information on Technology, Pharmaceuticals or Fast Moving Consumer Goods that have recently been launched in India. Since sector funds do not diversify into multiple se Offshore Funds.

Offshore Funds These funds invest in equities in one or more foreign countries thereby K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd achieving diversification across the country's borders. However they also have additional risks - such as the foreign exchange rate risk - and their performance depends on the economic conditions of the countries they invest in. Offshore Equity Funds may invest in a single country (hence riskier) or many countries (hence more diversified).

Small Cap Equity Funds These funds invest in shares of companies with relatively lower market capitalization than that of big, blue chip companies. They may thus be more volatile than other funds, as smaller companies' shares are not very liquid in the markets. In terms of risk characteristics, small company funds may be aggressive-growth or just growth type. Option Income Funds Option Income Funds write options on a significant part of their portfolio. While options are viewed as risky instruments, they may actually help to control volatility, if properly used. Conservative option funds invest in large, dividend paying companies, and then sell options against their stock positions. This ensures a stable Income stream in the form of premium income through selling options and dividends. Diversified Equity Funds A fund that seeks to invest only in equities except for a very small portion in liquid money market securities, but is not focused on any one or few sectors or shares, may be termed a diversified equity funds seek to reduce the sector or stock specific risks through diversification. They have mainly market risk exposure. Diversified funds arc clearly at the lower risk level than growth funds Equity Linked Saving Schemes: An Indian Variant In India, the investors have been given tax concessions to encourage them to invest in equity markets through these special schemes. Investment in these schemes entitles the investor to claim an income tax rebate, but usually has a lock-in period

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Stock Holding Corporation of India Ltd before the end of which funds cannot be withdrawn. These funds are subject to the general SEBI investment guidelines for all equity funds and would be in the Diversified Equity Fund category. However, as there are no specific restrictions on which sectors these funds ought to invest in, investors should clearly look for where the Fund Management Company proposes to invest and accordingly judge the level of risk involved. Equity Index Funds An index fund tracks the performance of a specific stock market index. The objective is to match the performance of the stock market by tracking an index that represents the overall market. The fund invests in shares that constitute the index and in the same proportion as the index. Since they generally invest in a diversified market index portfolio, these funds take only the overall market risk, while reducing the sector and stock specific risks through diversification. Balanced Fund A balanced fund is one that has a portfolio comprising debt instruments, convertible securities, and Preference equity shares. Their assets are generally held in more or less equal proportions between debt/money market securities and equities. By investing in a mix of this nature, balanced funds seek to attain the objectives of income, moderate capital appreciation and preservation of capital, and are ideal for investors with a conservative and long-term orientation. Commodity Funds Commodity funds specialize in investing in different commodities directly or through shares of commodity companies or through commodity future contracts. Specialized funds may invest in a single commodity or a commodity group such as edible oils or grains, while diversified commodity funds will spread their assets over many commodities. Real Estate Funds

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Stock Holding Corporation of India Ltd Specialized Real Estate Funds would invest in Real Estate directly, or may fund real estate developers, or lend to them, or buy shares of housing finance companies or may even buy their securities assets. The funds may have a growth orientation or seek to give investors regular income. There has recently been an initiative to offer such an income fund by the HDFC. Systematic Investment Planning (SIP): It is a simple and straight forward method of investing for investors who want to systematically build their investment portfolio over time. It is an investment strategy that evens out the fluctuations in the price of an investment made over time by purchasing the same amount of shares or units at regular intervals. It is most commonly used to purchase mutual fund units on a regular basis. It works much the same way as a recurring deposit account. Periodically, one invests a fixed sum of money into a specific investment vehicle, for a predetermined number of periods.

Instruments where Mutual funds deploy funds


1. Equity Equity represents the shares of a company. Mutual funds are entitled to dividends, rights and bonuses declared by the companies apart from the benefit of capital appreciation resulting from appreciation resulting from appreciation in the market value of the held shares. This is definitely reflected in the appreciation of the net asset value of the mutual fund units. The disadvantage of investing in equity is the highly volatile nature of the Indian capital markets leading to sudden changes in the prices of the shares. 2. Convertible Debentures These are bonds issued by companies that automatically get converted into equity shares on a pre-determined date. From that date onwards the so converted shares have the same benefits and risks that normal equity shares have.

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Stock Holding Corporation of India Ltd 3. Fixed Income Securities. Mutual funds invest a part of their funds in fixed income securities like debentures or Bonds or Gilts. The underlying idea is to have some fixed return to safeguard and meet the recurring expenses and to pay at least some dividend to the investors. Bonds or debentures are instruments issued by public or private limited companies, having a fixed rate of interest payable on a fixed date every year. Gilts are also similar instruments but the only difference is that they are issued by the Government and are hence considered as the safest investment. 4. Money Market Instruments Money market instruments are instruments that are issued /invested in for a short term ranging from a few days to a few months. In spite of the fact the yield from such instruments is very low, mutual funds (especially open-ended) invest a part of their funds in money market instruments to maintain adequate liquidity to meet short term / sudden requirements like repurchase. Some of the money market instruments are commercial paper, Treasury Bills, Bills of exchange and Call Money.

TYPES OF MUTUAL FUND:MUTUALFU ND TYPE Diversified equity funds Sector fund Index fund WHO SHOULD INVEST Moderate and aggressive investors Aggressive investors Moderate investors Objective High growth Investment portfolio Equity shares Equity shares Portfolio like BSE. Sensex, Nifty,etc Risk High Ideal investme nt 1-3years

High growth To generate returns which are similar to the returns of the respective

Very high Returns of NAV, very with index performan ce

1-3years 1-3years

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Stock Holding Corporation of India Ltd index

Equity linked saving scheme(ELSS ) Balance fund

Moderate and aggressive investors Moderate and aggressive investors

Long-term growth with tax saving Growth and regular income

Equity shares Balance ratio of equity and debt fund to ensure higher returns at lower risk Predomina ntly debenture governmen t securities, corporate bonds Governme nt securities Call money commercia l papers, treasury bill shortterm G-secs Treasury bills, certificate of deposits commercia l papers, securities call money

High

1-3years

Capital market risk and interest rate risk

Over 2 years

Bond funds

Salaried and conservati ve investors

Regular income

Credit risk and interest rate risk

Over 912months

Gilt fund

Short-term funds

Salaried and conservati ve investors Investors with surplus short-term fund

Security and income

Interest rate risk

Over 12 months

Liquidity and moderate income

Linked interest rate risk

3weeks 3months

Liquidity funds

Investors who park their fund in current account or short term bank fixed deposits

Liquidity +moderate income preservation of capital

Negligible Risk

2days 3weeks

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Stock Holding Corporation of India Ltd

Benefits of Mutual Fund


Portfolio Diversification Return on investment from just one industry or sector are subject to how well or poorly the industry fares. But with mutual fund ones money is invested across different sector. This reduces the risk of low returns on investments, because rarely do different sectors decline at the same time. Professional Management A mutual fund draws on the professional expertise of a team of research analysts and fund managers in investing ones saving in a number of securities. Reduction of Transaction Costs The purchase or sale of financial assets through the exchanges entails a certain proportion of changes known as transaction made. Investments through mutual fund reduce these costs considerably as they enjoy the benefits of economies of scale. Liquidity If one invests in an open-ended mutual fund, one can claim the money at net asset value related prices from the mutual fund itself. Convenience and Flexibility

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Stock Holding Corporation of India Ltd One has access to up-to-date information on the value of the investment in addition to the investments that have been made by the scheme, the proportion allocated to different assets and the fund managers investment strategy. Return Potential Investing in a Mutual Fund reduces paperwork and helps to avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save time and make investing easy and convenient. Transparency Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, one can systematically invest or withdraw funds according to once needs and convenience. Affordability 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. 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.

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Stock Holding Corporation of India Ltd

Mutual Fund Industry-A Profile


Origin of Mutual Funds

The Mutual Fund industry traces its roots to England in the mid 1800s. The enactment of two British laws, the joint stock companies Acts of 1862 and 1867, permitted investors, for the first time to share in the profits of an investments enterprise, and limited investor liability to the amount of investment capital devoted to the enterprise. Shortly thereafter, in 1868, the Foreign and Colonial Government Trust formed in London. This trust resembled a mutual fund in basic structure, providing the investor of moderate means the same advantage as the large capitalists by spreading the investment over a number of different stocks.

This concept of offering the investment potential of financial markets to all individuals spawned additional investment companies in Britain and Scotland and among other things helped finance the development of the post-civil was US economy. Most of the early British investment companies or trusts resembled todays closed-end funds by issuing a fixed number of shares to groups of investors whose pooled assets were invested in various companies. The Scottish American Investment Trust, formed on February 1, 1873 by fund pioneer Robert Fleming, was significant because it invested in the economic potential of the United States Chiefly through American railroad bonds. Many other trusts followed that not only target

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Stock Holding Corporation of India Ltd investment in America, but more importantly led to the introduction of investment fund concept on U. S shares in the late 1800s and early 1900s.

History of the Indian Mutual Fund Industry


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 the. The history of mutual funds in India can be broadly divided into four distinct phases First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the 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 Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89),

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Stock Holding Corporation of India Ltd 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 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 Franklin Templeton) was the first private sector mutual fund registered in July 1993. 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.

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Stock Holding Corporation of India Ltd 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.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming 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 September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes. LIST OF MUTUAL FUNDS IN INDIA Mutual Fund Bank sponsored BOB Asset Management Co. Ltd Can Bank Investment Management Sponsors Year of Entry

Bank of Baroda Canara Bank

1992 1987 1987 1963 1990

Services Ltd., S.B.I. Funds Management Ltd., State Bank of India UTI Asset Management Co., Pvt. Ltd., SBI, PNB, BOB, LIC Institutions G.I.C. Asset Management Co. Ltd., General Insurance Corporation & other 4 PSU Jeevan Bhima Sahyoga Asset Management Co. Ltd., Private Sectors Benchmark Asset Management Co. Pvt. NICHE Financial Services Ltd., Chola Mandalam Asset Management Co. Ltd., Escorts Asset Management Ltd., J. M. Capital Management Pvt. Ltd., Kotak Mahindra Asset Management Co. Ltd., Reliance Capital Asset Management Co. Chola Mandalam Investments Escorts Finance J.M. Shares and Stock Brokers Kotak Mahindra Bank Reliance Capital GIC LIC

1989

2001 1997 1996 1994 1998 1995

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Stock Holding Corporation of India Ltd Ltd., Sahara Asset Management Co. Pvt. Ltd., Sundaram Asset Management Co. Ltd., Tata Asset Management Pvt. Ltd., Birla Sun Life Asset Management Pvt. Ltd.,

Sahara India Finance Sunadaram Finance Tata Sons Birla Global Finance

1996 1996 1995 1994 1996 2000

Joint Ventures Predominantly Indian

D.S.P. Merrill Lynch Fund Manager Ltd., D.S.P. Merrill Lynch HDFC Asset Management Co. Ltd., HDFC & Std Life Investment Joint Ventures Predominantly Foreign Alliance Capital Asset Management Pvt. Ltd., Deutsche Asset Management Pvt. Ltd., Franklin Templeton Asset Management Pvt. Ltd., HSBC Asset Manageent Pvt. Ltd., ING Inveatment Management Pvt. Ltd., Morgan Stanley Investment Management Pvt. Ltd., Prudential ICICI Asset Management Pvt. Ltd., Principal Asset Management Co. Pvt. Ltd., Principal Financial Service Prudential ICICI Alliance Capital Management Deutsche Asset Management Franklin Templeton Investments HSBC Security ING Group Morgan Stanley

1994 2002 1996 2002 1999 1993 1993 1994

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Stock Holding Corporation of India Ltd Standard Charted Asset Management Ltd.,

Standard Charted Bank

2000

Sales Practices in the Indian Mutual Fund Market Agent commissions Agents are compensated by the funds through commissions, commission rates. In India there are no rules prescribed for governing the minimum r maximum commissions payable by a fund to its agents. Each fund has discretion to decide the commission structure for its agents. Thus sundaram pays commission to its agents as a basic rates plus an incentive that depends on the volume of business. In recent times funds have been paying commissions in the range of 1.5-2 % on equity oriented funds and 0.4-0.8 % on debt based funds. Higher commissions are generally paid in case of investments that are made with the purpose of taking tax benefits, since investors are required to lock in their funds for a longer period. SEBI Regulations Although SEBI does not prescribe the minimum or maximum amount of commission payable by a fund to agents under SEBI (MF) Regulations, 1996, all initial expenses including Brokerage paid to agents are limited to 6 % of resources raised under the schemes. In additions, SEBI regulated open-end funds are authorized to charge the investors are entry & exit loads to cover the fund distribution expenses. These loads should not exceed the percentage specified in the schemes offer document. In case the agents commissions paid by the fund result in over all distribution expenses are to be borne by AMC i.e. the excess cannot be passed on to the unit holders. A no load, charging no entry or exit loads is authorized to charge the schemes with the commissions paid to agents as part of the regular management & marketing expenses allowed by SEBI. SEBI puts a cap on the total expenses (including

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Stock Holding Corporation of India Ltd commissions) that can be charged to a scheme each year. Any excess over allowable expenses is required to be borne by the AMC.

Marker Practice Some funds pay the entire commission up- fronts to the agents (i.e. at the time of sale of units), while others pay apart of it up-front and the balance in phases. The latter practice is known as trail commission. Some funds follow the practice of nonpaying the balance to the agent if the investor exits the scheme before a specified period or stop paying the commission after the investor exits whenever he does. On the issue of commissions, is that of rebating by the agent to the investor of a part of the commission received from the fund on the sale to that investor. Although agent commissions in the in the mutual industry are not at the same levels as in insurance, investors have come to expect such rebates from agents of all financial products. It is possible in future such rebates might reduce in future & may even disappear. He distributors themselves will tend to realize that they provide useful processing and advisory services to investors, & have to incur costs in the process that need to be covered from their well deserve commissions received from the funds Agents Obligation Commission/other arrangements are between the fund and agent/broker. Subbrokers serve as agents of the principle agent and the fund is not answerable for their activities. Clearly, given the need for and widespread existence of a sub-broker network in India their role cannot be washed away. But the distributors need to make the investors aware of whom they are dealing with, whom the commission rebate is received from, & whom should they contact in case of any problems. Agents are well advised to practice honesty & transparency in explaining the commission structure & the timing of any rebate payment to the investors, whose trust will build a long-term relationship.

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Stock Holding Corporation of India Ltd Structure of Mutual Funds in India Like other countries, India has a legal framework within which mutual funds be constituted. Unlike in the UK, where two distinct trust and corporate structures are followed with separate regulations, in India open-end and closed end funds operate under the same regulatory structure and are constituted along one unique structure as unit trusts. A mutual fund in India is allowed to issue open-end and closed-end schemes under a common legal structure. Therefore, a mutual fund may have several different schemes (open-end and closed-end) under it. That is under one unit trust, at any point of time.

The structure is required to be followed by mutual funds in India is laid down under SEBI (mutual fund) regulations, 1996. In the following paragraphs, we look at the structure of each of the fund constituent Sponsor What a promoter is to a company, a sponsor is to a mutual fund. The sponsor initiates the idea to set up a mutual fund. It could be a financial services company, a bank or a financial institution. It could be Indian of foreign. It could do it alone or through a joint venture. In order to run a mutual fund in India, the sponsor has to obtain a license from SEBI. For this, it has to satisfy certain conditions, such as a

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Stock Holding Corporation of India Ltd capital and profits, back records (at least five years in financial services), default free dealings and a general reputation for fairness.

Asset Management Company (AMC) An AMC is the legal entity formed by the sponsor to run a mutual fund. Its the AMC that employs fund managers and analyst, and other personnel. Its the AMC that handles all operational matters of a mutual fund from launching schemes to managing them to interacting with investors.

The people in the AMC who should matter the most to you are those who take investment decisions. There is the head of the fund house, generally referred to as the chief executive officer (CEO). Under him comes the chief investment officer (CIO), who shapes the funds investment philosophy and fund managers who manage its schemes. A team of analysts, who track markets, sectors and companies, assists them. Trustees Trustees are like internal regulations in a mutual fund, and their job is to protect the interests of unit holders. Trustees are appointed or corporate bodies. In order to ensure They are impartial and fair, SEBI rules mandate that at least two thirds of the trustees be independent that is, not have any association with the sponsor.

Trustees appoint the AMC, subsequently seeks their approval for the work it does and reports periodically to them on how the business is being run. Trustees float and market schemes and secure necessary approvals. They check if the AMC investments are within defined limits and whether the funds accountable for financial irregularities in the mutual fund. K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd Custodian A custodian handles the investment back office of a mutual fund. Its responsibilities include receipt and delivery of securities, collection of income, and distribution of dividends and segregation of assets between schemes. The sponsor of a mutual fund cannot act as a custodian to the fund. This condition, formulated in the interest of investors, ensures that the assets of a mutual fund are not in the hands of its sponsor. For example Deutsche Bank is a custodian but it cannot service Deutsche Mutual Fund, its mutual fund arm. Registrar Registrars also known as transfer agents, handles all investor related services. This includes issuing and red reaming units. Sending fact sheet and annual reports. Some fund houses handle such functions in house. Others outsource it to registrars; Karvy and CAMS are the more popular ones. It doesnt really matter which model your mutual fund opts for, as long as it is prompt and efficient in servicing you. Most mutual funds in addition to registrars also have investor service centers of their own in some cities. Recent Trends in Mutual Fund Industry The most important trend in the mutual fund industry is the aggressive expansion of the Foreign owned mutual fund companies and the decline of the companies floated by Nationalized Banks and smaller Private Sector players. Many Nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organization. Some schemes offered guaranteed returns and their parent organization had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd whether, barring a few exceptions they have serious plans of continuing the activity in a major way. The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to Foreign owned companies, some have merged with others and there is general restructuring going on. The Foreign owned companies have deep pockets and come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact they have forced the industry to Future Scenario The asset base will continue to grow at an annual rate of about 30 to 35% over the next few years as investors shift their assets from banks and other traditional avenues. Some of the older and private sector players will either close shop or be taken over. In the coming years the market will witness a flurry of new players entering the arena. There will be a large number of offers from various AMCs 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 behind. Derivatives in India as this would enable it to hedge its risk and this in turn would be reflected in its NAV.

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Stock Holding Corporation of India Ltd

Global Scenario 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 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. 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 Information.

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Stock Holding Corporation of India Ltd 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. 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. Corpus:Investing in a scheme is a simple process. Juts walk into any office of the mutual fund or that of its representatives. Fill up a short and simple form, and hand over a cheque. Yours money gets added to the pool already with the scheme, given to it by numerous other investors like you. The total money available with a scheme at any point in time is referred to as the Corpus or Asset under management the K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd mutual fund, on your and other investors behalf invests this corpus in various securities in line with its sated objectives Units: Mutual fund issues you units against your investment. A unit is the currency of a fund. What a share is to company, a unit is to a fund. Net asset value (NAV): NAV: (Net asset of the scheme /number of units o/s) (Number of units outstanding as at the NAV) You are allotted units on the basis of a scientific mechanism. This price, measured per unit, is called the Net Asset Value (NAN) of the unit. Just as share or land is bought and sold at its NAV. if for example, you were to invest Rs 10000 in scheme when its NAV Is Rs 10. You will be allotted 1000 units (10000/10) roughly the fund charges a nominal processing fee. The NAV of any scheme tells how much each units of its is worth at any point in time, and is therefore the simplest measure of how it is performing. Schemes NAV is its net assets (Market value of the securities its own minus it owes) divided by the number of units it has issued. A scheme NAV is dynamic figure. The market value of a schemes portfolio, changes from day to day, as prices of shares and bonds move up or down. The number of units outstanding also changes as new investors come into the scheme and told ones leave. If the NAV of your scheme rises from Rs 10 to Rs, 11 over a period of time, your scheme is said to have generated a return of 10%. Similarly, if its NAV falls from Rs 10 to Rs 9, it is said to have lost 10% Fund house have to calculate and disclose the NAVs of their schemes daily fund NAVs can be easily looked up. While dailies give a random listing of schemes the financial papers are more exhaustive in their coverage.NAV information is also

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Stock Holding Corporation of India Ltd available on website, of the mutual fund concerned and of independent data providers. When invested in a scheme, its NAV is the figure to track as it qualifies your returns and your purchase price and sale price will be based on it.

Load:Although the NAV represents scheme current market value it is not the exact price at which an investor enters or exits the scheme. Fund houses levy a nominal charge, on most of their schemes, to meet their processing costs and to discourage investors from lacking. This charge is referred to as load and it is price you pay over and above the fund NAV when you buy or cell units. You pay an entry load at the time buying units and an exit load while selling. Loads are always expressed as percentage of the NAV, and have the effect of reducing your returns. An entry load increases your NAV, which places fewer units in your hands. An exit load decrease youre NAV of Rs 10 and it levies an entry and exit load of 1% (10 paisa) each. So when you buy units youll pay Rs 10.1 (10+0.10)per unit, not Rs 10. Similarly if you sell youll get Rs 9.90(10-0.10) per unit, not Rs 10. Under SEBI rules, the sum of entry and exit loads charged by a scheme cannot exceed 7%

Cost of investment in mutual fund:Another entry that eats into your return is expenses this is what your fund charges you for managing your only. Fund managers have to be paid a fee, as do the other constraints involved in managing your money. All this entails costs, which your scheme recovers from you, within limits. Every year, a fund charges same amount to your schemes NAV reducing your returns by that amount. SEBI rules allow equity

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Stock Holding Corporation of India Ltd schemes to charge a maximum of 2.5%of corpus as expenses every year, the corresponding figure for debt schemes is 2.25% SEBI also decides what kind of expenses a fund can charge its unit holders and what it cannot. For e.g.: the cost of running a campaign about a fund having won an award cannot be charged to investors.

Disclosures:From time to time, your fund house will share with you information relating to your scheme. It does this in various ways, in various degrees. Under SEBI rules, fund houses have to send to all unit holders annual reports disclosing the complete portfolio of all units holders annul reports disclosing the complete portfolio of all units holders annul reports disclosing the compete portfolio of all their schemes and publish half-yearly results in newspapers. These document shade light on your schemes performing over various time periods, and how it stands up, given market conditions. Some fund house goes beyond such mandatory information sharing. Whatever information is relevant to your investment they send it to you on a quarterly basis, through fax and newsletters. Most fund houses update their scheme portfolio on their website even quicker, the norm being on a monthly basis. This information you can use to make an investment in the schemes Redemption:Whenever you want, you can sell your units, partly or fully back to your fund. Although its sale from your point of view in mutual fund parlance it is called repurchase or redemption youll have to fill up another short and simple from your Mutual fund will pay you the schemes NAV prevailing on that date minus the exit load, Mail you a cheque within three to five days.

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Stock Holding Corporation of India Ltd DISTRIBUTION COMPANIES. A distribution company has several agents and distributors working for it, and is the transitional interface with the mutual fund. It is institutional agent for a mutual fund, and earns commissions on funds mobilized. Distribution companies are a very popular channel with mutual fund today. Risks involved in investing in Mutual Funds Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares, debentures, bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of Mutual Funds. Some of the Risk to which Mutual Funds are exposed to is given below: Market risk If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance. Non-market risk Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. Interest rate risk

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Stock Holding Corporation of India Ltd Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively. Credit risk Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating. Rights available to a Mutual Fund holder in India. As per SEBI Regulations on Mutual Funds, an investor is entitled to: 1 Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. 2 Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme. 3 Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. 4 The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information, which may have an adverse bearing on their investments. 5 6 7 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund. 75% of the unit holders can pass a resolution to wind-up the scheme. An investor can send complaints to SEBI, who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved.

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Fund Offer document


A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. That way, before you put in your money, you're well aware of the risks etc involved. This has to be designed in accordance with the guidelines stipulated by SEBI and the prospectus must disclose details about: Investment objectives Risk factors and special considerations Summary of expenses Constitution of the fund Guidelines on how to invest Organization and capital structure Tax provisions related to transactions Financial information

The Financial Planning Process.


Financial Planning involves advising clients on how to manage their finances and investments so as to achieve their financial goals. A financial planner assimilates the aspirations of his clients and draws a road map to make them a reality. Before we review the process of financial planning, it is useful to understand some basic terms used by financial planners.

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Stock Holding Corporation of India Ltd Financial Planning: Financial Planning is the overall process of advising clients on how to achieve their financial goals. Financial Goals and Objectives: Clients should be made to define their financial goals in terms of how much money they need and when they will need it. These include Income for a comfortable retirement. Funding for a child's wedding or education Money to buy a home, a car or other material acquisition Where with al to lead a better life and indulge in pursuits such as charity, hobbies, travel, etc.

Asset Allocation:
The allocation of a client's investments at a broad level across various asset classes, which include hard assets and financial assets. The latter can be categorized into equities or growth assets, bonds or income assets and money market or liquid assets. There are also further subdivision of equities into different sectors and bonds into government and corporate bonds of different ratings and maturities.

Risk Tolerance:
The extent of loss in value that clients can tolerate. Psychologically and financially and for how long they can with stand such declines in value. In dealing with Mutual Funds it is necessary to understand the value of their units. The NAV of the units is an important relevant concept in this context it is basis for unit pricing. In case of Open Ended Funds and Closed End funds the NAV per unit is basically arrived at by calculating the total market value of investments or

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Stock Holding Corporation of India Ltd assets of the Mutual Funds subtracting liabilities and dividing by the number of units currently outstanding. Total market value of assets or securities in the portfolio of the fund - liabilities NAV = ______________________________________________________ Number of funds units outstanding. In case of units of Open Ended Funds the NAV is calculated daily and the sales and repurchases on each day are made at the on the most recently circulated NAV. The approximate formulae used to calculate sale and repurchase prices of units are as follows: (Market value of assets liabilities excluding contingent liabilities, initial share capital reserve and unit capita)+brokerage charges, commission, tax, stamp duties, other management & administrative expenses Sale price=___________________________________________________ Number of units outstanding.

(Market value of assets- liabilities excluding contingent liabilities, initial share capital, reserve and unit capital)brokerage charges, commission etc. Repurchase Price=____________________________________________________ Number of units outstanding.

Risk appetite of investors For investors with low risk appetite Money market funds K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd Government securities funds. For investors with moderate risk appetite Income funds Balanced funds Growth and income funds Short -term bond funds Intermediate bond funds Index funds.

For investors with high risk appetite Aggressive growth funds International funds Sector funds Specialized funds Precious metal funds High-yield bond funds Commodity funds PORTFOLIO A portfolio is a collection of investments held by an institution or a private individual. Holding a portfolio is part of an investment and risk-limiting strategy called diversification. By owning several assets, certain types of risk (in particular specific risk) can be reduced. The assets in the portfolio could include stocks, bonds, options, warrants, gold certificates, real estate, futures contracts, production facilities, or any other item that is expected to retain its value.

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Stock Holding Corporation of India Ltd Management Portfolio management involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios comprised of different asset bundles are compared. Mutual funds have developed particular techniques to optimize their portfolio holdings.

Models Some of the financial models used in the process of Valuation, stock selection, and management of portfolios include:

Maximizing return, given an acceptable level of risk. Modern portfolio theory - a model proposed by Harry Markowitz among others. Capital asset pricing model. Arbitrage pricing theory. The Jensen Index. The Treynor Index. The Sharpe Diagonal (or Index) model. Value at risk model.

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Stock Holding Corporation of India Ltd Index fund An index fund or tracker can be defined as a mutual fund or exchange-traded fund (ETF) that tracks the result of a target market index. Good tracking can be achieved simply by holding all of the investments in the index, in the same proportions as the index; alternatively, statistical sampling may be used. This constant adherence to the securities held by the index is why these funds are referred to as passive investments. The market index used is Nifty for balanced funds and the CNX Mid Cap for Mid cap funds.

Beta coefficient
The Beta coefficient, or financial elasticity (sensitivity of the asset returns to market returns, relative volatility), is a key parameter in the Capital asset pricing model (CAPM). Beta can also be defined as the risk of the stock to a diversified portfolio. Therefore the beta of a stock will be much lower than its (the stock's) standard deviation. The coefficient measures the asset's non-diversifiable risk, also called systematic risk or market risk, rm measures the rate of return of the market and ra measures the rate of return of the asset. On an individual asset level, measuring beta can give clues to volatility and liquidity in the marketplace. On a portfolio level, measuring beta is thought to separate a manager's skill from his willingness to take risk. The beta movement should be distinguished from the actual returns of the stocks. For example a sector may be performing well and may have good prospects but the fact that its movement does not correlate well with the broader market index may decrease its beta. It however should not be taken as a reflection on the overall attractiveness or the loss of it for the sector or stock as the case may be. Beta is a measure of risk and not be confused with the attractiveness of investment.

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Stock Holding Corporation of India Ltd The beta coefficient was actually borne out of regression analysis. It is linked to a regression analysis of the return of the stock index (x-axis) in a specific year versus the return of the market (y-axis) in a specific year. The regression line is then called the Security Characteristic Line (SCL). For example, in a year where the broad market or benchmark index returns 25%, suppose two managers gain 50%. Since this is theoretically possible merely by choosing a portfolio whose beta is exactly 2.0, we would expect a skilled portfolio manager to have built the portfolio with a beta somewhat less than 2, such that the excess return not explained by the beta is positive. If one of the managers has an average beta of 3.0 in his portfolio, and the other's is only 1.5, then the CAPM simply states that we are not being adequately compensated for the first manager's risk, whereas the second manager has done more than expected of him and appears capable of generating superior returns. Calculation of Beta To calculate Beta, one needs a list of (e.g., daily closing) prices for the asset and prices for the index, hopefully corrected for dividends. The first step is to calculate ri, the return for each period, for the asset and for the index. Next, a plot should be made, with the index returns on the x-axis and the asset returns on the yaxis, in order to check that there are no serious violations of the linear regression model assumptions. The fitted slope from the linear least-squares system is Beta. The y-intercept is "Alpha", a less commonly used term. The Sharpe Performance Index The Sharpe Index is a measure with which you may measure the performance of your portfolio over a given period of time. The important aspect of the Sharpe Index is that this performance indicator takes into consideration the risk of the portfolio.

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Stock Holding Corporation of India Ltd In order to use the Sharpe Index, you must know three things; the portfolio return, the risk-free rate of return, and the Standard Deviation of the portfolio. For the risk-free rate of return, you may use the average return (over the period of time) of some government bond or note. The Standard Deviation of the portfolio is a measure of the systematic risk of the portfolio. Using the Standard Deviation, rather than the beta (as in the Treynor Index), you are assuming that the portfolio is NOT a diversified portfolio. If you are looking at the return of a mutual fund, this figure is typically available from the fund company itself (this and other measures are also available from the American Association of Individual Investors' Guide to Mutual Funds).

Formula for the index;


Sharpe = (Portfolio Return - Risk-Free Return) / Standard Deviation Let's use the same example information. A portfolio manager achieved a return of 15.0%, his portfolio had a standard deviation of 0.3 and the market achieved a return of 14.6% vs. a risk free rate of return of 7%. To calculate the Sharpe Index: Index = (.15 - .07) / .3 = 0.267 To compare, another portfolio manager achieved a return of 13.5% with a standard deviation of .25. The Sharpe index for this portfolio manager is: Index = (.135 - .07) / .25 = 0.26 This means that the 1st portfolio manager out performed the second portfolio manager on a risk-adjusted basis. Sharpe index Is one of the indices used by analysts to measure investment performance relative to the risks associated with the performance. It measures the ratio of the portfolio excess return above the risk-free rate to the standard deviation of portfolio returns. A Sharpe index number greater than 1 indicates a good performance in relation to the level of risk taken while a number below 0.1 indicates the opposite. Treynor Index

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Stock Holding Corporation of India Ltd A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. This is a similar ratio to the Sharpe ratio, except that the portfolio's beta is considered the measure of risk as opposed to the variance of portfolio returns. This is useful for assessing the excess return from each unit of systematic risk, enabling investors to evaluate how structuring the portfolio to different levels of systematic risk will affect returns. Expected return = (Beta * Market Risk Premium) + Risk-Free Rate The "Beta" of a stock is determined by figuring out how much the stock's return has varied in relation to the market over a specified time. The risk-free rate is what we could get by buying a risk-free government bond of the same investment time horizon as our proposed stock investment. So if we're looking at a three-year holding period, we would look at the returns on Government Bonds which is currently about 8%. The market risk premium is what we as investors can reasonably expect to get by investing in the market. A related concept is called the Treynor Index, which measures the risk-adjusted return of a stock: Treynor Index = (Expected Return - Risk-Free Rate) Beta A high Treynor Index indicates that we're getting a good deal in terms of the returnto-risk ratio.

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Stock Holding Corporation of India Ltd

Introduction to the study


Mutual funds are the most popular channel in the investment activity as they, by and large, not only guarantee repayment of the principal money invested but assure a reasonable and regular return. But, there are some exemptions to this phenomenon. Mutual funds, being an institution/investment agency, are treated as a suitable vehicle specifically for small investors, who normally feel shy of the capital market and are unable to predict its conditions through different schemes. A comparative analysis of the returns of different mutual funds has been made with a definite purpose to identify a better performing fund. The study focuses on the NAV of some selected AMCs so as to serve as a guide to the investing public to help them find out as to which mutual fund registered increased Net Asset Value in selected mutual fund schemes. Hence the present study analyzes equity schemes and balanced scheme applying various statistical measures. K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

Objective of the Study


1. To know the performance of various mutual funds schemes. 2. To compare Mutual Fund Average Return with NIFTY Average Return 3. To help the investors for taking decision about selection of mutual fund schemes.

Scope of the study


Mutual Funds provide the much needed fund requirements for the corporate sector. In the present day scenario, most of the corporate have been reportedly tapping the mutual fund route as a reliable source of finance. This decisive shift by the corporate towards the mutual fund route is due to the fact that there is a minimum or reasonable but assured rate of return which would be sufficient in the case of mutual funds to satisfy the investors. So, whether investing in mutual funds would be an ideal choice has to be probed from the viewpoint of the investor population. And if the answer is yes, which type of mutual fund will help investors to get regular return based on the NAV performance? In a nutshell, among other objectives, the present study aims at helping the investor to apply basic minimum criterion while making investments in mutual funds.

Data Collection and Sampling


The required data for the re-search study were collected from secondary sources. The data relating to NAV of the schemes were collected from the web site www.amfiindia.com, www.indiainfoline.com, www.nseindia.com &

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Stock Holding Corporation of India Ltd www.investorsmartindia.com. This study adopts convenience-sampling method with a stipulation that complete data were available for the three-year period for the schemes.

Limitations of the study


The present study covers only equity scheme and balanced scheme. The study is related to three financial years only namely, 2004-2005, 20052006 and 2006-2007 spanning 36 months. Though care has been taken to collect data for the whole period of study, information was found missing for some days.

Equity Fund
1. Absolute Return ABSOLUTE RETURN NIFTY HDFC Kotak Mahindra Templeton Fund JM Fund 1ST YEAR 37.575 44.26477 38.94951 41.642 33.88327 2ND YEAR 93.576 122.3802 121.0356 92.2757 89.63138 3RD YEAR 182.805 256.9088 299.9517 177.8117 207.1798

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Stock Holding Corporation of India Ltd

FUND BETA 1ST YEAR 2ND YEAR 3RD YEAR

HDFC 0.10276 1 3.72659 5 4.74212 7 5.39440 8

Kotak Mahindra 0.177291 5.487078 9.055365 7.317761

Templeton JM Fund FUND 0.202172 0.593209 6.801477 15.35418 5.609805 19.95515 7.376479 32.02607

RISK PREMIUM

Fund name HDFC KOTAK TEMPELTON JM

SD(fund) 4.263649 1.223796 1.281128 1.403864

SLOPE(Beta) 0.102761 0.177291 0.202172 0.593209

Correlation 0.032289 0.193998 0.21208 0.565482

HDFC Mutual Fund has performed better in short term of 1yr by giving returns upto 44.26. And Kotak Mahindra has performed better in long run with result of 299.95 when compared with nifty. The beta of HDFC Mutual Fund is also low. Since the beta measures funds sensitivity to market movements, therefore if the future resembles the past, this means that on average when the market rises an extra 1 %, Kotak Mahindra Mutual Fund NAV will rise by an 0.18% and HDFC by 0.10%

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Stock Holding Corporation of India Ltd

2. Sharpe Index Ranking


SHARP RATIO 1ST YEAR 2ND YEAR 3RD YEAR Average Sharp Ratio Kotak Mahindra 0.324125 0.525392 0.427383 0.42563333 Templeton Fund 0.353975 0.295032 0.382416 0.343807667

HDFC 0.423884 0.522709 0.581619 0.509404

JM FUND 0.281847 0.359408 0.562893 0.401382667

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Stock Holding Corporation of India Ltd

The Sharpe Index is a measure to measure the performance of portfolio over a given period of time. It take into consideration of Standard Deviation of the fund. SD is used to measure the desperation of the fund. It enables us to determine how far individual items in a distribution deviated form its mean. If SD differ by 1% HDFC NAV may go up or comes down by o.5594%. SD of HDFC is 4.26, even though SD is high but the beta is low. This may be because the portfolio return may differ from period to period AMC have moved/managed there fund very well.

3. Treynor Index Ranking


Treynor Ratio 1ST YEAR 2ND YEAR 3
RD

HDFC 36.26477 46.14727 52.49484

Kotak Mahindra 30.94951 51.0762 41.27536

Templeton Fund 33.642 27.74766 36.48612

JM FUND 25.88327 33.63934 53.98786

YEAR

Average Trenyor Ratio 44.969 41.100 32.625 37.837

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A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. HDFC Mutual Fund is having a higher Treynor ratio of 44.969

Balanced Fund
1. Absolute Return ABSOLUTE RETURN NIFTY HDFC Kotak Mahindra Prudential ICICI JM FUND 1ST YEAR 2ND YEAR 3RD YEAR 36.42808 91.96198 180.4467 22.35651 17.44572 31.33449 32.51587 56.04685 42.25679 76.61643 85.52222 106.417 106.2572 144.6465 139.4407

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FUND BETA 1ST YEAR 2ND YEAR 3RD YEAR

HDFC 0.00475 5 0.06693 9 0.08980 8 0.11895 2

Kotak Prudential Mahindra ICICI 0.168911 4.094155 5.41767 3.557794 0.136962 2.663021 4.184771 4.475645

JM FUND 0.110645 1.05205 1.187265 3.839771

RISK PREMIUM

FUND NAME HDFC ICICI KOTAK JM

SD(FUND) 3.916123 1.388914 1.109182 0.966361

SLOPE(Beta) 0.004755 0.136962 0.110645 0.168911

CORRELATION 0.001626 0.13202 0.133269 0.2346

JM Mutual Fund has performed better in short term of 1yr by giving returns upto32.51%. And ICICI has performed better in long run with result of 144.6465% when compared with nifty. The beta of JM Mutual Fund is also moderate. Since the beta measures funds sensitivity to market movements, therefore if the future resembles the past, this means that on average when the market rises an extra 1 %, JM Mutual Fund NAV will rise by an 1.05% and ICICI by 2.66%

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2. Sharpe Index Ranking

SHARP RATIO 1ST YEAR 2ND YEAR 3


RD

HDFC 0.20035 0.248447 0.309738 0.253

Kotak Mahindra 0.102958 0.115179 0.35491 0.191

JM FUND 0.2396 0.317956 0.207846 0.255

Prudential ICICI 0.216836 0.327943 0.349181 0.298

YEAR

Average Sharp Ratio

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The Sharpe Index is a measure to measure the performance of portfolio over a given period of time. The important aspect of the Sharpe Index is that this performance indicator takes into consideration the risk of the portfolio. The fund performing well according to this index is ICICI Mutual Fund with the average ratio of 0.298%

3. Treynor Index Ranking


Kotak Mahindra 14.07782 18.88749 25.01664 9.50834 10.7304 34.70351 Prudential ICICI 19.44348 JM FUND 24.2385

Treynor Ratio 1ST YEAR 2 3


ND RD

HDFC

YEAR YEAR

30.55422 32.07407 32.67797 21.0631

Average Trenyor Ratio 19.327 18.314 27.559 25.792

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Stock Holding Corporation of India Ltd

A measure of a portfolio's excess return per unit of risk, equal to the portfolio's rate of return minus the risk-free rate of return, divided by the portfolio's beta. ICICI Mutual Fund is having a higher Treynor ratio of 27.599%

FINDINGS
1. Returns of Equity scheme shows that most of Mutual Funds Company has outperformed the Nifty returns. 2. HDFC Mutual Fund has been out performed the nifty returns. 3. In the Balance Scheme Prudential ICICI has performed better in terms of absolute returns in 3yr. 4. According to Sharpes index in Equity Scheme, HDFC Mutual Fund is having the highest ratio of 0.509% in Equity scheme. 5. According to Treynor index Equity Scheme, HDFC Mutual Fund is having the average highest ratio of 44.969% in Equity scheme

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Stock Holding Corporation of India Ltd 6. And other AMC in Equity scheme that is Kotak Mahindra has been also performing well. According to Sharpes index and Treynor index. The funds Sharpe ratio is 0.4256% and Treynor index is 41.100% 7. According to Sharpes index in Balance Scheme, ICICI Mutual Fund is having the highest ratio of 0.298%. 8. According to Treynor index Balance Scheme, ICICI Mutual Fund is having the average highest ratio of 27.599% in Balance scheme 9. And other AMC in balanced scheme JM Fund has been performing well according to Sharpes index and Treynor index. The funds Sharpe ratio is 0.255 and Treynor index is 25.792

RECOMMENDATION
SCHL has to educate its investor before investing in mutual funds. They can come up with investor awareness program SHCIL has to advertise about its service. The AMC should publish the Beta, Standard deviation, Sharpe Ratio Treynor Ratio so that it helps the investor in analyzing to with fund they can go for/invest.

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CONCLUSION
In this study, I have done a Performance evaluation of two schemes namely Equity and Balanced. The evaluation was done on the basis of the absolute returns from the funds and using indices like Sharpe index and Treynor index. With the help of this I was able to draw the following conclusions. Data of equity scheme shows that most of mutual funds have performed well with the Nifty returns. HDFC Mutual Fund has got good Sharpes index and Treynor index. When we consider its portfolio it has concentrated on sectors like Industrial capital goods, petroleum product, Pharma, Software, consumer non durables, Media services and Auto Ancillaries. And another funds in equity scheme like Kotak, has also concentrated in Banking, Construction, Industrial capital goods, Software, Pharmaceuticals and K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd Telecom services. Franklin and JM have concentrated mainly on two or three sectors like industrial capital goods, consumer non-durables; banks, pharmaceuticals; banks, cement, auto; cement, consumer non-durables respectively. And in balance scheme Prudential ICICI has performed better with 144.65% returns. And they have concentrated more on industrial capital goods, banks, Software, Pharmaceuticals etc. While other funds like Kotak, HDFC, JM has concentrated on ferrous metals, industrial capital goods; industrial goods, industrial products respectively.

MUTUAL FUND DETAILS


MUTUAL FUND KOTAK Equity scheme ASSET MANAGEMENT COMPANY Kotak Mahindra Asset management company ltd HDFC Asset management company Ltd Capital management Ltd FUND MANAGER Ritesh Jain

HDFC Equity Scheme

Prashant Jain

JM Financial Equity Scheme

Sandip Sabharwal

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd Templeton Mutual Fund Templeton Asset Equity Scheme management (I) Pvt Ltd Prudential ICICI Balance Scheme HDFC Balance Scheme Prudential ICICI Asset management company Ltd HDFC Asset management company Ltd Capital management Ltd Kotak Mahindra Asset management company ltd

Dr. J Mark Mobius

Deven Sangoi

Vinay Kulkarni

JM Financial Balance Scheme KOTAK Balance scheme

Sandeep Neema

Krishna Sanghvi & Ritesh Jain

BIBLIOGRAPHY
Books Security Analysis And Portfolio Management By Punithavanithy Pandian Security Analysis And Portfolio Management By Donald E. Fischer & Ronald J. Jordan Web Sites
www.nseindia.com K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd www.amfiindia.com www.mutualfundindia.com www.investsmartindia.com www.wikipedia.com www.google.co.in www.indiainfoline.com

ANNEXURE 1
PORT FOLIOS OF DIFFERENT FUNDS

Fund Portfolio
HDFC Equity Fund - (G) Fund: HDFC Mutual Fund Class: Equity OPEN
NAV (Jul 13, 2007): Percentage Returns: 1 Month Ago 3 Months Ago 1 Year Ago Rs.171.95 9.14% 17.49% 48.36%

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd


Sector / Company Name Percentage held
(%)

No.of shares
Nos.

Market Value

Others Net CA & Others CCI -0.59 1.83 0 0 -26.61 82.79

Auto Ancillaries Motherson Sumi JK Tyre & Indust Exide Inds. Balkrishna Inds. Amtek Auto 0.35 0.65 1.08 1.28 4.52 1286511 2195326 10140000 945640 5000000 15.62 29.27 48.98 57.67 204.18

Banks Bank of Baroda St Bk of India ICICI Bank 2.99 3.49 1.02 5000000 1032490 483895 135.13 157.54 46.23

Chemicals Savita Chemicals 0.47 812563 21.07

Construction Punj Lloyd 4.23 7416975 190.84

Consumer Non Durables Britannia Inds. Pidilite Inds. 0.98 0.65 280878 2397672 44.25 29.31

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

Fund Portfolio
HDFC Balanced Fund (G) Fund: HDFC Mutual Fund Class: Balanced OPEN
NAV (Jul 13, 2007): Percentage Returns: 1 Month Ago 3 Months Ago 1 Year Ago Rs.33.50 7.31% 11.31% 24.49%

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd


Sector / Company Name Percentage held
(%)

No.of shares
Nos.

Market Value

Others Net CA & Others CCI Reliance Inds. Bajaj Auto Grasim Inds. HDFC Indian Oil Indian Rail Fin -0.64 12.33 1.37 3.44 4.54 3.89 3.90 4.03 0 0 5 7 8 50 50 50 -0.77 14.73 1.64 4.11 5.43 4.65 4.66 4.81

Auto Ancillaries Amtek Auto Balkrishna Inds. 2.56 6.00 75000 117500 3.06 7.17

Banks Bank of Baroda Federal Bank 4.52 2.53 200000 100000 5.41 3.02

Chemicals Aarti Inds. 1.54 420000 1.84

Consumer Non Durables ITC 2.40 185000 2.86

Ferrous Metals Jindal Saw 4.09 80000 4.89

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

Others Net CA & Others Cash & Bank Balance Allahabad Bank ICICI Bank DSP Merrill Lyn Tata Sons M & M Financial Tata Sons Tata Tele Servic Power Grid Corp. Indian Rail Fin Infrast Deve Fin NABARD -4.47 2.03 1.50 3.05 0.05 2.24 4.62 0.02 1.75 1.16 2.31 3.31 7.50 0 0 0 0 0 0 0 0 0 0 0 0 0 -19.33 8.77 6.50 13.20 0.20 9.67 20.00 0.09 7.56 5.00 9.98 14.32 32.46

Cement Chemicals K.L.Es Institute Construction Century Textiles Indiabulls Real Time Technoplast Grasim Inds. IVRCL Infrastruc

Of Management Studies And Research 1.56


0.97 1.21 2.49 1.54

100110 100528 90928 40758 186301

6.77 4.18 5.22 10.75 6.68

Fund Portfolio
Pru ICICI Balanced Fund - (G) Fund:Prudential ICICI Mutual Fund Class:
NAV (Jul 13, 2007): Percentage Returns: 1 Month Ago 3 Months Ago 1 Year Ago Rs.37.71 6.68% 10.01% 30.39%

Stock Holding Corporation of India Ltd


Balanced OPEN

Sector / Company Name

Percentage held
(%)

No.of shares
Nos.

Market Value

Auto Ancillaries MICO Sundaram Clayton Banks 0.70 1.28 6776 63713 3.04 5.52

Andhra Bank Bank of Baroda Pun. Natl. Bank ICICI Bank

1.01 1.93 2.63 3.96

510913 308847 210972 179515

4.39 8.35 11.39 17.15

Ferrous Metals SAIL Tata Steel 2.04 1.28 674866 92769 8.85 5.54

Hardware CMC Industrial Capital Goods BHEL Bharat Electron 2.34 3.77 65915 89229 10.14 16.33 2.19 79443 9.47

Industrial Products K.L.Es Institute Of Management Studies And Research AIA Engg 4.41 108555 19.09

Stock Holding Corporation of India Ltd

Fund Portfolio
Kotak Balance Fund:Kotak Mahindra Mutual Fund Class: Balanced OPEN
NAV (Jul 13, 2007): Percentage Returns: 1 Month Ago 3 Months Ago 1 Year Ago Rs.47.13 8.98% 13.84% 27.96%

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd


Sector / Company Name Percentage held
(%)

No.of shares
Nos.

Market Value

Others Net CA & Others CBLO Kotak Mah. Bank St Bk of Mysore Indian Rail Fin ICICI Bank Citicorp Finance M & M Financial Divi`s Lab Bharti Airtel Auto M&M Auto Ancillaries Amtek Auto Banks Andhra Bank Indian Overseas Union Bank (I) ICICI Bank Cement Grasim Inds. Construction Gammon India Jaiprakash Assoc Consumer Non Durables Asian Paints ITC Diversified Hind. Unilever Ferrous Metals JSW Steel Jindal Steel 3.04 1.53 45000 4000 2.75 1.38 1.87 90000 1.70 0.89 0.85 10000 50000 0.81 0.77 1.34 1.47 29400 18000 1.21 1.33 0.87 3000 0.79 1.14 1.30 2.20 2.64 120184 100000 150000 25000 1.03 1.18 1.99 2.39 1.08 24000 0.98 1.68 21000 1.52 -0.72 8.28 2.76 1.54 6.70 3.34 4.42 5.52 -0.57 1.79 0 0 0 0 0 0 0 0 -868 19500 -0.65 7.50 2.50 1.40 6.06 3.02 4.00 5.00 -0.51 1.62

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

Fund Portfolio
JM Balanced Fund - (G) Fund: J M Mutual Fund Class: Balanced OPEN
NAV (Jul 13, 2007): Percentage Returns: 1 Month Ago 3 Months Ago 1 Year Ago Rs.80.10 13.81% 17.81% 42.04%

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd


Sector / Company Name Percentage held
(%)

No.of shares
Nos.

Market Value

Others Orbit Corporatio CBLO Union Bank (I) Indian Rail Fin IDBI 0.42 5.41 7.30 5.35 13.95 0 0 0 0 0 0.06 0.81 1.10 0.81 2.10

Auto Ancillaries Apollo Tyres 1.59 7497 0.24

Banks HDFC Bank 5.33 7015 0.80

Cement India Cements Century Textiles 3.46 5.17 25090 11512 0.52 0.78

Chemicals Asahi Songwon 2.02 50181 0.30

Construction Kalindee Rail Era Construction 1.82 6.20 10443 24934 0.27 0.93

Consumer Non Durable Dabur India 2.77 40495 0.42

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

K.L.Es Institute Of Management Studies And Research

Stock Holding Corporation of India Ltd

Fund Portfolio
Templeton India Growth Fund - (G) Fund:Templeton Mutual Fund Class: Equity OPEN
NAV (Jul 13, 2007): Percentage Returns: 1 Month Ago 3 Months Ago 1 Year Ago Rs.77.61 8.82% 20.75% 47.04%

Sector / Company Name

Percentage held
(%)

No.of shares
Nos.

Market Value

Others Net CA & Others Auto Ashok Leyland Tata Motors Banks Union Bank (I) St Bk of India ING Vysya Bank Cement Grasim Inds. Consumer Non Durables ICI (India) EID Parry 1.63 1.81 100000 463537 5.31 5.87 7.31 90000 23.74 0.06 2.82 5.11 14130 60000 670000 0.19 9.15 16.60 1.28 3.30 1100000 160000 4.16 10.72 1.68 0 5.45

K.L.Es Institute Of Management Studies And Research Ferrous Metals


SAIL Sesa Goa 0.93 3.08 230354 56385 3.02 10.02

Finance Sundaram Finance Tata Invest.Corp 2.24 11.95 169008 828258 7.29 38.83

Stock Holding Corporation of India Ltd


Gas GAIL (India) Non - Ferrous Metals Hindalco Inds. Hindalco Inds. Oil ONGC Paper T N Newsprint Petroleum Products Indian Oil BPCL HPCL Reliance Inds. Power Reliance Energy Software Satyam Computer Telecom - Services Reliance Communi Idea Cellular Bharti Airtel Transportation 2.07 3.45 5.15 130000 900000 200000 6.72 11.21 16.72 6.83 475000 22.20 0.41 21487 1.32 0.35 2.70 4.95 7.85 25902 257992 600000 150000 1.15 8.77 16.07 25.50 1.28 415944 4.16 7.45 268500 24.22 2.04 4.19 632552 850000 6.62 13.61 2.47 260000 8.02

K.L.Es Institute Of Management Studies And Research