MUTUAL FUNDS INVESTMENTS

IBS HYDERABAD

2011

Project Prepared by: NEELAM MANDOWARA (10BSPHH010444) HARSH MODI (10BSPHH010265) MANSI MATELA (10BSPHH010) MILAN DHODIA (10BSPHH010) INDER GARG (10BSPHH010280) KUNAL BASU (10BSPHH010352)

10/9/2011

MUTUAL FUNDS INVESTMENTS 2011

ACKNOWLEDGEMENT
We take this proud privilege to acknowledge gracefully the help we received from different sources in preparation of this report. We are highly obliged to Mr. R. K. JAIN, our professor and faculty for Security Analysis at IBS Hyderabad for giving us a chance to work in this project and providing us a comfortable work environment and his continued guidance throughout the project. This would not have been possible without his sincerity and dedication towards the subject ad helping us all the way through.

I would also like to extend my thanks to all my colleagues for the assistance, support and the suggestions, throughout which have been valuable to me, and for providing a friendly work atmosphere with healthy competition throughout the project.

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MUTUAL FUNDS INVESTMENTS 2011 Contents
ACKNOWLEDGEMENT .............................................................................................................. 2 What are Mutual Funds? ................................................................................................................. 5 Investors in mutual funds ................................................................................................................ 5 Types of Mutual Funds Schemes in India....................................................................................... 6 Motive behind different schemes .................................................................................................. 11 Business Model of Mutual Funds ................................................................................................. 18 Revenue Expense Model of Mutual Funds ................................................................................... 19 Advantages of Mutual Funds ........................................................................................................ 20 Disadvantages of Mutual Funds.................................................................................................... 22 Risks in Mutual Funds investments .............................................................................................. 24 Evolution of Mutual Fund Industry .............................................................................................. 27 First Phase – 1964-87................................................................................................................ 27 Second Phase – 1987-1993 (Entry of Public Sector Funds) ..................................................... 27 Third Phase – 1993-2003 (Entry of Private Sector Funds) ....................................................... 27 Fourth Phase – since February 2003 ......................................................................................... 28 Choosing a Fund ........................................................................................................................... 30 Risk capacity ............................................................................................................................. 30 Liquidity.................................................................................................................................... 30 Specific needs ........................................................................................................................... 30 Track record .............................................................................................................................. 31 Transacting Mutual Funds ............................................................................................................ 31 Close-ended schemes ................................................................................................................ 31 Open ended schemes ................................................................................................................. 31 Buying close ended units post IPO ........................................................................................... 31 TAX .............................................................................................................................................. 32 Appreciation/Depreciation of the NAV ........................................................................................ 33 Total Return Method ................................................................................................................. 33 Reinvesting Dividend................................................................................................................ 33 Investment Inflows and Outflows in Mutual Funds ..................................................................... 35 Investor Profile in the Mutual Fund Industry ........................................................................... 37 Regulations in Mutual fund Industry ............................................................................................ 38 Regulatory Authorities .................................................................................................................. 39 Challenges and Issues ................................................................................................................... 40 Page | 3

........................... 47 Standard Deviation.................................................... 45 Performance Measurement: A Comparative Analysis ........................................................................................................................................... 48 Beta ...... 53 Future Outlook of Mutual Funds Industry ................................................ 49 The Treynor’s Ratio ...................................................................................................................................................................... 52 Jensen’s Measure .......................................................................... 42 Current NEWS in Mutual Fund Industry .............................................................................................................................................................. 57 References ............................................................................................................................................................................MUTUAL FUNDS INVESTMENTS 2011 Recent trends in Mutual Fund Industry ........................................................................................................... 51 Sharpe Ratio .......................................................... 60 Page | 4 ............................................................................................................................................................. 55 Research Papers ...............................

a connecting bridge or a financial intermediary that pools the savings of a number of investors who share a predetermined investment objective such as capital appreciation and dividend earning. collect the income from investments and capital appreciation realized by the scheme & distribute the gains to the unit holders in proportion to the number of units owned by them. and precious metals). Investors in mutual funds Investor need to be aware of who can buy mutual funds units or shares. thus by pooling money together in a mutual fund. Mutual Funds in India are open to Investment broadly by : o o o o FIIs NRIs Corporates/Institutions/Others Individuals 1% 4% 58% 37% Page | 5 .MUTUAL FUNDS INVESTMENTS 2011 What are Mutual Funds? A Mutual Fund can be considered a trust. bonds. real estate. Mutual funds are considered as one of the best available investment option when compared to others as they are very cost efficient and also easy to invest in. One can think of a mutual fund as a company that brings together a group of people and invests their money in stocks. but the majority of mutual funds invest in stocks and/or bonds. which represents a portion of the holdings of the fund and thus on investing becomes a shareholder or unit holder of the fund. and other securities or asset classes that match the stated objective of that scheme. The fund manager is responsible for investing the gathered money into specific securities (stocks or bonds). investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. A Mutual Fund can comprise of many investments other than stocks and bonds (including annuities. Each investor owns shares of the mutual fund company.

It is easier to think of mutual funds in categories. Being a collection of many stocks. Indian Companies Indian trusts/charitable trusts Banks Non-Banking Finance companies Insurance companies Provident funds Non Residents Including o o Non resident Indians Overseas corporate bodies Foreign entities o o Foreign Institutional Investors registered with SEBI Foreign citizens/entities are however now allowed to invest in India. There are over hundreds of mutual funds scheme to choose from. risk tolerance and return expectations etc. thus mutual funds has Variety of flavors. Types of Mutual Funds Schemes in India Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position.MUTUAL FUNDS INVESTMENTS 2011 They can also be categorized as followings: Residents including o o o o o o o Resident Indian Individual. mentioned below. Page | 6 . an investors can go for picking a mutual fund might be easy.

One can invest directly in the scheme at the time of the initial issue. however one cannot buy units and can only sell Page | 7 .MUTUAL FUNDS INVESTMENTS 2011  Classification Based on type of Structure: 1.Ended Schemes: These schemes have a pre-specified or stipulated maturity period. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV. 2. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. expectations of unit holder and other market factors.Ended Schemes: An open-end fund is one that is available for subscription all through the year. Close . Open . The key feature of open-end schemes is liquidity. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. These do not have a fixed maturity.

These Funds carry zero Default risk but are associated with Interest Rate risk. Debt funds: The objective of these Funds is to invest in debt papers. these funds ensure low risk and provide stable income to the investors. Interval Schemes: Interval Schemes are that scheme. The Equity Funds are sub-classified depending upon their investment objective. Debt funds are further classified as: o Gilt Funds: Invest their corpus in securities issued by Government. It gets benefit of both equity and debt market. thus Equity funds rank high on the riskreturn matrix. banks and financial institutions are some of the major issuers of debt papers. 3. which combines the features of open-ended and closeended schemes. o Income Funds: Invest a major portion into various debt instruments such as bonds. private companies. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. o MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities.MUTUAL FUNDS INVESTMENTS 2011 units during the liquidity window. corporate debentures and Government securities. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. Government authorities. Page | 8 . 2. popularly known as Government of India debt papers. These schemes are safer as they invest in papers backed by Government.  Classification by type of nature 1. as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon. Equity fund: These funds invest a maximum part of their corpus into equity holdings. By investing in debt instruments. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.

preservation of capital and moderate income. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. The aim of these schemes is to provide regular and steady income to investors. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. These schemes invest in both shares and fixed income securities. These funds provides easy liquidity and preservation of capital.MUTUAL FUNDS INVESTMENTS 2011 o Short Term Plans (STPs): Meant for investment horizon for three to six months. They invest in both equities and fixed income securities. These schemes generally invest in fixed income securities such as bonds and corporate debentures.  Classification by type of investment objectives 1. Page | 9 . Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. certificates of deposit. 4. 3. Equity part provides growth and the debt part provides stability in returns. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Balanced funds: As the name suggest they. The aim of these schemes is to provide capital appreciation over medium to long term. are a mix of both equity and debt funds. Capital appreciation in such schemes may be limited. Growth Schemes: Growth Schemes are also known as equity schemes. Some portion of the corpus is also invested in corporate debentures. These schemes aim to provide investors with the best of both the worlds. inter-bank call money market. in the proportion indicated in their offer documents (normally 50:50). These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds. short-term instruments. Money Market Schemes: Money Market Schemes aim to provide easy liquidity. These schemes generally invest in safer. 2. These schemes invest in short-term instruments like Treasury Bills. such as treasury bills. commercial paper and inter-bank call money. which are in line with pre-defined investment objective of the scheme. o Liquid Funds: Also known as Money Market Schemes. CPs and CDs. Income Schemes: Income Schemes are also known as debt schemes. 3.

the returns from such schemes would be more or less equivalent to those of the Index. Fast Moving Consumer Goods (FMCG). Most funds also pass on these gains to investors in a distribution. Under Sec. You can then sell your mutual fund shares for a profit. Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. Software. Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. 2. etc. 2.g. Pharmaceuticals. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.MUTUAL FUNDS INVESTMENTS 2011  Other Schemes 1. And hence. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution. Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time.88 of the Income Tax Act. 3. where the total returns provided by mutual funds can be enjoyed by investors: 1. Income is earned from dividends on stocks and interest on bonds. The portfolio of these schemes will consist of only those stocks that constitute the index. the fund's shares increase in price. 3. If the fund sells securities that have increased in price. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns. If fund holdings increase in price but are not sold by the fund manager. Page | 10 . Petroleum stocks. they are more risky compared to diversified funds. Types of Returns There are three ways. contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate. the fund has a capital gain. The percentage of each stock to the total holding will be identical to the stocks index weightage. e.

Speciality funds are concentrated and thus. There are following types of speciality funds: b. fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Without entirely adopting speculative strategies. Speciality Funds . Sector Funds: Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria.MUTUAL FUNDS INVESTMENTS 2011 Motive behind different schemes 1. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Growth Funds . There are different types of equity funds each falling into different risk bracket.In Aggressive Growth Funds. There are following types of speciality funds: a.Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Growth Funds invest in those companies that are expected to post above average earnings in the future. are comparatively riskier than diversified funds.. In the order of decreasing risk level. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. are prone to higher risk than other equity funds. Because of these speculative investments Aggressive Growth Funds become more volatile and thus.Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria.. are comparatively riskier than diversified funds. Foreign securities funds achieve international Page | 11 . Speciality funds are concentrated and thus.e. there are following types of equity funds: Aggressive Growth Funds . Equity Funds Equity funds are considered to be high risk funds as compared to other types. but they also provide higher returns than other funds. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. for 3 years or more. It is advisable that an investor looking to invest in an equity fund should invest for long term i.

One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). foreign securities funds are exposed to foreign exchange rate risk and country risk. However. Market capitalization of Mid-Cap companies is less than that of big. investment gets risky. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. diversified equity funds invest mainly in equities without any concentration on a particular sector(s). Sensex) are less risky than equity index funds that Page | 12 . Equity Index Funds . d. Option Income Funds write options on a large fraction of their portfolio. a minimum of 90% of investments by ELSS should be in equities at all times. These funds invest in big. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. which is otherwise considered as a risky instrument. high dividend yielding companies.MUTUAL FUNDS INVESTMENTS 2011 diversification and hence they are less risky than sector funds.Except for a small portion of investment in liquid money market. c. Proper use of options can help to reduce volatility. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. 500 crores. 500 crores) and Small-Cap companies have market capitalization of less than Rs. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. These funds are well diversified and reduce sector-specific or company-specific risk. Equity index funds that follow broad indices (like S&P CNX Nifty. and then sell options against their stock positions. 2500 crores but more than Rs. blue chip companies (less than Rs. However. like all other funds diversified equity funds too are exposed to equity market risk.Equity Index Funds have the objective to match the performance of a specific stock market index. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently. As per the mandate. which generate stable income for investors. Option Income Funds: While not yet available in India. Diversified Equity Funds .

financial institutions. is reduced. Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds. they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. banks. governments and other entities belonging to various sectors (like infrastructure companies etc. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Narrow indices are less diversified and therefore. sugar etc. Debt funds that target high returns are more risky. Debt / Income Funds Funds that invest in medium to long-term debt instruments issued by private companies. are more risky.) which make them volatile in the short-term. debt (or income) funds distribute large fraction of their surplus to investors. Value Funds . Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. steel. it is advisable to invest in Value funds with a long-term time horizon as risk in the long term. Therefore. debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio.Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. Value stocks are generally from cyclical industries (such as cement. In order to ensure regular income to investors. Equity Income or Dividend Yield Funds . Page | 13 . Although debt securities are generally less risky than equities.) are known as Debt / Income Funds.MUTUAL FUNDS INVESTMENTS 2011 follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). to a large extent. To minimize the risk of default. 2.The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Based on different investment objectives. there can be following types of debt funds as shown below.

The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers.e. Currently. Any loss incurred. is shared by all investors which further reduces risk for an individual investor. debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period.MUTUAL FUNDS INVESTMENTS 2011 Diversified Debt Funds . UTI was not able to fulfill its promises and faced large shortfalls in returns. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Fixed Term Plan Series . However. on account of default by a debt issuer. on account of default by a debt issuer.As we now understand that risk of default is present in all debt funds. and therefore. no AMC in India offers assured return schemes to investors. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. High Yield Debt funds . the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors. But. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI had offered assured return schemes (i. Any loss incurred. High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade".Although it is not necessary that a fund will meet its objectives or provide assured returns to investors.Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity.Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. although they may earn at times higher returns for investors. is shared by all investors which further reduces risk for an individual investor. Focused Debt Funds . government had to intervene and took over UTI's payment obligations on itself. Assured Return Funds . Eventually. SEBI permits only those funds to offer assured return schemes whose sponsors have adequate networth to guarantee returns in the future.Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to Page | 14 . These funds are more volatile and bear higher default risk. though possible. In the past.

these investments have little credit risk (risk of default) and provide safety of principal to the investors. like all debt funds. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. Unlike closed-end funds. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction. 3. Balanced funds are appropriate for conservative investors having a long term investment horizon. However.MUTUAL FUNDS INVESTMENTS 2011 investors at regular intervals. Fixed term plan series usually invest in debt / income schemes and target short-term investors. Hybrid funds have an equal proportion of debt and equity in their portfolio. These funds invest in companies having potential Page | 15 . The typical investment options for liquid funds include Treasury Bills (issued by governments). even money market / liquid funds are exposed to the interest rate risk. gilt funds too are exposed to interest rate risk. Gilt Funds Also known as Government Securities in India. fixed term plans are not listed on the exchanges. hybrid funds are those funds whose portfolio includes a blend of equities. thus making money market / liquid funds the safest investment option when compared with other mutual fund types.Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. Issued by the Government of India. convertible securities. 5. debts and money market securities. These securities are highly liquid and provide safety of investment. 4. o Growth-and-Income Funds . Money Market / Liquid Funds Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. moderate capital appreciation and at the same time minimizing the risk of capital erosion. and equity and preference shares held in a relatively equal proportion.The portfolio of balanced funds include assets like debt securities. The objectives of balanced funds are to reward investors with a regular income. Hybrid Funds As the name suggests. There are following types of hybrid funds in India: o Balanced Funds . However. Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period.

Exchange Traded Funds (ETF) Exchange Traded Funds provide investors with combined benefits of a closed-end and an openend mutual fund. flexibility of holding a single share (tradable at index linked prices) at the same time.Mutual funds may invest in financial assets like equity. Commodity Funds Those funds that focus on investing in different commodities (like metals. Recently introduced in India. are known as Specialized Real Estate Funds.) or commodity companies or commodity futures contracts are termed as Commodity Funds. Real Estate Funds Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. The biggest advantage offered by these funds is that they offer diversification. and therefore. 6. The level of risks involved in these funds is lower than growth funds and higher than income funds. crude oil etc. these funds are quite popular abroad.MUTUAL FUNDS INVESTMENTS 2011 for capital appreciation and those known for issuing high dividends. o Asset Allocation Funds . "Precious Metals Fund" and Gold Funds (that invest in gold. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets.. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. the success of these funds depends upon the skill of a fund manager in anticipating market trends. food grains. commodities etc. Page | 16 . 7. debt. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. In other words. money market or non-financial (physical) assets like real estate. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. gold futures or shares of gold mines) are common examples of commodity funds. fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns.

just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. but do invest in other mutual fund schemes offered by different AMCs. Page | 17 .MUTUAL FUNDS INVESTMENTS 2011 9. which further helps in diversification of risks. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment. are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes. the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund scheme. Fund of Funds Mutual funds that do not invest in financial or physical assets. However. Such a Fund scheme is not yet introduced in India mutual fund markets.

They do the due diligence. Custodian: The one who takes custody of securities and other assets of a mutual fund and is registered with SEBI. Dividend and Capital Give back to Gain Investors Via Pool their Agents/Distributors money withpool their or directly. There are four parties involved in setting up a mutual fund. we should know their basic operation as shown in below figure. invest. Once Mutual Fund is set up. 3. We can see that Investors (Unit Holders) pool in their money with Mutual Fund Managers who then select securities to invest in accordance with the objectives stated and generate return for investors. 1. Sponsor: The one who set up a mutual fund in the form of a trust by registering with SEBI and is like a promoter of a company. 2. Fund Managers / AMC: The one who actually manage the funds by making investments and are approved by SEBI to do so. Agents and Distributors are the third parties involved in this complete process who are spread all over the country for promoting and collecting application forms from potential investors. report and give returns.MUTUAL FUNDS INVESTMENTS 2011 Business Model of Mutual Funds First let’s see how mutual funds are set up. Trustee: The one who have a fiduciary responsibility towards unit holders and check whether investments are within limits. Investors can also invest directly with Mutual Funds. 4. money with Return Fund Managers Invest in Creates Securities Page | 18 .

25% of total AUM in a year. maximum charges for Equity funds is 2. SEBI in Aug 2011 imposes initial transaction fees as explained below • Initial Transaction Fee: SEBI passed a circular in Aug 2011 stating that new investors will pay Rs. Brokerage fee is not incurred in expense ratio.MUTUAL FUNDS INVESTMENTS 2011 Revenue Expense Model of Mutual Funds Revenue • Entry Fee: Till August 2009.75% for Equity funds and 1.5% and Debt funds is 2. 150 and existing investors will pay Rs. This is to bring down the frequency of withdrawal from funds. As per SEBI regulations.5% irrespective of corpus accumulated. 900 crores. Expenses • Brokerage or Trading Fee: It also includes the Securities Transaction Tax in it. As a back door imposition of entry load. The charges decrease with increase in fund corpus and finally capped at 1. • Expense Ratio / Annual Maintenance Charges: Depend on the type of fund and size of fund. • Exit Fee / Backend Load: Around 1% of total redemption value is charged if the investor withdraw within 1 year. the expense ratio is capped at 1.5%.5% for Debt funds each with a corpus of exceeding Rs. Mutual Funds used to charge entry fee to the investors but after that it was banned by SEBI. (source: CNBC-TV18) • Fund's Advisor Fee • Marketing and Advertising Costs • Administrative Fees • Distribution Fee / Agent Commission Page | 19 .25% and 1.000 . 10. But there are chances that Mutual Funds might have to incorporate this into their expense ratios. 100 for investment of >= Rs. For index funds and ETFs. On an average Expense Ratio varies between 1. The payment will be to the distributor. This fee was used to be around 2. instead it goes to the cost of the security. These charges are automatically deducted from investors' NAV on daily basis.25% of NAV.

Small Investment Capability of an Individual To have good stocks or bonds in the portfolio high investment is required to get higher returns for example to buy government securities or to build a decent portfolio of blue-chip companies minimum requirement is 25000 which may be not affordable for number of small investors. A mutual fund. Therefore.MUTUAL FUNDS INVESTMENTS 2011 Advantages of Mutual Funds 1. the fund manager is ideally placed to research various investment options. on a small outlay. 4. The rationale for this is that even if one pick in the portfolio does not perform well. investor gets to participate in the investment prospects of a number of securities. 2. and investors neither have time tot rack markets nor skills hence comes in the role of mutual funds and by virtue of being in the market. qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money It is also very difficult for new entrants to understand and analyze the stocks. Affordability As mutual funds deal with large pool of money hence as economies of scale is attained transaction cost decreases hence mutual funds pay lesser transaction costs in the market and such benefits are passed on to the investors. and invest accordingly for the investor. informed and highly informed hence the basic advantage of mutual fund is that the former two types of investors get an opportunity to manage their fund by the latter hence in nutshell. however. This is because a mutual fund pools in funds of several investors. Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio and hence mitigate risk.000. 3. Professional Management Market is filled by three types of investors uninformed. Diversification One of the most stated facts for portfolio management is: diversify. Page | 20 . and invests the resultant large sum in a number of securities.000-5. gives small investors an ownership of the same investment pie at an outlay of Rs 1. In other words. don’t put all your eggs in one basket. the others can check the erosion in the portfolio value.

which govern mutual funds. Well Regulated All Mutual Funds are registered with SEBI (Securities Exchange Board of India) and they function within the provisions of strict regulations designed to protect the small retail investors. For example. administration and management of mutual funds and also prescribe disclosure and accounting requirements. Dividends distributed by them are tax-free in the hands of the investor.MUTUAL FUNDS INVESTMENTS 2011 5. Liquidity A distinct advantage of a mutual fund over other investments is that there is always a market for its unit/ shares. Choices of Schemes Mutual funds provide investors with various schemes with different investment objectives. 9. 7. 8. mutual funds offer significant tax advantages. an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk taking capabilities and thus create a balanced portfolio easily or simply buy a Balanced Scheme. the proportion invested in each class of assets and the fund manager's investment strategy and outlook. such a high level of regulations seeks to protect the interest of investors. It's easy to get one’s money out of a mutual fund any time in an open-ended mutual fund and redemptions can be made by filling a form attached with the account statement of an investor. Transparency The investor gets regular information on the value of the investment made and disclosure on the specific investments made under the scheme. Page | 21 . An investor can also choose schemes depending upon his/her risk appetite. They also give the advantages of capital gains taxation. The regulatory body has clearly defined rules. These rules are related to the formation. Hence this quality of mutual funds makes the investments in the same highly liquid yet profitable. Tax benefits Last but not the least. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. 6.

Restrictive gains Diversification helps. This is because most closedend funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch. 3. Reliance appreciated 50 per cent. Mutual funds are not insured or guaranteed by any government body (unlike a bank deposit. depending upon the yearly costinflation index (which is calculated to account for rising inflation). a subsidiary of the Reserve Bank of India).000 in the scheme in a year. your investment in a mutual fund can fall in value. No assured returns and no protection of capital Mutual funds do not offer assured returns and carry risk. But the investment in the mutual fund. resulting in losses to investors. unlike bank deposits. For instance. There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. 2. the lack of investment focus also means that we gain less than if we had invested directly in a single security. say. For example. one can avail of a 20 per cent tax exemption on an investment of up to Rs 10. which had invested 10 per cent of its corpus in Reliance. if risk minimization is the objective. Mutual funds also provide tax-saving schemes and pension schemes which give added advantage of benefits as under Section 88. Disadvantages of Mutual Funds 1. A direct investment in the stock would appreciate by 50 per cent. thereby reducing the gap between the actual purchase costs and selling price. However.MUTUAL FUNDS INVESTMENTS 2011 For holding units beyond one year. Fees and commissions Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investment (as long as he holds the units). one gets the benefits of indexation that is indexation benefits increase the purchase cost by a certain portion. will see only a 5 per cent appreciation. This reduces tax liability. where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation. irrespective of the performance of the fund Page | 22 .

unlike stocks. he/she foregoes management risk. or financial planners. mutual funds do not offer investors the opportunity to compare the P/E ratio. 5.MUTUAL FUNDS INVESTMENTS 2011 Some funds also charge sales commissions or "loads" to compensate brokers. if one had invested in Index Funds. but how do investor know if one fund is better than another. earnings per share. Even if the investor doesn’t use a broker or other financial adviser. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities. he/she depends on the fund's manager to make the right decisions regarding the fund's portfolio. investor might not make as much money on his investment as he had expected. Management risk When an investor invests in a mutual fund. sales growth. Of course. Page | 23 . Evaluating Funds In mutual funds it is difficult for investors interested in researching and evaluating the different funds. because these funds do not employ managers. If the manager does not perform as promised. etc. financial consultants. he will pay a sales commission if he buys shares in a Load Fund 4.

Thus investors choose mutual funds as their primary means of investing.Return Tradeoff for mutual funds The risk return trade-off indicates that an investor is willing to take higher risk only if he can expect higher returns and vise versa. as Mutual funds are considered to have low risk but not risk free. The school of thought when investing in mutual funds suggests that the longer the investment time horizon of the investor less is he/she affected by short-term volatility. as show in figure below: Page | 24 . Risk has the potential for higher return and it also has the greater potential for losses or negative returns. Hence. provides moderate return with minimal risk. Risk. Different mutual fund categories have inherently different risk characteristics. a bank FD . a risk is defined as any downside deviation from the expected return and is measured by standard deviation. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. shorter the investment time horizon. the more concerned the investor is with short-term volatility and higher is the risk. For example.MUTUAL FUNDS INVESTMENTS 2011 Risks in Mutual Funds investments Every investment has risk associated with them. the risks are based on the investments an investor holds. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. But capital protected funds and profit-bonds give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.

Types of risks associated with Mutual Funds 1. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk. a bond fund faces interest rate risk and income risk. If interest rates go up. Income risk is greater for a short-term bond fund than for a long-term bond fund. Call Risk The chance that a bond issuer to call its high yielding bond before the bond’s maturity because of falling interest rates in the market 2. Bond income is also affected by the change in interest rates. a sector stock fund (which invests in a single industry. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. such as telecommunications) is at risk that its price will decline due to developments in its industry. bond values will go down and vice versa. Bond values are inversely proportional to interest rates.MUTUAL FUNDS INVESTMENTS 2011 For example. Similarly. Credit Risk The possibility that a bond issuer will fail to repay interest and principal in a timely manner also called as default risk Page | 25 .

Interest Rate Risks The possibility that a bond fund value will decline because of an increase in interest rates 4. with periods when prices rise and other periods when prices fall 6. Manager Risk The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives 5. Market Risk The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Principal Risk The possibility that an investment will lose its value from the original or invested amount Page | 26 . Stock and bond markets tend to move in cycles.MUTUAL FUNDS INVESTMENTS 2011 3.

UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87). Punjab National Bank Mutual Fund (Aug 89). Bank of Baroda Mutual Fund (Oct 92).6. Second Phase – 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non. Indian Bank Mutual Fund (Nov 89). Also. at the initiative of the Government of India and Reserve Bank of India. Third Phase – 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in 1993.UTI.47. public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). 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. Bank of India (Jun 90). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. except UTI were to be registered and governed. 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. 1993 was the year in which the first Mutual Fund Regulations came into being. the mutual fund industry had assets under management of Rs. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India. a new era started in the Indian mutual fund industry.700 crores of assets under management. giving the Indian investors a wider choice of fund families. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Page | 27 . SBI Mutual Fund was the first non.MUTUAL FUNDS INVESTMENTS 2011 Evolution of Mutual Fund Industry The concept of a mutual fund originated in 1870s with Robert Fleming establishing the first investment trust in Scotland in 1890. under which all mutual funds. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India.004 crores. At the end of 1988 UTI had Rs. At the end of 1993. The first scheme launched by UTI was Unit Scheme 1964. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.

conforming to the SEBI Mutual Fund Regulations.000 crores of assets under management and with the setting up of a UTI Mutual Fund. Fourth Phase – since February 2003 In February 2003. It is registered with SEBI and functions under the Mutual Fund Regulations.805 crores. 1. Page | 28 . assured return and certain other schemes. with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions.21. PNB.44. following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. The Unit Trust of India with Rs. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.76.835 crores as at the end of January 2003. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs. and with recent mergers taking place among different private sector funds. The second is the UTI Mutual Fund.MUTUAL FUNDS INVESTMENTS 2011 Mutual Fund Regulations in 1996. The Specified Undertaking of Unit Trust of India.29. representing broadly. The number of mutual fund houses went on increasing. BOB and LIC.541 crores of assets under management was way ahead of other mutual funds. there were 33 mutual funds with total assets of Rs. sponsored by SBI. the assets of US 64 scheme. the mutual fund industry has entered its current phase of consolidation and growth. 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. As at the end of January 2003. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.

Mar.Mar.Mar.MUTUAL FUNDS INVESTMENTS 2011 The graph indicates the growth of assets over the years. Asset Under Mnagement 700000 600000 500000 Rs (in Crores) 400000 300000 200000 100000 0 Mar-65 Nov-66 Jul-68 Mar-70 Nov-71 Jul-73 Mar-75 Nov-76 Jul-78 Mar-80 Nov-81 Jul-83 Mar-85 Nov-86 Jul-88 Mar-90 Nov-91 Jul-93 Mar-95 Nov-96 Jul-98 Mar-00 Nov-01 Jul-03 Mar-05 Nov-06 Jul-08 Mar-10 Mar.Jan.Mar65 87 93 03 03 03 04 05 06 07 08 09 10 11 Rs (in crores) 25 4564 47000 12180 87190 79464 13961 14955 23186 32638 50515 41730 61397 59225 Page | 29 .Mar.Mar.Mar.Feb.Mar.Mar.Mar.Mar.

one means that a money market scheme will be more liquid than an equity scheme. These schemes stay away from equity shares almost completely and offer an average returns. the Fund Manager can handle this situation easily. Equity shares are the riskiest investments since they are unsecured and are the last to receive money in case the company winds up. a debt scheme. a close-ended scheme is suitable. there is a risk of the Fund Manager being forced to sell during a rush for redemptions. Specific needs Over and above risk taking ability and liquidity needs. if the company does well. This helps balance risks with debt being the cushion in case of a downfall in the equity investments. Money market instruments are sellable easily and very quickly. However. if you are okay with your money not being available to you quickly and easily and would rather remain invested. Another way of looking at liquidity is the size of the money collected (corpus) by the scheme and the type of investments of that scheme. they are given the highest share of the profits. an investor may have specific needs such as saving of taxes (for which he can invest in a tax saving Mutual Fund scheme) or wanting to invest in a stock market index (for which he should invest in an index scheme). If the corpus is very small. go for an open-ended scheme. go in for an equity scheme. Page | 30 .MUTUAL FUNDS INVESTMENTS 2011 Choosing a Fund Risk capacity Risk and return are always commensurate with each other. These schemes invest an equal portion of their funds in equity shares and debt. If you are willing to take risks but would like to moderate it. By the type of investments. Mutual Funds have devised a number of schemes catering to these specific needs. Liquidity If you want your money to be available to you easily in time of need. However. Hence money market schemes can return your money within 2 working days whereas an equity scheme will take between 4 to 7 working days. go in for a balance scheme. However. money market scheme and gilt scheme are ideal for you. if there is a large corpus. If you are absolutely not willing to take any risks with your money. If you are willing to take a higher risk with your money.

Performance comparison is done by comparing the annualized percentage growths in the scheme’s NAV over a period of time. the investor has to also incur costs of stamp duty to transfer the units in his name. while selling units on the stock exchange. The broker will execute your order and hand over the unit certificates to you (if you have bought the units in the physical segment) or will intimate you that the units have been credited to your dematerialization account (if you have bought the units in the dematerialized segment).e.MUTUAL FUNDS INVESTMENTS 2011 Track record Check the scheme’s performance since its inception and compare it with similar schemes. one means. while purchasing units from the stock exchange. the investor has to pay his broker a brokerage fee for purchase of his units. In case of Page | 31 . say a debt scheme. Open ended schemes Units of open ended Mutual Fund schemes are first available during the scheme’s IPO at face value (i. However. place the order with your broker for purchase of the units. The higher the percentage of appreciation. the investor does not incur any cost for investment. Transacting Mutual Funds Close-ended schemes An existing close-ended scheme invested who has purchased his units during the scheme’s IPO and does not want to stay invested till maturity of the scheme. compare an equity scheme with another equity scheme and not with. While purchasing units.While investing during the scheme’s IPO. Buying close ended units post IPO Contact your broker to find out the market price of the Mutual Fund scheme on the stock exchange and the availability of units. the investor doesn’t have to incur any costs for purchase. 10 per unit) and then the Mutual Fund offers sale and repurchase facilities thereafter ( at the current NAV). The instrument invested in being different in both these schemes will make a comparison have no meaning. While purchasing units during the IPO. the investor has to pay his broker a brokerage fee for sale of his units. no stamp duty is payable. Similarly. can sell his units on the stock exchange to a person wanting to buy units of that scheme. the better is the performance. By similar schemes. However. Rs. if the investor purchases units in the dematerialized form. On ensuring that the buy price is acceptable and there are sellers.

fill in the transfer deed and lodge it along with the unit certificates with the Registrar of the Mutual Fund. If he sells. on 31st March 2008. nothing further has to be done. can move away from low-return infrastructure bonds.000 in Prudential –ICICI Mutual Fund’s Tax Saving Scheme. Page | 32 . the purchase date. The NAV and load. In case of an open-ended Mutual Fund scheme.MUTUAL FUNDS INVESTMENTS 2011 receiving units in the physical form.000 in the same year that he sells. In case of purchase in the dematerialized form. ask your broker to find out the NAV of the scheme and entry load.000 and treated as a part of investments of Rs 1 lakh under section 80CCE.e. they are listed after the initial 3 year lock in. X will receive a tax rebate of Rs. 10.000 for getting maximum tax benefits.000 for the Financial year ended 31 st March 2001 and will have to stay invested in Prudential-ICICI Mutual Fund’s scheme up to 31st March 2011.For individuals who are looking for more returns from their investments. is also available on the website of the Mutual Fund or a personal finance site. 2. on the day you are submitting your application form. the cost of your investment ( your entry NAV) and the current value of your investment (i. transfers or pledges his units. For instance. the NAV on date the account statement was made). if any. Your application is processed after which you receive an account statement indicating the number of units allotted to you. transfers or pledges his units during this time he will be taxed on his investment of Rs. X invested Rs. 10. If they are close-ended. Submit the filled in application form along with the cheque to either your broker or directly to the Mutual Fund’s banker (the names of the bankers and form collection centres are mentioned on the application form). Rs 1 lakh can be invested under this section without any sublimits. if any. Earlier they were bound to purchase for Rs 30. Investment in pension funds under section 80CCC can still be up to a maximum of Rs 10. These schemes are specifically designed to offer tax rebate to investors under section 88 of the Income Tax Act. TAX There are no tax implications while investing in Mutual Funds except while investing in Tax saving schemes of Mutual Funds.

000.00) Total Appreciation value is 1000 x 7.. 7000 + 1000) %age Appreciation = 57.21-14) Total Appreciation value is 1000 x 7. e NAV on 30th September 2010. This changes the cost of his investment.00 = 7.16.000.000. The NAV of each unit of hi was on RS. on 31st Dec’10.MUTUAL FUNDS INVESTMENTS 2011 Appreciation/Depreciation of the NAV NAV is the market value of each unit of the Mutual Fund. Page | 33 . Rs. To find out the scheme performance.000. Reinvesting Dividend When an investor opts to have the dividend declared and reinvested back into the scheme he gets additional units to the extent of the dividend declared.00 (Appreciation in NAV + dividends. The Total Return method is elaborated with an example below: You bought units of a mutual fund 1 Jan 2010 Appreciation in the NAV( 21. work out the annualized %age appreciation in the NAV between the periods for which performance is to be evaluated.00 Total Appreciation to your credit = 8. This value is what the investor gets back on exiting from his investment.00. Appreciation in the NAV (RS.21. An example to clarify this is stated below: Total Return Method In case investment in a scheme where the investor has opted for dividend payout he should use the Total Return method of evaluating his Mutual Fund performance.00 = 7. Rs.. e units received on reinvested (21-16).00. Reinvestment of the dividend happens at the prevailing NAV.00 (Appreciation in NAV + dividends.5 units dividend reinvested back into the scheme at the prevailing Nav of Rs.00 = 7.14% Since Investment is held for 1 year there is no question of having to annualize the return. Return in this case has to take into account both these aspects. 7000 + 1000) Appreciation in NAV of new Units i. You receive additional units (Dividend due/NAV on 30th Sep’2010).00 Total Appreciation to your credit = 8. You have chosen to have this 62.7.00 ( i. 16.00.00 – 14. This is enumerated with example below: On 30th September 2000. the same Mutual Fund declared a dividend of 10% (1000 units x 10%).

1000.15.7312.5 x 62.50 Total Cost of Investment Rs.MUTUAL FUNDS INVESTMENTS 2011 Total Appreciation in value of new Rs.312. Page | 34 .00 + Rs.7.5 Units) Total Appreciation in value of Rs.50/15.000.5 Units) Total Appreciation (Original Units + New Units) Rs.75% Since investment is held of one year there is no question of having to annualize the return.50 (Rs.00 (Rs.5 x 62.00 x 100 = 48.000.312.312.000.50 (Rs.00) Return on Investment = Rs.000.00 + Rs.14.7.

AUM Category Wise 350000 300000 250000 200000 150000 100000 50000 0 Liquid/M oney Market AUM (Rs. Crore) 800000 700000 600000 500000 400000 300000 200000 100000 0 2008-09 2009-10 2010-11 Apr-Jun 11 The Average Assets Under Management (AAUM) of the Indian mutual fund industry has witnessed a decrease on a year on year basis.81 17552.51% Gilt Debt Oriented Equity Oriented Balanced Fund of ETFs(othe Funds Gold ETF r than investing Gold) Overseas 4400.42% 3507.44 197562.4 0. on account of substantial outflows from equity. liquid and income schemes.43 0.09% 2.29 294217.86 % Share 12.42% 2520.94% As of March 31.MUTUAL FUNDS INVESTMENTS 2011 Investment Inflows and Outflows in Mutual Funds There are 44 Mutual Funds Houses registered with SEBI in India which generate and invest this corpus of funds. Cr) 74699.59% 49.41 0.2 0. Average Asset Under Management (In Rs.28% 33. 2011 Page | 35 .74% 2516.

400 crore in the year.00% 2.562 crore. Turbulences in the equity market hurt the investor sentiments which resulted in more redemption on equity side. Whereas AUM of Equity category. 4.35%.00% 8.73% in AUM to a total of Rs.97.77% while the physical gold prices rose 27. The industry needs to focus on inclusion of the rural sector in mutual fund industry as mentioned in detail below.76% 10. a collection of equity exchange traded funds (ETFs) also witnessed higher growth of 162.248 crore during the period and yielded an annual return of 25.00% 10. on a year-on-year basis.MUTUAL FUNDS INVESTMENTS 2011 In the above table we can see that Debt Oriented Mutual Funds were the most preferred type of mutual fund holdings. Equity oriented funds are just behind debt Oriented funds.29% The GDP to AUM Ratio is around 10% for India which is very low compared to other developed nations with this ratio being from 20 % to 70 %.27% 11. The category attracted inflows of Rs. Page | 36 . This also gives us an insight that the industry has a lot of scope to grow and is far from saturation. 1.00% 0. The category witnessed a highest growth of 176. 2.00% 2008-09 2009-10 2010-11 9. The GDP to AUM ratio GDP to AUM Ratio 14.90% during the year. The category – Other ETFs.00% 12.00% 6. Gold ETFs has been glittering and attracting investors’ attention during the year. fell to Rs.00% 4.

Financial Institutions and Foreign Institutional Investors are minimal investors. Page | 37 . corporate is the major investors in the mutual fund industry.17% * Defined as individuals investing Rs 5 lakhs and above As of March 31st 2011 As seen in the above table.39% 0.59 2969.54 162225.48 596976. Banks.18% 4.75% 27. Cr) 263773.8 % of Total 44.MUTUAL FUNDS INVESTMENTS 2011 Investor Profile in the Mutual Fund Industry Investor Classification Corporate Banks/FIs FIIs High Networth Individuals* Retail Total AUM (Rs. thus the industry must focus on spreading awareness among the general population in order to gain a larger pie from the retail investors.81 141808.50% 23. Followed by the retail investors. HNI’s are not far behind in terms of contributing to the mutual fund investments.38 26199.

not act as a trustee of any mutual fund. unless full disclosure of its intention to invest has been made in the offer documents. No scheme shall be launched by the asset management company unless such scheme is approved by the trustees and a copy of the offer document has been filed with SEBI.MUTUAL FUNDS INVESTMENTS 2011 Regulations in Mutual fund Industry Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as amended from time to time. if any of such activities are not in conflict with the activities of the mutual fund. Full disclosure of portfolio twice a year – Most Funds provide monthly disclosure. Certification Test for Agent Distributors. The asset management company shall not invest in any of its scheme. The mutual fund shall appoint a Custodian to carry out the custodial services for the schemes of the fund and sent intimation of the same to the Board within fifteen days of the appointment of the Custodian. provident funds. Benchmark indices for comparing performance of Mutual funds. Restrictions on business activities of the asset management company: The asset management company shall. Uniform Cut-off Time for applicability of NAVs. since 2000. code of conduct for AMCs & Distributors. Valuation. insurance funds. . not undertake any business activities other than in the nature of management and advisory services provided to pooled assets including offshore funds. Publication of Half Yearly unaudited results & Audited Annual Accounts. Page | 38 . NAV computation and disclosure. Over the years established world class standards in Accounting. in case of schemes launched after the notification of Securities and Exchange Board of India (Mutual Funds). Comprehensive Risk Management System. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision Simplification of Offer Documents & Key Information Memorandum – recently further simplified. pension funds. Valuation: CRISIL – a third party research and rating agency developed “Bond Valuer” in consultation with AMFI to provide uniform methodology for valuation of bonds.

MUTUAL FUNDS INVESTMENTS 2011 Regulatory Authorities
In India, SEBI acts as regulator for the Mutual Fund Industry. To safeguard the investors from potential irregularities, it formulates policies and regulates the mutual funds. It notified regulations in 1993 and is fully revised in 1996. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations. SEBI approved Asset Management Company (AMC) manages the funds by making investments in securities. The investment made securities are not as strictly governed as in countries like US, or UK. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) is a Non-profit organization formed by the industry players. It reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. It would play a very important in overcoming some of the challenges currently faced by the MF Industry. AMFI also focuses its attention on upgrading professional standards and in promoting best industry practices in diverse areas.

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MUTUAL FUNDS INVESTMENTS 2011 Challenges and Issues
1. Regulations As the industry moves on from its nascence to adolescence, it is joint responsibility of the industry players, the regulators and also the investors to ensure that it further transits to maturity as smoothly as possible. A strong regulatory platform is a key challenge in any business environment, more so in the Indian context at this point on the growth curve of the industry. While we do have a strong regulatory platform in place, more can be done based on the experience of mature markets like the US and UK, where investor protection has assumed top priority. The industry is well governed with a spate of reactive regulations and its now time to introduce more proactive, growth enhancing regulations. 2. Administration and Distribution The penetration of the mutual funds is very low except in the urban regions. The penetration in the tier II and Tier III cities needs to be increased by way of investor awareness. Rural participation in mutual funds has been poor and continues to be the same. They need adequate support in terms of banking infra structure, distribution services and technological solutions to ensure a sustainable cost-benefit model of growth. 3. Low Levels of Customer Awareness India has one of the lowest levels of awareness and financial literacy which poses a big challenge to the mutual fund industry players. This lack of knowledge hampers the growth of the Mutual Fund Industry, as it discourages the savings being directed to the industry corpus. The differences between investing in Mutual Funds and Stock Market Directly must be highlighted to the customer. The customer must be informed about customization options which can be used by him to invest in mutual funds according to his capacity and how important regularity is when investing in mutual funds. 4. The technological backbone Fund houses have introduced technological innovations such as transacting through the internet, net asset value updates on mobile phones, unit balance alerts via SMS messages, transacting through ATM cards etc. However, these innovations currently cater to the already pampered urban class of investors.

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MUTUAL FUNDS INVESTMENTS 2011
The internet revolution in our country is yet to penetrate to the grass root levels. The per capita usage of internet in our country is still very low compared not only to the developed countries but also as compared to our developing peers. Mobile telephony comparatively has grown exponentially. It is a challenge to strike the right balance while choosing to invest in technological advancements. The industry is now at a stage where to progress to the next level of growth, it needs more support from other sectors in the economy. It is necessary to join hands with other sectors of the economy such as banking and telecommunications. 5. Diminishing talent pool As the Industry plans to spread awareness and penetrate deeper in the market, it would require an army of professionals. But the industry is facing an acute shortage of talented resources which is showing its impact. The pool of talented people is diminishing and staff costs are soaring. The key challenge is to find a permanent solution to tide over this acute shortage. One possible solution could be for the industry is to tie up with universities and colleges to offer programmes dedicated to the financial services and the mutual fund industry which would cover various critical aspects of the industry. 6. Growth versus Governance The Indian Mutual Fund industry was strong in the midst of adversities in the capital markets due to the strong regulatory framework in place. An increasing responsibility is being placed on the Trustees to ensure that the operations of the funds are managed to the full benefit of the investors. As the number of players in the market increases, competition may force fund houses to comply not only with the laid down regulations and concentrate more on growth but endeavor in creating excellence in governance as well.

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albeit encompassing some shortfalls in AUM due to business cycles.005 crores and by the end of august 2000. 1.MUTUAL FUNDS INVESTMENTS 2011 Recent trends in Mutual Fund Industry The Indian Mutual Fund has passed through three phases.028 crores at the end of 1994 and the number of schemes was 167. The Indian Mutual fund industry has witnessed considerable growth since its inception in 1963. Major Fund houses to operate in India are: o o o o o o o o o o o o o Fortis Birla Sun Life HDFC ING Vysya ICICI Mutual Funds DSP Black Rock Fidelity Franklin SBI Mutual Funds TATA Kotak Mahindra Unit trust of India Reliance. etc. 13. The first phase was between 1964 and 1987 with Unit Trust of India the only player with a total asset of Rs. In a span of 10 years (from 1999 to 2009). the industry has registered a CAGR of 22. The third phase began with the entry of private and foreign sectors in the Mutual Fund industry in 1993. The second phase was between 1987 and 1993 during this period 8 Funds were established (6 by banks and one each by LIC and GIC).849 crores.700 crores at the end of 1988. 02. there were 33 Funds with 391 schemes and assets under management of Rs 1. Page | 42 . As at the end of financial year 2000 32 Funds were functioning with total assets under management equal to Rs.173 bn in Mar-09 from just Rs 250 mn in Mar65. The impressive growth in the Indian Mutual fund industry in recent years can largely be attributed to various factors such as rising household savings.3%. The total assets under management had grown to 61. 6. Kothari Pioneer Mutual Fund was the first Fund to be established by the private sector in association with a foreign Fund. comprehensive regulatory framework. The assets under management (AUM) have surged to Rs 4.

Further. With the growing risk appetite. index funds.0% of the total net assets as on March 31.3% in 2001. increase in personal financial assets.3% to the total net assets of the industry as on March 31.7% in 2008 as against 1. Indian mutual funds industry is witnessing a rapid growth on the back of infrastructural development. contribute as much as 56. The comparatively lower share of net assets of individual investors in total net assets is mainly due to lower penetration of mutual fund as an investment instrument among working population (age group 18-59 years) and a majority of investors in this age group are not aware of mutual funds or are investing in mutual funds through Systematic Investment Plan (SIP) only. The wide variety of schemes offered by the Indian Mutual fund industry provides multiple options of investment to common man. insurance linked funds. gilt funds. The tax benefits allowed on mutual fund schemes (for example investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of the Income Tax Act) has also helped mutual funds to evolve as the preferred form of investment among the salaried income earners. like Fixed Deposits (FDs) and postal savings that are considered safe. In recent pasts SEBI has introduced various regulatory measures in order to protect the interest of small investors that augurs well for the long term growth of the industry. Page | 43 .2% of the total number of investors’ in Mutual funds industry. the industry has launched special schemes to invest in foreign securities. special category funds.MUTUAL FUNDS INVESTMENTS 2011 favourable tax policies. says our new research report “Indian Mutual Fund Market Analysis”. and increasing awareness. It also has introduced Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold or gold related instruments. but provide comparatively low returns. 2009. mutual funds in India are becoming a preferred investment option compared to other investment vehicles. Corporate and institutional investors on the other hand which accounts for only 1. investor education campaign and role of distributors. sector-specific funds. exchange traded funds. The investor-wise pattern of asset-holding as well as investors accounts reveals that individual investors accounts for almost 96. capital protection oriented schemes. and introduction of several new products.75% of total investors and contribute Rs 1552.8 bn which is 37. 2009. rising income. etc. Moreover the mutual fund industry has introduced an array of innovative products such as liquid/money market funds. and rise in foreign participation. The share of mutual funds in households’ financial savings has also witnessed a substantial increase of 7.

on account of substantial outflows from equity. Even though there were inflows of Rs.54% to Rs. down from Rs. A sharp fall in equity markets as well as spiked yields on the long term debt side during the financial year forced the investors to opt for other alternate asset classes like gold and silver. 5.92. The financial yearend AUM of the industry for March 2011 stood at Rs.13 lakh crore in March 2010.0003%) and contribute Rs 49.92 lakh crore.83 bn to the total net assets (1% of total net assets of the Indian Mutual fund industry as on March 31. 6.2%. Maximum growth was observed in AUM of Gold ETFs by 176. the financial year end requirements by banks and corporates led to redemptions from income and liquid funds. liquid and income schemes.MUTUAL FUNDS INVESTMENTS 2011 Despite a rise in net FII inflows in the domestic mutual funds. FIIs constitute a very small percentage of investors’ accounts (0. 27.250 crore on a year on year basis. The Assets Under Management (AUM) of the Indian mutual fund industry as on March 31.912 crore into FMPs(Fixed Maturity Plans) that were mopped up by way of NFOs( New Fund Offers) during the month of March 2011. 2009). The graph indicates Growth of Assets over the Year Page | 44 . 2011 (as per AMFI Monthly data) has witnessed a decrease of 3. 5.7%. while AUM of ‘FOF Overseas’ dropped the most with 12.

” Total MUF of dips by 4.96 lakh crore in August 2011. suggests investors are holding back from putting their money in mutual funds due to their perceived high risk and a lack of information on how mutual funds work.MUTUAL FUNDS INVESTMENTS 2011 Current NEWS in Mutual Fund Industry Mutual funds are an under tapped market in India: Despite being available in the market for over two decades now with assets under management equaling Rs 7. it has been decided to permit SEBI-registered Mutual Funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes. their advance to decline ratio stood at 77:0 & 123:1 respectively. AUM of Other ETFs fell by 13. only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. while FMCG and MNC funds decline. as per the latest CRISIL mutual fund ranking released for the quarter ended march 2011.81.9% among others.71. To liberalize the portfolio investment route. NAVs end with positive returns: as published on Fri. 09-09-2011 on moneycontrol.2% in July 2011.3% (by Rs 31. dipped by 4. CRISIL Rating: Large equity and ultra short term debt funds were the best performers in the equity and debt categories.9% and Equity Funds by 6. Budget 2011: In the budget speech of Finance Minister of India. less than 10% of Indian households have invested in mutual funds.000 respondents in 15 Indian cities and towns as of March 2010. Liquid and Income Funds that faced huge inflow of funds during the month of July. The debt funds and equity category had returns close to 2% and negative 7%.com it says Equity diversified NAVs ended positive with advance: decline ratio of 219:24.8%. Boston Analytics.3% in August 2011: Total Assets Under Management (AUM) of the mutual fund (MF) industry that climbed up 8. This would enable Indian Mutual Funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market.152 Lakhs as of 28 February 2010 given by Association of Mutual Funds. respectively. A recent report on Mutual Funds Investments in India published by research and analytics firm. witnessed net outflows to a tune of Rs 6925 crore and Rs 10066 crore respectively in August 2011.449 crore) to Rs 6. This report is based on a survey of approximately 10. he has said “Currently. Among the Sector fund banking. Equity Linked Savings Scheme (ELSS) by 7.35% and negative return of 0. Page | 45 .57% respectively during the quarter ended December 2010.There are 43 Mutual Funds at present. respectively during the quarter ended March 2011 as compared to 1. Long and Short term debt funds ended higher. pharma and technology funds advance.

The net inflow during the month was a result of gross purchases Rs 737783 crore and gross sales Rs 501548 crore. Taking the first step towards forming these regulations.MUTUAL FUNDS INVESTMENTS 2011 Capital Inflow and Outflow in Mutual Funds Industry: Mutual funds were net sellers for the second consecutive year in the equity spectrum to the tune of Rs 17703.90 crore during the financial year 2011 after being the net seller of Rs. mutual funds were seen as net buyers over years. the Securities and Exchange Board of India (Sebi) sent a note to all asset management companies (AMCs) in March 2011. 10161.The net outflow during the period was a result of gross purchases Rs 151450 crore and gross sales Rs 168695 crore. On the debt front. Page | 46 . 237981 crore during the financial year 2011. asking them to ensure that their distributors follow certain due diligence while selling MF schemes.60 crore in the financial year 2010. SEBI plans to introduce new regulations for MF sales: Capital Market regulator is planning to introduce a set of regulations to keep a check on the mis-selling of mutual fund schemes by the distributors. MF bought debt securities worth a net Rs.

we have taken the following 12 Asset Management Companies: 1. we have taken the Index Growth funds of 12 AMCs. This analysis will give us an idea of how the mutual funds are performing against the index and among themselves as well. SBI Mutual Funds 11.return basis. HDFC Mutual Funds 6. In the comparative analysis. Tata Mutual Funds 10.MUTUAL FUNDS INVESTMENTS 2011 Performance Measurement: A Comparative Analysis The performance measurement of Mutual Funds is usually done on a risk. or sometimes both. Fidelty Mutual Funds 4. UTI Mutual Funds 12. Birla Sunlife Mutual Funds 2. ICICI Prudential Mutual Funds 7. For this purpose. Reliance Mutual Funds Page | 47 . DSP Black Rock Mutual Funds 3. Kotak Mahindra Mutual Funds 8. Sundaram Mutual Funds 9. Both risk as well as return is needed to provide a sufficient measure of the performance of a particular mutual fund. There are many statistical measures used to evaluate the performance of mutual funds and almost all of them measure either the risk associated or the returns expected. Franklin Templeton Mutual Fund Investments 5.

5%. A simple comparison of standard deviations of different funds with similar investment strategies can give an idea of which fund is better off in terms of maximization of returns received.MUTUAL FUNDS INVESTMENTS 2011 Standard Deviation Standard deviation denotes the degree to which the returns deviate around the average. thus showing a high degree of risk associated with them. The following table shows the calculated Standard Deviations of the selected Index Funds: Standard Deviation (σ) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0. Around 75% of funds’ actual returns range within plus or minus one standard deviation of their monthly averages. i.095839 0.e.090359 0.082721 0.105154 The table shows the highest standard deviation in case of Reliance. 10.087260 0. greater is the risk.078456 0.e.092158 0.085181 0.9% Page | 48 .5%).082578 0. followed by ICICI (9. higher the standard deviation. This measure is directly proportional to the risk. The others are more or less of the same risk class having their standard deviations between the range of 7.080817 0. i.095782 0.8% .078072 0.

911220 0. risk cannot be evaluated alone. while reliance has the lowest of 0. without taking into consideration the respective returns.04. The formula for calculating Beta is: Where.0 is considered to be a defensive portfolio that invests primarily in slow moving stocks. An average well diversified portfolio will have a beta of 1. However.854562 0. it fluctuates in a similar fashion as the market index does. Funds having beta more than 1.8 – 0.966426 0. i.925317 0. The following table shows the calculated Beta (β) of the selected Index Funds: Beta (β) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.864371 0.MUTUAL FUNDS INVESTMENTS 2011 Beta Beta gives a measure of the relationship between the returns from a fund and the market (NIFTY in this case).96.805352 0.046436 0. Cov(i. Usually monthly returns from the fund are taken for a considerable number of years and are correlated with the corresponding monthly returns of the index.945825 0.0.910732 0.e.0.565029 It is clear from the table that almost all the funds. Page | 49 . except Reliance and Sundaram. Portfolio having beta less than 1.5 and Sunadaram has the highest beta of 1. Beta gives the sensitivity of a fund’s return to fluctuations in the respective market considered.m) is the covariance of the fund’s returns with the market’s returns and Var(m) is the variance of the market returns. have Beta in the range of 0.962436 0. show above average volatility and thus a sign of greater risk.888937 1.

4608% 23.8%. Reliance Mutual fund’s Index fund has a low beta as well as a low return of 11.6556% 16. DSPBR has the lowest returns and a high beta.MUTUAL FUNDS INVESTMENTS 2011 The following table shows the calculated Return (Ri) of the selected Index Funds: Returns BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 21.96.7833% 26.4228% 21. making it he most unattractive bet for an investor. as it has given the highest returns over the past 5 years of 26% (CAGR). and have a beta of 0. we can conclude that ICICI Index funds are the best bet for an investor. a beta close to 1. but however.5990% 17.5091% 20.0 indicates that it fluctuates in synch with the market.2754% 16.8040% 17.8808% Looking at both the returns as well as the risks associated.5851% 11.3731% 8. Page | 50 . A highly risk averse investor would be willing to invest in such a type of portfolio.3123% 17. gives a much higher return.

125768 0.118097 Since all the selected funds have a positive Teynor’s Ratio.034744 0.135752 0.Average Return of the Risk-Free Rate) / Beta of the Portfolio While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund. Page | 51 .190754 0.200721 0.MUTUAL FUNDS INVESTMENTS 2011 The Treynor’s Ratio This ratio was developed by Jack Treynor.109397 0. with ICICI being the best among others and DSPBR the worst. The following table shows the calculated Treynor’s Ratio of the selected Index Funds: Treynor's Index (Ti) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0. Treynor’s Ratio is also known as “Reward to Volatility Ratio”.221343 0.122603 0. a low and negative Treynor's Index is an indication of unfavorable performance. The formula for calculating Treynor’s Ratio is: (Average Return of the Portfolio . It measures the returns from a fund earned over and above of that which could have been earned on a riskless investment per unit of market risk. All the funds have provided adequate return to investor per unit risk taken.176462 0.203851 0. It is basically a riskadjusted measure of return based on systematic risk. we can conclude that all of them have been able to outperform the market.135904 0.

The formula for calculating Sharpe ratio is: (Expected Return from the Portfolio . a low and negative Sharpe Ratio is an indication of unfavorable performance.297091 1.253997 1.148202 1.MUTUAL FUNDS INVESTMENTS 2011 Sharpe Ratio This ratio was developed by William F Sharpe. Sharpe’s ratio is also thus known as “Risk to Reward Ratio”.187196 1. Page | 52 . while the latter considers only the systematic risk.Average Return of the Risk-Free Rate) / Standard Deviation of the Portfolio While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund.288668 1. The positive Sharpe Ratio of all the selected funds shows that the risk taken by an investor of the respective funds have been rewarded by adequate returns. It also is a measure of the returns from a fund earned over and above the expected return from the portfolio.296891 1.228771 0.632617 A higher Sharpe’s ratio means a higher volatility of portfolio return.286248 1. The difference between the Sharpe ratio and the Teynor’s ratio is that the former takes into consideration the total risk associated with a portfolio. It relates risk and return of the portfolio and assesses the performance as “return per unit of total risk”.294980 1.182093 1. The following table shows the calculated Sharpe’s Ratio of the selected Index Funds: Sharpe’s Ratio (Si) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 1.307270 1.

Ra is the average return of the portfolio for a particular period. This indicates that DSPBR and Sundaram have been giving lesser returns than the market while reliance’s returns have been comparable to the market return. is the If the fund fares better than predicted. It is a measure of the returns from a fund in excess to the one predicted by the Capital Asset Pricing (CAPM) Model. which indicates that it is providing a highly excessive return than the market. Page | 53 .016019 -0. Higher alpha represents superior performance of the fund and vice versa.MUTUAL FUNDS INVESTMENTS 2011 Jensen’s Measure This was developed by Michael Jensen. The following table shows the calculated Jensen’s Alpha (α) of the selected Index Funds: Jenson's Alpha (α) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.008722 0. which is very near to Zero.000206 A higher positive Alpha (α) indicates better performance. The difference between the actual returns and the ones predicted by CAPM Model for a particular period denotes Alpha (α).016550 0. Again ICICI emerges as the best investment option as it has the highest alpha among the selected funds.078473 0.066835 -0.0002. Also.004606 0. and Reliance has an alpha of 0. it has a positive alpha & vice-versa. Beta of the portfolio and Rm is the market return for that particular period.100132 0. DSPBR and Sundaram have a negative alpha.007734 0.050765 0.062402 0. Rf is the risk free rate. This is also a risk adjusted performance measure. The formula for calculating Jensen’s Alpha is: Where.076791 0.

295 1. Another observation has been made for Reliance Index Funds.MUTUAL FUNDS INVESTMENTS 2011 The following table gives a comparative picture of all the selected funds vis-à-vis the measures used to evaluate their performance.009 0.59% 11.096 0.123 0.077 0. Standard Deviation (σ) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.105 Required Return (Ri) 21.078 0.254 1.016 -0.148 1.017 0. Page | 54 .42% 21.78% 26.96 0. a low beta of 0. Also.85 0. Thus it is not advisable to invest in DSPBR.062 0.averse investor.051 0.307 1.86 0.66% 16.083 0. and a high standard deviation as well. It has shown a low return of just 8%. Also DSPBR has shown the worst performance over the years.46% 23.57 Sharpe Ratio (Si) 1.221 0. and is not a good option for a rational investor to invest in such a portfolio.93 0.005 0.289 1.57 shows a low volatility to market fluctuations and thus a lower risk.176 0. Thus reliance index funds are a safe bet for a risk.100 0.083 0.077. Over the years.109 0.286 1.95 0.28% 16.88% Beta (β) 0.085 0. The other funds taken in the analysis have a similar performance pattern in terms of risk and return.297 1.05 0.97 0.092 0.633 Jenson's Alpha (α) 0.201 0.91 0.31% 17.118 The whole analysis depicts a very high preference for ICICI Index funds as all the measures used give a positive picture for this fund as far as high returns and low risks are concerned.51% 20.008 0.035 0. in the past five years.000 Treynor's Index (Ti) 0.078 0.91 0.087 0.182 1.89 1.136 0.187 1.80% 17.096 0.090 0.126 0.297 1. Also.191 0.067 -0.60% 17. a negative alpha of -0.081 0.204 0.229 0. the fund has constantly outperformed the market and has been able to give higher returns as compared to the other funds.37% 8.078 0. this fund has been performing almost at par with the market.81 0.136 0.

Here we will discuss the growth drivers and the possible changes in industry in future.17 56.4 .43 34. Although the industry witnessed a slight fall in value of AUM during recession.04 2. 2.00 20. Also if we see the below figure.51 20. we can say that the disposable income will increase in future due to the increase in middle and rich class by 55.08 2009-10 43.30 Per household annual income (INR lakh at 200910 price levels) Rich >17 Middle 3.4 Deprived <1. But according to Moody’s official release Sept 2011.9%.to long-term economic potential continues to be buoyed by its demographic profile. According to a quarterly survey conducted by RBI. Savings Rate and Disposable Income According to India Economic Outlook 2011-12. the projection of real GDP growth rate for 2011-12 is 7.8% in 2010-11 and supposed to be at 34% in 2011-12.15 2015-16 Asprirers 1. Growth Drivers 1. Thus we think that the economic outlook of India will be positive in future.00 40.00 0. GDP We see that the key macroeconomic driver – GDP growth rate is being scaled down by forecasters due to the rising inflation rates. “India's medium.33 13.07 29. This coupled with increasing savings rate will lead to more savings amount available for investment in financial securities. we think that the industry has bright future prospects.00 60.5 Source: NCAER Page | 55 . of Household (mn) 1. 120.5 3. domestic savings rate as a ratio of GDP is around 33.00 100.00 % of Total No.3% and 88. robust savings and investment rates and rising international competitiveness of its corporations”.00 80.6% respectively by 2015-16.MUTUAL FUNDS INVESTMENTS 2011 Future Outlook of Mutual Funds Industry The Indian Mutual Funds Industry has been showing rapid growth in the past driven by favorable economic and demographic factors.

The transparency of fees not only will increase the confidence of investors but also will increase the competition among the distributors and thus the overall quality of the industry. This will not only save commission fees for funds but also the transaction fees for investors.MUTUAL FUNDS INVESTMENTS 2011 3. New Innovative Products & Greater Penetration Funds can create more innovative products to attract investors and penetrate into tier 2 and 3 cities to reach retail investors. it can be that mutual funds will start selling more directly to investors or start their own distribution services instead of depending on agents. Own Distribution Services In the case of industry model. Previously investors used to see the distributors as default choice but now they know that they have to pay a fee to distributors so they will think twice before selecting one distributor. 3. It will further increase the growth of mutual funds. 4. inferior distribution and limited banking services and thus this area will take time to conquer. 2. Increase Awareness To tap the opportunity of growing savings as mentioned above. Changes Anticipated 1. Union Budget 2011-12 The other factor that supports our view of growing mutual funds industry is the Union Budget 2011-12. advantages and disadvantages and the process involved in investing in mutual funds. The finance minister has permitted the SEBI registered Mutual Funds to accept investments from KYC-compliant foreign investors for equity schemes. The funds can come up with some combined education programs at various centers educating retail investors over the risk and return. Regulations The participation of retail investors will also increase due to the removal of entry load done by SEBI as it brings more transparency to the cost structure of mutual funds. Mutual funds need to increase awareness among retail investors and thus increase their participation in Mutual funds. In fact investors will be more interested to go for direct investment to the mutual fund too. Page | 56 . This will widen the foreign investor base of mutual funds and also the quality based on the strategy-oriented mindset there. But the one area where it will be more difficult for mutual funds to gain access is the rural regions due to lack of awareness.

The study shows considerable downside risk in terms of VAR to the tune of 40% to 90% at 99% level of confidence. we have covered briefly the research papers over Indian mutual funds industry. Research Papers In this section. we anticipate bright future prospects for Indian Mutual Fund Industry based on the drivers we mentioned above. But the rate of consolidation will not be so high due to certain tax issues that increase the cost of merger. Here we have shown papers which have done some experiment. And this scenario will be seen in near future only as once the investors gain confidence they will be willing to take more risks. In the case of the various schemes available. analysis. Overall. This is because of the growing risk aversion nature of the investors due to the recent recession. Industry Consolidation We can also find industry consolidation owing to the approval of SEBI for merger of mutual funds. moving average and exponentially weighted moving average) and one non parametric model (historical simulation) to predict the VAR and also tested its robustness through “back testing”. Market Timing Ability of Selected Mutual Funds in India: A Comparative Study by B Phaniswara Raju & K Mallikarjuna Rao. 2009 Soumya & Ashok attempt to show the importance of VAR as a single downside risk measure for Indian equity mutual funds which is being ignored currently. The results indicate that a majority of the selected mutual fund scheme managers are not seriously engaged in any market timing activities and are relying mainly on stock selection skills. But off course the distribution of funds among various schemes will not be totally onesided as we always have investors who are risk-takers. fund managers of private sector exhibited better market timing as per Henriksson and Merton model. Downside Risk Analysis of Indian Equity Mutual Funds: A Value at Risk Approach by Soumya Guha Deb & Ashok Banerjee. we think that Debt schemes and Money Market funds will see more increase in the near future and those too open-ended mutual funds. survey. They used three parametric models (random walk. Further.25% of value). Please note that we have avoided the articles which are just literature or theory. Mar 2009 Raju and Rao explored the market timing ability of selected Indian mutual fund managers using two models – Treynor and Mazuy & Henriksson and Merton. etc.MUTUAL FUNDS INVESTMENTS 2011 4. A merger involves redemption of certain equity oriented schemes which attract Security Transaction Tax (currently the STT in mutual funds schemes is 0. The same results have been found in studies done in Page | 57 .

May 2008 Sehgal & Jhanwar evaluated the performance of selected equity-based mutual funds. It was in line with the global findings. They also found that increasing the observation frequency such as using daily returns improve the selectivity and timing ability evidence of Indian fund managers. they found that winner portfolio does provide gross abnormal returns of 10% per annum on post-formation basis. etc. They demonstrated how the performance results related to both selectivity and market timing skills get modified if use multi-factor benchmark instead of standard one-factor CAPM benchmark. 2006 Ms. flexibility. The authors used both traditional and conditional models with monthly and weekly data frequency. factor analysis. they found no strong evidence of persistence but with daily data. imageconscious and cautious. They used both one factor and multi factor models and that too using both daily and monthly data. reputation and credibility of fund manager. expense ratio. credit ratings. She found that the statistically significant fund related factors that investors look for are Fund performance. Market Timing and Stock Selection Ability of Mutual Funds in India: An Emirical Investigation by Soumya Guha Deb. On Stock Selection Skills and Market Timing Abilities of Mutual Fund Managers in India by Sanjay Sehgal & Manoj Jhanwar. Overall the study is in conformity with efficient market hypothesis. Short-Term Persistence in Mutual Funds Performance: Evidence from India by Sanjay Sehgal & Manoj Jhanwar. Ashok Banerjee and B B Chakrabarti. Does Mutual Fund Management in India Correspond to its Investment Objective Classification? Page | 58 . Kavitha Ranganathan. Apr 2008 The authors tried to analyse whether there exists short term persistence in equity mutual funds performance. The author states that their results have implications for Hedge funds and other managed portfolios who consistently look for extranormal returns. A Study of Fund Selection Behavior of Individual Investors Towards Mutual Funds – With Reference to Mumbai City by Ms. though closed ended fund managers should have more market timing ability as they have more control over the cash inflows to their schemes. The results indicated very little evidence of market timing ability but good evidence of stock selection ability. Also authors found that most of the positive timers were open-ended funds. With monthly data. She further divided these factors among three types of investors – professional. portfolio. June 2007 The paper explored the market timing ability and stock selection ability of Indian mutual fund managers during Jan 2000 to June 2005. Ranganathan explored the behavioral finance behind the fund selection process using surveys.MUTUAL FUNDS INVESTMENTS 2011 developed capital markets.

MUTUAL FUNDS INVESTMENTS 2011 by Luis Ferruz Agudo & Cristina Ortiz L´azaro. T. Then they compare whether the classification they done fit with the stated investmentobjective classification. But the Cluster Analysis gave opposite results indicating that the mutual funds do not really follow the strategies they explain in their prospects. Page | 59 . The survey also revealed that the investors are first influenced by intrinsic product qualities and then the fund management efficiency and general image of fund. investors look for safety first in Mutual Funds products. Rajeswari & Prof. Rama Moorthy. According to the results. An Empirical Study on Factors Influencing the Mutual Fund/Scheme Selection by Retail Investors by Ms. Factor analysis indicates that risk is a major factor that determines the evolution of return or NAV of mutual funds in India. followed by good returns. Also the infrastructural facilities and reputation influence the decision of investors.E. 2002 Rajeswari & Moorthy also analysed the behavioral finance aspects and conducted a survey with Factor analysis. tax benefits. V. liquidity and capital appreciation in the order.R. Dec 2005 Agudo & Cristina used NAV to infer some kind of pattern to classify mutual funds using factor and cluster analysis.

reuters.php http://indian-mutualfund.aspx?report_id=2976425 http://www.com/mf/knowledge/concept.appuonline.mutualfundsindia.hdfcsec.moneycontrol.htm http://www.com/pdf/capitalmarket/CRISIL-mf-ranking-booklet-mar-2011.com/news/mf-news/sebi-mulls-to-make-mfs-brokerage-feepartexpenses_565927.com/mutualfunds/types.html http://www.html/ Page | 60 .intoday.com/story/indias-real-gdp-growth-rate-cut-to-79-for-fiscal-2011-12-rbiforecasters-survey-2011-08-12 http://articles.mutualfundsindia.com/news/key-points-indias-economic-outlook-20112012-4948.mutualfundsindia.24/Mutual-Funds-Reports/Total-AUM-ofMF-Industry-Dips-by-4-3-in-August-11 http://blogs.html http://banking.in/faq/mf_faq.htm http://www.php/2011/07/current-senario-of-mutual-fund-industry/ http://www.economictimes.investopedia.com/Report/IM307.asp http://www.html http://www.crisil.sebi.com/india-expertzone/2011/03/03/budget-2011-good-news-for-mutual-fundindustry/ http://www.com/mfbasic.kpmg.com/search/label/MF%20News http://www.pdf www.blogspot.html http://www.com/university/mutualfunds/#axzz1XUMecmWT http://www.com/ind_upd.rncos.indiatimes.gov.html http://www.com/business/slide-show/slide-show-1-perfin-how-to-calculate-mutual-fundscosts/20110425.pdf http://www.livemint.mutualfundsnavindia.in/story/sebi-imposes-rs-150-transaction-fee-on-new-mfinvestments/1/18127.com/faq.com/research/ResearchDetails.com/tl_files/pictures/mutual-fund-web.com/news/505202/10/22.contify.asp http://www.com/getnav.in/corewealth/index.in.mutualfundsresource.adityabirlamoney.asp http://www.india-briefing.html http://businesstoday.rediff.MUTUAL FUNDS INVESTMENTS 2011 References http://www.com/2009/08/24001154/Indian-mutual-fund-industry-to.com/2011-09-06/news/30119291_1_gdp-growth-growthestimates-indian-economy http://www.corepro.

ece http://indian-mutualfund.blogspot.thehindubusinessline.html Ebscohost Database Page | 61 .com/markets/stock-markets/article1501295.MUTUAL FUNDS INVESTMENTS 2011 http://www.com/2011/04/mf-schemes-merger-hits-taxation-hurdle.

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