A

PROJECT
REPORT
On
MUTUAL FUND
ANALYSIS & TRENDS

Page 1 of 76
 A
PROJECT REPORT
On
MUTUAL FUND ANALYSIS & TRENDS
At
SHAREKHAN LTD.

Submitted By:
VIJAYANT KUMAR SINHA
PGDBA IIIrd SEM.

A report submitted in the partial fulfillment of

The requirements of
POST GRADUATE DEPLOMA IN BUSINESS ADMINISTRATION
Conducted By
GRADUATE SCHOOL OF BUSINESS AND ADMINISTRATION

UNDER GUIDE BY:

Internal Guide:
Mr. T.N. Shrivastava
(Placement Head,GSBA)

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External Guide:
Mr. Vishal Bansal
(Assitant Manager, Share Khan, NIODA)

ACKNOWLEDGMENT

I would like to express my sincere gratitude to Mr. Muneet Rastogi

(Branch Manager, SHAREKHAN, NOIDA) for giving me the
opportunity to work under his guidance.

I would also like to thank my External guide Mr. Vishal Bansal

(Assistant Manager, SHAREKHAN, NOIDA) for giving me this
opportunity to work upon this project.

I sincerely thank my Internal guide Mr.T.N. Shrivastava (Placement

Head,GSBA ) , for guiding me throughout the project and helping me
by furnishing the required information as and when I needed.

I would like to extend my deepest thanks to Prof. P.L. Maggu

(Executive Director,GSBA) and the entire faculty member for the co-
operation extended by them.

I would also like to express my profound gratitude to all others who

have been instrumental in the preparation of the project report.

Above all I would like to thank God for giving me the strength.

(VIJAYANT KUMAR SINHA)

Page 3 of 76
 CONTENTS
EXECUTIVE SUMMARY.................................................................................................7
SYNOPSIS.........................................................................................................................8
COMPANY PROFILE......................................................................................................10
Introduction...............................................................................................................10

Services provided by the SHAREKHAN :-- ............................................................11

Equities and Derivatives ..........................................................................................12

Sharekhan equity analysis .......................................................................................12

MUTUAL FUND..............................................................................................................13
Introduction...............................................................................................................13
Organisation of a Mutual Fund.................................................................................14
Sponsor......................................................................................................................14
Mutual Fund as Trusts...............................................................................................14
Asset Management Company(AMC)........................................................................15
History.......................................................................................................................15
MUTUAL FUNDS IN INDIA..........................................................................................16
.......................................................................................................................................16
First Phase - 1964-87................................................................................................16
Second Phase - 1987-1993 (Entry of Public Sector Funds)......................................17
Third Phase - 1993-2003 (Entry of Private Sector Funds) .......................................17
Fourth Phase - since February 2003..........................................................................17
Advantages of Mutual Funds....................................................................................19
Objectives..................................................................................................................20
MORE ABOUT MUTUAL FUNDS.................................................................................21
What is the Regulatory Body for Mutual Funds?.....................................................21
What are the benefits of investing in Mutual Funds?...............................................21
What is NAV?...........................................................................................................22
What is Entry/Exit Load?..........................................................................................22
Are there any risks involved in investing in Mutual Funds?....................................22
TYPES OF MUTUAL FUNDS........................................................................................23
Schemes By Structure...................................................................................................24
Schemes by investment Objective................................................................................24
Other Objective.............................................................................................................24
Schemes By Structure In Detail....................................................................................24
Schemes according to Investment Objective In Detail.................................................24
Other Schemes In Detail...............................................................................................26

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TAX BENEFITS...............................................................................................................27
To The Mutual Fund......................................................................................................28
Tax Implications To Investors.......................................................................................28
RISK FACTORS...............................................................................................................29
STATUTORY DETAILS...................................................................................................29
DIFFERENT INVESTMENT PLANS THAT MUTUAL FUND OFFERS....................30
Growth Plan and Dividend Plan....................................................................................30
Dividend Reinvestment Plan.........................................................................................30
RIGHTS AVAILABLE TO A MUTUAL FUND HOLDER IN INDIA...........................31
FUND OFFER DOCUMENT...........................................................................................31
ACTIVE FUND MANAGEMENT..................................................................................32
PASSIVE FUND MANAGEMENT.................................................................................32
EXCHANGE TRADE FUND (ETF)................................................................................33
Latest Development In ETF (TOI Aug 12, 2006).........................................................34
SHARE KHAN MUTUAL FUNDS.................................................................................35
Investment Philosophy..................................................................................................35
ASSOCIATION OF MUTUAL FUND IN INDIA (AMFI).............................................36
The AMFI Code Of Ethics............................................................................................36
AMFI Mutual Fund.......................................................................................................37
Professional Selling Practice.........................................................................................38
Enforcement..................................................................................................................40
Definitions.....................................................................................................................41
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)(MUTUAL FUNDS)
REGULATIONS, 1996.....................................................................................................44
Procedure for Registering a Mutual Fund with SEBI
.......................................................................................................................................46
Terms & Conditions for Registration (Regulation: 10).................................................47
Constitution of the Mutual Fund (Regulation: 14)........................................................48
Contents of trust deed (Regulation: 15)........................................................................48
SEBI Guidelines (2001-02) Relating to Mutual Funds.................................................48
Investing in Mutual Funds............................................................................................49
INVESTOR’S BEHAVIOUR...........................................................................................50
STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY..................................54
Some of the AMCs operating currently are..................................................................55
RECENT TRENDS IN THE INDIAN MUTUAL FUND INDUSTRY...........................56
Causal Factors For The Trend.......................................................................................56
Growth of Business Of UTI..........................................................................................61
Mutual fund flows -- Private sector funds in focus.......................................................62
Shifting asset base ........................................................................................................63
Big share in inflows .....................................................................................................64
Healthy competition .....................................................................................................65
Beating the broader indices ..........................................................................................67
Top performing funds ...................................................................................................67
Sector funds, a mixed bag ............................................................................................69
Focus on select sectors .................................................................................................69
The laggards .................................................................................................................70
Sector funds lose steam ................................................................................................71

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 Mid-cap focus pays off .................................................................................................71
Tax-saving funds race ahead ........................................................................................72
Broader indices, tough to beat ......................................................................................72
Large-cap focus drags performance .............................................................................72
PROBLEMS......................................................................................................................74
MEASURES TO OVERCOME THESE PROBLEMS....................................................74

LIST OF FIGURES
Figure 1: GROWTH IN ASSETS UNDER MANAGEMENT........................................18
Figure 2: Indian Mutual Fund Industry Organization.......................................................58
Figure 3: Asset under Management .................................................................................59
Figure 4: Number of Schemes..........................................................................................59
Figure 5: Asset Under Management..................................................................................60

BIBLIOGRAPHY

Page 6 of 76
 EXECUTIVE SUMMARY

Mutual fund industry has emerged as the most dynamic segment of

the Indian financial system. Thanks to the rigorous policy initiatives of
the government. Till 1987 the UTI was the only mutual fund. The
industry has witnessed an unprecedented level of growth with the
entry of mutual funds sponsored by nationalized banks and
insurance companies. The objective of this project is to explain the
data interpretation and Analysis of Mutual funds industry.

Description of the Project:

Take a comprehensive look at the overall performance of the MF

industry in India:

• The origin and development of Mutual Funds.

• Regulatory Environment of Mutual Funds.
• Mutual fund Industry – Its size and growth
• Investment pattern of Mutual Funds, includes:

1. Comparison of Returns
2. Investor’s Behavior
3. Pattern of investments

• Evaluation of performance of Mutual Funds includes:

1. Performance of Private sector Funds

2. Performance of Public sector Funds
3. Performance of UTI Funds

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 4. Problems the industry is facing and measures to overcome
these problems

SYNOPSIS
TITLE: MUTUAL FUND ANALYSIS AND TRENDS

Objective of Project:

To make analysis of. Mutual funds and their performance

 To make a comparative analysis of public sector & private
sector.
 To serve Retail investor’s concern about the risk factor.
 To explain the Scope and methodology of mutual funds.
 Find out the growing investment opportunity for the investor in
mutual funds.
Scope:

This project will provide me the better platform to understand

the history, growth & various other aspects of mutual fund. It
will also help me to under stand the behavior of Indian investor
regarding different investment tools. The study also
encompasses the trend mutual fund industry has been
following and to find out how good and safe are these as an
investment option.
Research Methodology:

The research methodology has been conclusive in nature. The

information has been gathered from various useful and relevant
web sites,books, newspaper and magazine.

Report Submitted:

Branch Office:
SHARE KHAN LTD.

Page 8 of 76
 P-12a, 3rd floor,
BHS Libery,
Sector-18,
NOIDA (U.P.)
Head Office:-
SHARE KHAN LTD.
A-206, Phoenix House,
2nd floor, Senapati Bapat Marg,
Lower Parel. MUMBAI-400013

Page 9 of 76
 COMPANY PROFILE
Introduction

Share khan is one of the leading retail brokerage firms in the country. It is the
retail broking arm of the Mumbai-based SSKI (Shripal Shivlal Kantilal Ishwarlal)
Group, which has over eight decades of experience in the stock broking business.
Share khan offers its customers a wide range of equity related services including
trade execution on BSE, NSE, Derivatives, depository services, online
trading, mutual fund, investment advice etc.

The firm's online trading and investment site—www.Sharekhan.com—was

launched on Feb 8, 2000. The site gives access to superior content and
transaction facility to retail customers across the country. Known for its jargon-
free, investor friendly language and high quality research, the site has a registered
base of over one-lakh customers. The number of trading members currently
stands at over 8000. While online trading currently accounts for just over 1 per
cent of the daily trading in stocks in India, Share khan alone accounts for 22 per
cent of the volumes traded online .

The content-rich and research oriented portal has stood out among its
contemporaries because of its steadfast dedication to offering customers best-of-
breed technology and superior market information. The objective has been to let
customers make informed decisions and to simplify the process of investing
in stocks.

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

Share khan’s ground network includes over 350 centers in 150 cities in
India, of which 130 are fully-owned twigs.

Share khan is lead by a highly regarded management team that has invested
corers of rupees into a world class Infrastructure that provides our clients with
real-time service & 24/7 accesses to all information and products. Our flagship
Share khan Professional Network offers real-time prices, detailed data and news,
intelligent analytics, and electronic trading capabilities, right at your fingertips.
This powerful technology complemented by our knowledgeable and customer
focused Relationship Managers. We are creating a world of Smart Investor.

10
Share khan offers a full range of financial services and products ranging from
Equities to Derivatives enhance your wealth and hence, achieve your financial
goals

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

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

Services provided by the SHAREKHAN :--

 Equities & Derivatives: -Comprehensive services for independent

investors,active traders & Non-Resident Indians.
 Sharekhan equity analysis: -Premium research on 401+ companies
updated daily.
 Depository Services: -Value added services for seamless delivery.

11
Equities and Derivatives

Our Retail Equity Business caters to the needs of individual Indian and Non-
Resident Indian (NRI) investors. Share khan offers broker assisted trade
execution, automated online investing and access to all IPO's.

Through various types of brokerage accounts, India bulls offers the purchase
and sale of securities which includes Equity, Derivatives and Commodities
Instruments listed on National Stock Exchange of India Ltd (NSEIL), The Stock
Exchange, Mumbai (BSE) and NCDEX.

Choose the service options that fit you best.

 Share khan Classic account - Comprehensive services including

research and investing guidance for independent investors.
 Share khan Fast trade – Share khan is dedicated to empower Active
Traders through personal service and advanced trading technology.
 Share khan Speed trade plus - With an extensive range of investment
products, you will discover an unwavering commitment to helping you
invest in India.

Sharekhan equity analysis

Building and maintaining your ideal portfolio demands objective, dependable

information. Share khan Equity Analysis helps satisfy that need by rating stocks
based on carefully selected, fact-based measures. And because we're not
focused on investment banking, we don't have the same conflicts of interest as
traditional brokerage firms. This objectivity is only one important difference in our
ratings

12
 MUTUAL FUND
Introduction
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is invested by the fund
manager in different types of securities depending upon the objective of the
scheme. These could range from shares to debentures to money market
instruments. The income earned through these investments and the capital
appreciations realized by the scheme are shared by its unit holders in proportion
to the number of units owned by them. Thus a Mutual Fund is the most suitable
investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed portfolio at a relatively low cost. The small
savings of all the investors are put together to increase the buying power and hire
a professional manager to invest and monitor the money. Anybody with an invest-
able surplus of as little as a few thousand rupees can invest in Mutual Funds.
Each Mutual Fund scheme has a defined investment objective and strategy.

13
Organisation of a Mutual Fund

There are many entities involved and the diagram below illustrates the
organisational set up of a mutual fund:

Three Key players namely Sponsor, AMC, and Mutual Fund Trust are involved in
setting up a Mutual Fund.

Sponsor

Sponser is any person who acting alone or with another body corporate
establishes a mutual fund. The sponsor of a fund is akin to the promoter of a
company as he gets the fund registered with SEBI.

Mutual Fund as Trusts

14
A Mutual Fund in India is constituted in the form of a public Trust created under
the Indian Trusts Act, 1882. The sponsor forms the trust and registers it with SEBI.
The fund sponsor acts as the settler of the Trust, contributing to its initial capital
and appoints a trustee to hold the assets of the trust for the benefit of the unit-
holders, who are the beneficiaries of the Trust. The fund then invites investors to
contribute their money in the common pool, by subscribing to ‘units’ issued by
various schemes established by the Trust as evidence of their beneficial interest
in the fund.

Asset Management Company(AMC)

An AMC is a firm that invests the pooled funds of retail investors in securities in
line with the stated investment objectives. For a fee, the investment company
provides more diversification, liquidity, and professional management service than
is normally available to individual investors.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibility
includes receipt and delivery of securities, collection of income, distribution of income
and segregation of asset between schems. The sponsor of a mutual fund can not act as a
custodian to the fund.

History

In 1774 a Dutch merchant invited subscriptions from investors to set up an

investment trust by the name of Eendragt Maakt Magt (Unity Creates Strength),
with the objective of providing diversification at low cost to the investors. Its
success caught on, and more investment trust were launched with verbose and
quirky names that, when translated, read, ‘Profitable and Prudent’ or ‘small
Matters Grow By Consent’. The foreign and Colonial Government Trust, formed in
London in 1868, promised “the investor of modest means the same advantage as
the large capitalist….by spreading the investment over a number of stocks”.

Mutual funds are not an American invention. The first was started in the
Netherlands in 1822, and the second in Scotland in the 1880's.
Originally called investment trusts, the first American one was the New York Stock
Trust, established in 1889. Most that followed were begun in Boston in the early
1920's, including the State Street Fund, Massachusetts Investor's Trust (now
called MFS), Fidelity, Scudder, Pioneer, and the Putnum Fund. The Wellington
Fund, the first balanced fund that included both stocks and bonds, was founded in
1928, and today is part of the giant Vanguard Funds Group.

In the 1960's there was a phenomenal rise in aggressive growth funds (with very
high risk). Sometimes called "go-go" or "hot-shot" funds, they received the

15
majority of the billions of dollars flowing into mutual funds at that time. In 1968 and
1969, over 100 of these new aggressive growth funds were established.

A severe bear market began in the autumn of 1969. People became disillusioned
with stocks and mutual funds. "The market's toast. it'll never get back to where it
was!" was echoed by panicked investors.
Unemployment grew, inflation went crazy, and investors pulled billions back out of
the funds. They should have hung in there! Many funds have risen 9,000% since
then.

The 1970's saw a new kind of fund innovation: funds with no sales commission
called "no load" funds. The largest and most successful no load family of funds is
the Vanguard Funds, created by John Bogle in 1977.

At the end of the 1920's there were only 10 mutual funds. At the end of the 1960's
there were 244. Today there are more than 6,500 unique funds and even
thousands more that differ only by their share class (how they are sold, and how
their expenses are charged).

Before we continue with all you need to know about mutual funds, here is
something that merits your attention. Since 1940, no mutual fund has gone
bankrupt. You sure can't say that about banks and savings and loans!

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank the. The
history of mutual funds in India can be broadly divided into four distinct phases:

MUTUAL FUNDS IN INDIA

First Phase - 1964-87

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

16
Second Phase - 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public
sector banks and Life Insurance Corporation of India (LIC) and General Insurance
Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund
established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab
National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of
India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual
fund in June 1989 while GIC had set up its mutual fund in December,1990.
At the end of 1993, the mutual fund industry had assets under management of
Rs.47,004 crores.

Third Phase - 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund families.
Also, 1993 was the year in which the first Mutual Fund Regulations came into
being, under which all mutual funds, except UTI were to be registered and
governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton)
was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual
funds setting up funds in India and also the industry has witnessed several
mergers and acquisitions. As at the end of January 2003, there were 33 mutual
funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with
Rs.44,541 crores of assets under management was way ahead of other mutual
funds.

Fourth Phase - since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit
Trust of India with assets under management of Rs.29,835 crores as at the end of
January 2003, representing broadly, the assets of US 64 scheme, assured return
and certain other schemes. The Specified Undertaking of Unit Trust of India,
functioning under an administrator and under the rules framed by Government of
India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It
is registered with SEBI and functions under the Mutual Fund Regulations. With
the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000
crores of assets under management and with the setting up of a UTI Mutual Fund,
conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking
place among different private sector funds, the mutual fund industry has entered

17
its current phase of consolidation and growth. As at the end of September, 2004,
there were 29 funds, which manage assets of Rs.153108 crores under 421
schemes. At present there are over 1000 schemes floated by these 29 funds.

Figure 1: GROWTH IN ASSETS UNDER MANAGEMENT

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The Indian Timeline

YEAR EVENT
1963 UTI is India’s first mutual fund
1964 UTI launches US-64
1971 UTI’s ULIP(Unit Linked Insurance Plan) is second scheme to
be launched
1986 UTI Mastershare, India’s first true ‘mutual fund’ scheme
launched
1987 PSU banks and insurers allowd to float mutual funds:State
Bank OF India (SBI) first off the blocks
1992 The Harshad Mehta-fulled Bbull market arouses middle-
class intrest in shares and mutual fund
1993 Private sector and foreign players allowd;Kothari Pioneer
first private fund house to start operations;SEBI set up to
regulate
1994 Morgan Stanley is the first foreign player
1996 SEBI’s mutual fund rules and regulations,come into force
1998 UTI Master Index Fund is the country’s first index fund
1999 The take over of 20th Century AMC by Zurich Mutual Fund is
the first acquisition in mutual fund industry
2000 The industry’s asset under management crosses Rs 100,000
crore
2001 US-64 scam leads to UTI overhaul
2002 UTI bifurcated,comes under SEBI perview;
2003 AMFI certification made compulsory for new agents

Advantages of Mutual Funds

The advantages of investing in a Mutual Fund are:

19
 • Professional Management
• Diversification
• Convenient Administration
• Return Potential
• Low Costs
• Liquidity
• Transparency
• Flexibility
• Choice of schemes
• Tax benefits
• Well regulated

Objectives
1. To define and maintain high professional and ethical standards in all areas of
operation of mutual fund industry

2. To recommend and promote best business practices and code of conduct to be

followed by members and others engaged in the activities of mutual fund and
asset management including agencies connected or involved in the field of capital
markets and financial services.

3. To interact with the Securities and Exchange Board of India (SEBI) and to
report to SEBI on all matters concerning the mutual fund industry.

4. To report to the Government, Reserve Bank of India and other bodies on all
matters relating to the Mutual Fund Industry.

5. To develop a cadre of well trained Agent distributors and to implement a

programmer of training and certification for all intermediaries and other engaged
in the industry.

6. To undertake nation wide investor awareness program so as to promote proper

understanding of the concept and working of mutual funds.

7. To disseminate information on Mutual Fund Industry and to undertake studies and

research directly and/or in association with other bodies.

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 MORE ABOUT MUTUAL FUNDS
What is the Regulatory Body for Mutual Funds?

Securities Exchange Board of India (SEBI) is the regulatory body for all
the mutual funds. All the mutual funds must get registered with SEBI.

What are the benefits of investing in Mutual Funds?

There are several benefits from investing in a Mutual Fund:

Small investments: Mutual funds help you to reap the benefit of
returns by a portfolio spread across a wide spectrum of companies
with small investments.

Professional Fund Management: Professionals having

considerable expertise, experience and resources manage the pool of
money collected by a mutual fund. They thoroughly analyse the
markets and economy to pick good investment opportunities.

Spreading Risk: An investor with limited funds might be able to

invest in only one or two stocks/bonds, thus increasing his or her
risk. However, a mutual fund will spread its risk by investing a
number of sound stocks or bonds. A fund normally invests in
companies across a wide range of industries, so the risk is diversified.

Transparency: Mutual Funds regularly provide investors with

information on the value of their investments. Mutual Funds also
provide complete portfolio disclosure of the investments made by
various schemes and also the proportion invested in each asset type.

Choice: The large amount of Mutual Funds offer the investor a wide variety
to choose from. An investor can pick up a scheme depending upon his risk/
return profile.

Regulations: All the mutual funds are registered with SEBI and they
function within the provisions of strict regulation designed to protect the
interests
of the investor.

21
What is NAV?
NAV or Net Asset Value of the fund is the cumulative market value of the
assets of the fund net of its liabilities. NAV per unit is simply the net value
of assets divided by the number of units outstanding. Buying and selling
into funds is done on the basis of NAV-related prices.

The NAV of a mutual fund are required to be published in newspapers. The

NAV of an open end scheme should be disclosed on a daily basis and the
NAV of a close end scheme should be disclosed at least on a weekly basis.

What is Entry/Exit Load?

A Load is a charge, which the mutual fund may collect on entry and/or exit
from a fund. A load is levied to cover the up-front cost incurred by the
mutual fund for selling the fund. It also covers one time processing costs.
Some funds do not charge any entry or exit load. These funds are
referred to as ‘No Load Fund’. Funds usually charge an entry load ranging
between1.00% and 2.00%.

Exit loads vary between 0.25% and 2.00%.For e.g. Let us assume an
investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the entry
load levied is 1.00%, the price at which the investorinvests is Rs.13.13 per
unit. The investor receives 10000/13.13 = 761.6146 units. (Note that units
are allotted to an investor based on the amount invested and not on the
basis of no. of units purchased).

Let us now assume that the same investor decides to redeem his 761.6146
units. Let us also assume that the NAV is Rs 15/- and the exit load is
0.50%. Therefore the redemption price per unit works out to Rs. 14.925.
The investor therefore receives 761.6146 x 14.925 = Rs.11367.10.

Are there any risks involved in investing in Mutual Funds?

Mutual Funds do not provide assured returns. Their returns are linked to
their performance. They invest in shares, debentures, bonds etc. All these
investments involve an element of risk. The unit value may vary depending
upon the performance of the company and if a company defaults in
payment of interest/principal on their debentures/bonds the performance of
the fund may get affected. Besides incase there is a sudden downturn in an
industry or the government comes up with new a regulation which affects a
particular industry or company the fund can again be adversely affected. All
these factors influence the performance of Mutual Funds. Some of the Risk
to which Mutual Funds are exposed to is given below:

Market risk
If the overall stock or bond markets fall on account of overall

22
economic factors, the value of stock or bond holdings in the fund's
portfolio can drop, thereby impacting the fund performance.

Non-market risk
Bad news about an individual company can pull down its stock price, which
can negatively affect fund holdings. This risk can be reduced by having a
diversified portfolio that consists of a wide variety of stocks drawn from
different industries.

Interest rate risk

Bond prices and interest rates move in opposite directions. When
interest rates rise, bond prices fall and this decline in underlying
securities affects the fund negatively.

Credit risk
Bonds are debt obligations. So when the funds invest in corporate
bonds, they run the risk of the corporate defaulting on their interest and
principal payment obligations and when that risk crystallizes, it leads to a
fall in the value of the bond causing the NAV of the fund to take a beating.

TYPES OF MUTUAL FUNDS

23
 Schemes By Structure
 Open-ended Fund/ Scheme
 Close-ended Fund/ Scheme

Schemes by investment Objective

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

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

Schemes By Structure In Detail

A mutual fund scheme can be classified into open-ended scheme or close-ended

scheme depending on its maturity period

a. Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription
and repurchase on a continuous basis. These schemes do not have a
fixed maturity period. Investors can conveniently buy and sell units at Net
Asset Value (NAV) related prices which are declared on a daily basis. The
key feature of open-end schemes is liquidity.

b. Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7
years. The fund is open for subscription only during a specified period at
the time of launch of the scheme. Investors can invest in the scheme at
the time of the initial public issue and thereafter they can buy or sell the
units of the scheme on the stock exchanges where the units are listed. In
order to provide an exit route to the investors, some close-ended funds
give an option of selling back the units to the mutual fund through periodic
repurchase at NAV related prices. SEBI Regulations stipulate that at least
one of the two exit routes is provided to the investor i.e. either repurchase
facility or through listing on stock exchanges. These mutual funds
schemes disclose NAV generally on weekly basis.

Schemes according to Investment Objective In Detail

24
A scheme can also be classified as growth scheme, income scheme, or balanced
scheme considering its investment objective. Such schemes may be open-ended
or close-ended schemes as described earlier. Such schemes may be classified
mainly as follows:

a. Growth / Equity Oriented Scheme

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

b. Income / Debt Oriented Scheme

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

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

d. Money Market or Liquid Fund Schemes

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

25
Other Schemes In Detail

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

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

c. Load And No-load Fund

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

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

d. Tax Saving Schemes

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

26
 TAX BENEFITS
As per the taxation laws in force as at the date of updating this document, the tax
benefits that are available to the investors investing in the Units of the Scheme(s)
are stated herein below.

27
The tax benefits described in this Document are as available under the present
taxation laws and are available subject to relevant conditions. The information
given is included only for general purpose and is based on advice received by the
AMC regarding the law and practice currently in force in India and the
Investors/Investors should be aware that the relevant fiscal rules or their
interpretation may change. As is the case with any investment, there can be no
guarantee that the tax position or the proposed tax position prevailing at the time
of an investment in the Scheme will endure indefinitely. In view of the individual
nature of tax consequences, each Investor is advised to consult his/ her own
professional tax advisor.

To The Mutual Fund

The entire income of the Mutual Fund will be exempt from Income Tax in
accordance with the provisions of Section 10(23D) of the Income Tax Act, 1961.

The Mutual Fund will receive all income without any deduction of tax at source
under the provisions of Section 196(iv), of the Act. However, on income
distribution, if any, made by the Mutual Fund, income-tax will be payable under
Section 115R of the Act, at 12.5% (plus surcharge as applicable from time to time)
on the dividends declared under the schemes on or after April 1, 2003

However, these provisions will not be applicable to any income distributed by an

open-ended equity oriented fund (where more than 50 percent of total proceeds of
the mutual fund are invested in equity shares of domestic companies as defined in
Section 115T of the Act) for a period of one year commencing from April 1, 2003.

Tax Implications To Investors

The following summary outlines the tax implications applicable to resident

Investors of the Schemes and is based on relevant provisions under the Act,
1961, Wealth-tax Act, 1957 and Gift Tax Act, 1958 (collectively called 'the relevant
provisions'), consequent upon the amendments enacted by the Finance Act 2003:

Income other than Capital Gains

As per the provisions of Section 10(35) of the Act, income received in
respect of units of a mutual fund specified under Section 10(23D) of the Act
is exempt from income tax in the hands of the recipient Investors.

Tax Deduction at Source

In view of the exemption of income in the hands of the Investors, no
income tax is deductible at source, on income distribution by the Mutual
Fund, under the provisions of sections 194K of the Act.

Capital Gains

28
 As per section 2(42A) of the act, units of the scheme held as a capital
asset, for a period of more than 12 months immediately preceding the date
of transfer, will be treated as a long-term capital asset for the computation
of capital gains; in all other cases, it would be treated as a short-term
capital asset.
Also, sub-section (7) of section 94 of the act provides that loss, if any,
arising from the sale/transfer of units (including redemption) purchased up
to 3 months prior to the record

RISK FACTORS
Mutual Funds and securities investments are subject to market risks and there
can be no assurance or guarantee that the Schemes objectives will be achieved.
As with any investment in securities, the Net Asset Value of Units issued under
the Schemes may go up or down depending on the various factors and forces
affecting the capital market. Past performance of the Sponsors/ AMC/ Mutual
Fund/ Schemes and its affiliates do not indicate the future performance of the
Schemes of the Mutual Fund. The Sponsors are not responsible or liable for any
loss or shortfall resulting from the operations of the Schemes beyond their
contribution of Rs.10,000/- each made by them towards setting of the Mutual
Fund The Names of the Schemes do not in any manner indicate either the quality
of the Schemes or their future prospects and returns. Investors in the Schemes
are not being offered any guarantee / assured returns. Please read the Offer
Documents carefully before investing.

STATUTORY DETAILS
In terms of The Unit Trust of India (Transfer of Undertaking and Repeal) Act 2002
(“Act”), the assets and liabilities of the erstwhile Unit Trust of India have been
bifurcated into two parts the specified undertaking and the specified company.
The Administrator of the Specified Undertaking of The Unit Trust of India
comprises of US 64 and the assured return schemes (most of which have since
been converted into tax free bonds, the present investment is guaranteed by the
Govt. of India) . The Specified Company has been set up as a mutual fund viz.
UTI MF, comprising of all net asset value based schemes. UTI MF has been
structured in accordance with SEBI (Mutual Funds) Regulations, 1996 The mutual
fund was registered with SEBI on January 14, 2003 under Registration Code
MF/048/03/01.

29
 DIFFERENT INVESTMENT PLANS THAT
MUTUAL FUND OFFERS
The term ’investment plans’ generally refers to the services that the funds provide
to investors offering different ways to invest or reinvest. The different investment
plans are an important consideration in the investment decision, because they
determine the flexibility available to the investor. Some of the investment plans
offered by mutual funds in India are:

Growth Plan and Dividend Plan

A growth plan is a plan under a scheme wherein the returns from

investments are reinvested and very few income distributions, if any, are
made. The investor thus only realizes capital appreciation on the
investment. Under the dividend plan, income is distributed from time to
time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan

Dividend plans of schemes carry an additional option for reinvestment of

income distribution. This is referred to as the dividend reinvestment plan.
Under this plan, dividends declared by a fund are reinvested in the scheme
on behalf of the investor, thus increasing the number of units held by the
investors.

30
 RIGHTS AVAILABLE TO A MUTUAL FUND
HOLDER IN INDIA
As per SEBI Regulations on Mutual Funds, an investor is entitled to:

1. Receive Unit certificates or statements of accounts confirming your title

within 6 weeks from the date your request for a unit certificate is received
by the Mutual Fund.
2. Receive information about the investment policies, investment objectives,
financial position and general affairs of the scheme.
3. Receive dividend within 42 days of their declaration and receive the
redemption or repurchase proceeds within 10 days from the date of
redemption or repurchase.
4. The trustees shall be bound to make such disclosures to the unit holders
as are essential in order to keep them informed about any information,
which may have an adverse bearing on their investments.
5. 75% of the unit holders with the prior approval of SEBI can terminate the
AMC of the fund.
6. 75% of the unit holders can pass a resolution to wind-up the scheme.
7. An investor can send complaints to SEBI, who will take up the matter with
the concerned Mutual Funds and follow up with them till they are resolved.

FUND OFFER DOCUMENT

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

31
 ACTIVE FUND MANAGEMENT
When investment decisions of the fund are at the discretion of a fund
manager(s) and he or she decides which company, instrument or class of
assets the fund should invest in based on research, analysis, market news
etc. such a fund is called as an actively managed fund. The fund buys and
sells securities actively based on changed perceptions of investment from
time to time. Based on the classifications of shares with different
characteristics, ‘active’ investment managers construct different portfolio.
Two basic investment styles prevalent among the mutual funds are Growth
Investing and Value Investing:

Growth Investing Style

The primary objective of equity investment is to obtain capital appreciation. A

growth manager looks for companies that are expected to give above
average earnings growth, where the manager feels that the earning
prospects and therefore the stock prices in future will be even higher.
Identifying such growth sectors is the challenge before the growth
investment manager.

Value investment Style

A Value Manager looks to buy companies that they believe are currently
undervalued in the market, but whose worth they estimate will be recognized
in the market valuations eventually.

PASSIVE FUND MANAGEMENT

When an investor invests in an actively managed mutual fund, he or she
leaves the decision of investing to the fund manager. The fund manager is
the decision- maker as to which company or instrument to invest in.
Sometimes such decisions may be right, rewarding the investor handsomely.
However, chances are that the decisions might go wrong or may not be right
all the time which can lead to substantial losses for the investor. There are
mutual funds that offer Index funds whose objective is to equal the return
given by a select market index. Such funds follow a passive investment style.
They do not analyse companies, markets, economic factors and then narrow
down on stocks to invest in. Instead they prefer to invest in a portfolio of

32
stocks that reflect a market index, such as the Nifty index. The returns
generated by the index are the returns given by the fund. No attempt is made
to try and beat the index. Research has shown that most fund managers are
unable to constantly beat the market index year after year. Also it is not
possible to identify which fund will beat the market index.

Therefore, there is an element of going wrong in selecting a fund to invest in.

This has lead to a huge interest in passively managed funds such as Index
Funds where the choice of investments is not left to the discretion of the fund
manager. Index Funds hold a diversified basket of securities which
represents the index while at the same time since there is not much active
turnover of the portfolio the cost of managing the fund also remains low.

This gives a dual advantage to the investor of having a diversified portfolio

while at the same time having low expenses in fund. There are various
passively managed funds in India today some of them are:

 Principal Index Fund, an index fund scheme on S&P CNX Nifty

launched by Principal Mutual Fund in July 1999.
 UTI Nifty Fund launched by Unit Trust of India in March 2000.
Franklin India Index Fund launched by Franklin Templeton
Mutual Fund in June 2000.
 Franklin India Index Tax Fund launched by Franklin Templeton
Mutual Fund in February 2001.
 Magnum Index Fund launched by SBI Mutual Fund in December
2001.
 IL&FS Index Fund launched by IL&FS Mutual Fund in February
2002. Prudential ICICI Index Fund launched by Prudential ICICI
Mutual Fund in February 2002.
 HDFC Index Fund-Nifty Plan launched by HDFC Mutual Fund in July
2002.
 Birla Index Fund launched by Birla Sun Life Mutual Fund in
September 2002.
 LIC Index Fund-Nifty Plan launched by LIC Mutual Fund in November
2002.
 Tata Index Fund launched by Tata TD Waterhouse Mutual Fund in
February 2003.
 ING Vysya Nifty Plus Fund launched by ING Vysya Mutual Fund in
January 2004.
 Canindex Fund launched by Canbank Mutual Fund in September
2004

EXCHANGE TRADE FUND (ETF)

33
 Think of an exchange-traded fund as a mutual fund that trades like a stock.
Just like an index fund, an ETF represents a basket of stocks that reflect an
index such as the Nifty. An ETF, however, isn't a mutual fund; it trades just
like any other company on a stock exchange. Unlike a mutual fund that has
its net-asset value (NAV) calculated at the end of each trading day, an ETF's
price changes throughout the day, fluctuating with supply and demand. It is
important to remember that while ETFs attempt to replicate the return on
indexes, there is no guarantee that they will do so exactly.

By owning an ETF, you get the diversification of an index fund plus the
flexibility of a stock. Because, ETFs trade like stocks, you can short sell
them, buy them on margin and purchase as little as one share. Another
advantage is that the expense ratios of most ETFs are lower than that of the
average mutual fund. When buying and selling ETFs, you pay your broker
the same commission that you'd pay on any regular trade. There are various
ETFs available in India, such as:

NIFTY BeES:
An Exchange Traded Fund launched by Benchmark Mutual Fund in
January 2002.

Junior BeES:
An Exchange Traded Fund on CNX Nifty Junior, launched by Benchmark
Mutual Fund in February 2003.

SUNDER:
An Exchange Traded Fund launched by UTI in July 2003.

Liquid BeES:
An Exchange Traded Fund launched by Benchmark Mutual Fund in July
2003.

Bank BeES:
An Exchange Traded Fund (ETF) launched by Benchmark Mutual Fund in
May 2004.

Latest Development In ETF (TOI Aug 12, 2006)

An amendment to the SEBI Mutual Fund regulation has hiked the annual fees,
that asset managers pay SEBI, by at least four times. A separate circular has

34
put different standards for funds that invest in securities as opposed to ETFs,
abroad.
The circular listing guidelines for mutual fund investing abroad says that a fund
has to have experience of at least 10 years as on December 31, 2006 to be
eligible to invest in Exchange Traded Funds (ETFs) which requires a relatively
passive investment strategy. The mutual fund or its sponsors have to be
experienced in foreign securities and they have to disclose the nature of
experience in the offer document. The trustees of the fund have to certify the
experience.
However the eligibility criteria does not apply to funds investing in ADRs and
GDRs, equity or debt of foreign companies
Intention to invest on foreign securities / ETFs shall be disclosed in the offer
document of the schemes. The attendant risk factor and returns ensuing from
such investment shall be explained.
SEBI has decided to hike its annual fees (called service fees until now) from Rs 25000
to 0.3% of the money collected in new fund offers or a minimum of Rs 1 lakh. If the
fund collects, say Rs 1000 crore from investors in offer, it will have to pay a total of Rs
30 lakh to SEBI.

SHARE KHAN MUTUAL FUNDS

Investment Philosophy

35
 SHARE KHAN Mutual Fund’s investment philosophy is to deliver consistent and
stable returns in the medium to long term with a fairly lower volatility of fund
returns compared to the broad market. It believes in having a balanced and
well-diversified portfolio for all the funds and a rigorous in-house research
based approach to all its investments. It is committed to adopt and maintain
good fund management practices and a process based investment
management.

SHARE KHAN Mutual Fund follows an investment approach of giving as equal

an importance to asset allocation and sectoral allocation, as is given to security
selection while managing any fund. It combines top-down and bottom-up
approaches to enable the portfolios/funds to adapt to different market conditions
so as to prevent missing an investment opportunity.

In terms of its funds performance, SHARE KHAN Mutual Fund aims to

consistently remain in the top quartile vis-à-vis the funds in the peer group.

ASSOCIATION OF MUTUAL FUND IN INDIA

(AMFI)
The AMFI Code Of Ethics

One of the objects of the Association of Mutual Funds in India (AMFI) is to

promote the investors’ interest by defining and maintaining high ethical and
professional standards in the mutual fund industry. In pursuance of this objective,

36
AMFI had constituted a Committee under the Chairmanship of Shri A. P. Pradhan
with Shri S. V. Joshi, Shri C. G. Parekh and Shri M. Laxman Kumar as members.
This Committee, working in close co-operation with Price Waterhouse–LLP under
the FIRE Project of USAID, has drafted the Code, which has been approved and
recommended by the Board of AMFI for implementation by its members. I take
opportunity to thank all of them for their efforts.

The AMFI Code of Ethics, “The ACE” for short, sets out the standards of
good practices to be followed by the Asset Management Companies in their
operations and in their dealings with investors, intermediaries and the public.
SEBI (Mutual Funds) Regulation 1996 requires all Asset Management Companies
and Trustees to abide by the Code of conduct as specified in the Fifth Schedule to
the Regulation. The AMFI Code has been drawn up to supplement that schedule,
to encourage standards higher than those prescribed by the Regulations for the
benefit of investors in the mutual fund industry.

This is the first edition of the Code and it may be supplemented further as may be
necessary. I hope members of AMFI would implement the code and ensure that
their employees are made fully aware of the Code.

Registered Office :
1218, B- Wing, Dalamal Tower,
Free Press Journal Marg, Nariman Point,
Mumbai – 400 021. Tel : 5632 4524 / 5632 4525 Fax : 2283 1163.

AMFI Mutual Fund

Integrity

 Members and their key personnel, in the conduct of their business shall
observe high standards of integrity and fairness in all dealings with
investors, issuers, market intermediaries, other members and regulatory
and other government authorities.
 Mutual Fund Schemes shall be organized, operated, managed and their
portfolios of securities selected, in the interest of all classes of unit holders
and not in the interest of_ sponsors_ directors of Members_ members of

37
 Board of Trustees or directors of the Trustee company_ brokers and other
market intermediaries_ associates of the Members_ a special class
selected from out of unitholders.

Due Diligence

 Members in the conduct of their Asset Management business shall at all

times_ render high standards of service._ exercise due diligence_ exercise
independent professional judgment.
 Members shall have and employ effectively adequate resources and
procedures which are needed for the conduct of Asset Management
activities.

Disclosures

 Members shall ensure timely dissemination to all unitholders of adequate,

accurate, and explicit information presented in a simple language about the
investment objectives, investment policies, financial position and general
affairs of the scheme.
 Members shall disclose to unitholders investment pattern, portfolio details,
ratios of expenses to net assets and total income and portfolio turnover
wherever applicable in respect of schemes on annual basis.
 Members shall in respect of transactions of purchase and sale of securities
entered into with any of their associates or any significant unitholder.
submit to the Board of Trustees details of such transactions, justifying its
fairness to the scheme._ disclose to the unitholders details of the
transaction in brief through annual and half yearly reports.
 All transactions of purchase and sale of securities by key personnel who are
directly involved in investment operations shall be disclosed to the compliance
officer of the member at least on half yearly basis and subsequently reported to the
Board of Trustees if found having conflict of interest with the transactions of the
fund.

Professional Selling Practice

 Members shall not use any unethical means to sell, market or induce any
investor to buy their products and schemes
 Members shall not make any exaggerated statement regarding
performance of any product or scheme.
 Members shall endeavor to ensure that at all times investors are provided
with true and adequate information without any misleading or exaggerated
claims to investors about their capability to render certain services or their
achievements in regard to services rendered to other clients, investors are
made aware of attendant risks in members’ schemes before any
investment decision is made by the investors, copies of prospectus,

38
 memoranda and related literature is made available to investors on
request, adequate steps are taken for fair allotment of mutual fund units
and refund of application moneys without delay and within the prescribed
time limits and, complaints from investors are fairly and expeditiously dealt
with.
 Members in all their communications to investors and selling agents shall
not present a mutual fund scheme as if it were a new share issue not
create unrealistic expectations not guarantee returns except as stated in
the Offer Document of the scheme approved by SEBI, and in such case,
the Members shall ensure that adequate resources will be made available
and maintained to meet the guaranteed returns. convey in clear terms the
market risk and the investment risks of any scheme being offered by the
Members. not induce investors by offering benefits which are extraneous to
the scheme. not misrepresent either by stating information in a manner
calculated to mislead or by omitting to state information which is material to
making an informed investment decision.

Investment Practice

 Members shall manage all the schemes in accordance with the

fundamental investment objectives and investment policies stated in the
offer documents and take investment decisions solely in the interest of the
unitholders.
 Members shall not knowingly buy or sell securities for any of their schemes
from or to any director, officer, or employee of the member any trustee or
any director, officer, or employee of the Trustee Company.

Operations

 Members shall avoid conflicts of interest in managing the affairs of the

schemes and shall keep the interest of all unitholders paramount in all
matters relating to the scheme.
 Members or any of their directors, officers or employees shall not indulge in
front running (buying or selling of any securities ahead of transaction of the
fund, with access to information regarding the transaction which is not
public and which is material to making an investment decision, so as to
derive unfair advantage).
 Members or any of their directors, officers or employees shall not indulge in
self dealing (using their position to engage in transactions with the fund by
which they benefit unfairly at the expense of the fund and the unitholders).
 Members shall not engage in any act, practice or course of business in
connection with the purchase or sale, directly or indirectly, of any security
held or to be acquired by any scheme managed by the Members, and in
purchase, sale and redemption of units of schemes managed by the
Members, which is fraudulent, deceptive or manipulative.

39
  Members shall not, in respect of any securities, be party to creating a false
market, price rigging or manipulation passing of price sensitive information
to brokers, Members of stock exchanges and other players in the capital
markets or take action which is unethical or unfair to investors.
 Employees, officers and directors of the Members shall not work as agents/
brokers for selling of the schemes of the Members, except in their capacity
as employees of the Member or the Trustee Company.
 Members shall not make any change in the fundamental attributes of a
scheme, without the prior approval of unitholders except when such
change is consequent on changes in the regulations.
 Members shall avoid excessive concentration of business with any broking
firm, and excessive holding of units in a scheme by few persons or entities.

Reporting Practice

 Members shall follow comparable and standardized valuation policies in

accordance with the SEBI Mutual Fund Regulations.
 Members shall follow uniform performance reporting on the basis of total
return.
 Members shall ensure scheme wise segregation of cash and securities
accounts.

Unfair Competition

 Members shall not make any statement or become privy to any act,
practice or competition, which is likely to be harmful to the interests of other
Members or is likely to place other Members in a disadvantageous position
in relation to a market player or investors, while competing for funds.

Observance Of Statutes, Rules And Regulations

 Members shall abide by the letter and spirit of the provisions of the
Statutes, Rules and Regulations which may be applicable and relevant to
the activities carried on by the Members.

Enforcement

Members shall:

 widely disseminate the AMFI Code to all persons and entities covered by it
 make observance of the Code a condition of employment
 make violation of the provisions of the code, a ground for revocation of
contractual arrangement without redress and a cause for disciplinary action

40
  require that each officer and employee of the Member sign a statement that
he/she has received and read a copy of the Code
 establish internal controls and compliance mechanisms, including
assigning supervisory responsibility
 designate one person with primary responsibility for excercising
compliance with power to fully investigate all possible violations and report
to competent authority
 file regular reports to the Trustees on a half yearly and annual basis
regarding observance of the Code and special reports as circumstances
require
 maintain records of all activities and transactions for at least three years,
which records shall be subject to review by the Trustees
 dedicate adequate resources to carrying out the provisions of the Code

Definitions

When used in this code, unless the context otherwise requires

(a) AMFI
“AMFI” means the Association of Mutual Funds in India
(b) Associate
“Associate” means and includes an ‘associate’ as defined in regulation 2(c)
of SEBI (Mutual Fund) Regulations 1996.
(c) Fundamental investment policies
The “fundamental investment policies” of a scheme managed by a member
means the investment objectives, policies, and terms of the scheme, that
are considered fundamental attributes of the scheme and on the basis of
which unitholders have invested in the scheme.
(d) Member
A “member” means the member of the Association of Mutual Funds in
India.

(e) SEBI
“SEBI” means Securities and Exchange Board of India.
(f) Significant Unit holder
A “Significant Unit holder” means any entity holding 5% or more of the total
corpus of any scheme managed by the member and includes all entities
directly or indirectly controlled by such a unit holder.
(g) Trustee
A “trustee” means a member of the Board of Trustees or a director of the
Trustee Company.
(h) Trustee Company
A “Trustee Company” is a company incorporated as a Trustee Company
and setup for the purpose of managing a mutual fund.

ACCOUNT STATEMENT:

41
A document issued by the mutual fund, giving details of transactions and holdings
of an investor.

ADJUSTED NAV (TOTAL RETURN)

The net asset value of a unit assuming reinvestment of distributions made to the
investors in any form.

ADVISOR

Your financial consultant who gives professional advice on the fund's investments
and who supervise the management of its assets.

AGE OF FUND
The time elapsed since the launch of the fund.

ANNUAL RETURN

The percentage of change in net asset value over a year's time, assuming
reinvestment of distribution such as dividend payment and bonuses.

ARBITRAGE

The practice of buying and selling an interlisted stock on different exchanges in

order to profit from minute differences in price between the two markets.

BALANCE SHEET

A financial statement showing the nature and amount of a company's assets,

liabilities and shareholders' equity.

BALANCED FUND

A mutual fund that maintains a balanced portfolio, generally 40% bonds and 60%
equity.

BALANCE MATURITY TENURE OF A SCHEME

In the case of close-ended schemes, the balance period till the redemption of the
scheme.

BLUE CHIP

A share in a large, safe, prestigious company, of the highest class among stock

42
market investments. A blue-chip company would be called thus by being well-
known, having a large paid-up capital, a good track record of dividend payments
and skilled management.

CAPITAL MARKET

The market where capital funds, debt (bonds) and equity ( stocks) are traded.

INTERNATIONAL FUNDS / EMERGING MARKET FUNDS

Funds investing in assets or bonds/shares of companies from emerging

economies. These are not permissible in India due to regulations against investing
abroad. Most of the schemes of Foreign Institutional Investors (FII's) investing in
India are funds of this type.

MUTUAL FUND

An investment that pools shareholders money and invests it toward a specified

goal. The funds are invested by a professional investment manager usually called
the AMC ( Asset Management Company).

MUTUAL FUND REGULATIONS

Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 as

amended up to date and such other Regulations, as may be in force from time to
time, to regulate the activities of the Mutual Fund.

PORTFOLIO

The list of securities owned by the mutual fund. This list may be long, for example,
Fidelity Magellan, with over 2000 stocks, or relatively short, for example, Sequoia,
with only 16 stocks.

PRIMARY MARKET(NEW ISSUE MARKET)

The market on which newly issued securities are sold, including government
security auctions and underwriting purchases of blocks of new issues, which are
then resold.

SECONDARY MARKET

The market where the securities are traded i.e. purchased or sold after they have
been initially offered to the public through a public offer in the primary market.

SECURITY

43
Generally, an instrument evidencing debt of or equity in a common enterprise in
which a person invests on the expectation of financial gain. The term includes
notes, stocks, bonds, debentures or other forms of negotiable and non-negotiable
evidences of indebtedness or ownership.

SECURITIES AND EXCHANGE BOARD OF

INDIA (SEBI)(MUTUAL FUNDS)
REGULATIONS, 1996

44
The fast growing industry is regulated by the Securities and Exchange Board of
India (SEBI) since inception of SEBI as a statutory body. SEBI initially formulated
"SECURITIES AND EXCHANGE BOARD OF INDIA (MUTUAL FUNDS)
REGULATIONS, 1993" Providing detailed procedure for establishment,
registration, constitution, management of Trustees, Asset Management Company,
about schemes/products to be designed, about investment of funds collected,
general obligation of MFs, about Inspection, audit etc. Based on experience
gained and feedback received from the market SEBI revised the guidelines of
1993 and issued fresh Guidelines in 1996 titled "SECURITIES AND EXCHANGE
BOARD OF INDIA (MUTUAL FUNDS) REGULATIONS, 1996". The said
regulation as amended from time to time is in force even today. The salient
features of these Regulatory measures are discussed in subsequent articles.

The SEBI Mutual Fund Regulations contain ten chapters and twelve schedules.
Chapters containing material subjects relating to regulation and conduct of
business by Mutual Funds (i.e. chapters II to VII are discussed in the subsequent
pages. Chapter I relates to definition of legal terms and other preliminary matters.
Chapter VIII relates to powers of SEBI for inspection and audit of Mutual Funds,
while Chapter IX deals with "Offences & Penalties"(Procedure for Action In Case
of Default). Chapter X deals with Miscellaneous Issues like "Saving" & "Repeal"
clauses etc. You may visit SEBI website and access the original Regulations in
case of need. The Table of Contents of the Regulations are given here under:

Chapter I: Preliminary
Chapter II: Registration of Mutual Fund
Chapter III: Constitution and Management of Mutual Fund
and Operation of Trustees, Etc
Chapter IV: Constitution and Management of Asset
Management Company and Custodian
Chapter V: Schemes of Mutual Fund
Chapter VI: Investment Objectives and Valuation Policies
Chapter VII: General Obligations

45
 Chapter VIII: Inspection and Audit
Chapter IX: Procedure for Action In Case of Default
Chapter X: Miscellaneous
Schedule I: Forms
Form A - Application for the Grant of Registration of Mutual
Fund
Form B - Certificate of Registration
Form C - Trusteeship of The Mutual Fund
Form D - Asset Management Company
Schedule II: Fees
Schedule III: Contents of The Trust Deed
Schedule IV: Contents of The Investment Agreement
Schedule V: Code of Conduct
Schedule VI: Advertisement Code
Schedule VII: Restrictions on Investments
Schedule VIII: Investment Valuation Norms
Schedule IX: Accounting Policies and Standards
Schedule X: Initial Issue Expenses
Schedule XI: Annual Report
Schedule XII: Half Yearly Financial Results

Procedure for Registering a Mutual Fund with SEBI

(Chapter: 2 of SEBI Regulations 1996)

An applicant proposing to sponsor a mutual fund in India must submit an
application in Form A along with a fee of Rs.25,000. The application is examined
and once the sponsor satisfies the prescribed eligibility criteria the registration
certificate is issued subject to the payment of registration fees of Rs.25.00 lacks.

Eligibility Criteria for Registration (Regulation: 7)

For the purpose of grant of a certificate of registration, the applicant has to fulfill
the following, namely:-

a. The sponsor should have a sound track record and general reputation of
fairness and integrity in all his business transactions;
Explanation: For the purposes of this clause "sound track record" shall
mean the sponsor should,-
i. be carrying on business in financial services for a period of not less
than five years; and
ii. The net-worth is positive in all the immediately preceding five years;
and
iii. The net-worth in the immediately preceding year is more than the
capital contribution of the sponsor in the asset management
company; and

46
 iv. The sponsor has profits after providing for depreciation, interest and
tax in three out of the immediately preceding five years, including
the fifth year.
(The applicant is a fit and proper person]

b. In the case of an existing mutual fund, such fund is in the form of a trust
and the Board has approved the trust deed;

c. The sponsor has contributed or contributes at least 40% to the net worth of
the asset management company;
Provided that any person who holds 40% or more of the net worth of an
asset management company shall be deemed to be a sponsor and will be
required to fulfill the eligibility criteria specified in these regulations;

d. The sponsor or any of its directors or the principal officer to be employed

by the mutual fund should not have been guilty of fraud or has not been
convicted of an offense involving moral turpitude or has not been found
guilty of any economic offence;

e. Appointment of trustees to act as trustees for the mutual fund in

accordance with the provisions of the regulations;

f. Appointment of asset Management Company to manage the mutual fund

and operate the scheme of such funds in accordance with the provisions of
these regulations;

g. Appointment of a custodian in order to keep custody of the securities and

carry out the custodian activities as may be authorized by the trustees.

Terms & Conditions for Registration (Regulation: 10)

The registration granted to a mutual fund under regulation 9, shall be subject to

the following terms and conditions: -

a. The trustees, the sponsor, the asset management company and the
custodian shall comply with the provisions of these regulations;

b. The mutual fund shall forthwith inform the Board, if any information or
particulars previously submitted to the Board was misleading or false in any
material respect;

c. The mutual fund shall forthwith inform the Board, of any material change in
the information or particulars previously furnished, which have a bearing on
the registration granted by it;

d. Payment of fees as specified in the regulations and the Second Schedule.

(Rs.25 Lacks)

47
Constitution of the Mutual Fund (Regulation: 14)

A mutual fund shall be constituted in the form of a trust and the instrument of trust
shall be in the form of a deed, duly registered under the provisions of the Indian
Registration Act, 1908 (16 of 1908) executed by the sponsor in favors of the
trustees named in such an instrument.

Contents of trust deed (Regulation: 15)

1. The trust deed shall contain such clauses as are mentioned in the Third
Schedule and such other clauses, which are necessary for safeguarding
the interests of the unit holders.

2. No trust deed shall contain a clause, which has the effect of-
i. Limiting or extinguishing the obligations and liabilities of the trust in
relation to any mutual fund or the unit holders; or
ii. Indemnifying the trustees or the asset management company for
loss or damage caused to the unit holders by their acts of
negligence or acts of commissions or omissions.

Qualification prescribed for selection of persons as Trustees, Duties/obligations of

Trustees and Code of Conduct prescribed are discussed in the next article

SEBI Guidelines (2001-02) Relating to Mutual Funds

•A common format is prescribed for all mutual fund schemes to disclose their
entire portfolios on half-yearly basis so that the investors can get a meaningful
information on the deployment of funds. Mutual Fund are also required to disclose
the investments in various types of instruments and percentage of investments in
each scrip to the total NAV, illiquid and non-performing assets, investments in
derivatives and in ADRs and GDRs.

•To enable the investors to make informed investments decisions, mutual funds
have been directed to fully revise and update offer document and memorandum at
least once in two years.

•Mutual Fund are also required to:

a. bring uniformaty in disclosures of various categories of
advertisements , with a view to ensuring consistency and
comparability across schemes of various mutual funds.

b. Reduce initial offer period from a maximum of 45 days to 30 days.

c. Dispatch statements of account once the minimum subscription

amount specified in the offer document is received even before the
closure of the issue.

48
 d. Invest in mortgaged back securities of investment grade given by
credit rating agency.

e. Identify and make provisions for the non-performing assets (NPAs)

according to criteria for classification of NPAs and treatment of
income accrued on NPAs in half-yearly portfolio reports.

f. Disclose information in a revised format on Unit Capital, reserves,

performance in terms of half-year period, annualized yields over the
last 1,3,5 years in addition to percentage of management fees,
percentage of recurring expenses to net assets, investments made
in associate companies, payment made to associate companies for
their services, and details of holdings, since their operation.

g. Declare their NAVs and sale/repurchase prices of all schemes

updated daily on regular basis on the AMFI website by 8:00 pm and
declare NAVs of their close-ended schemes on every Wednesday.

•The format for un-audited half-yearly results for the mutual funds has been
revised by SEBI. These results are to be published before the expiry of one month
from the close of each half - year as against two months period provided earlier.
These results shall also be put in their websites by mutual funds.

•All the schemes by mutual funds shall be launched within six months from the
date of the letter containing observations from SEBI on the scheme offer
document. Otherwise, a fresh offer document along with filling fees shall be filed
with SEBI.

•Mutual funds are required to disclose large unit-holdings in the scheme, which
are over 25% of the NAY.

Investing in Mutual Funds

Mutual funds normally come out with an advertisement in newspapers publishing

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

49
 INVESTOR’S BEHAVIOUR
An abridged offer document, which contains very useful information, is required to
be given to the prospective investor by the mutual fund. The application form for
subscription to a scheme is an integral part of the offer document. SEBI has
prescribed minimum disclosures in the offer document. An investor, before
investing in a scheme, should carefully read the offer document. Due care must
be given to portions relating to main features of the scheme, risk factors, initial
issue expenses and recurring expenses to be charged to the scheme, entry or exit
loads, sponsor’s track record, educational qualification and work experience of
key personnel including fund managers, performance of other schemes launched
by the mutual fund in the past, pending litigations and penalties imposed, etc.

INVESTORS OFTEN MAKE BAD INVESTMENT DECISIONS. AND

WHAT'S THEIR BIGGEST MISTAKE? NOT USING THE SERVICES
OF A PROFESSIONAL FINANCIAL ADVISER

The second half of the 1990s saw the rise of the self-directed investor who was
spurred on by the relative ease and growth of Internet trading and an
unprecedented bull market. However, many of these investors fell victim to bad
investment behavior — such as chasing performance or selling impulsively during
short-lived market dips — causing them to act contrary to their best financial
interests.

Financial Research Corp., a financial services research and consulting firm based
in Boston, studied mutual fund investor habits from 1990 through to the peak of
the equity markets in March 2000. Its research provides empirical evidence
showing how investors who work without a financial adviser are often their own
worst enemy.

Here, we look at some of the biggest errors committed by self-directed investors,

what influences their financial misbehavior, and offer solutions for financial
professionals to help their clients avoid making bad investment decisions.

Some of the most common errors that are made by individual investors include
trading too often and bad timing.

During the 10-year period of the study, unassisted investors realized a lower
return on their mutual fund investments than the actual mutual fund returns. The
study found that individual investors had consistently higher redemption rates and
shorter holding periods than investors who used a financial adviser. In 1996, the
average investor had held a long-term mutual fund for 5.5 years and the
redemption rate was 17.4%. Four years later, at the height of the boom market,
the typical investor held the same long-term mutual fund investment for an

50
average of only 2.9 years and the redemption rate was up to 32.1%. In addition,
individual investors compounded the negative effect of trading too often by
making poor choices in terms of timing.

The Financial Research study found that many investors purchase funds based
on past performance, usually when the funds are at or near their peak, which
results in the investors not participating in the greatest gains.

In 42 of the 48 Morning star mutual fund categories studied, higher net flows were
received into funds after their best performing quarters. Investors are missing out
on superior future potential returns because they consistently prefer to invest in
sectors that produced the best returns in the recent past.

Why people do the things they do?

Bad investment behaviour can be attributed to external and internal factors.

Externally, investors are influenced by factors they have no control over, such as
the three Ms — market, marketers and media.

The market

If the 1980s were kind to investors, then the 1990s could only be described as
incredibly generous. Never in the history of the stock market had investors seen
returns like the five, 10 and 20 years leading up to the end of the 20th century.
Some investors watched from the sidelines, wondering whether they were too late
to jump on the bandwagon. Those who did participate regretted not committing
more money to the market.

In either case, many investors witnessing this phenomenal period of performance

came to a seemingly reasonable conclusion that it is easy to make money in the
market. Ultimately, the fear of losing money was replaced with the fear of not
making money.

The marketers

Marketers have used a variety of tactics aimed at increasing assets and market
share. Much of this effort further perpetuated the notion that it is easy to make
money in the market. The technology available to access data about funds has
increased significantly. The tools and information available made it easy to
constantly trade between funds, fund families and even individual securities.
While this information is convenient and technically accurate, it masquerades as
knowledge to many investors. Raw data alone, for the majority of investors, can
only take them part of the way to making an informed financial decision.

The media

51
Prior to the 1990s, stock market news (if it made the nightly newscast at all) was
covered in a segment that ran significantly shorter than sports. During the 1990s,
with the explosion of mutual fund and stock market investors, market news found
its way into the headlines.

Headlines may grab the attention of the investor but when it comes to investment
products, the goal of the media should be to describe their function and ability to
consistently achieve their stated goals, not their temperature or popularity.
However, the best that investor publications can do is to offer unqualified advice
for the masses. This advice is not often tailored to an investor's personal financial
goals, age, investment experience, tolerance for risk or current holdings — all of
which are critical factors in determining the suitability of any potential investment.

Some analysts believe that the proliferation of investment information has

permanently shifted the volatility characteristics of the market, since investors are
more apt to trade to the constant barrage of "critical market information."

Internal factors
Behavioural finance has been receiving much attention in recent years. There is a
vast amount of research demonstrating that investors have a strong disposition to
make irrational investment decisions that undermine the achievement of long-term
goals despite their best intentions to pursue long-term financial goals. Bad
investment decisions can result from any of the following:

• Fear of Regret: - The inability to accept that a bad decision has been
made, which leads to holding on to losing investments too long or anxiety
after selling winners too soon.
• Myopic Loss Aversion: - The fear of losing money and the subsequent
inability to withstand short-term events and maintain a long-term
perspective. Investors can focus too closely on daily market events and the
fear of losing money that market volatility can produce instead of
considering that the long-term affect will likely be insignificant.
• Cognitive Dissonance: - In order to decrease emotional discomfort, these
investors will deny there is a problem with a choice they have made, even
when it is obvious. They become paralyzed and are unable to take
corrective action.
• Representative Ness; - In an effort to classify things quickly, the brain
tends to assume that items with similar traits are likely to be identical,
despite the fact they are, in reality, quite different. If investors have made a
decision that a stock is good, they will continue to classify the stock as
good well after its performance sours. These investors could overreact to
past negative information and under react to positive information, such as
valid signs of market improvement.
• Overconfidence: - People can have a tendency to overestimate their
abilities relative to others and investor overconfidence can blind them to the

52
 complicated environmental and emotional issues inherent in stock market
investing.
• Anchoring: - People tend to give too much credence to their most recent
experience and are reluctant to adjust their beliefs as new information warrants.
These investors take a position (or anchor), such as "the Nasdaq is the place to be,"
and will under react when new information challenges their beliefs.

Finding a solution
The best solution to overcoming bad investment behaviour is for an investor to
hook up with a financial professional. financial professionals have the education
that better equips them to interpret the flood of available financial data. They are
trained to objectively assess an investor's holistic financial profile and risk
tolerance level.

As an impartial third party, financial professionals lend an element of discipline to

help investors stick with their long-term plan, despite the many tempting but
illusory opportunities. There are many real-world solutions that financial
professionals can put into practice with their clients that will help avoid the effects
of bad investment behaviour.

Investment policy statement:

Clients and their financial advisers should develop an investment-policy statement
together. The statement should outline their investment objectives, including
return objectives and risk tolerance, and identify investment constraints such as
liquidity needs, time horizons, tax considerations and any unique circumstances.
These investment goals will in turn guide the investment selection process,
discourage random revisions and encourage rational long-term discipline.

Other solutions:

• Educate clients on bulls, bears and the nature of market turbulence. It can
be useful for clients who may be under- or overreacting to market forces.
• Speak in dollar terms. Clients are often less comfortable with high-risk
investments if they are informed of how much their portfolio could lose in
dollar terms rather than percentages.
• Allow clients to play a small portion. Helping clients set up online accounts
with discount brokers and a small portion of their portfolio allows clients to
fulfil the urge to play the market, while limiting potential losses. Position this
as the play money — funds that if are lost tomorrow will not impact their
financial planning goals.
• Be aware of your clients' daily activity and what they are doing in their
private portfolios. This allows you to stay on top of their investments and

53
 call them when risks are mounting. This level of concern for their financial
well-being will strengthen your relationship.
• Be firm. Remember the value you bring to your client relationship and stick
with your decisions. Advisers should not bend to clients' every desire.
Clients may say they want to gamble on a big return, but, in reality, many
find they are not so willing when they lose money. It is more important to
make reasonable returns for clients and have them angry with you for
missing the highest point in the market than it is to lose their money.

Unlike many individual investors who have full-time jobs, the No. 1 priority of an
investment professional is to help investors achieve their financial goals. In
addition to developing, implementing, monitoring and adjusting an investor's
financial plan, a financial professional adds tremendous value by helping investors
make the right decision during periods of uncertainty or increased volatility.

As financial professionals know, good investment decisions come from knowing

what not to do as much as knowing what to do.

STRUCTURE OF THE INDIAN MUTUAL FUND

INDUSTRY
The Indian mutual fund industry is dominated by the Unit Trust of India which has
a total corpus of Rs700bn collected from more than 20 million investors. The UTI
has many funds/schemes in all categories ie equity, balanced, income etc with
some being open-ended and some being closed-ended. The Unit Scheme 1964
commonly referred to as US 64, which is a balanced fund, is the biggest scheme
with a corpus of about Rs200bn. UTI was floated by financial institutions and is
governed by a special act of Parliament. Most of its investors believe that the UTI
is government owned and controlled, which, while legally incorrect, is true for all
practical purposes.

The second largest category of mutual funds are the ones floated by nationalized
banks. Canbank Asset Management floated by Canara Bank and SBI Funds
Management floated by the State Bank of India are the largest of these. GIC AMC

54
floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated
by the LIC are some of the other prominent ones. The aggregate corpus of funds
managed by this category of AMCs is about Rs150bn.

The third largest category of mutual funds are the ones floated by the private
sector and by foreign asset management companies. The largest of these are
Prudential ICICI AMC and Birla Sun Life AMC. The aggregate corpus of assets
managed by this category of AMCs is in excess of Rs250bn

Some of the AMCs operating currently are

Name of the AMC Nature of ownership

Alliance Capital Asset Management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Bank of Baroda Asset Management Company Limited Banks
Bank of India Asset Management Company Limited Banks
Canbank Investment Management Services Limited Banks
Cholamandalam Cazenove Asset Management Company Private foreign
Limited
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian

55
GIC Asset Management Company Limited Institutions
IDBI Investment Management Company Limited Institutions
Indfund Management Limited Banks
ING Investment Asset Management Company Private Limited Private foreign
J M Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management Company Limited Private Indian
Kothari Pioneer Asset Management Company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company Limited Institutions
Morgan Stanley Asset Management Company Private Limited Private foreign
Punjab National Bank Asset Management Company Limited Banks
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Banks
Share Khan Securities Pvt. Ltd. Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institutions
Zurich Asset Management Company (I) Limited Private foreign

RECENT TRENDS IN THE INDIAN MUTUAL

FUND INDUSTRY
The most important trend in the mutual fund industry is the aggressive expansion
of the foreign owned mutual fund companies and the decline of the companies
floated by nationalized banks and smaller private sector players.

Causal Factors For The Trend

Many nationalized banks got into the mutual fund business in the early nineties
and got off to a good start due to the stock market boom prevailing then. These
banks did not really understand the mutual fund business and they just viewed it
as another kind of banking activity. Few hired specialized staff and generally
chose to transfer staff from the parent organizations. The performance of most of
the schemes floated by these funds was not good. Some schemes had offered
guaranteed returns and their parent organizations had to bail out these AMCs by
paying large amounts of money as the difference between the guaranteed and
actual returns. The service levels were also very bad. Most of these AMCs have

56
not been able to retain staff, float new schemes etc. and it is doubtful whether,
barring a few exceptions, they have serious plans of continuing the activity in a
major way.

The experience of some of the AMCs floated by private sector Indian companies
was also very similar. They quickly realized that the AMC business is a business,
which makes money in the long term and requires deep-pocketed support in the
intermediate years. Some have sold out to foreign owned companies, some have
merged with others and there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new
practices such as new product innovation, sharp improvement in service
standards and disclosure, usage of technology, broker education and support etc.
In fact, they have forced the industry to upgrade itself and service levels of
organizations like UTI have improved dramatically in the last few years in
response to the competition provided by these.

The Indian mutual fund industry began with the formation of the Unit Trust of India
(UTI) in 1964 by the Government. UTI was formed as a non-profit organisation
governed under a special legislation, the Unit Trust of India Act, 1963. It had a
monopoly up to 1987 and during this period, UTI launched a series of equity and
debt schemes and established itself as a household name with assets under
management of Rs.4563 crore and unitholder accounts of slightly under 3 million
by mid 1987. UTI's growth continued up to 1996 when the strong entry of private
sector players saw its share of the market reducing sharply although UTI
continues to be a dominant force in the Indian financial services industry with
assets of over Rs. 67,000 crore as of December 31, 1999.

In 1987, the industry saw the entry of public sector mutual funds, i.e. funds
promoted by public sector banks and financial institutions, such as SBI, Canara
Bank, LIC and IDBI. Predictably they were given the brand of their promoters such
as SBI Mutual Fund, Canbank Mutual Fund, LIC Mutual Fund and IDBI Mutual
Fund. Other Public sector mutual funds also entered the market but UTI continued
to remain the dominant player with a share of 84% in 1991-92 (Source: H.
Sadhak: "Mutual Funds in India").

The Government first allowed private sector participation in 1993 and the
subsequent entry of a large number of players has made the industry very
competitive. The diagram below shows the three segments and a few of the
players in each segment.

57
 Figure 2: Indian Mutual Fund Industry Organization

The private sector players, after an indifferent start in the early years, have made
a strong impression especially in the larger cities, with a high quality of fund
management, sales and customer service. This sector has dented UTI's
dominance resulting in a falling market share towards the end of the last
millennium.

As on June 30, 2003 As on Sep 30, 2004

UTI 57.09% 53.60%
Bank Sponsored 3.66% 3.78%
Institutions 4.12% 4.46%
Private Sector 35.13% 38.16%
Total 100.00% 100.00%
Total (Rs. in crore) 97953 91811

58
 (Source - AMFI Update Jul-Sep 2004 Vol I Issue XIII)
Figure 3: Asset under Management

Today, the mutual fund industry boasts of a wide spread of schemes catering to all
types of investors. The table below gives a good idea of this diversity.

Number of Schemes (As on September 30, 2003)

Open Close End Assured Total
End Return
INCOME 85 28 29 142
GROWTH 96 15 - 111
BALANCED 31 4 - 35
LIQUID/MONEY MKT. 28 - - 28
GILT 24 - - 24
ELSS 19 52 - 71
TOTAL 283 99 29 411

Source - AMFI Update Jul-Sep 2004 Vol I Issue XIII

Figure 4: Number of Schemes

Although there are many schemes across different investment objectives, Income
Schemes account for almost half the corpus of the industry today as shown in the
table below.

Assets under Management as on September 30, 2003 (Rs. in crores)

Open Close End Assured Total
End Return
INCOME 28090 5533 17736 51359
GROWTH 6708 3675 - 10383
BALANCED 15674 224 - 15898
LIQUID/MONEY MKT. 9113 - - 9113
GILT 3415 - - 3415
ELSS 297 1346 - 1643
TOTAL 63297 10778 17736 91811

59
 Source - AMFI Update Jul-Sep 2004 Vol I Issue XIII

Figure 5: Asset Under Management

Although the mutual fund industry has made an impact in the Indian financial
services arena, we believe that we have barely scratched the surface. Going
ahead, we see mutual funds dominating the financial services landscape and
challenging banks in the larger cities and the smaller towns as more people
realise the simplicity and convenience of mutual funds.

UTI PERFORMANCE

Steady growth of mutual fund business in India in the four decades from 1964,
when UTI was set up is given in the table below

Aggregate Investment Aggregate Investment

Period (Year) Period (Year)
In Crores of Rs. In Crores of Rs.

1964-69 65 1992-93 46988.02

1969-74 172 1993-94 61301.21
1974-79 402 1994-95 75050.21

60
1979-84 1261 1995-96 81026.52
1986-87 4563.68 1996-97 80539.00
1987-88 6738.81 1997-98 68984.00
1988-89 13455.65 1998-99 63472.00
1989-90 19110.92 1999-00 107966.10
1990-91 23060.45 2000-01 90587.00
1991-92 37480.20 2001-02 94571.00

The downturn in the industry during 1996 to 1998 due to steep slump in the
securities market at that time and the fluctuations in recent years after 2000 is due
to problems faced by UTI. This is discussed in a later article

[Source: SEBI & AMFI]

Growth of Business Of UTI

Unit trust of India (UTI) is the India's largest Mutual Fund organisation. UTI
manages funds over Rs. 58,221 crore as on 30/6/2001 and over 41.80 million
investors account under 85 schemes.

UTI was set up in 1964 by an act of parliament and commenced its operation from
July 1964, with a view to encouraging saving and investment and participation in
the income, profit and gain accruing to corporation from the acquisition, holding,
management and disposal of securities.

UTI is a trust without ownership capital and independent Board of trustees. The
first scheme was Unit scheme 1964. The contributors of initial capital of Rs. 5
crore for US-64 scheme were RBI, LIC, SBI and some foreign banks. Under the
provision of the act, chairman of the board would be appointed by the
Government of India. Today it have 54 branch offices, 266 chief representatives
and about 67,000 agents. It provide complete range of services to its investors.

UTI has set up associate companies in the field of banking, securities, trading,
investor servicing, investment advice and training, meeting investor's varying
needs under a common umbrella.

i. UTI Bank Ltd. (1994)

ii. UTI Securities Exchange Ltd (1994)
iii. UTI Investors Services Ltd (1993)
iv. UTI Institute of Capital Market (1989)

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 v. UTI Investment Advisory Services (1988)
vi. UTI Mutual Fund Growth Schemes

According to data published by SEBI, the mutual funds have mobilised a gross
amount of Rs.61,241.23 crores during the financial year 1999-2000 as against
Rs.22,710.73 crores mobilised during the previous year 1998-1999.
After adjustment of repurchases and redemptions, there was an inflow of funds of
Rs.18,969.88 crores in the financial year 1999-2000 as against net outflow of
Rs.949.67 crores during the year 1998-99.

Further analysis of data shows that there was a net inflow of funds of
Rs.15,166.48 crores in case of private sector mutual funds compared to net inflow
of Rs.1,452.70 crores during the previous year 1998-1999. While there was a net
inflow of Rs.4,548.32 crores in case of UTI as against net outflow of Rs.2,737.53
crores during the previous year, there was a net outflow of Rs.744.92 crores in
case of other public sector mutual funds (as against net inflow of Rs.335.16 crores
during the previous year).

During the last four years UTI is facing severe crisis due to volatility in the interest
rate structures of the money market and falling scale of yields in its investment
against committed higher returns to the investors. Government of India has come
to the support of UTI and has worked out a package for meeting its commitments
and restructuring the same. These are discussed in detail in subsequent articles

Mutual fund flows -- Private sector funds in focus

PRIVATE sector mutual funds appear to still have the hold on the sector that they
established in the wake of the US-64 crisis two years ago.
The woes dogging the UTI in US-64 and in many assured schemes, and the
indifferent performance of the bank- and institution-sponsored funds created a
fertile ground for private sector funds to thrive.

The good performance of such funds as Alliance Capital, Birla Sun Life and
Kothari Pioneer (after a bad period in the mid-1990s) over a fairly long period also
provided investors with alternatives. The sustained good performance, backed by
better disclosures and improved service levels, ensured that private sector funds
attracted better investor interest.

The comeback by many funds in the dumps, such as Prudential ICICI, SBI Mutual
Fund, Apple Mutual Fund (now part of Birla sun Life) and 20th Century Mutual
Fund (now part of Zurich India), also helped improve investor perception about
private sector funds. The numbers tell the tale.

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Shifting asset base

As the Table shows, private sector funds now have a higher share in the assets
under management in the industry. It was inevitable that the share of the biggest
player -- the Unit Trust of India (UTI) -- would decline from the time when it had a
monolithic hold on the market. But the US-64 crisis ensured that the decline was
much faster.

Between March 1997 and October 2000 -- a period of 40 months -- the UTI's
share declined from 82.3 per cent to 64.8 per cent. And this happened at a time
when the level of assets under management in the industry rose 47.8 per cent,
from Rs 65,510 crore to Rs 96,837 crore. Collectively, the share of private sector
funds rose from 4.7 per cent to 27.3 per cent.

The growth rate in fund mobilisation also confirms the picture. The UTI, for all its
stress on mobilisation targets, managed a compounded annual growth of 4.3 per
cent in 1997-2000. This must be seen in the light of the Rs 12,000 crore raised by
its Monthly Income Plans in this period. If, despite this, the assets under
management are up by only Rs 9,000 crore, the pressures of
repurchase/redemption becomes clear. Since the US-64 corpus has also risen
after the crisis-driven redemption in 1998, numbers suggests pressures on other
UTI schemes too.

Bank-sponsored funds have actually seen an annual decline of 8.7 per cent in
assets under management driven by redemption of a few big schemes, such as
BOI Double Square Plus, and the absence of any notable inflows. The slew of
income products have ensured that LIC/GIC-sponsored funds have seen a
modest, 7 per cent growth.

In sharp contrast, private sector funds (Indian) have recorded compounded

annual growth rates of over 60 per cent. Those with an FII linkage (with a foreign
institutional investor as a partner) have seen growth rates in excess of 80 per
cent. The low base is certainly a factor. But, in absolute terms, private sector
funds have close to Rs 26,500 crore under management.

During the period, notwithstanding the sharp decline in the market, the assets
under management have increased. In the UTI, on the other hand, the assets
under management declined by around Rs 14,000 crore from a high of Rs 76,547
crore in March 2000. Income funds -- especially short-term -- provided an impetus
here for the private sector funds.

63
Big share in inflows

While in terms of assets under management, the UTI has a sizeable share of over
60 per cent, the trends in fresh inflows provide a clearer idea of the changes
underway in terms of investor preferences. From a share of 25 per cent in fresh
mobilisation three years ago, private sector funds now account for over 80 per
cent of fresh inflows. Between March 1997 and now, these funds collected Rs
92,031 crore -- almost twice the level of funds raised by the UTI (see Table).

But the story on the redemption side is equally interesting. Having raised
substantial sums of money, the private sector funds also had a larger outgo of Rs
69,265 crore. At the end of the day, the net accretion to the private sector funds

64
was almost three times the levels managed by the UTI, though the latter, as a
single fund, continues to be largest fund mobiliser, with a net accretion of Rs
8,451 crore.

Healthy competition

At the end of the day, the sums mobilised by way of fresh sales and redemption
highlight the intense activity in the industry and its rising importance. Aggregate
fresh mobilisation between 1997 and now were Rs 1,46,949 crore, and
redemption Rs 1,17,500 crore. Add the activity of the FIIs, which have become
bigger and bigger traders, and the growing role of institutional investors in the
Indian debt and equity markets becomes clearer.

From the point of view of the UTI, the loss in market share and the rising number
of players is a good thing. It ensures better balance in the market place. And if the
private sector funds collectively grow larger from the present -- a prospect pretty
much on the cards -- the disadvantage of being the sole big player may be left
behind as far as the UTI is concerned.

This has implications for its investment performance. If the fund management is
handled objectively without extraneous pressures, the UTI may be able to effect
its buying and selling without as much of an impact cost as earlier. UTI buying and
selling has a big impact on prices, which run up or decline in a sharper manner,
affecting its performance. A better balance is now in the offing and that is good for
mutual funds, including the UTI and investors.

65
WITH the Sensex plunging from 6,000 levels to 4,500 and bouncing back to cross
6,000 & get 12,000 points, it was certainly a roller-coaster ride for the equity
market in 2004. Investors in equity mutual funds may still be dizzy from the ride,
but some might say it was worth it, going by the returns that funds delivered in
2004.

True, the performance was not as spectacular as in 2003, when the returns of
some of the top-performing funds were over 100 per cent. But equity funds still
outperform the indices by a wide margin, which makes them an attractive option
for the lay investor.

66
Beating the broader indices

That a majority of the funds outperformed the indices is not too surprising. After
all, funds have, over the years, found it fairly easy to beat the Sensex and the
Nifty by spotting better investment opportunities outside the indices.

The average return recorded by equity funds in 2004 was 23 per cent, beating the
Sensex's 12-per-cent return and the Nifty's 9 per cent, by a wide margin. Of the
131 equity funds analysed by Business Line, more than 80 per cent beat the
Sensex and over 90 per cent the Nifty.

If this is not a stellar performance in itself, returns against the BSE-200 and the
S&P CNX 500, which encompass a broader range of stocks, is noteworthy. More
than 70 per cent of the funds outperformed the S&P CNX 500, a tough benchmark
that returned 16 per cent during the year.

Top performing funds

The funds that made it to the top took a more aggressive approach in their
investment style, by way of enhancing exposure to mid-cap stocks and taking a
more focused approach to sector selection. Relatively new funds, such as UTI
Dynamic Equity, HSBC Equity, Sundaram Midcap and Birla Dividend Yield Plus,
also raced to the top quartile of the performance list.

But sticking to funds with a consistent, long-term track record such as, HDFC Tax
Saver, Franklin Prima and HDFC Top 200, would have also paid off, with these
funds also figuring in the top quartile.

Tax-saving funds emerged winners in 2004, with three of the top ten funds falling
in this category. On an average, tax saving funds delivered returns of 25 per cent.

Taking into account the savings on the tax outgo as well, these funds would have
earned a tidy return on investments. Their superior performance is partly due to
their small and relatively stable asset base, which allows the fund manager
greater maneuverability compared to other diversified funds that do not have a
three-year lock-in period and are, hence, subject to larger inflows and outflows.

67
Mid-caps boost performance...

A generous allocation to mid-caps was a common trend among most of the

diversified equity funds that made it to the top quartile of rankings.

To put things in perspective, the CNX Mid-cap 200 jumped 42 per cent in 2004;
the Nifty's 9 per cent pales in comparison. Funds such as Alliance Buy India,
HDFC Long Term Advantage (HDFC Tax Plan 2000) and HDFC Tax Saver, which
are among the top five, had portfolios packed with mid-cap stocks.

Mid-cap funds, too, turned in strong performances. Franklin Prima ranks first
among the mid-cap funds with returns of about 36 per cent — a sound
performance, given its large asset base.

Sundaram Mid-Cap and Birla Mid-Cap also delivered returns in excess of 30 per
cent. In contrast, the NAVs of their large-cap counterparts, Franklin Bluechip and
Sundaram Growth, rose 22 per cent and 26 per cent respectively.

68
… but are not the only drivers

Mid-cap funds, however, did not make it to the top ten. Sector selection would
also have played a role for funds that are not strictly mid-cap but yet managed to
outperform the latter.

What is more, a few funds with a fair degree of exposure to large-cap stocks, such
as HSBC Equity, Principal Growth Fund and Kotak-30, matched the performance
of these mid-cap funds.

The rally in large-caps towards the end of the year led to a surge in the NAVs of
these funds, so you would have been better off having both large-caps and mid-
cap funds in your core portfolio. Focusing strictly on mid-cap funds, therefore,
would not necessarily have given you the best returns and would also have
enhanced the risks associated with your investments.

Sector funds, a mixed bag

With more than one sector participating in the rally, diversified equity funds floated
to the top, while the performance of sector funds was mixed. The Reliance
Banking Sector Fund was the top-performer, while FMCG, pharmaceutical and IT
funds figured in the middle of the rankings.

Funds that focused on oil and petrochemical stocks, such as UTI Petro and JM
Basic, were the laggards.

Within sector funds too, there were differences in performance. For instance,
although FMCG stocks did not figure in the market rally, PruICICI FMCG Fund
delivered a return of 26 per cent, and figured in the top quartile of rankings.
Franklin FMCG fund, however, trailed with a return of 11 per cent.

However, with different sectors featuring as themes in the market across periods,
the timing of your entry would have been important. For instance, had you
invested in UTI Petro Fund six months ago, your investment would have grown
more than 35 per cent.

Focus on select sectors

With investor interest quickly flitting from sector to sector, diversified equity funds
were better placed to ride the different themes over the year. A focused approach
to sector selection also helped in the cases of SBI Magnum Tax Gain, Alliance
Buy India and SBI Magnum Contra.

Funds such as Alliance Buy India took concentrated exposures to mid-cap stocks
in the retailing and pharmaceutical sectors early on, which earned it a 50 per cent
return. SBI Magnum Contra, a sector fund that focuses on a few sectors that are

69
out of favour in a particular period, benefited from its large holdings in the
construction and cement sectors.

Concentrated exposures to sectors, however, increase the risk profile of these

funds, as the returns depend to a large extent on the performance of a few stocks
and sectors.

The laggards

The case for active investing was made yet again in 2004, with index funds
making up the bulk of the laggards list; their returns hovering at 6-9 per cent. Also,
indices in India are poorly constructed, with weights concentrated in select sectors
and stocks.

This is why most funds find it easy to beat indices by staying away from stocks
and sectors that are out of favour in the market, but have a high weightage in the
indices.

Other funds that made up the bottom quartile include JM Basic, Bonanza
Exclusive Growth, UTI Petro, PruICICI Growth and LICMF Tax Plan.

Overall, equity funds have weathered the different moods in the market well. Their
ability to withstand corrections and rebound quickly from lower levels strengthens
the argument for always having equity funds as a part of your investment portfolio.

Sticking to diversified equity funds with a good track record, such as HDFC Equity,
HDFC Top200 and Franklin Prima, would stand you in good stead, as it did in
2004.

IN THE past couple of months, a spate of mutual fund IPOs (initial public
offerings) mopped up more than Rs 1,000 crore from the market. The
overwhelming investor response to these IPOs is, in a way, indicative of the faith
in the fund managers' ability to outperform the market substantially (as they did in
2003), no matter how stormy the conditions in the bourses.

As it happens, the confidence was not misplaced. An analysis of mutual fund

performance in the July-September quarter reveals that funds have, indeed,
performed well, even in a relatively difficult market.

The benchmark indices — the Nifty and the Sensex — gained about 14 per cent and 15
per cent respectively over the quarter, while equity funds, on an average, recorded returns
of 16-17 per cent — nothing extraordinary compared to the performance in 2003, but good
enough considering the rather sedate pace of the market during

70
 this period. Of the 177 equity funds analysed by Business Line, 133 beat the Nifty, while
114 outpaced the Sensex.
Sector funds lose steam

In the April-June quarter, a good number of sector funds topped the list,
particularly those focused on the technology and pharmaceutical sectors. But, this
time, sector funds were missing from the top ten, giving way to diversified equity
funds.

With the rally witnessed across more than one sector, diversified equity funds
were better placed to cash in on such themes as engineering, chemicals,
electrical equipment and pharmaceuticals. These sectors figured prominently in
the portfolios of the top-performing funds.

Select sector and theme funds, however, did record a good performance, with UTI
Basic, SBI Contra, Prudential ICICI Tech Plan and UTI Pharma Fund generating
more than 20 per cent returns. But, even within a sector, funds turned in varying
performances.

For instance, while UTI Pharma managed 21 per cent, SBI Pharma turned in
about 9 per cent, reinforcing the importance of stock selection. Banking sector
funds, of course, lagged the list, with bank stocks being largely out of favour in
recent months.

Mid-cap focus pays off

A bias towards mid-caps certainly appears to have aided funds' performance. In

the July-September quarter, the CNX Mid-Cap 200 gained a whopping 29 per
cent. Mid-cap funds such as Sundaram Select Mid-Cap and Taurus Discovery
made it to the top ten.

Mid-cap funds were also ahead of their large-cap counterparts. For instance,
Sundaram Select Mid-cap generated a 30 per cent return, while Sundaram
Growth turned in 17 per cent. Again, the NAV of Franklin Prima appreciated about
21 per cent. Franklin Bluechip registered just 12 per cent during the quarter
underperforming the Sensex — perhaps for the first time.

Large-cap funds such as HDFC Equity, HSBC Equity and Franklin Bluechip have
swelling asset bases at more than Rs 1,000 crore, leaving them little flexibility to
invest in mid-cap and small-cap stocks. With hardly any action in the large-caps
this quarter, these funds turned in more modest performances than mid-cap-
focused funds.

71
Tax-saving funds race ahead

In contrast, tax-saving funds, with their smaller asset bases, were able to
capitalise on the mid-cap rally. Tax-saving funds turned in a strong performance
during the quarter, with an average return of 19 per cent.
Five of the top ten funds were tax-saving funds. Funds such as HDFC Tax Plan
2000 and Prudential ICICI Tax Plan were ahead of the pack with their strong mid-
cap bias.

Broader indices, tough to beat

Despite the focus on mid- and small-cap stocks, only 45 per cent of the funds beat
the 17 per cent return of the S&P CNX 500. This considerably lags the
performance in the April-June quarter, when more than 75 per cent of the funds
beat the index.

While mid-cap funds beat the CNX 500 with ease, they found outperforming the
CNX Mid-cap 200 — a more stringent benchmark — an uphill task. Mid-cap funds
such as Franklin Prima and Birla Mid-Cap trailed the CNX Mid-cap considerably.

Within the basket of mid-cap funds, there were divergent performances. Funds
that kept pace with the index, such as Sundaram Select Mid-cap, had large
holdings in engineering and chemicals sectors. Mid-cap stocks belonging to these
sectors sprinted during the quarter.

Franklin Prima and Birla Mid-cap, however, lacked a strong presence in these
sectors, which could explain their lagging performance. This, again, emphasises
the importance of investing in the right sectors and stocks to stay ahead of the
rest.

Large-cap focus drags performance

Funds heavily invested in large-caps, such as UTI MasterPlus, GIC D'MAT and
SBI Magnum Growth Fund, found themselves at the bottom of the list. Almost all
index funds were relegated to the last quartile of the fund rankings.

Funds such as LIC MF Index Fund had a substantial tracking error, turning in just
about eight per cent. Other index funds did generate returns that fell only slightly
short of the Nifty and the Sensex. Investing in actively managed funds is still a
better option than investing in index funds.

Diversified equity funds that were fairly heavily invested in banking stocks were
also dragged to the bottom of the pile. These include funds such as Principal
Equity Fund, Franklin India Bluechip, Alliance Frontline Equity and banking sector
stocks such as Reliance Banking Fund and UTI Banking Fund.

72
Other funds that trailed the indices include Birla Dividend Yield Plus and the
recently launched DSP ML T.I.G.E.R Fund, which turned in 12 per cent in its debut
quarter.

Leading funds such as HDFC Equity and HSBC Equity formed the middle rung in
the ranking list, with returns of about 19 per cent. These funds have, however,
been credited with consistency in performance, particularly HDFC Equity, which
has a longer track record.

Strategies such as taking concentrated exposures to stocks or sectors may have

helped performances in this quarter, but may not hold good in the long term. A
bias towards mid-caps during a mid-cap rally did not necessarily propel a fund to
the top of the list.

The performance of these funds would have to be viewed against their track
record and evaluated over a longer period, before fresh investments are
contemplated.

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 PROBLEMS
1. Problem of low retention and consequently low profitability, which is one of
the problems plaguing the business.
2. Equity did not find favor with investors since the market was lack-luster and
performances of funds, barring a few, were quite disappointing for
investors.
3. The industry did see spectacular growth in assets, particularly among the
private sector players, on the back of the continuing debt bull run.
4. Unfair trade allocations: Another major issue haunting mutual funds relates
to allocation of trades. Industry sources say that most mutual funds do not
have adequate systems and processes to ensure “fair” trade allocations.

MEASURES TO OVERCOME THESE

PROBLEMS
1. Mutual funds are required to maintain separate records for portfolio
transactions relating to each fund scheme. So that they can have adequate
systems and process to ensure “fair” trade allocations.
2. Retention of Mutual funds is to be increased. So that the MFs business can
grow with a rapid pace.
3. The investors are to be motivated to invest in Equity Funds.
4. More transparency should be exercised by the fund houses.

74
In India, mutual funds have a lot of potential to grow. Mutual funds companies
have to create and market innovative products and frame distinct marketing
strategies. Product innovation will be one of the key determinants of success. The
mutual fund industry has to bring many innovative concepts such as high yield
bond funds, principal protected funds, long short funds, arbitrate funds, dynamic
funds, precious metal funds, and so on. The penetration of mutual funds can be
increased through investor’s education, providing investor oriented value-added
service, and innovative distribution channels.

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

BIBLIOGRAPHY

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www.moneycontrol .com

www.valueresearch.com

www.nseindia.com

www.amfiindia.com

www.sharekhan.com

www.uti.com

www.sebi.com

Times Of India

Outlook MONEY : The Layman’s Guide To Mutual Fund

76