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MUTUAL FUNDS

CONTENTS
o o

INTRODUCTION. 2 OBJECTIVES OF MUTUAL FUNDS MUTUAL FUNDS HOW I T WORKS? RI GHTS OF A MUTUAL FUND HOLDER IN INDI A GLOBAL HI STORY INDIAN HI STORY

PAGE NO.
3 4

THE ASSOCIATION OF MUTUAL FUNDS IN INDIA AMFI. 6 o 8 HISTORY OF MUTUAL FUNDS9 o o 9 10

TYPES OF MUTUAL FUNDS.. 13 BUYING MUTUAL FUNDS.... 20 o o STEPS BEFORE BUYING BUYI NG MUTUAL FUNDS 20 23

SELECTING MUTUAL FUNDS25 o o DOs I N SELECTI NG A MUTUAL FUND DONTs I N SELECTI NG A MUTUAL FUND 25 26

ADVANTAGES OF MUTUAL FUNDS.. 27 DISADVANTAGES & RISKS IN MUTUAL FUNDS.. 32 SOME KEY TERMINOLOGIES..35 MUTUAL FUND ANALYSIS39 o o o o o o o UTI ASSET MANAGEMENT COMPANY LIMI TED UTI -DIVIDEND YEI LD FUND (G) PROVISIONAL AND UNAUDI TED PORTFOLI O DI SCLOSURE AS ON 31/10/2008. PORTFOLIO ANALYSI S SECTORWI SE ANALYSI S YEAR WI SE PERFORMANCE MEASURES TO BE ADOPTED BY MUTUAL FUND I NDUSTRY 39 40 42 45 46 47 48

PERFORMANCE OF MUTUAL FUNDS IN INDIA...51 A QUICK RECAP 52 BIBLIOGRAPHY. 53

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INTRODUCTION:-

utual funds have become extremely popular over the last 20 years. What was once just another obscure financial instrument is now a part of our daily lives. More than 80

million people, or one half of the households in America, invest in mutual funds. That means that, in the United States alone, trillions of dollars are invested in mutual funds. In fact, to many people, investing means buying mutual funds. After all, its common knowledge that investing in mutual funds is (or at least should be) better than simply letting your cash waste away in a savings account, but, for most people, that's where the understanding of funds ends. It doesn't help that mutual fund salespeople speak a strange language that is interspersed with jargon that many investors don't understand. Originally, mutual funds were heralded as a way for the little guy to get a piece of the market. Instead of spending all your free time buried in the financial pages of the Wall Street Journal, all you had to do was buy a mutual fund and you'd be set on your way to financial freedom. As you might have guessed, it's not that easy. Mutual funds are an excellent idea in theory, but, in reality, they haven't always delivered. Not all mutual funds are created equal, and investing in mutual funds isn't as easy as throwing your money at the first salesperson who solicits your business. A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests the ir money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

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A mutual fund is not an alternative investment option to stocks and bonds, rather it pools the money of several investors and invests this in stocks, bonds, money market instruments and other types of securities.

OBJECTIVES OF MUTUAL FUNDS:The funds objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance. Some popular objectives of a mutual fund are Fund Objective Equity (Growth):Debt (Income):Money Market (including Gilt):Balanced:Only in stocks Only in fixed- income securities In short-term money market instruments (including government securities) Partly in stocks and partly in fixed-income securities, in order to maintain a 'balance' in returns and risk What the fund will invest in

One can make money from a mutual fund in three ways:1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a cheque for distributions or to reinvest the earnings and get more shares.

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MUTUAL FUNDS HOW IT WORKS?

ach Mutual Fund can have different character and objectives. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. Mutual Funds issue units to the investors, which represent an equitable right in the assets of

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

Investors Passes back to Pool their money with

Returns

Fund Managers

Generates

Invest in

Securities

Figure 1 Working of Mutual Funds

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Mutual funds can be either or both of open ended and closed ended investment companies depending on their fund management pattern. An open-end fund offers to sell its shares (units) continuously to investors either in retail or in bulk without a limit on the number as opposed to a closed-end fund. Closed end funds have limited number of shares.

Mutual funds have diversified investments spread in calculated proportions amongst securities of various economic sectors. Mutual funds get their earnings in two ways. First is the most organic way, which is the dividend they get on the securities they hold. Second is by the redemption of their shares by investors will be at a discount to the current NAVs (net asset values).

Mutual funds work on the principle of pooling money from countless number of investors and investing in various instruments such as bonds, stocks and money market in short term instruments. This means investors who do not or were not able to buy shares from other buyers or from exchanges can buy shares/units of mutual funds that have purchased the same shares. Principally a fund trades, invests and redeems its holding of shares to maximize the returns on its investment and dividends. The entire earnings are shared among the share holders of a particular fund whose names are recorded in the books of the mutual fund on a given date (record date) though some funds have a different ways of sharing the dividends.

Buying mutual fund actually means investing in mutual funds and to a certain degree you can rest assured that you are safe at the hands of the best money managers. However even on your part, you need top make an investment decision when you buy shares of a particular mutual fund.

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THE ASSOCIATION OF MUTUAL FUNDS IN INDIA - AMFI

ith the increase in mutual fund players in India, a need for mutual fund association in India was generated to function as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have launched mutual fund schemes are its members. It functions under the supervision and guidelines of its Board of Directors.Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a professional and healthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and promoting the interests of mutual funds as well as their unit holders. AMFI is a trade body of all the mutual funds in India. It was incorporated in August 1995 as a non-profit organisation to promote and protect the interests of mutual funds and their unitholders, define and maintain high ethical and professional standards and enhance public awareness of mutual funds. All mutual funds in India are members of the association. AMFI works through committees_and_working_groups. Over the years, AMFI has worked closely with SEBI in establishing standards that match the best in the world. It has played a significant role in introducing best practices to reinforce the growth of the industry on healthy lines and protect the interests of the investors. One of the major initiatives of AMFI has been the introduction of certification programme for agent distributors. SEBI has mandated that all those engaged in sales and marketing of mutual fund schemes will be AMFI certified and registered. AMFI has brought out a detailed workbook on mutual funds based on which it conducts computerized testing through National Stock Exchange test centers. It also organizes written examinations in different languages. Till date over 31000 agent distributors have passed the test. AMFI compiles and publishes data on a monthly and quarterly basis. It has a quarterly publication "AMFI update" which summarises major developments in the mutual fund industry and changes in the regulatory framework.

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The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has certain defined objectives which juxtaposes the guidelines of its Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a high professional and ethical standard in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct which is followed by members and related people engaged in the activities of mutual fund and asset management. The agencies who are by any means connected or involved in the field of capital markets and financial services also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund industry.

Association of Mutual Fund of India does represent the Government of India, the Reserve Bank of India and other related bodies on matters relating to the Mutual Fund Industry.

It develops a team of well qualified and trained Agent distributors. It implements a programme of training and certification for all intermediaries and other engaged in the mutual fund industry.

AMFI undertakes all India awareness programme for investors in order to promote proper understanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate information on Mutual Fund Industry and undertakes studies and research either directly or in association with other bodies.

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RIGHTS OF 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. 7. 75% of the unit holders can pass a resolution to wind-up the scheme. An investor can send complaints to SEBI, who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved.

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HISTORY OF MUTUAL FUNDS.

GLOBAL HISTORY

utual funds are investment companies that pool money from investors at large and offer to sell and buy back its shares on a continuous basis and use the capital thus raised to

invest in securities of different companies. Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, it had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds represented less than $10 million in 1924. The stock market crash of 1929 hindered the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that a fund be registered with the Securities and Exchange Commission (SEC) and provide prospective investors with a prospectus that contains required disclosures about the fund, the securities themselves, and fund manager. The SEC helped draft the Investment Company Act of 1940, which sets forth the guidelines with which all SEC-registered funds today must comply. With renewed confidence in the stock market, mutual funds began to blossom. By the end of the 1960s, there were approximately 270 funds with $48 billion in assets. The first retail index fund, First Index Investment Trust, was formed in 1976 and headed by John Bogle, who conceptualized many of the key tenets of the industry in his 1951 senior thesis at Princeton University. It is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets. A key factor in mutual- fund growth was the 1975 change in the Internal Revenue Code allowing individuals to open individual retirement accounts (IRAs). Even people already enrolled in corporate pension plans could contribute a limited amount (at the time, up to $2,000 a year). Mutual funds are now popular in employer-sponsored "defined-contribution" retirement plans such as (401(k)s) and 403(b)s as well as IRAs including Roth IRAs.

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INDIAN HISTORY
The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in the year 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered the industry. In the past decade, Indian mutual fund industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under Management (AUM) was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April 2004, it reached the height of 1,540 bn. Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to be intellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market the product correctly abreast of selling.

FOUR PHASES OF MUTUAL FUND GROWTH 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. Second Phase: 1987-93 (Entry of Public Sector Funds) Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov

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89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets under management. 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 fund s, 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 compre hensive 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 This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). 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 AUM 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

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entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

The following growth phase diagram will sum up the above four phases in a nutshell: GROWTH IN ASSETS UNDER MANAGEMENT

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

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TYPES OF MUTUAL FUNDS

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. Being a collection of many stocks, an investors go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. The mutual fund schemes can be classified according to their investment objective (like income, growth, tax saving) as well as the number of units (if these are unlimited then the fund is an open-ended one while if there are limited units then the fund is close-ended). It is easier to think of mutual funds in categories, mentioned below:-

Structure

Nature

Investment

Other

Open Ended

Equity

Growth

Tax Saving

Close Ended

Debt

Income

Index

Growth/Equity Oriented

Balanced

Balanced

Sector Specific

Money

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[A]

MUTUAL FUNDS

BY STRUCTURE
1.

Open Ended

These funds are sold at the NAV based prices, generally calculated on every business day. These schemes have unlimited capitalization, open-ended schemes do not have a fixed maturity - i.e. there is no cap on the amount you can buy from the fund and the unit capital can keep growing. These funds are not generally listed on any exchange
2.

Close Ended

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 iss ue 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.
3.

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 fund s 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]

BY NATURE:1.

Equity Fund

These funds invest a maximum part of their corpus into eq uities holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows :

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i. ii. iii. iv.

MUTUAL FUNDS

Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon, thus Equity funds rank high on the riskreturn matrix.
2.

Debt Funds The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as :
i.

Gilt Funds:Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

ii.

Income_Funds: Income Funds invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

iii.

MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

iv.

Short_Term_Plans_(STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs)

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and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
v.

Liquid Funds Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

3.

Balanced funds : As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.

[C]

BY INVESTMENT OBJECTIVE:1. Growth Schemes Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. These funds seek to provide growth of capital with secondary emphasis on dividend. They invest in shares with a potential for growth and capital appreciation. Because they invest in well-established companies where the company itself and the industry in which it operates are thought to have good long-term growth potential, growth funds provide low current income. Growth funds generally incur higher risks than income funds in an effort to secure more pronounced growth. These funds may invest in a broad range of industries or concentrate on one or more industry sectors. Growth funds are suitable for investors who can

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afford to assume the risk of potential loss in value of their investment in the hope of achieving substantial and rapid gains. They are not suitable for investors who must conserve their principal or who must maximize current income. 2. Income Schemes Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and

corporate debentures. Capital appreciation in such schemes may be limited.

3.

Balanced Schemes Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer_documents_(normally_50:50).

4.

Money Market Schemes Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank_call_money.

[D]

OTHER SCHEMES:1.

Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.

2.

Index Schemes : Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of

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only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.

3.

Sector Specific Schemes : These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc.

The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.

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Objective Money Market Income

Open Ended Yes Yes

Close Ended No Yes

Time Horizon

Risk Profile

Equity (%) 0 0

Debt (%) 0-20 80-100

Short-Term Low Medium Long Term Long Term Long term Long term Low to Medium High Medium to high High

Money Market Inst./Others (%) 80-100 0-20

Growth Balanced Tax Saving

Yes Yes Yes

Yes Yes Yes

80-100 0-60 80-100

0-20 0-40 80-100

0-20 0-20 0-20

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns. For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesnt mean mutual fund investments risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

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BUYING MUTUAL FUNDS

STEPS BEFORE BUYING
Before investing in mutual funds a proper analysis is required. While all analyses' efforts are aimed at maximizing returns and minimizing risks, it is the latter that gains importance as the single most fundamental criterion to compare mutual funds. Investing in mutual funds is not a child's play unless one does a mutual funds' analysis. At least it is not as easy as picking top performers going by indices and investing in them. While all analyses' efforts are aimed at maximizing returns a nd minimizing risks, it is the latter that gains importance as the single most fundamental criterion to compare mutual funds.

FUNDAMENTAL OBJECTIVES OF INVESTMENT To begin with our mutual funds' analysis you need to be clear about the investment objectives you have, that is whether the objective is growth of capital or regular income. Whatsoever be the case, the basics of objective of investment are not to be forgotten. TIPS TO DO MUTUAL FUND ANALYSIS It is needless to say that you need to have some rudimentary knowledge of investing in stocks and securities apart from street smartness to research mutual funds. Here are a few tips for analysis before investing mutual funds. We will begin our exercise from the point you have collected all the relevant information about competing funds.

LOOK AT THE PORTFOLIO OF YOUR PICK OF FUNDS

Most of the plans will have invested in multiple stocks or securities for diversification. Critical point here is in what proportion they have invested in different stocks. Giving a higher weightage to a high returning stock leaves less opportunity for broader allocation and may back fire when market is bearish (plummeting steadily). Also higher returning stocks carry high element of risk.

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THE OPTIMUM PORTFOLIO SIZE

What should be the optimum portfolio size (assortment investments under one plan) for your pick of fund? Well, opinions are divided about this, but it is crucial to look into the specifics of stock bets and sectors you will be exposed to. Higher exposure to specific sectors may see you losing out on broad based rallies in the bourses (stock markets). Optimally 65 % to 85% may be allocated in stocks from different sectors for diversification plus growth and the balance being in typical bond and money market instruments.

IS YOUR PICK OF FUNDS REALLY DIVERSIFIED

Notice that the competing plans, though from different fund companies, perform almost on par as if they have a correlation. They indeed have. So, does it mean you have diversified by spreading your money amongst them? Well, think again. Similar plans have similar pattern of their holdings of stocks and with a similar portfolio. This means, in actual effect you are not diversifying. They all go up and down almost as if they do it in tandem. For clear diversification, pick those with different portfolios though they are similar plans (ex: growth, index or dividend paying etc).

TAKE A LOOK AT RISK FACTOR

Legendary investor Warren Buffett says risk results from putting money in stocks that are not among the best. It is not important how big a portfolio your plan has, instead how many of them are the best of the stocks. For example, a prospectus may tell you they invest in 50 stocks for a particular plan. But you can easily say not more than half of them are fundamentally good.

DON'T IGNORE EXPENSES

Every fund charges some kind of fees/loads to cover expenses. Then there are taxes to pay in most of the cases. Typical average expense charged by fund managers is 1.5% though there are funds that charge you as low as 0.2% also.

TRACK THE TRACK RECORD OF COMPANIES

To check mutual funds the shortest time frame you should check for is three year period. As mutual funds are long term investments, it is better to stick to a fund (plus its manager) that has shown consistent performance over long periods (a ten years time is the benchmark). A hot performance of a quarter or a year may suck investors who chase them but even for a short term investment, it is advisable that long term track records are important.

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WHO IS MANAGING YOUR FUND

Finally taking a look at the fund's manager should tell you why the fund is performing as it had. If a fund has a new manager at the helm of affairs after a strong five year performance, it is something to be cautious. Not that you should refrain from that company. Digging deeper into his historical abilities at managing funds throws light on his track record as a fund manager. There are times when you come out winners even with blind investing. But it pays to do a thorough research even in a bull market before investing. Now after seeing how analysis of mutual funds takes place & after coming to a conclusion that Mutual funds are indeed a better option, let us see when it is a ripe time to buy mutual funds.

IS THE TIME RIPE TO BUY MUTUAL FUNDS?

Buying mutual funds have never been difficult even considering the complexities involved in it. Mutual funds market has grown big enough in the last decade or so that it has almost always outperformed the stock market. Those of you who are looking to investing money in order that higher returns can be made must have concluded stock market is too hot for you especially so when you are a new and a novice investor. But sulking that you are losing out on action while others are walking to their banks merrily is not necessary. Take a look at the world of mutual funds. Mutual funds market has grown big enough in the last decade or so that it has almost always outperformed the stock market. Yes, there is big money to be made in mutual fund investment too provided you played your cards with aplomb.

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BUYING MUTUAL FUNDS

Buying mutual funds have never been difficult even considering the complexities involved in it. You can buy mutual funds as easily as 1-2-3. Here are the typical steps involved when you want to buy mutual funds You can buy mutual funds when mutual fund companies make initial public offerings. At

this time you will usually have to pay the basic face value and not the market dictated price that includes a premium as in many cases. Filling out an application form with a payment of some initial deposit is all it takes. Buying mutual funds called closed end funds is from stock exchanges. Closed end funds

are initially sold by fund companies in limited numbers and they are listed in a stock exchange to facilitate trading by investors. These will be usually at premium prices or as dictated by demands in the market (higher demands for various reasons attract higher premiums). Buying mutual funds called closed end funds is from stock exchanges. Closed end funds

are initially sold by fund companies in limited numbers and they are listed in a stock exchange to facilitate trading by investors. These will be usually at premium prices or as dictated by demands in the market (higher demands for various reasons attract higher premiums). You can also buy mutual funds (open end funds - funds purchasable perpetually from the

company). Here the price at which you buy will be a figure called as NAV in the industry circles. This term stands for net asset value, a figure that denotes the current value of a share of the company after adding the earnings and deducting the expenses and taxes equally amongst all the number of shares.

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How do you mutual funds online? Most companies and banks that are in the mutual funds

business facilitate online buying of mutual funds to the ir customers. They need you to have a trading as well as a demat account and connect your bank account to this. You can log on to a broker's or the company's own trading internet portal to be able to buy online. Once online you can choose from the array of exchange traded mutual funds (ETF) and open end funds too. Your trades will be either credited or debited to your demat account (an account to hold dematerialized shares - electronic form of shares) instantaneously WHAT KIND OF FUNDS TO BUY AND HOW TO PICK FROM A HUGE POOL OF EXISTING FUNDS? Well. It is not easy to pick from a really huge pool of funds. Add to it the spate of new public offers every now and then, to make things worse. But you have your objectives in place. If it is making money, you sure would not want to go to money market funds in a big way. STOCK FUNDS FOR GROWTH You can bet a good chunk of your money on growth funds such as index funds and sector funds. These are also called as stock funds in a broader sense. Stock funds come in different varieties like index funds that invest and track specific index and sector specific funds that invest and track for example automotive sector. 401 (K) PLANS For retirement plans you can choose from many of the 401 (k) plans. These funds appreciate in value over long periods and carry lesser risk compared to growth funds. It is a tailor made fund for those looking for safer investment for retirement. The advantage here is your employer makes an equal contribution to yours and your contribution is fro m your before-tax salary. Your account will not be taxed until you withdraw thus paving way for faster growth. BALANCED FUNDS These Funds allocate assets in predetermined proportions among government securities for safety and in stocks for rapid growth. Investment in stocks grows rapidly while government securities give a sort of cushion with their definite but slow growth.

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SELECTING MUTUAL FUNDS

Now after considering the method of how to select & which mutual funds to select, here are some DOS & DONTs which are a MUST to consider before buying in order to stay in a safe zone.

DOs IN SELECTING A MUTUAL FUND

1. Draw down your investment objective. There are various schemes suitable for different needs. For example retirement plan, capital growth etc. Also get clear about your time frame for investment and returns. Equity funds are not advisable for short term because of their long term nature. You can consider money market and floating rate funds for short term gains. This equals asking - What kind of mutual fund is right for me? 2. Once you have decided on a plan or a couple of them, collect as much information as possible on them from different sources offering them. Funds' prospectus and advisors may help you in this. 3. Pick out companies consistently performing above average. Mutual funds industry indices are helpful in comparing different funds as well as differe nt plans offered by them. Some of the industry standard fund indices are Nasdaq 100, Russel 2000, S&P fund index and DSI index with the latter rating the Socially Responsible Funds only. Also best mutual funds draw good results despite market volatility. 4. Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for all your short listed funds and how they affect your returns. Best mutual funds have lower cost out go. 5. Best mutual funds maximize returns and minimize risks. A number called as Sharpe Ratio explains whether a fund is risk free based on its expected returns compared against a risk free money market fund. 6. Some funds have the advantage of low minimum initial investments. You can start investing even with $250 a month. This is advisable for building asset bases over a long period with small regular investments.

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DONTs IN SELECTING A MUTUAL FUND

Like there are pit falls in every investment sphere you must be careful about even while investing in mutual funds. Here is a list of don'ts you must consider for selecting best performing mutual funds
1.

Don't go by the past performance alone. For, an average of performance over a period will not tell you whether the performance is growing or at least maintained in the recent years.

2.

Don't go by hearsay about the reputations of a fund. There are various rating agencies which index the mutual funds regularly based on multiple factors. It forms your first step in finding the best performing mutual funds.

3.

Don't invest huge sums of money in a single fund or all the money in one go. Spread out your investments rationally. For example: Index funds for high returns, bond funds for lower risks, 401 (k) retirement plans and so on.

4.

Don't ignore absolute returns. NAVs and percentage growths don't fac tor- in the taxes and charges. Higher loads can diminish you in absolute returns. Some of the funds load you at both buying as well as selling. Even no load funds have fees such as Rule 12-b fees.

5.

Don't chase a mutual fund because it is performing great in a bull run in the stock market. Once the market stagnates or the trend reverses these funds will follow suit.

6.

Don't compare a mutual fund across the category. This means a diversified fund should not be compared with index fund. While choosing a best one compare funds from the same category regardless of the promoting companies. It is definitely not easy to pick a few best mutual funds from those in the market. It is like

searching for the proverbial needle in the stack of hay. However, a best mutual fund is one that charges low fees, that sticks to principles and investment styles, that puts your interest on top of everything else. The most important character of best mutual funds is they don't just know how to ride a bull run but also a bear market.

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ADVANTAGES OF MUTUAL FUNDS

1. Diversification: "Don't put all your eggs in one basket." We have all heard these words many times. In investing this is certainly true. If you invest your nest egg in the stock of a single company and something unforeseen happens, i.e., the company goes bankrupt, new technology makes the company's product obsolete, etc., you could wipe out your entire investment. A major attraction to mutual funds is the diversification they offer investors. A typical fund will have dozens, or perhaps, hundreds of different securities in their portfolio. A poor performance by one of the companies in the portfolio will have much less of an effect on the total return and safety of your principal. Every dollar you have invested in a mutual fund has this diversification. 2. Professional Management: Professional management is another key attraction to mutual funds. The average investor just does not have the time or experience needed to make informed and profitable decisions. Fund managers perform extensive economic and financial research. They may visit dozens or hundreds of companies and talk with hundreds of top business executives in a years time. They study balance sheets, trade publications, research reports, marketing reports and a myriad of other financial data. When you buy shares in a mutual fund you are getting this professional management for a relatively very low fee. The typical management fee of a mutual fund is 1/2 of 1% of those funds assets on a yearly basis. On Rs. 5,000 investment, this is a yearly fee of Rs. 25.00/-. Professional money management has always been available to institutions and wealthy individuals. Now it is available to everyone through mutual funds.

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3. Low Cost Even if you had the time, the experience, and the knowledge necessary to profitably select your own stocks and the wherewithal to properly diversify, you cannot do it as cheaply as a mutual fund can. Even using discount brokers you will pay up to two percent or more in commissions - even more using a full service broker. You will pay again when you sell. Because they may buy millions of rupees worth of stock at a time, mutual funds are able to negotiate broker's fees to the bare minimum. 4. Ease of Recordkeeping: Mutual funds handle all the paperwork and recordkeeping necessary to keep track of your investment transactions. They will mail your dividend checks promptly or reinvest them in additional shares (the choice is yours). They will provide accurate year-end summaries of all your transactions for income tax purposes. If you ha ve any questions many are available 24 hours a day via a toll- free phone call. 5. Rupee-Cost-Averaging/ Systematic Investment: If you fear you will invest in a mutual fund right before the market goes into a nose dive, you should consider Rupee-cost-averaging. This is a technique of investing a set amount of money at regular intervals, monthly or quarterly, rather than a lump sum all at once. You invest the same amount of money regardless of whether the stock market is going up or down. In fact, this strategy will turn the ups and downs of the market into an advantage. Let's look at an example: Suppose you will have Rs.100.00/- available to invest for each of the next four months. You are interested in a mutual fund whose units are currently selling for Rs. 10.00/- each. You invest your initial Rs. 100.00/- and get 10 units in return. The next month, despite the fact the market dropped - your units are now trading at Rs. 5.00/- you again invest your Rs. 100.00/- and this time you receive 20 units. Let's assume by the next month the market has recovered and the shares are again trading at Rs. 10.00/-. You invest your Rs. 100.00/- and receive 10 units. The next month finds the market continuing its rise and your units are now selling for Rs. 12.50/-. You invest your Rs. 100.00/- and receive 8 shares.

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Let's see how you have done:

Month 1 2 3 4 TOTAL

Investment (In Rs.) 100 100 100 100 400

NAV 10.00 05.00 10.00 12.50

Units Purchased 10 20 10 8 48

Average unit cost Rs. 8.33/- (Rs. 400 / 48 units) Ending unit NAV Rs.12.50/You have invested a total of Rs.400.00/- and own 48 units at an average NAV of Rs. 8.33/- per unit. Your 48 units are worth a total of Rs. 600.00/- you have made a profit of Rs. 200.00/- in a mixed market. Investing A Lump Sum: Single Investment (In Rs.) 400 Units Purchased 40

NAV 10

Average unit cost - Rs. 10.00/- (Rs. 400 / 40 units) Ending unit NAV - Rs. 12.50/Had you invested the whole Rs. 400.00/- in the first month you would have received 40 units at the price of Rs. 10.00 each. Those units would now be worth Rs. 500.00/- for a gain of Rs. 100.00/-. Certainly a good return (using our example) but only 50% as well as using Rupee-costaveraging.

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Rupee-cost-averaging guarantees that you will always buy more units when the price of the units are lower and less units when the price is higher. It doesn't take a lot of brilliance or hard work just discipline. You must invest the same amount every month (or every quarter). 6. Liquidity: Mutual fund investors can cash in their shares at any time and receive the current value of their holdings. The fund is always ready to redeem (buy back) its shares. Most funds will allow you to use a wire transfer to transfer the funds directly to your bank account. Many funds also have a check writing privilege - if you need your money in a hurry, simply write a check. Many funds also provide for redemption via a toll- free phone call. 7. Family of Funds: Many mutual funds are part of a "family of funds" (a group of funds managed by the same company but with different investment objectives). The advantage to this is an option known as an exchange privilege or fund switching. Fund switching has become quite popular as fund companies have made it easy to move your money from one fund to another, usually with only a toll- free telephone call. Switching is an easy and convenient way to take advantage of changing market conditions. If the stock market began to decline, for instance, and your money was in a stock fund, you might consider switching your investment into a money market fund within the same family. 8. Convenience: Mutual fund shares are easy to buy. Generally, no- load funds have a toll- free number an investor (or potential investor) can call for information. Some fund companies have even set up retail centers for investors. Many have payroll deduction plans and some funds, with proper authorization, will deduct and invest on a regular basis a specified a mount from the shareholder's bank account.

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9. Tax Benefits: 100% Income Tax exemption on all Mutual Fund dividends. Capital Gains Tax to be lower of 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit. Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are exempt from the payment of dividend tax for a period of 3 years from 1999-2000.

10. Transparency Mutual Funds regularly provide investors with information on the value of their investments. They also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each type.

11. Spreading Risk: An investor with limited funds might be able to invest in only one or two stocks/bonds. A fund normally invests in companies across wide range of industries, so the risk is diversified.

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DISADVANTAGES & RISKS IN MUTUAL FUNDS

utual 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:-

1. Market risk If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance.

2. 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 d iversified portfolio that consists of a wide variety of stocks drawn from different industries.

3. 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.

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4. 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.

5. No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money.

6. Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.

7. Taxes: When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gains tax is triggered, which affects how profitable the individual is from the sale. During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made. It might have been more advantageous for the individual to defer the capital gains liability.

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8. Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.

9. Dilution It's possible to have too much diversification. Because funds have small holdings in so many different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.

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SOME KEY TERMINOLOGIES

1. 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. o The NAV describes the company's current asset and liability position. Investors might believe that the company has significant growth prospects, in which case they would be prepared to pay more for the company than its NAV. o The current value of a company' s assets may be higher than the historical financial statements used in the NAV calculation. o Certain assets, such as goodwill (which broadly represents a company's ability to make future profits), are not necessarily included on a balance sheet and so wil l not appear in an NAV calculation. NAV is one of the valuation indices of REITs and be defined as the total value of assets held by an investment corporation less total liabilities. Normally, it is quoted on a per investment unit basis where the value is divided by the number of total outstanding investment units. In simple terms, NAV is an adjusted net asset value reflecting the market values of real estate properties held by an investment corporation. The degree of premium/discount on individual investment unit prices relative to the per- unit NAV serves as the yardstick for assessment.

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2. 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 between 1.00% 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 investor invests 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. 3. SALE PRICE Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. 4. REPURCHASE PRICE Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

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5. AVERAGE ANNUAL RETURN US mutual funds use SEC form N-1A to report the average annual compounded rates of return for 1-year, 5-year and 10-year periods as the "average annual total return" for each fund. The following formula is used: P*(1+T) n = ERV Where: P = a hypothetical initial payment of $1,000. T = average annual total return. n = number of years. ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion). 6. TURNOVER Turnover is a measure of the fund's securities transactions, usually calculated over a year's time, and usually expressed as a percentage of net asset value. This value is usually calculated as the value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and another one bought as one "turnover". Thus turnover measures the replacement of holdings. In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio is calculated based on the lesser of purchases or sales divided by the average size of the portfolio (including cash).

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7. REDEMPTION PRICE Is the price at which open-ended schemes repurchase their units and closeended schemes redeem their units on maturity. Such prices are NAV related. 8. EXPENSE RATIO AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management. A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.

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MUTUAL FUND ANALYSIS

UTI ASSET MANAGEMENT COMPANY LIMITED
Jan 14, 2003 is when UTI Mutual Fund started to pave its path following the vision of UTI Asset Management Company Limited, who has been appointed by the UTI Trustee Pvt. Limited Co. for managing the schemes of UTI Mutual Fund and the schemes transferred/migrated from the erstwhile Unit Trust of India. The UTI Asset Management Company provides professionally managed back office support for all business services of UTI Mutual Fund (excluding fund management) in accordance with the provisions of the Investment Management Agreement, the Trust Deed, the SEBI (Mutual Funds) Regulations and the objectives of the schemes. State-of-the-art systems and communications are in place to ensure a seamless flow across the various activities undertaken by UTIMF. UTI AMC is a registered portfolio manager under the SEBI (Portfolio Managers) Regulations, 1993 on 3rd February 2004, for undertaking portfolio management services and also acts as the manager and marketer to offshore funds through its 100 % subsidiary, UTI International Limited, registered in Guernsey, Channel Islands. Assets Under Manage ment UTI Asset Management Company presently manages a corpus of over Rs. 38,358 Crores* as on 31st October 2008. UTI Mutual Fund has a track record of managing a variety of schemes catering to the needs of every class of citizenry. It has a nationwide network consisting 103 UTI Financial Centres (UFCs) and UTI International offices in London, Dubai and Bahrain. With a view to reach to common investors at district level, 1 satellite offices have also been opened in select towns and districts. We have well-qualified, professional fund management teams, who have been highly empowered to manage funds with greater efficiency and accountability in the sole interest of unit holders. The fund managers are also ably supported with a strong in-house securities research department. To ensure better management of funds, a risk management department is also in operation.

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UTI-DIVIDEND YEILD FUND (G)

(An Open Ended Growth Fund) The investment objective of the Scheme is to provide medium to long Investment Objective term capital gains and / or dividend distribution by investing predominantly in equity and equity related instruments, which offer high dividend yield. Types of instruments Asset Allocation Patte rn of the Scheme High dividend yield equity & equity related instruments Other equity and equity related instruments Debt & Money Market Instruments Plans and Options Normal Allocation (% of Net Assets) 65-100% 0-35% 0-10%

Growth Option and Dividend Option with Payout and Reinvestment facilities. Systematic Investment Plan (SIP), Systematic Transfer Investment Plan (STRIP) and Automatic Trigger facilities are available. Minimum initial investment is Rs. 5,000/- and any amount thereafter. Subsequent minimum investment under a folio is Rs. 1,000/- and in multiples of Re.1/- thereafter with no upper limit. 827.07 (As on 31st October,2008) 03-May-05

Facilities Offered Minimum Application Amount/Number of Units Asset Size (Rs in Cr.) Launch date

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Entry Load Exit Load Load Comme nts

2.25% 0.00% Entry load of 2.25% for investments less than Rs 25 lacs and 0.50% for investments above Rs 25 lacs but less than 2 crores. Dividend distribution, if any, under the scheme will be made subject

Dividend Policy

to availability of distributable surplus and other factors and a decision is taken by the Trustee to make dividend distribution.

Name of the Fund Manager

Swati Kulkarni

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PROVISIONAL AND UNAUDITED PORTFOLIO DISCLOSURE AS ON 31/10/2008.

(Market value in Lacs) NAME OF THE INSTRUMENT [A] Equity ONGC Ltd. ITC Ltd. GAIL (India) Ltd. Indian Oil Corporation Ltd. Infosys Technologies Ltd. HDFC Ltd. State Bank Of India Hindustan Unilever Ltd. Great Eastern Shipping Co. Ltd. Tata Chemicals Ltd. ICICI Bank Ltd TCS Ltd. Sesa Goa Ltd. I C I (India) Ltd. Axis Bank Ltd. Bajaj Auto Ltd. Indian Bank Deepak Fertilizers & Petrochem. Union Bank Of India Glaxosmithkline Pharma. Ltd. Procter & Gamble Hel Care Ltd. Oil Non Durables Gas Petroleum Software Finance Banks Non Durables Transportation Fertilizers Banks Software Minerals/Mining Non Durables Banks Auto Banks Fertilizers Banks Pharmaceuticals Non Durables 555,000 2,367,878 1,438,245 832,969 200,000 127,268 191,140 937,079 900,000 1,050,000 400,000 272,477 1,600,000 317,954 220,000 209,739 892,125 2,063,301 878,529 99,487 149,135 3,713.51 3,673.76 3,087.19 2,817.93 2,777.90 2,245.90 2,121.08 2,077.97 1,980.90 1,666.35 1,595.00 1,464.56 1,289.60 1,274.84 1,238.49 1,142.87 1,142.37 1,134.82 1,095.96 1,078.39 1,062.21 4.49 4.44 3.73 3.41 3.36 2.72 2.56 2.51 2.40 2.01 1.93 1.77 1.56 1.54 1.50 1.38 1.38 1.37 1.33 1.30 1.28 INDUSTRY QTY MKTVALUE % TO NAV

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Gujarat Mineral Dev Corpn. Ltd. Clariant Chemicals (India) Ltd. Bharat Electronics Ltd. Reliance Industries Ltd. NTPC Ltd. Marico Ltd. Indian Hotels Company Ltd. Tata Power Company Ltd. Punjab National Bank Indian Overseas Bank Ltd Great Offshore Ltd. Power Finance Corporation Ltd. Gujarat Inds.Power Co.Ltd. Mahindra & Mahindra Ltd. Hero Honda Motors Ltd. Chambal Fertilizers Ltd Cummins India Ltd. Steel Authority Of India Ltd. NIIT Technologies Ltd. Shipping Corpn. Of India HCL Technologies Ltd. Electro Steel Castings Ltd. Greaves Cotton Ltd. Birla Corporation Limited. Colgate Palmolive India Ltd. Essel Propack Ltd Ranbaxy Laboratories Ltd.

Minerals/Mining Chemicals Capital Goods Petroleum Power Durables Hotels Power Banks Banks Oil Finance Power Auto Auto Fertilizers Industrial Prod. Ferrous Metals Software Transportation Software Industrial Prod. Industrial Prod. Cement Non Durables Industrial Prod. Pharmaceuticals

2,035,212 566,297 160,419 70,000 681,402 1,817,991 1,922,963 121,850 199,105 1,037,527 227,557 720,849 1,532,151 170,000 84,602 1,377,358 287,643 626,948 785,509 474,878 217,935 2,142,416 340,000 329,337 67,016 1,832,232 80,969

1,001.32 975.73 974.47 962.82 961.46 891.72 885.52 840.28 837.63 762.58 753.44 748.60 645.04 636.65 630.62 620.50 587.22 530.40 500.76 398.90 376.81 362.07 344.76 263.80 254.39 246.44 136.64

1.21 1.18 1.18 1.16 1.16 1.08 1.07 1.02 1.01 0.92 0.91 0.91 0.78 0.77 0.76 0.75 0.71 0.64 0.61 0.48 0.46 0.44 0.42 0.32 0.31 0.30 0.17

Total: Equity and Equity related

[A]

56812.17

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[B] Others/Unlisted Tata Steel Ltd. (Pref. Shares) Total: Othe rs/Unlisted [C] Short Term Deposits UCO Bank State Bank Of Indore Vijaya Bank Stock Holding Corpn Of India Ltd Oriental Bank Of Commerce Total :Short Term Deposits [C] Cash/Call Net Current Assets Total :Cash/Call [D] 0 18195.87 18195.87 21.99 [C] 0 0 0 0 0 5000.00 1500.00 900.00 135.00 89.00 7624.00 6.05 1.81 1.09 0.16 0.11 Ferrous Metals [B] 238,500 75.01 75.01 0.09

TOTAL :UTI - Dividend Yield Fund [A+B+C+D]

82707.05

Notes:a) Total NPAs provided for 0 lacs i.e.0 % to NAV b) Total value of non-traded Equity shares: 0 lacs i.e.0 % to NAV c) NAV at beginning of half year: 96858.59 lacs NAV at end: 82707.05 lacs d) Outstanding Exposure in derivative instruments: Rs. 7367.22 lacs e) Total investments in foreign securities/ADRs/GDRs: NIL f) Average Portfolio maturity (years): 0.0082 g) Portfolio Turnover (%): 80.87

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PORTFOLIO ANALYSIS
Asset Allocation Equity Others/Unlisted Short Term Deposits Cash / Call (%) 68.70 0.09 9.22 21.99

Asset Allocation
68.70
21.99

Equity Others/Unlisted

Short Term Deposits

9.22 Cash / Call

0.09

Notes:The above data reveals that during tough times of the Equity Market, the UTI Dividend Yield Fund has been diversifying towards its maximum limit of holdings in Debt and Money Market Instruments. 1. On the other hand, its holdings in the Equity Sector has been falling towards its minimum limit of 65% 2. The above observations conclude that even during tough times, the fund has capability to yield returns as compared to other equity related mutual funds.

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SECTORWISE ANALYSIS

Sector (%)
Banking/ Finance Oil & Gas Non-Durables Software Technology Petroleum Fertilizers Others 20.73 13.27 16.22 9.01 6.64 6.00 28.13

Sector-wise Analysis
28.13 6.00 Banking/ Finance 20.73 Oil & Gas Non-Durables 6.64 9.01 Software Technology Petroleum

13.27
16.22

Fertilizers Others

Notes:The banking system in India is the most extensive. The total asset value of the entire banking sector in India is nearly US$ 270 billion. The total deposits are nearly US$ 220 billion. Banking sector in India has been transformed completely. Presently the latest inclusions such as Internet banking and Core banking have made banking operations more user-friendly and easy. Non-durables industry do not generally suffer from the market actions. They are based on the products consumed daily. Hence it is the least affected sector in current market situation.

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YEAR WISE PERFORMANCE:-

YEAR 2008 2007 2006 2005

Q1 -27.4 -0.9 14 -

Q2 -8.6 18.4 -18.6 -1.1

Q3 15.3 21 19.8

Q4 27.3 4.1 8.3

ANNUAL 69.5 19.9 29.8

RELATIVE SHOWING UTI DIVIDEND YIELD FUND & SENSEX

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MEASURES TO BE ADOPTED BY MUTUAL FUND INDUSTRY.

or any Mutual Fund industry / organization; Unit Trust of India in our example, SEBI has laid down some guidelines or measures which will ensure orderly growth of Mutual Funds

industry / organizations. Following are the guidelines or measures:

Ponzi schemes are not new for Indias financial sector. The countrys first mutual fund scheme US64 managed by UTI which ran into a crisis in mid 2000 was seen as being operated like a Ponzi scheme. So is the employees pension scheme.

The Indian mutual fund industry, which has made considerable progress over the past four years, appears to have improvised on this as the recent experience of fixed maturity plans (FMP) show. Mutual Fund houses were almost running a quasi-Ponzi schemes through FMPs, whereby investors of the older FMP schemes were being repaid with the money invested by the investors in new schemes, as a fund manager admitted. It was this practice that the market regulator Securities and Exchange Board of India (SEBI) wanted to put an end to, when it revised rules to ensure that close-ended schemes cannot have assets with a maturity beyond that of the scheme. FMPs have been a rage with institutional investors as it combines tax advantages, superior returns and easy liquidity. Other than boosting their assets under management, these schemes are not very profitable for the fund houses that manage them. But a higher AUM, helps improve the valuation of fund houses. In a bid to woo investors into FMPs, fund houses would tacitly promise returns superior to those offered by an average fixed income product. To deliver these returns, fund houses would invest the money in securities that have a maturity period longer than that of the scheme. For instance, a one-year FMP scheme would invest in debt securities with a maturity period of 18 months. But a few days from the expiry of the first FMP, the fund house would launch a second one. Older investors would then be repaid with the money put by the investors into the new scheme. This went on smoothly for a long time, making FMPs very popular with institutional investors. But the cycle snapped abruptly in October 2008 with disastrous consequences, not just for the investors, but also for Indian credit market as a whole. Several fund houses came under severe pressure after institutional investors pulled out funds owing to a

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liquidity squeeze, as well as due the concerns about the quality of the assets in some of the schemes, especially FMPs. An early exit by large institutional investors can put fund managers in trouble as meeting redemption requirements at short notice is tough. At such times, fund managers are forced to resort to a fire sale of good assets early, which in turn hurts the existing investors in the fund. SEBIs measures blocking early exit by investors in close-ended schemes and restrictions on asset maturities will make corporate investors think twice before investing in fixed maturity plan (FMP) schemes of mutual funds, say industry participants. Investors in these schemes will continue to save on tax. The tax rate for corporate investors in liquid schemes is 28.3%, compared with 33% on bank fixed deposits. In the case of income, liquid plus and FMP schemes, the tax rate is even lower at 22.7%. However, the other two features of FMPs superior returns and easy liquidity have been blunted by the SEBI rules. Corporates invest in FMPs largely due to the liquidity it offers. With the new norms there will be absence of liquidity as closeended funds trade at steep discounts to the net asset value, said Value Research CEO Dhirendra Kumar. SEBI had taken note of the fact that most fund houses invested in securities that had a maturity period longer than that of the scheme, because of the high yields those papers offered. An assessment of MF portfolios by SEBI showed that some funds had 15-16% exposure to the real estate sector and nearly 5% to non-banking finance companies (NBFCs). MFs exposure in realty firms and NBFCs is through pass-through certificates. The consideration is that investments should be done in a proper way. Fund managers will have to structure their portfolio by buying assets that will mature along with the tenure of the scheme, said Amfi chairman AP Kurien. By making it mandatory for fund houses to list their close-ended schemes, SEBI is reverting to the policy of yesteryears. In the late 80s and early 90s, it was mandatory for asset management companies to list closeended schemes within six mont hs from the date of launch, so as to provide an exit options for investors. As the mutual fund industry evolved, openended funds gained popularity with investors, as they could enter and exit at will. Many AMCs began converting their close-ended schemes to open-ended ones, as they sought to draw more investors. There was a good reason for close-ended funds falling out of favour with investors lack of liquidity in the secondary market. In theory, these funds could be traded on the stock exchanges, but investor participation was low. Fund managers feel this situation will now be repeated.

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But industry experts say that the new regulations will usher in healthy practices. For one, it will help in attracting quality long-term assets under management (AUM) into the debt segment, which will be highly beneficial for retail investors. Usually, it is this class of investors that is affected the most due to the sudden withdrawals by institutional investors. New rule will also help fund houses plan their cash flows more efficiently since there is no danger of premature redemptions. Fund managers expect investors to flock to open-ended fixed income schemes. Traditionally, these schemes have performed well as they aim to capture interest rate movement across the yield curve, and across different debt instruments like G-Secs, T-bills, commercial papers, corporate deposits, corporate bonds and even credit spread. Fund managers say most investors have missed out on the gains in income funds, in their craze for FMPs. The new norms will also force fund houses to focus on profitability rather than merely assets under management. Among debt schemes, FMPs were the least profitable, with margins being negligible. Yet fund houses were keen to float such schemes in large numbers to attract as much funds as possible, and in turn boost their valuations. In the new scenario, policy makers and senior fund managers reckon that the changes could spell and end to the runaway growth that the mutual fund industry witnessed during the last few years. But there could well be a positive a much slower pace of growth but which could be far more sustainable.

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PERFORMANCE OF MUTUAL FUNDS IN INDIA:-

he following paragraphs will give an outline of the performance of Mutual Funds in India since its inception.

In the year 1963 Unit Trust of India invited investors or rather to those who believed in savings, to park their money in UTI Mutual Fund. For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992. This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, people were miles away from the preparedness of risks factor after the liberalization. The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performance of mutual funds in India through figures. From Rs. 67bn. the Assets under Management rose to Rs. 470 bn. in March 1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.The net asset value (NAV) of Mutual Funds in India declined when stock prices started falling in the year 1992. Those days, the market regulations did not allow portfolio shifts into alternative investments. There was rather no choice apart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market. The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses by disinvestments and of course the lack of transparent rules in the whereabouts rocked confidence among the investors. Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds trading at an average discount of 1020 percent of their net asset value. The supervisory authority adopted a set of measures to create a transparent and competitive environment in mutual funds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, and paving the gateway for mutual funds to launch pension schemes. The measure was taken to make mutual funds the key instrument for long-term saving. The more the variety offered, the quantitative will be investors. At last to mention, as long as mutual fund companies are performing with lower risks and higher profitability within a short span of time, more and more people will be inclined to invest until and unless they are fully educated with the dos and donts of mutual funds.

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A QUICK RECAP:o A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities. o The advantages of mutual funds are professional management, diversification, economies of scale, simplicity and liquidity. o The disadvantages of mutual funds are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return. o There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc. o Mutual funds have lots of costs. o Costs can be broken down into ongoing fees (represented by the expense ratio) and transaction fees (loads). o The biggest problems with mutual funds are their costs and fees. o Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party. o Mutual fund ads can be very deceiving.

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BIBLIOGRAPHY
1. Books/Handouts: The Stock market Journal UTI Fund Factsheet October 2008.

2. Web sites: http://moneycontrol.com http://amfiindia.com http://utimf.com

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