2009

MUTUAL FUND ANALYSIS & TRENDS

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF POST GRADUATE DIPLOMA IN MANAGEMENT. AT SHAREKHAN MUTUAL FUND LTD.

DEVKI NANDAN YADAYA GRADUATE SCHOOL OF BUSINESS & ADMINISTRATION 8/15/2009

TABLE OF CONTENTS
PREFACE ACKNOWLEDGEMENT OBJECTIVE OF PROJECT OBJECTIVE OF STUDY.6 SCOPE OF STUDY..7 LIMITATIONS.............................................................7 JOB DESCRIPTION.9

METHODOLOGY OF WORK RESEARCH DESIGN10 INTRODUCATION COMPANY OVERVIEW ABOUT SHAREHKAN 11-15

MUTUAL FUND

Introduction to Mutual Funds...17

ORGANISATION OF A MUTUAL FUND. 18 IMPORTANT CHARACTERISTICS OF A MUTUAL FUND18 OBJECTIVES OF A MUTUAL FUND18-19 ADVANTAGES OF MUTUAL FUNDS.19-20

INVESTORS PROFILE 21 TYPES OF MUTUAL FUNDS ..22-28

Investment norms 29-36

RISKS ASSOCIATED WITH MUTUAL FUND S..37 MUTUAL FUND INDUSTRY PHASES 41 PERFORMANCE MEASURES OF MUTUAL FUNDS. 42-46 MUTUAL FUND INDUSTRY ANALYSIS 53 4738-

NEW TRENDS OF MUTUAL FUND INDUSTRY. 5459 QUESTIONNAIRE.. 60-64 DATA REPRESENTATION 6573 MAJOR FINDING 75 RECOMMEDATIONDS76

Emergence of new business models 77 Global Practice.. 76-77

CONCLUSION.. 78 BIBLIOGRAPHY. 79

ACKNOWLEDGMENT Knowledge is an experience gained in life, it is the choicest possession, which should not be shelved but should be happily shared with others. I express my gratitude to my esteemed guide, Faculty guide Dr. Vivekanand Singh, NIMBUS ACADEMY OF MANAGEMENT for their valuable critiques, assistance and encouragement, which enabled me to carry on the project successfully. They gave me a wonderful opportunity to work on this project. Their time-to-time guidance and incessant support helped me to broaden my outlook on the project I am highly obliged for their support throughout the Training.
I would like to express my deep sense of gratitude to my Industry guide, Mr. Rakesh Kunwar, Asst. Manager Sales Sharekhan Ltd., Greater Kailash Branch, New Delhi, who spent his valuable time and guided me. I have benefited a great deal from his incisive analysis and erudite suggestions. The atmosphere of a learning organization that he has created along with his peers in Greater Kailash Branch has not only helped me but all the other trainees.

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

PREFACE

OBJECTIVE OF PROJECT

OBJECTIVE OF PROJECT
The Broad objective of the project is to make clients and let them know about the different services offered by the Sharekhan. Also to convince them about how Sharekhan services out score their rivals. And how in future they will be benefited from the services offered by Sharekhan. This project will accomplish to understand the problem faced by the existing client and find ways to solve their queries at your level otherwise let the above level know about their problem. Trainees have to be in regular contacts with their clients so they we come to know about the problem client are facing. This also helps them to multiply their clients by getting the further references. By this trainees are able to make a chain of the customers which expands as they satisfy their needs. 1. To study about the competitive position of Sharekhan Ltd in Competitive Market. 2. To study about the effectiveness & efficiency of Sharekhan Ltd in relation to its competitors 3. To study about whether people are satisfied with Sharekhan Services & Management System or not 4. To study about the difficulties faced by people while Trading at Sharekhan. 5. To project Mutual Fund as the productive avenue for investing activities.

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

SCOPE OF STUDY
To make analysis of. Mutual funds and their performance To make a comparative analysis of public sector & private sector. To serve Retail investors concern about the risk factor. To explain the Scope and methodology of mutual funds. Find out the growing investment opportunity for the investor in mutual funds The study will help the organization to formulate marketing strategies so that they can attract more customers/potential investors towards the company. To help the investors in getting out the most of their holdings in the stock market To help the analyst to know the effectiveness of the stock ideas provided by the organization.

LIMITATION OF STUDY
1. The study is limited only to the analysis of different schemes and its suitability to different investors according to their risk-taking ability. 2. The study is based on secondary data available from monthly fact sheets, websites and other books, as primary data was not accessible.

3. The study is limited by the detailed study of various schemes of different Asset Management Company. 4. Some respondents either do not have time or willing does not respond as they are quite annoyed with the phone call 5. Size of the research may not be substantial. 6. There was lack of time on the part of respondents. 7. There may be biasness in information by market participant.

JOB DESCRIPTION
The company placed me as a Summer Trainee. I have been handling the Following responsibilities: My job profile was to sale the products of the organization. My job profile was to coordinate the team and also help them to sale the product and also help them in field. My job profile was to generate the leads by cold calling. My job profile was to understand customers needs and advising them to make a portfolio as per their investment. My job profile was to do sales promotion through e-mails, canopies, making cold calling, distributing pamphlets and etc.

AREA ASSIGNED
I covered areas like Delhi, Ghaziabad and NCR.

TARGET ASSIGNED

To sell 10 accounts per month.

TARGET MARKET
Different properties dealers. Charted accountants. Lawyers Travel agencies Transport business House wives Businessmen Corporate Employees etc.

DAY TO DAY JOB DESCRIPTION Reporting time: 9.30 AM Fixing appointment with clients. Visit clients place. Demonstrate the product on Internet to the client. Completing the formalities like filling the application form and documentation. Cold calling.

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RESEARCH DESIGN
RESEARCH METHODOLOGY: The research methodology applied will be basically descriptive study. DATA COLLECTION: Data has been collected through literature survey and departmental opinion. The part of data is collected from various primary sources and secondary sources. DATA COLLECTION METHOD: The data is collected through both primary and secondary methods PRIMARY METHOD: Information gathered by feedback forms filled by and interview and discussions with the customer of various our area. SECONDARY METHOD: Secondary data is being collected through following methods; It will be collected through internal and external sources under internal source through the sharekhan site i.e. www.sharekhan.com and under external sources through use of

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canopies, advertisements, printed material of the company, brochures analysis is carried out.

COMPANY PROFILE

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ABOUT SHAREKHAN LIMITED

Sharekhan Ltd. is one of the leading retail stock broking house of SSKI Group which is running successfully since 1922 in the country. It is the retail broking arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the stock broking business. Sharekhan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc. The firms online trading and investment site - www.sharekhan.com - was launched on Feb 8, 2000. The site gives access to superior content and transaction facility to retail customers across the country. Known for its jargon-free, investor friendly language and high quality research, the site has a registered base of over one lakh customers. The content-rich and research oriented portal has stood out among its contemporaries because of its steadfast dedication to offering customers best-of-breed technology and superior market information. The objective has been to let customers make informed decisions and to simplify the process of investing in stocks. On April 17, 2002 Sharekhan launched Speed Trade, a net-based executable application that emulates the broker terminals along with host of other information relevant to the Day Traders. This was for the first time that a net-based trading station of this caliber was offered to the traders. In the last six months Speed Trade has become a de facto standard for the Day Trading community over the net.

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Sharekhans ground network includes over 640 centers in 280 cities in India which provide a host of trading related services. Sharekhan has always believed in investing in technology to build its business. The company has used some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial Technologies India Ltd, Spider Software Pvt Ltd. to build its trading engine and content. The Morakhiya family holds a majority stake in the company. HSBC, Intel & Carlyle are the other investors. With a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and corporate finance 18 years ago. Presently SSKI is one of the leading players in institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each of these segments. SSKIs 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 organizations 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 Shoppers Stop. PROFILE OF THE COMPANY Name of the company: Year of Establishment: Headquarter : Sharekhan ltd. 1925 ShareKhan SSKI A-206 Phoenix House Phoenix Mills Compound Lower Parel Mumbai - Maharashtra, INDIA- 400013 Service Provider Depository Services, Online Services and Technical Research. Over 3500 Data Not Available 14

Nature of Business Services

: :

Number of Employees : Revenue :

Website Slogan

: :

www.sharekhan.com Your Guide to The Financial Jungle.

Vision To be the best retail brokering Brand in the retail business of stock market. Mission To educate and empower the individual investor to make better investment decisions through quality advice and superior service. Sharekhan is infact Among the top 3 branded retail service providers No. 1 player in online business Largest network of branded broking outlets in the country serving more than 7,00,000 clients. REASON TO CHOOSE SHAREKHAN LIMITED

Experience SSKI has more than eight decades of trust and credibility in the Indian stock market. In the Asia Money broker's poll held recently, SSKI won the 'India's Best Broking House for 2004' award. Ever since it launched Sharekhan as its retail broking division in February 2000, it has been providing institutional-level research and broking services to individual investors. Technology With its online trading account one can buy and sell shares in an instant from any PC with an internet connection. One can get access to its powerful online trading tools that will help him take complete control over his investment in shares. Accessibility

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Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These services are accessible through its centers across the country over the internet (through the website www.sharekhan.com) as well as over the Voice Tool. Knowledge In a business where the right information at the right time can translate into direct profits, one can get access to a wide range of information on Sharekhan limiteds content-rich portal. One can also get a useful set of knowledge-based tools that will empower him to take informed decisions. Convenience One can call its Dial-N-Trade number to get investment advice and execute his transactions. Sharekhan ltd. have a dedicated call-centre to provide this service via a Toll Free Number 1800-22-7500 & 1800-22-7050 from anywhere in India. Customer Service Sharekhan limiteds customer service team will assist one for any help that one may require relating to transactions, billing, demat and other queries. Its customer service can be contacted via a toll-free number, email or live chat on www.sharekhan.com. Investment Advice Sharekhan has dedicated research teams of more than 30 people for fundamental and technical researches. Its analysts constantly track the pulse of the market and provide timely investment advice to its clients in the form of daily research emails, online chat, printed reports and SMS on their mobile phone. PRODUCTS AND SERVICES OF SHAREKHAN LIMITED The different types of products and services offered by Sharekhan Ltd. are as follows: Equity and derivatives trading Depository services Online services Commodities trading Dial-n-trade Portfolio management Share shops 16

Fundamental research Technical research

MUTUAL FUND

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Introduction to Mutual Funds

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

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A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual/corporate investors and invests the same on behalf of the investors/unit holders, in Equity shares, Government securities, Bonds, Call Money Markets etc, and distributes the profits. In the other words, a Mutual Fund allows investors to indirectly take a position in a basket of assets. Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread among a wide cross-section of industries and sectors thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at same time. Investors of mutual funds are known as unit holders. The investors in proportion to their investments share the profits or losses. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A Mutual Fund is required to be registered with Securities Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

ORGANISATION OF A MUTUAL FUND:

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

(For detailed definitions in the above chart refer to annexure 1) Mutual Funds diversify their risk by holding a portfolio of instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced. Mutual Fund investments are not totally risk free. In fact, investing in Mutual Funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced. A very important risk involved in Mutual Fund investments is the market risk. However, the company specific risks are largely eliminated due to professional fund management.

IMPORTANT CHARACTERISTICS OF A MUTUAL FUND

A Mutual Fund actually belongs to the investors who have pooled their Funds. The ownership of the mutual fund is in the hands of the Investors. A Mutual Fund is managed by investment professional and other

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Service providers, who earns a fee for their services, from the funds. The pool of Funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investors share in the fund is denominated by units. The value of the units changes with change in the portfolio value, every day. The value of one unit of investment is called net asset value (NAV). The investment portfolio of the mutual fund is created according to The stated Investment objectives of the Fund.

OBJECTIVES OF A MUTUAL FUND:

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

ADVANTAGES OF MUTUAL FUNDS:

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

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STRUCTURE OF A MUTUAL FUND

Sponsor

Trustee s

Mutual fund

ASSET MANAGEMENT COMPANY

Custodia n

Registra r

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

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analyze the companies financials more minutely than an individual can do as they have the expertise to do so. Moving up the risk spectrum, there are people who would like to take some risk and invest in equity funds/capital market. However, since their appetite for risk is also limited, they would rather have some exposure to debt as well. For these investors, balanced funds provide an easy route of investment, armed with expertise of investment techniques, they can invest in equity as well as good quality debt thereby reducing risks and providing the investor with better returns than he could otherwise manage. Since they can reshuffle their portfolio as per market conditions, they are likely to generate moderate returns even in pessimistic market conditions. Next comes the risk takers, risk takers by their nature, would not be averse to investing in high-risk avenues. Capital markets find their fancy more often than not, because they have historically generated better returns than any other avenue, provided, the money was judiciously invested. Though the risk associated is generally on the higher side of the spectrum, the return-potential compensates for the risk attached.

TYPES OF MUTUAL FUNDS:

Schemes By Structure Open-ended Fund/ Scheme Close-ended Fund/ Scheme Schemes by investment Objective Growth / Equity Oriented Scheme Income / Debt Oriented Scheme Balanced Scheme Money Market or Liquid Fund Scheme

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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 The holders of the shares in the Fund can resell them to the issuing Mutual Fund company at the time. They receive in turn the net assets value (NAV) of the shares at the time of re-sale. Such Mutual Fund Companies place their funds in the secondary securities market. They do not participate in new issue market as do pension funds or life insurance companies. Thus they influence market price of corporate securities. Open-end investment companies can sell an unlimited number of Shares and thus keep going larger. The open-end Mutual Fund Company Buys or sells their shares. These companies sell new shares NAV plus a Loading or management fees and redeem shares at NAV.In other words, the target amount and the period both are indefinite in such funds An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. b. Close-ended Fund/ Scheme A closedend Fund is open for sale to investors for a specific period, after which further sales are closed. Any further transaction for buying the units or repurchasing them, Happen in the secondary markets, where closed end Funds are listed. Therefore new investors buy from the existing investors, and existing investors can liquidate their units by selling them to other willing buyers. In a closed end Funds, thus the pool of Funds can technically be kept constant. The asset management company (AMC) however, can buy out the units from the

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investors, in the secondary markets, thus reducing the amount of funds held by outside investors. The price at which units can be sold or redeemed Depends on the market prices, which are fundamentally linked to the NAV. Investors in closed end Funds receive either certificates or Depository receipts, for their holdings in a closed end mutual Fund. A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. Schemes according to Investment Objective In Detail A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: a. Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. b. Income / Debt Oriented Scheme The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

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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. 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

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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.

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

MUTUAL FUNDS TRUST:Mutual fund trust is created by the sponsors under the Indian trust act, 1982 Which is the main body in the creation of Mutual Fund trust The main functions of Mutual Fund trust are as follows: Planning and formulating Mutual Funds schemes. Seeking SEBIs approval and authorization to these schemes. Marketing the schemes for public subscription. Seeking RBI approval in case NRIs subscription to Mutual Fund is Invited

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 Attending to trusteeship function. This function as per guidelines can be assigned to separately established trust companies too. Trustees are required to submit a consolidated report six monthly to SEBI to ensure that the guidelines are fully being complied with trusted are also required to submit an annual report to the investors in the fund.

FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY (AMC)

AMC has to discharge mainly three functions as under: I. Taking investment decisions and making investments of the funds through market dealer/brokers in the secondary market securities or directly in the primary capital market or money market instruments II. Realize fund position by taking account of all receivables and realizations, moving corporate actions involving declaration of dividends,etc to compensate investors for their investments in units; and III. Maintaining proper accounting and information for pricing the units and arriving at net asset value (NAV), the information about the listed schemes and the transactions of units in the secondary market. AMC has to feed back the trustees about its fund management operations and has to maintain a perfect information system.

CUSTODIANS OF MUTUAL FUNDS:Mutual funds run by the subsidiaries of the nationalized banks had their respective sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign banks with higher degree of automation in handling the securities have assumed the role of custodians for mutual funds. With the establishment of stock Holding Corporation of India the work of custodian for mutual funds is now being 28

handled by it for various mutual funds. Besides, industrial investment trust company acts as sub-custodian for stock Holding Corporation of India for domestic schemes of UTI, BOI MF, LIC MF, etc

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

RESPONSIBILITY OF CUSTODIANS: Receipt and delivery of securities Holding of securities. Collecting income Holding and processing cost Corporate actions etc FUNCTIONS OF CUSTOMERS Safe custody Trade settlement Corporate action Transfer agents

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

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Formation and regulations:

1. Mutual funds are to be established in the form of trusts under the Indian trusts act and are to be operated by separate asset management companies (AMC s) 2. AMCs shall have a minimum Net worth of Rs. 5 crores; 3. AMCs and Trustees of Mutual Funds are to be two separate legal entities and that an AMC or its affiliate cannot act as a manager in any other fund; 4. Mutual funds dealing exclusively with money market instruments are to be regulated by the Reserve Bank Of India 5. Mutual fund dealing primarily in the capital market and also partly money market instruments are to be regulated by the Securities Exchange Board Of India (SEBI) 6. All schemes floated by Mutual funds are to be registered with SEBI

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

Investment norms:1. No mutual fund, under all its schemes can own more than five percent of any companys paid up capital carrying voting rights;

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2. No mutual fund, under all its schemes taken together can invest more than 10 percent of its funds in shares or debentures or other instruments of any single company; 3. No mutual fund, under all its schemes taken together can invest more than 15 percent of its fund in the shares and debentures of any specific industry, except those schemes which are specifically floated for investment in one or more specified industries in respect to which a declaration has been made in the offer letter. 4. No individual scheme of mutual funds can invest more than five percent of its corpus in any one companys share; 5. Mutual funds can invest only in transferable securities either in the money or in the capital market. Privately placed debentures, securitized debt, and other unquoted debt, and other unquoted debt instruments holding cannot exceed 10 percent in the case of growth funds and 40 percent in the case of income funds.

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

MUTUAL FUND SCHEME TYPES:

Equity Diversified Schemes These schemes mainly invest in equity. They seek to achieve long-term capital appreciation by responding to the dynamically changing Indian economy by moving across sectors such as Lifestyle, Pharma, Cyclical, Technology, etc. 31

 Sector Schemes These schemes focus on particular sector as IT, Banking, etc. They seek to generate long-term capital appreciation by investing in equity and related securities of companies in that particular sector. Index Schemes These schemes aim to provide returns that closely correspond to the return of a particular stock market index such as BSE Sensex, NSE Nifty, etc. Such schemes invest in all the stocks comprising the index in approximately the same weightage as they are given in that index.

Exchange Traded Funds (ETFs) ETFs invest in stocks underlying a particular stock index like NSE Nifty or BSE Sensex. They are similar to an index fund with one crucial difference. ETFs are listed and traded on a stock exchange. In contrast, an index fund is bought and sold by the fund and its distributors. Equity Tax Saving Schemes These work on similar lines as diversified equity funds and seek to achieve long-term capital appreciation by investing in the entire universe of stocks. The only difference between these funds and equity-diversified funds is that they demand a lock-in of 3 years to gain tax benefits. Dynamic Funds These schemes alter their exposure to different asset classes based on the market scenario. Such funds typically try to book profits when the markets are overvalued and remain fully invested in equities when the markets are undervalued. This is suitable for investors who find it difficult to decide when to quit from equity.

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 Balanced Schemes These schemes seek to achieve long-term capital appreciation with stability of investment and current income from a balanced portfolio of high quality equity and fixed-income securities. Medium-Term Debt Schemes These schemes have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio is in the range of five to seven years. Short-Term Debt Schemes These schemes have a portfolio of debt and money market instruments where the average maturity of the underlying portfolio is in the range of one to two years. Money Market Debt Schemes These schemes invest in debt securities of a short-term nature, which generally means securities of less than one-year maturity. The typical short-term interest-bearing instruments these funds invest in Treasury Bills, Certificates of Deposit, Commercial Paper and Inter-Bank Call Money Market. Medium-Term Gilt Schemes These schemes invest in government securities. The average maturity of the securities in the scheme is over three years.

Short-Term Gilt Schemes These schemes invest in government securities. The securities invested in are of short to medium term maturities. Floating Rate Funds

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They invest in debt securities with floating interest rates, which are generally linked to some benchmark rate like MIBOR. Floating rate funds have a high relevance when interest rates are on the rise helping investors to ride the interest rate rise. Monthly Income Plans (MIPS) These are basically debt schemes, which make marginal investments in the range of 10-25% in equity to boost the schemes returns. MIP schemes are ideal for investors who seek slightly higher return that pure long-term debt schemes at marginally higher risk.

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

Growth Plan In this plan, dividend is neither declared nor paid out to the investor but is built into the value of the NAV. In other words, the NAV increases over time due to such incomes and the investor realizes only the capital appreciation on redemption of his investment. Income Plan In this plan, dividends are paid-out to the investor. In other words, the NAV only reflects the capital appreciation or depreciation in market price of the underlying portfolio. Dividend Re-investment Plan In this case, dividend is declared but not paid out to the investor, instead, it is reinvested back into the scheme at the then prevailing NAV. In other words, the investor is given additional units and not cash as dividend.

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MUTUAL FUND INVESTING STRATEGIES:

1. Systematic Investment Plans (SIPs) These are best suited for young people who have started their careers and need to build their wealth. SIPs entail an investor to invest a fixed sum of money at regular intervals in the Mutual fund scheme the investor has chosen, an investor opting for SIP in xyz Mutual Fund scheme will need to invest a certain sum on money every month/quarter/half-year in the scheme. 2. Systematic Withdrawal Plans (SWPs) These plans are best suited for people nearing retirement. In these plans, an investor invests in a mutual fund scheme and is allowed to withdraw a fixed sum of money at regular intervals to take care of his expenses 3. Systematic Transfer Plans (STPs) They allow the investor to transfer on a periodic basis a specified amount from one scheme to another within the same fund family meaning two schemes belonging to the same mutual fund. A transfer will be treated as redemption of units from the scheme from which the transfer is made. Such redemption or investment will be at the applicable NAV. This service allows the investor to manage his investments actively to achieve his objectives. Many funds do not even charge any transaction fees for his service an added advantage for the active investor.

ADVANTAGES OF INVESTING TRHOURGH MUTUAL FUNDS :

There are several reasons that can be attributed to the growing popularity and suitability of Mutual Funds as an investment vehicle especially for retail investors : 35

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

Investment Type

Percentage of Allocation (% of total portfolio)

Total portfolio of the Mutual Fund scheme (Rs. In crores)

Investors portfolio allocation (Rs.)

EQUITY: State Bank of India Infosys Technologies ABB Reliance Industries MICO Tata Power DEBT: Govt. Securities Company Debentures Institution Bonds Money Market Total

57% 15% 12% 10% 9% 7% 4% 43% 20% 10% 9% 4% 100%

57 15 12 10 9 7 4 43 20 10 9 4 100

57,000 15,000 12,000 10,000 9,000 7,000 4,000 43,000 20,000 10,000 9,000 4,000 1,00,000

Thus Asset Allocation is allocating your investments in to different investment options depending on your risk profile and return expectations. DIVERSIFICATION

Diversification is spreading your investment amount over a larger number of investments in order to reduce risk. For instance, if you have Rs.10,000 to invest in Information Technology (IT) stocks, this amount will only buy you a handful of 36

stocks of perhaps one or two companies. A fall in the market price of any of these company stocks will significantly erode your investment amount instead it makes sense to invest in an IT sector mutual fund scheme so that your Rs.10,000 is spread across a larger number of stocks thereby reducing your risk. PROFESSIONALS AT WORK

Few investors have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividend income, or to investigate the thousands of securities available in the financial markets. Fund managers are professionals and experienced in tracking the finance markets, having access to extensive research and market information, which enables them to decide which securities to buy and sell for the fund. For an individual investor like you, this professionalism is built in when you invest in the Mutual Fund. REDUCTION OF TRANSACTION COSTS

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

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

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The investor gets regular information on the value of his investment in addition to disclosure on the specific investments made by the fund, the proportion invested in each class of assets and the fund managers investment strategy and outlook. SAVING TAXES

Tax saving schemes of Mutual Funds offer investor a tax rebate under section 88 of the Income Tax Act. Under this section, an investor can invest up to Rs.10,000 per Financial year in a tax saving scheme. The rate of rebate under this section depends on the investors total income. INVESTING IN STOCK MARKET INDEX

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

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

All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. CONVENIENCE AND FLEXIBILITY

Mutual Funds offer their investors a number of facilities such as inter-fund transfers, online checking of holding status etc, which direct investments dont offer.

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RISKS ASSOCIATED WITH MUTUAL FUNDS:Investing in Mutual Funds, as with any security, does not come without risk. One of the most basic economic principles is that risk and reward are directly correlated. In other words, the greater the potential risk the greater the potential return. The types of risk commonly associated with Mutual Funds are: 1) MARKET RISK Market risk relates to the market value of a security in the future. Market prices fluctuate and are susceptible to economic and financial trends, supply and demand, and many other factors that cannot be precisely predicted or controlled. 2) POLITICAL RISK Changes in the tax laws, trade regulations, administered prices, etc are some of the many political factors that create market risk. Although collectively, as citizens, we have indirect control through the power of our vote individually, as investors, we have virtually no control. 3) INFLATION RISK Interest rate risk relates to future changes in interest rates. For instance, if an investor invests in a long-term debt Mutual Fund scheme and interest rates increase, the NAV of the scheme will fall because the scheme will be end up holding debt offering lower interest rates. 4) BUSINESS RISK Business risk is the uncertainty concerning the future existence, stability, and profitability of the issuer of the security. Business risk is inherent in all business ventures. The future financial stability of a company cannot be predicted or guaranteed, nor can the price of its securities. Adverse changes in business circumstances will reduce the market price of the companys equity resulting in proportionate fall in the NAV of the Mutual Fund scheme, which has invested in the equity of such a company. 39

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

MUTUAL FUND INDUSTRY PHASES

The Mutual Fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The History of Mutual Funds in India can be broadly divided into four distinct phases. First Phase (1964-87)

Unit Trust of India (UTI) was established on 1963 by an act of parliament. It was set up by Reserve Bank of India and functioned under the regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management. Second Phase- 1987-1993(Entry of Public Sector Funds)

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

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1989 while GIC had set up its Mutual Fund in June 1989 while GIC had set up its Mutual Fund in December 1990. At the end of 1993, the Mutual Fund industry had assets under management of Rs.47,004 crores. Third Phase-1993-2003 (Entry of Private Sector funds)

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

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administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile. UTI which had in March 2000 more than Rs. 76,000crores of assets under management and with the setting up of a UTI Mutual Fund, confirming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the Mutual Fund industry has entered its current phase of consolidation and growth. As at the end of October 31, 2003, there were 31 funds, which manage assets of Rs.1, 26,726crores under 386 schemes.

Mutual Fund Industry

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

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

PERFORMANCE MEASURES OF MUTUAL FUNDS:

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

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funds. Factors such as investment strategy and management style are qualitative, but the funds record is an important indicator too. Though past performance alone cannot be indicative of future performance, it is, frankly, the only quantitative way to judge how good a fund is at present. Therefore, there is a need to correctly assess the past performance of different Mutual Funds. Worldwide, good Mutual Fund companies over are known by their AMCs and this fame is directly linked to their superior stock selection skills. For Mutual Funds to grow, AMCs must be held accountable for their selection of stocks. In other words, there must be some performance indicator that will reveal the quality of stock selection of various AMCs. Return alone should not be considered as the basis of measurement of the performance of a Mutual Fund scheme, it should also include the risk taken by the fund manager because different funds will have different levels of risk attached to them. Risk associated with a fund, in a general, can be defined as Variability or fluctuations in the returns generated by it. The higher the fluctuations in the returns of a fund during a given period, higher will be the risk associated with it. These fluctuations in the returns generated by a fund are resultant of two guiding forces. First, general market fluctuations, which affect all the securities, present in the market, called Market risk or Systematic risk and second, fluctuations due to specific securities present in the portfolio of the fund, called Unsystematic risk. The Total Risk of a given fund is sum of these two and is measured in terms of standard deviation of returns of the fund. Systematic risk, on the other hand, is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis--vis market. The more responsive the NAV of a Mutual Fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a Mutual Fund with the returns in the market. While Unsystematic risk can be diversified through investments in a number of instruments, systematic risk cannot. By using the risk return relationship, we try to assess the competitive strength of the Mutual Funds one another in a better way. In

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

The most important and widely used measures of performance are:

1) The TreynorMeasure The Sharpe Measure Jenson Model Fama Model The Treynor Measure:-

Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return, and Bi is beta of the fund. All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. 2) The Sharpe Measure :-

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In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Index (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund, Ri represents return on fund, and Rf is risk free rate of return. While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance. Comparison of Sharpe and Treynor Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure. 3) Jenson Model:-

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Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the differential Return Method. This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund1 given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as: Ri = Rf + Bi (Rm - Rf) Where, Ri represents return on fund, and Rm is average market return during the given period, Rf is risk free rate of return, and Bi is Beta deviation of the fund. After calculating it, Alpha can be obtained by subtracting required return from the actual return of the fund. Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive. 4) Fama Model:-

The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called Net Selectivity. The Net Selectivity represents the stock selection skill of the fund manager, as it is the excess returns over and above the return required to compensate for the total risk taken

47

by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf) Where, Ri represents return on fund, Sm is standard deviation of market returns, Rm is average market return during the given period, and Rf is risk free rate of return. The Net Selectivity is then calculated by subtracting this required return from the actual return of the fund. Among the above performance measures, two models namely, Treynor measure and Jenson model use Systematic risk is based on the premise that the Unsystematic risk is diversifiable. These models are suitable for large investors like institutional investors with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors. However, Sharpe measure and Fama model that consider the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversify. Moreover, the selection of the fund on the basis of superior stock selection ability of the fund manager will also help in safeguarding the money invested to a great extent. The investment in funds that have generated big returns at higher levels of risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite.

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MUTUAL FUND INDUSTRY ANALYSIS

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INDIAN MUTUAL FUND INDUSTRY MARKET OF MUTUAL FUND

The Indian mutual funds industry is witnessing a rapid growth as a result of infrastructural development, increase in personal financial assets, and rise in foreign participation. With the growing risk appetite, rising income, and increasing awareness, mutual funds in India are becoming a preferred investment option compared to other investment vehicles like Fixed Deposits (FDs) and postal savings that are considered safe but give comparatively low returns, according to Indian Mutual Fund Industry. The Indian mutual fund industry has grown at an impressive pace in terms of Assets under Management (AUM) over the past few years. This is well reflected in the fact that AUM recorded a compounded annual growth rate of 35% during the last five year period between FY 2005 to FY2009. Household financial savings in mutual funds has increased from 1.2% to 7.7% between FY 2004 to FY2008. The number of retail customers investing in mutual funds as also the number of distributors across Metros, Tier 2 & Tier 3 towns has also growing steadily.

-The Indian mutual funds retail market, growing at a CAGR of about 30%, is forecasted to reachUS$ 300 Billion by 2015. -Income and growth schemes made up for majority of Assets Under Management (AUM) in thecountry. -At about 84% (as on March 31, 2008), private sector Asset Management Companies account for majority of mutual fund sales in India. -Individual investors make up for 96.86% of the total number of investor accounts and contribute36.9% of the net assets under management. The share of debt-oriented funds in industry assets increased to 73 per cent in May 2009 from 66 per cent a year ago. In contrast, the share of equity-oriented funds has reduced to 26 per cent in May 2009 from 33 per cent a year ago, largely owing to mark to market losses in equity funds as the equity markets had been performing weakly for a large part of this period. Fixed income funds, on the other hand, have seen net cash inflows of close to Rs 750 billion, accounting for around 95 per cent of net cash inflows, for year ending May 2009. The fixed income AAUM for the industry stood at Rs 4.84 trillion in May 2009. Bank investment in mutual funds, as per RBI data, topped Rs 1.23 trillion as on June 19, 2009, as compared to less than Rs 100 billion in October 2008. 50

COMPRETIVE ANALYISIS OF MUTUAL FUND INDUSTRY we are taking to some company mutual fund scheme to understand to market. Mutual fund industry has reported a decline in Assets Under Management (AUM) snapping a three month incline in previous months. The AUM has decreased by 17.96% to Rs 4,17,300 crore compared with Rs 5,08,670 crore in February 2009. The industry recorded the sharpest fall in assets since October last year as income and liquid funds collectively saw a net outflow of 99,372 crore. The decline in AUMs was primarily due to huge redemptions from banks and institutional investors in liquid and money market funds ahead of financial closure on March 31. Reliance Mutual fund Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme. Reliance Equity Opportunities Fund is an aggressive diversified equity scheme Reliance Equity Opportunities is to seek to generate capital appreciation and provide long term growth opportunities by investing in a portfolio constituted of equity securities and equity related securities. The fund has a high portfolio turnover ratio.

It has Instrument type such as Equity & Equity related Instruments and Debt & Money Market Instruments Reliance Mutual fund continued to be in the first position to Rs 80,962.94 crore in its AUM in March 2009. However, its AUM has dropped by 0.81% in March 2009 over February 2009. HDFC MUTUL FUND HDFC Core and Satellite Fund is an Open-Ended Equity Scheme. HDFC Core and Satellite Fund is an diversified equity scheme The Scheme may seek investment opportunity in the ADR / GDR / Foreign Equity and Debt Securities, in accordance with guidelines stipulated in this regard by SEBI and RBI from time to time.

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The net assets of the Scheme will be invested primarily in equity and equity related instruments in a portfolio comprising of 'Core' group of companies and 'Satellite' group of companies.

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

HDFC MF retained second position with the average AUM of Rs 57,956.45 crore a rise of 1.92% compared with the month of February 2009 followed by ICICI mutual fund. ICICI Mutual Fund ICICI Mutual Fund with an AUM of Rs 51,432.50 crore with a fall of 3.89% in March 2009 over February 2009. RELIANCE EQUITY OPPORTUNITIES FUND: Reliance Equity Opportunities Fund is an Open-Ended Equity Scheme. Reliance Equity Opportunities Fund is an aggressive diversified equity scheme Reliance Equity Opportunities is to seek to generate capital appreciation and provide long term growth opportunities by investing in a portfolio constituted of equity securities and equity related securities. The fund has a high portfolio turnover ratio. It has Instrument type such as Equity & Equity related Instruments and Debt & Money Market Instruments. Reliance-Anil Dhirubhai Ambani Group company Reliance Mutual Fund bought 5.23% stake in Financial Technologies, the promoter of Indias largest commodity exchange, Multi-Commodity bought from the Fidelity group at Rs 502.50 per share. The deal values Financial Technologies at Rs 2,304 crore. Fidelity, which held 10.65% in Financial Technologies, sold 8.20% of it in a block deal for Rs 188.80 crore. Apart from Reliance Mutual Fund, several high net-worth individual investors bought the balance 2.97%. Baroda Pioneer Mutual Fund Baroda Pioneer Mutual Fund has topped among others by recording AUM growth of 30.90% to 1,132.01 lakh crore in March 2009.

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Religare Mutual FUND Religare Mutual Fund followed it by posting a rise of 11.05% in its AUM. The other mutual funds, in terms of AUM included UTI MF recording a fall of 0.96% to Rs 48,754.17 crore in March 2009. Birla Sun Life MUTUAL FUND Birla Sun Life MF has recorded a drop of 3.01% in its AUM to Rs 47,096.23 crore and SBI MF also plunged 4.50% to Rs 26,382.68 crore. HDFC Mutual Fund recorded the highest inflow in AUM of Rs 1,092.06 crore, while Tata MF recorded the highest outflow of Rs 2,269.87 crore in March 2009.

Assets under management as on March 31, 2009

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Net Inflow/Outflow in Mutual Funds

Net Mutual Fund inflow in Financial Market

54

*Till 6th March, 2009

RESULT Assets Under Management (AUM) of mutual fund industry decreased by 17.96% to Rs 4,17,300 crore for March over February. Reliance MF buys 5.23% stake in Finacial Technologies from Fidelity. Reliance Mutual Fund retained its top positions with AUM of Rs. 80,962.94 crore till March. Net outflow in Mutual Funds was Rs. 98,697 crore.

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NEW TRENDS OF MUTUAL FUND INDUSTRY

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RECENT TRENDS IN INDIAN MUTUAL FUND INDUSTRY RECENT TRENDS

Distribution Mix

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

Future Trends

Certification of Financial Advisors will be made mandatory. More no. of professional Financial Advisors to emerge Introduction of pension products will inculcate long term savings habit Penetration into rural areas Distributorsshift of focus to other Financial products like Insurance & secondary market. Limited distribution reach. After sales service might not be efficiently given to investors with direct investments post initial investment. Only people with internet access will be at advantage. 57

FUTURE OF MUTUAL FUND INDUSTRY

Industry Size

Comparison with other developed market reflects the lack of penetration in Indian market all point to a significant untapped opportunityahead Source: Journal of Financial Economics Indias current industry size to GDP is approx 12%

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India managed assets to exceed ~$1 Trillion(40 lac crs.) by 2015 Professionally managed assets (2005 2015)

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The Evolving Indian Mutual Fund Market

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

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Tremendous Opportunity across Categories

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QUESTIONNAIRE

62

QUESTIONNAIRE Dear respondent,

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

Thanking you Yours truly

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INSTRUCTION FOR RESPONDENT

Please tick the following options to your opinions & facts. Specify according to your decision

Fill the form.. NAME & ADDRESS OF FIRM........................................................................................................... .. LOCATION NAME OF CONTACT PERSON . DESIGNATION.. NAME OF CURRENT PROJECT

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QUESTIONNAIRE

1) Do you know about investment options available?

o YES

NO

2) Most preferable investment scenario. o BANK o DERIVATIVES & SECURITES MARKET o INSURANCE o BONDS o REAL ESTATE o OTHERS 3) What is the basic purpose of your investment? o Liquidity o Returns o Capital appreciation o Tax benefits o Risk covering

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4) MOST IMPORTANT THINGS YOU TAKE INTO YOUR MIND WHILE MAKING INVESTMENT, o RISK o RETURNS o BOTH 6) Awareness related to security markets o COMPLETE o PARTIAL o NIL 7)Do you have any de-mat & trading account? o YES NO

8)In which company you have d-mat and trading account? o o o o o o SHAREKHAN INDIAINFOLINE ICICI DIRECT INDIA BULLS KARVY OTHERS

9)Specify the reason of satisfaction with the current broking house. o OPERATING EXPENCESS o SERVICE o BROCKAGE

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DATA REPRESENTATION

67

1)Do you know about investment options available?

KNOWLEDGE %AGE Yes No TOTAL 80% 20% 100

COMMENT Only 80% people knows the exact meaning of investment. Because of remaining 20% take his/her residential property as an investment. According to law purpose this is not an investment because of it is not create any profit for the owner.
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2) Most preferable investment scenario. INVESTMENT SCENARIO %AGE Banks 24% Derivatives & securities market 28% Insurance Bonds Real estate Others TOTAL 4% 20% 20% 4% 100

COMMENT Today scenario is changed so that most area covered by the derivative and securities market. It is 28% of the total population.

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3) What is the basic purpose of your investment? INVESTMEN T PURPOSE Liquidity Returns Capital appreciation Tax benefits Risk covering Others TOTAL PERCENTAGE 30% 25% 10% 20% 5% 10% 100

COMMENT:- 75% people are interested in liquidity, returns and tax benefits. And remaining 25% are

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interested in capital appreciations, risk covering, and others. 4)Most important things you take into your mind while making investments? FACTOR Risk Returns Both TOTAL %AGE 8% 17% 75% 100

COMMENT

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

6) Awareness related to security markets

KNOWLEDGE Complete Partial Nil TOTAL

PERCENTAGE 8% 75% 17% 100

COMMENT
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On that basis, we conclude that 17% people know nothing about the securities investments and 75% people have partial knowledge about it, so, some promotional activities are required for increasing the awareness about security market.

7) Do you have any de-mat & trading account? ACCOUNTS Yes No TOTAL PERCENTAGE 60% 40% 100%

COMMENT

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Only 75% respondents have de-mat and trading account and remaining 25% says no because they dont know why shares move up and down. 8)In which company you have d-mat and trading account?
COMPANY SHAREKHAN INDIAINFOLINE ICICI DIRECT INDIA BULLS KARVY Others TOTAL PERCENTAGE 38% 20% 14% 12% 9% 7% 100

COMMENT In Sharekhan Ltd 38% respondents have de-mat & trading account because of better services and no annual maintenance and other charges.
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9) Specify the reason of satisfaction with the current broking house. SATISFACTION Operating expenses Services Brokerage TOTAL PERCENTAGE 18% 25% 57% 100

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MAJOR FINDING, RECOMMEDATIONDS & CONCLUSION

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

According to the survey most of the customers of Sharekhan Ltd says that it is pocket friendly. Coming to faith 70% say Sharekhan Ltd is better than others stock brokers due to customers satisfaction. Lack of promotional activities undertaken by Sharekhan securities Ltd. Main purposes of investments are returns & liquidity. Investors take risk as well as returns into their mind while making the investment. Businessmen are more interested in the stock market than the others. Commodity market is less preferred by the investors. 77

People want to invest their money in the security market but they havent the proper knowledge. People are not aware of hedging in stock market. People pay more emphasis on brokerage than service provided by brokerage houses.

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

Emergence of new business models

Discount brokers : Rebates , if legalized can be a way of reducing investors costs of buying a Mutual Fund. Entities in product selling will have to offer rebates or charge lower entry load Fee based advisory model : Value-added advisors will charge fee

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Polarization : One pool of AMCs with direct interface with investors & other continued with distributors. Advent of No-load funds in India Variable Pricing Model : A necessity

Global Practice:
Variable Pricing Model

Investors have many choices as to how they buy funds. Depending on the choices they make, investors may encounter several different arrangements for paying distribution and shareholder service expenses, (e.g. A shares (front-end load); B shares (12b-1 fee plus back-end load), C shares (level load), and no-load. Rule 12b-1 Fees -- The SEC adopted Investment Company Act Rule 12b-1 in 1980, which permits fund assets to be used for distribution and shareholder services. NASD Rule 2830 establishes a general limit of 0.75% for distribution, 0.25% for service fees. The fund distributor pays fees from fund assets to broker-dealers and others who sell fund shares and/or provide ongoing services to fund shareholders. Class A Shares -- are typically subject to a front-end sales charge. The front-end sales charge often has "breakpoints" for larger size investments. Funds often establish waiver categories, disclosed in their prospectuses, so that particular categories of investors are permitted to purchase shares with a reduced or waived front-end sales charge. Class A shares also may have a Rule 12b-1 fee of 0.250.50% of average annual net Class A assets. Class B Shares -- typically have no front-end sales charge, a relatively high Rule 12b-1 fee of up to 1.00%, and a contingent deferred sales charge. Because the fund underwriter pays brokers a commission up-front for sales of Class B shares, the Rule 12b-1 fee is designed to pay the underwriter back for these advances. Class B shares typically convert to Class A shares within a year or two after the CDSC disappears. Class C Shares -- Class C shares generally have no, or very low, front-end sales charges or CDSC. They may have a Rule 12b-1 fee of up to 1.00%. Class C shares typically do not convert to Class A shares.

Example of Variable Pricing Model AXA Global Growth fund Initial Charges 79

 Standard 5% Funds Network 2% Investor Save 3%

CONCLUSION: In India, mutual funds have a lot of potential to grow. Mutual funds companies have to create and market innovative products and frame distinct marketing strategies. Product innovation will be one of the key determinants of success. The mutual fund industry has to bring many innovative concepts such as high yield bond funds, principal protected funds, long short funds, arbitrate funds, dynamic funds, precious metal funds, and so on. The penetration of mutual funds can be increased through investors education, providing investor oriented value-added service, and innovative distribution channels. Mutual funds have failed during the bearish market conditions. To sell successfully during the bear market, there is a need to educate investors about risk-adjusted return and total portfolio return to enable them to take informed decision. Mutual funds need to develop a wide distribution network to increase its reach and tap investments from all corners and segments. Increased use of Internet and development of alternative channels such as financial advisors can play a vital role increasing the penetration of mutual funds. Mutual funds have come a long way, but a lot more can be done.

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BIBLIOGRAPHY Mutual Funds Primer By ECONOMIC TIMES

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

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