Index

Introduction Mutual Funds: What are they? Mutual fund industry Concept &role of mutual fund Mutual fund investing v/s investing through banks Unit holders are the shareholders Organizational structure of mutual fund Mutual fund as an investment Types and classification of mutual funds Scope and functions of mutual funds Mutual fund pricing (NAV calculation process) Who can buy mutual funds units? Risk associated with mutual fund and it is mitigated Advantages & Disadvantages of mutual funds. Portfolio management - managing unit holders' money Recommendations & Suggestions Case study Conclusion Bibliography

CHAPTER 1 INTRODUCTION

The economic progress of a company is, to a certain extent, linked with the growth of the capital market. Capital market growth depends on the savings of the nation. In India, notwithstanding a high rate of savings by the community, the capital market is not in a position to grow fast because the common man has not acquired the necessary know-how himself to select appropriate avenues of investment which will serve his needs. Therefore, the savings are mainly directed towards bank deposits/real estate/gold etc. if he is assured that there are organizations of repute which have necessary expertise to select appropriate avenues of investment where the yield is attractive enough, with utmost security of the capital invested, it would create a proper climate for diversion of a part of the savings which at present goes into sectors where there is either only capital appreciation but with little or no scope for regular periodical return on investment or on capital appreciation at all, but with periodical small return on the investment. In these circumstances, there is enough scope for mutual funds to operate, which would not only assure a reasonable capital appreciation on his investment but also provide a regular dividend at periodical intervals with also a facility for easy encashment of the principal.

CHAPTER 2 MUTUAL FUNDS: WHAT ARE THEY?

Definition
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 their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. You 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 check for distributions or to reinvest the earnings and get more shares.

Origin of the Funds

The origin of the concept of mutual fund dates back to the very dawn of commercial history. It is said that Egyptians and Phoenicians sold their shares in vessels and caravans with a view to spreading the risk attached with these risky ventures. However, the real credit of introducing the modern concept of mutual fund goes to the foreign and colonial Government Trust

of London established in 1868. thereafter, a large number of close-ended mutual funds were formed in the U.S.A. in 1930s followed by many countries in Europe, the Far East and Latin America. In most of the countries, both open and close-ended types were popular. In India, it gained momentum only in 1980, though it began in the year 1964 with the Unit Trust of India launching its first fund, the Unit scheme 1964

CHAPTER3 MUTUAL FUND INDUSTRY

The history of mutual fund industry
Although historians may differ on the exact genesis of mutual funds, the origin of mutual funds can be traced back to a little more than one & half century ago. In 1822, king William of the Netherlands formed societe generale de belique, at Brussells, which appears to be the first mutual fund. It was intended to facilitate small investments in foreign government loans,
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which, then, offered more security and returns than the home industry. Later, another similar company was started with an objective to make cooperative investments, to protect investors against loss by wide undertakings, and to secure larger returns through investing in industries. While the mutual funds had its origin in Belgium, it did not take firm root in continental soil but flourished when transplanted in UK AND USA surroundings.

UTI THE FIRST MUTUAL FUND Mutual fund industry in India the background
In India, the setting up of Unit Trust of India (UTI) in 1964 marked the advent of mutual fund industry. Unit Trust of India was set up by an act of parliament. Detailed debate had taken place in the parliament before this institution saw the light of the day. UTI was regulated since its inception by the UTI Act, 1963 and regulations framed there under. UTI was established as a corporate body. The general superintendence, direction and management of the affairs and business of this corporate body vested in a board of trustees. An executive committee was formed with a view to effectively supervise the asset management functions. The members of the executive committee were drawn from the board of trustees. The executive committee reported to the board. In matters involving public interest the Central Government and the Reserve Bank of India had powers to give directions. The day to day functioning to UTI was left to the chairman and the operating management reporting to him. IMPETUS TO EQUITY MARKET

The purpose of establishing the Unit Trust of India was to give a fillip to equity market. In the wake of the indo-china war of 1961, there was shortage of savings going into industrial investment for economic development. There was a need to mobilize adequate amount of risk capital for industrial enterprises. The household saving were sought to be channellized into primary and secondary share markets through units. However, in the initial years, the emphasis in UTI was on income products. Master-share launched in 1986 ushered in the equity-oriented schemes in India. Unit Trust of India launched a variety of innovative products suited to meet diverse needs of investors, virtually the complete life cycle of the investors.

Evolution of mutual fund industry in India

The association of Mutual Funds in India (AMFI) has officially classified the four decades of mutual funds in India into four phases. The first phase during the years 1963-1987 saw UTI consolidating its position by offering a varity of products and extending its reach throughout the country. The next phase (1987-93) marked the arrival of mutual funds sponsored by public sector banks and financial institutions. The third phase began in 1993 with the arrival of private sector players, both Indian and foreign. The fourth phase started with SEBI (Mutual Fund) Regulations, 1996. In 1986 to public sector banks and financial institutions were given permission to establish mutual funds. State Bank of India established the first mutual fund. SBI preferred to adopt the trust route and set up the mutual fund as a trust under the Indian Trusts Act, 1882. this choice was purely accidental. Other mutual funds followed the SBI model. The trust form

under the Indian Trust Act came to be the accepted legal form of mutual funds in India. A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993. Foreign asset management companies were allowed to enter the mutual fund business. In the year 1992, there were nine mutual funds, all in public sector. In 2003 there were thirty-three asset management companies covering Indian public sector, private sector, and joint ventures with foreign players. Initially mutual funds were not regulated. The RBI issued the first set of guidelines for bank-sponsored mutual funds in July 1989. The Ministry of Finance issued guidelines in June 1990 asking SEBI to prescribe the accounting and disclosure requirements. Thus two different set of guidelines remained in force leading to problems in compliance and monitoring. The mutual funds were not inspected by any agency. In April 1992, the SEBI Act was passed giving power to SEBI to regulate the mutual funds (except UTI) in India. During the first two phases most mutual funds were closed ended. With the arrival of private sector players, open-ended funds became the dominant form of mutual fund product. The fund industry in India has come a long way in the last 40 years. The assets managed by the industry have grown many hundred times during 1965-2002. AMFI CERTIFICATION In July 2000, AMFI launched a mutual fund testing and certification programme for mutual fund agents, distributor advisors and employees. A certification committee was constituted to prepare a framework for certification that included preparation of syllabus, workbook, examination modules, test procedures, eligibility standards, educational programmes, and a comprehensive registration process.
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AMFIs various committees have studied issues such as methodology for valuation, proper benchmarking for performance evaluation in mutual funds, fixation of sale and repurchase prices, advertisement code, operational procedures on unclaimed redemptions & dividends, disclosure norms, pension fund, AMFI as a self-regulatory organization (SRO), nonperforming assets, securities trading by employees, etc. Recently, the industry has taken a stand that the agents should not entice investors by sharing part of the commission upfront with the investors.

Review of Mutual Funds Industry in India

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India. at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases: First Phase-1964-87 (Introduction of UTI). Second Phase-1987-1993 (Entry of Public Sector Funds). Third Phase-1993-2003 (Entry of Private Sector Funds). Fourth Phase-since February 2003 (Repeal of the Unit Trust of India Act 1963).

CHAPTER 4 CONCEPT AND ROLE OF MUTUAL FUND

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

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

Mutual Fund Operation Flow Chart Investors have a basic choice: they can invest directly in individual securities, or they can invest indirectly through a financial intermediary. Financial intermediaries gather savings from investors and invest these monies in a portfolio of financial assets. A mutual fund is a type of financial intermediary that pools the funds of investors who seek the same general investment objective and invests them in a number of different types of financial claims ( e.g., equity shares, bonds, money market instruments). These pooled funds provide thousands of investors with proportional ownership of diversified portfolios managed
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by professional investment managers. The term mutual is used in the sense that all its returns, minus its expenses, are shared by the funds unit holders.

CHAPTER 5 MUTUAL FUND INVESTING V/S. INVESTING THROUGH BANKS

Mutual funds are only one kind of financial intermediary. Bank is the largest intermediary in the financial system. Thousands of depositors pool their
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savings in a bank. However, investments in banks entitle the depositors different financial claims than the one generated by the mutual funds.

PASS-THROUGH STRUCTURE
In a sense, mutual fund is the purest form of financial intermediary because there is almost perfect pass through of money between unit holders (savers) and the securities in which the fund invests. Unit holders are indicated a-priori in what type of securities their funds will be invested. Value of the securities held in the fund portfolio is translated on the daily basis directly to the value of the fund units held by the unit holders. By contrast, a commercial bank is not a pass through type of financial intermediary. Banks collect deposits from depositors (savers). The depositors have no specific knowledge of how their funds will be used. Bank invests the monies of the depositors in loans & advances which the bank officers feel appropriate at the time. On the deposits collected banks usually give a specified rate of return (interest) that is not linked with the performance of its loans & advances portfolio.

INVESTORS MAY LOSE MONEY IN A MUTUAL FUND

It is important to understand that an investor can lose money in a mutual fund, though regulations ensure disciplined investments and ceilings on expenses that are charged to the unit holders, unit holders assume investment
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risk, including the possible loss of principal, because mutual funds invest in securities whose value may rise and fall. Unlike bank deposits, mutual funds are not insured under Deposit Insurance and Credit Guarantee Corporation Act, 1961. of course there is also an upside to investment risk. Generally speaking, the greater investment risks, greater the potential reward.

CHAPTER 6 UNIT HOLDERS ARE THE SHAREHOLDERS

Thus, mutual fund unit holders are the fund shareholders, while bank depositors are the banks creditors. The above diagram clearly compares these two investment vehicles. Please note that shareholders of a bank are

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different from its depositors, and here claims of unit holders have been compared and contrasted with those of the depositors.

Mutual funds vs. direct investing

Unit holders of mutual funds always have a choice of direct investing. Mutual fund investing offers certain advantages over direct investing.

Benefits of mutual fund investing

The mutual fund industry has enjoyed substantial growth in terms of the assets under management as well as the investors accounts. Of many reasons that contributed to the growth of mutual fund industry, the fundamental one is the increasing complexity of modern investment. The number of securities available for investment has increased substantially. The varied and interrelated forces influence the price of the securities, and the technical and analytical study of securities value made it difficult for the man of small means and limited knowledge to make sound and profitable investment decisions. In such situation mutual funds offer several advantages to the investors over direct investing. Professional investment management Risk reduction through diversification Convenience Availability of alternative portfolio objectives and products Unit holders account administration and services ensuring liquidity of investment Lower transaction and other costs

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 Regulatory protection Relatively higher returns than other financial instruments vis--vis their risks. PROFESSIONAL INVESTMENT MANAGEMENT The money pooled in the mutual fund is managed by professionals who decide investment strategy on behalf of the unit holders. Because of the relatively large pool of investable funds, mutual funds have the resources to hire very qualified, full time investment managers. These professionals choose in investments that best match the investment objective of the scheme as described in the schemes prospectus. Their investment decisions are based on extensive research of the market conditions, and financial performance of the individual company and specific securities. As the market conditions and / or the expectation about the securities performance change these professionals churn their portfolios over accordingly with a view to provide higher returns to the unit holders. LAW OF LARGE NUMBERS RISK REDUCTION THROUGH DIVERSIFICATION The old axiom that it is not wise to put all eggs into one basket was probably in the minds of those who formed the first mutual fund. Deep and basic in the mutual fund form of investment is the insurance principle in a unique manner. The function of mutual fund is not to insure its unit holder against losses by investments, but to afford them the opportunity of investing small amounts in a large number of securities. A single event defies prediction, but the mass remains always practically the same or varies in ways that can be predicted.

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Elimination of risk by combination is the application of the so-called law of large numbers. MARKET RISK AND UNIQUE RISK The total risk of the portfolio comprises of systematic (market) risk and unsystematic (unique) risk. The risk that can be effectively diversified by investing in adequate number of securities is the unique risk of each security and the industry risk. The other type of risk that cannot be diversified away is the market related risk (systematic risk). One of the major tasks performed by the fund manager is the risk reduction of portfolio by providing adequate diversification. Mutual funds provide diversification benefits in a manageable, compact way because each unit represents a pro rata share of the entire portfolio. Diversification may take several forms. It may involve investing in different types of financial claims e.g., equity shares, bonds etc., or investment in securities offered by different issuers e.g., investments in bonds issued by different companies. Portfolio diversification is the major advantage stressed by mutual funds, especially for retail investors. Retail investors with limited money to invest are likely to incur huge transaction costs, should they desire to hold a well-diversified portfolio, due to small quantity purchase of each security. By purchasing units of mutual funds, investor holds a proportional claim on a portfolio comprising large number of securities in adequate quantity. VARIETY AVAILABILITY OF VARIED PORTFOLIO OBLECTIVES There are more than 400 mutual fund schemes with wide variety of investment objectives and options available to investors in India. AMFI has classified
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mutual fund schemes into 6 broad categories according to their basic investment objectives: Growth Income Balanced Liquid & money market Gilt Equity linked saving schemes (ELSS) Each of these categories can further be classified into more categories. This wide range of schemes arose over the years to meet the requirements of the investors with different financial objectives. CONVENIENCE Mutual funds provide investors with variety of products and increasingly broad array of customer services. The increasing breadth of mutual fund products and services offer investors a great deal of choice in picking up the scheme that is consistent with his risk-returnliquidity requirements. Mutual fund units are easy to buy and sell over internet, telephone and ATMs. UNIT HOLDERS ACCOUNT ADMINISTRATION AND SERVICES A major service offered by the mutual funds is liquidity. Liquidity refers to the speed with which an asset can be converted into cash without much loss of its economic value. SEBI requires the open-ended fund to stand ready to redeem the units on daily basis at its NAV based price. NAV of the scheme is to be calculated and reported daily. Apart from ensuring continuous liquidity, mutual funds provide many other services. These services include providing a variety of flexible and convenient plans to the investors. A mutual fund product with systematic
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investment plan (SIP) refers to the practice of investing a constant amount every month. This translates into holding lesser number of units in rising market and more number of units in falling market. Systematic withdrawal plan (SWP) is a mirror image of SIP. Flexi withdrawal plan (FWP) enables withdrawal of different amounts of money for different months. A mutual fund product with systematic transfer plan (STP) allows the investor to maintain a target mix of debt and equity in ones portfolio. Unit holders are updated on their investment status. They receive periodical statements of their accounts. Their fund portfolio is disclosed regularly. Half yearly and annual and reports are also published. REDUCTION IN COST OF INVESTMENT Average cost of managing a rupee will be much lower for mutual funds, than for an investor managing a diversified portfolio all on his own. The low costs are due to standardization, and high economies of scale (arising on account of the collective investment character). Further, SEBI has set ceiling with regard to expenses, which can be charged to the investors. Expenses above the set limits cannot be charged to the unit holders. Apart from the regulatory ceiling, competition plays its own role in determining the cost of mutual fund investing. The recent past has witnessed a trend in reduction / elimination of sales charged and redemption fees. TRANSPARENCY REGULATORY PROTECTION mutual funds are subject to strict regulation and oversight by SEBI. As part of this regulation all mutual funds provide full and complete disclosures about the funds in a written offer document. This offer document describes, among other things schemes
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investment objectives, its investment policies, its investment methods, and information about how to purchase and redeem units and information about risk the portfolio of the scheme is exposed to SEBI requires the placement of a fee table at the beginning of every offer document. All mutual funds are required to provide their unit holders with annual and semi-annual reports that contain recent information about the funds portfolio, performance and investment goals and policies. HIGH RETURNS mutual funds trade in securities both equities and bonds. While bank deposits offer fixed returns, bond funds offer higher returns to investors due to trading in bonds by funds. Similarly, balanced funds and equity funds generally offer higher returns as against instruments of comparable risk. Although there are no guaranteed returns and protection of capital, mutual funds are usually able to give better returns to investors than fixed income product.

What mutual funds are not?

Mutual funds are not get rich quick investments Mutual funds are not risk free investments (but strictly regulated and controlled) Mutual funds are not assured return investments Mutual fund is not a universal solution to all investment needs.

CHAPTER 7
ORGANISATIONAL STRUCTURE OF MUTUAL FUND

Structure of mutual funds in India

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The SEBI (Mutual Funds) Regulations, 1993, later replaced by SEBI (Mutual Funds) Regualtions,1996 prescribe the legal structure of mutual funds in India. There are four independent entities, supported by other independent administrative entities like banks, registrar and transfer agents.

Organization of a Mutual Fund Sponsor: Akin to the promoter of the company Establishes the fund Gets it registered with SEBI Forms a trust, and appoints board of trustees Trustees: Hold assets on behalf of the unit-holders in the trust

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 Appoint Asset Management Company and ensure that all the activities of the AMC are in accordance with SEBI regulations Appoint the custodian of the fund Custodian Holds the funds securities in safekeeping Settles securities transactions for the fund Collects interests and dividends paid on securities, and Records information on stock splits and other corporate actions. Asset Management Company Floats schemes and manages them in accordance with SEBI Regulations Distributors / Agents Sell units on behalf of the fund Banker Facilitates financial transactions Provide remittance facilities Registrar and transfer agent Maintain records of unit holders accounts and transactions Disburses and receives funds from unit holder transactions, prepares and distributes account statements and tax information, handles unit holder communication, and Provides unit holder transaction services.

CHAPTER 8 MUTUAL FUND AS AN INVESTMENT

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In the present scenario the investment in equities by way of Mutual funds would enable the investor to explore the advantages of equities. Investor can diversify the investment by selecting the funds as per his investment preferences. Short term market volatility is created by demand and supply in the market, which purely depends on the market sentiment. Risk could be further reduced by making investment for a longer time because time dilutes the risk created out of short-term market volatility. Investments in mutual funds have following advantages: Investment Solutions for every Investor. Professional Fund Management. Built-in Diversification & Adequate Safety. Superior Risk Adjusted Returns. High level of Transparency. High Liquidity. Hassle-free Operations.

CHAPTER 9
TYPES AND CLASSIFICATION OF MUTUAL FUNDS

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Mutual funds are collecting funds from vast segment of society. The needs and expectations of different persons of society are different. Therefore, one type of mutual fund will not suit the requirements of all persons. Keeping in mind to attract all types of investors the mutual fund schemes of various nature are launched by the mutual fund organizations from time to time. Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc The various types of mutual funds may be classified as follows:

By Structure
o Open - Ended Schemes o Close - Ended Schemes

By Investment Objective o Growth Schemes o Income Schemes o Balance Schemes o Money Market Schemes Other Schemes o Tax Saving Schemes o Special Schemes
o By

Structure

1. Open - Ended Schemes

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It is just the opposite of close-ended funds. Under this scheme, the size of the fund and/or the period of the fund is not pre-determined. The investors are free to buy and sell any number of units at any point of time. For instance, the unit scheme (1964) of the Unit Trust of India is an open-ended one, both in terms of period and target amount. Anybody can buy this unit at any time and sell it also at any time at his discretion. 2. Close - Ended Schemes Under this scheme, the corpus of the fund and its duration are prefixed. In other words, the corpus of the fund and the number of units are determined in advance. Once the subscription reaches the predetermined level, the entry of investors is closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus, the fund ceases to be a fund, after the final distribution.

By Investment Objective
1. Growth Schemes Unlike the Income Funds, Growth Funds concentrate mainly on long run gains, i.e., capital appreciation. They do not offer regular income and they aim at capital appreciation in the long run. Hence, they have been described as Nest Eggs Investments.

2. Income Schemes

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As the very name suggests, this fund aims at generating and distributing regular income to the members on a periodical basis. It concentrates more on the distribution of regular income and it also sees that the average return is higher than that of the income from bank deposits. 3. Balanced Schemes This is otherwise called income-cum-growth fund. It is nothing but a combination of both income and growth funds. It aims at distributing regular income as well as capital appreciation. This is achieved by balancing the investments between the high growth equity shares and also the fixed income earning securities. 4. Money Market Schemes These funds are basically open ended mutual funds and as such they have all the features of the open ended funds. But, they invest in highly liquid and safe securities like commercial paper, bankers acceptances, certificates of deposits, treasury bills etc. These instruments are called money market instruments. They take the place of shares, debentures and bonds in a capital market. They pay money market rates of interest. These funds are called money funds in the U.S.A. and they have been functioning since 1972. investors generally use it as a parking place orstop gap arrangement for their cash resources till they finally decide about the proper avenue for their investment, i.e., long-term financial assets like bonds and stocks.

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 Other Schemes
1. Tax Saving Schemes A taxation fund is basically a growth oriented fund. But, offers tax rebates to the investors either in the domestic or foreign capital market. It is suitable to salaried people who want to enjoy tax rebates particularly during the month of February and March. In India, at present the law relating to tax rebates is covered under Sec. 88 of the Income Tax Act, 1961. an investor is entitled to get 20% rebate in Income Tax for Investments made under this fund subject to a maximum investment of Rs. 10,000/- per annum. The Tax Saving Magnum of SBI Capital market Limited is the best example for the domestic type. UTIs US $60 million India Fund, based in the USA, is a example for the foreign type. 2. Special Fund Besides the above, a large number of specialized funds are in existence abroad. They offer special schemes so as to meet the specific needs of specific categories of people like pensioners, widows etc. there are also Funds for investments in securities of specified areas. For instance, Japan Fund, South Korea Fund etc. in fact, these funds open the door for foreign investors to invest on the domestic securities of these countries. Again, certain funds may be confined to one particular sector or industry like fertilizer, automobiles, petroleum etc. These funds carry heavy risks since the entire investment is in one industry. But, there are
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high risk taking investors who prefer this type of fund. Of course, in such cases, the rewards may be commensurate with the risk taken. At times, it may be erratic. The best example of this type is the Petroleum Industry Funds in the U.S.A.

CHAPTER 10 SCOPE AND FUNCTIONS OF MUTUAL FUNDS

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Mutual Fund organizations are dealing in funds; therefore their scope of functions is limited only to financial matters. In India various mutual funds are governed by guidelines laid down by the SEBI, the Finance Ministry of the Government of India; Reserve Bank of India from time to time. The U.T.I. is governed by the provisions of the U.T.I. Act 1963. On the basis of the nature and guidelines of these agencies, the scope of mutual funds is limited to the following activities: Dealing in Capital Market Instruments: The main function of these organizations is to deal in various securities of capital market. First, they are issuing their own securities (Units/Shares) to raise the funds from the public. Later on They are investing such collected funds in securities (shares, debentures and bonds) of other companies. Although they are financial institutions, they should involve only in those activities which are re management of mutual funds. The following activities are restricted for them: (i) They should not take the activities of merchant banking, financial consultancy, leasing and factoring. (ii)They should not grant loans other than to invest in transferable securities in money market including the privately placed debentures. (iii) mutual fund. (iv) They should not keep deposits with companies and other corporate bodies. One mutual fund should not invest in other

Maintenance of Management Information System: A mutual fund should maintain effective management information
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system so that all facts and reports may be submitted whenever they are required.

Professional Management at low cost: Most mutual funds pay topflight professionals to manage their investments. These managers decide what securities the fund will buy and sell. Money pooled in the mutual funds is managed by professionals. These professionals choose investments, which match best with the objectives stated in the fund's offer documents. As economic conditions changes the investment manager may adopt a very aggressive or defensive posture to meet its investment objectives. Unit holders' incur fees and expenses when they buy and hold mutual funds. These costs include the expenses that the fund incurs for providing professional management, fund administration and other services. Over the last 10 years, the competition among the players in the Indian mutual fund industry has increased tremendously, as the number of players has increased from 9 in 1992 to 33 in 2003. This competition coupled with technology innovation has resulted in lower costs. Further, the regulator has imposed the limitation on fees and expenses that can be charged to the scheme. It has been observed that many a fund charges expenses and fee below the regulatory ceilings.

CHAPTER 11 MUTUAL FUND PRICING (NAV CALCULATION

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PROCESS)
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Further. the securities are required to be valued on a Mark to Market basis. Every fund is required to announce its NA V at least once a week. Mutual Funds are also required to provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type. NAV of a mutual fund unit is expressed as: Market value of investments + Receivables + other accrued Income+ Other Assets - Accrued expenses - other payables - other liabilities No. of units outstanding as on NA V date

CHAPTER 12 WHO CAN BUY MUTUAL FUNDS UNITS?

The following persons are eligible to buy mutual fund units:

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 Residents including: Adult individuals (or minors holding through their parents or guardians) holding singly or jointly (not exceeding three in all); Hindu Undivided Families through their respective Kartas; Companies, corporate bodies, public sector undertakings, financial institutions, banks, partnerships, associations of persons or bodies of individuals, religious and charitable trusts and other societies registered under the Societies Registration Act, documents); Religious and charitable public trusts and private trusts, subject to receipt of necessary approvals as "Public Securities", where-ever required Association of persons or body of individuals . Mutual funds registered with SEBI Army/Air Force/Navy other paramilitary units and bodies created by such institutions besides other eligible institutions. Foreign Institutional Investors registered with SEBI. Multilateral funding agencies/bodies corporate incorporated outside India with the permission of Government of India/Reserve Bank of India Overseas financial organizations which have entered into an arrangement for investment in India, inter-alia with a Mutual Fund registered with SEBI and which arrangement is approved by the Central Government. NRls, OCBs, FIls and persons of Indian origin residing abroad,
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1860 (so long as

the purchase of Units is permitted under their respective constituent

on a full repatriation basis/non-repatriation basis Other schemes of the same mutual fund subject to the conditions and limits prescribed by SEBI Regulations The Trustees/Trust, AMC or Sponsor or their affiliates, their associate companies & subsidiaries Provident/Pension/Gratuity / Superannuation and such other retirement and employee benefit and other similar funds.

CHAPTER 13 Risk Associated With Mutual Fund and It Is Mitigated

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Risk:Mutual Funds do not provide assured returns. Their returns are linked to their performance. They invest in shares. Debentures. Bonds etc. All these investments involve an element of risk. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/ bonds the performance of the fund may get affected. Besides incase there is a sudden downturn in an industry or the government comes up with new a regulation which affects a particular industry or company the fund can again be adversely affected. All these factors influence the performance of mutual funds. Risk Mitigation:Mutual funds are managed by professional fund managers. Professionals having considerable expertise. experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyze the markets and economy to pick good investment opportunities. Fund managers mitigate the risk by appropriately diversifying the portfolio into debt instruments as well as equities.

CHAPTER 14 ADVANTAGES OF MUTUAL FUNDS.

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Mutual funds are collecting large sum from the public, which is invested in securities of various companies. Thus, it helps the process of economic development of the country. It is also helping to, utilise the savings for productive activities. This process increases the rate of future savings and capital formation. Besides, the mutual funds are providing many advantages to its investing members. The main advantages available to investors are as follows: 1. Easy Investment Decision: When a person is having some spare money (savings), he has to think carefully where he should invest his money. In the absence of services of mutual funds, an intending investor has to study the various facts about the different companies, market trend and stock exchange movements. This is not a very easy task and is not possible for every person due to lack of knowledge to analyse the financial facts, scarcity of time and complexity of stock exchange activities. Due to all these difficulties, sometimes a person is not able to invest his money anywhere and thus a large part of savings remain un-invested (idle) or sometimes they are spent in unproductive activities. But with the advent of mutual funds schemes, investors need not involve in these tedious activities and straight away invest his money in some or other scheme of mutual fund as per his choice. In this way mutual funds are providing an opportunity of easy investment. 2. Flexibility: The investments of mutual funds are generally tradable at stock exchange. Therefore, whenever an investor wants to sell his investment he can do so easily and may further invest his money elsewhere. Thus, mutual funds are providing flexibility in financial matters. 3. Easy Liquidity:
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Most of the mutual fund schemes are providing the facility of buyback of their units after the gap of certain defined period. In this way, an investor may get his money back easily after that period. 4. Expert Managerial Services: Mutual funds are employing the persons of high calibre and expertise on financial matters. Thus even a small investor is able to get the benefit of high managerial services in his financial matters which was not possible for him in his personal capacity. 5. Tax Benefit: The investors of mutual funds schemes are getting various tax benefits in India on some of the schemes of mutual funds. These tax benefits are provided under sections 80 L and 88 of Income Tax Act and also under Wealth Tax Act.

DISADVANTAGES AND DEFECTS OF MUTUAL FUNDS

Mutual Funds are of great help for the economy as well as for small investors. But these are not free from defects due to involvement of high cost and unfair handling of large sum collected by them in practice. The following defects of these funds may be listed. 1. High Promotional Cost: Since 1987, when mutual fund business has been allowed to many organizations of public sector and nationalized banks, competition in mutual fund business has increased at high rate. The competition will become more cut throat with the advent of Private Sector in mutual fund business. All players of mutual funds are trying to allure public to invest the money in their schemes. For this purpose, they are making a large expenditure on
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advertisement, paying high commission to agents, merchandising banks and institutions. It is estimated that generally it costs about Rs. 1.5 crore to launch a fund scheme. Due to high promotional cost, the return of investors decreases substantially. 2. High Managerial Cost: To manage the schemes of mutual funds, the experts of financial management are employed by the operators at high salaries and perks, which is ultimately shared by the investors by way of reduction in their return. But this defect is not tenable, if the personnel employed are necessarily required and they are working efficiently. Only excess staffing should be avoided. 3. High Operational Cost: Mutual funds organizations require a big establishment to operate their activities which increases the cost of operation and decreases the return of investors. 4. Redemption Cost: Some of the mutual funds schemes assure buy back facility to the investors after sometime. But the instruments are redeemed after deducting the cost of redemption which reduces the realizable price of the instrument to the disadvantage of the investors.

CHAPTER 15

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PORTFOLIO MANAGEMENT - MANAGING UNITHOLDERS' MONEY

DEFINITIONOF PORTFOLIO MANAGEMENT
The goal of portfolio management is to assemble various securities into a portfolio that address investor needs and then to manage those portfolios to achieve investment objectives. The investors' needs are defined in terms of risk, and the portfolio manager maximizes return for the investment risk undertaken. ROLE OF FUND MANAGER IN A MUTUAL FUND In a mutual fund, portfolio management is at the heart of the activitychain. Portfolio manager, popularly known as fund manager carryon this function. Each scheme of mutual fund has a designated fund manager who is responsible for constructing, managing and protecting portfolios to achieve pre-defined investment objectives. Support functions The portfolio management process is proceeded by investment advisory functions & dealing activities and succeeded by investment monitoring function: Investment Advisory
Fund Management Executing dealing

Investment Monitoring

Department of securities research

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Normally mutual funds have separate department/cells/wings performing these activities. Investment advisory department/ department of securities research provide research support to the department of fund management. Given the kinds of schemes the mutual fund has, its fund management department specify a set of securities that have to be regularly tracked. For such securities, various reports may be prepared by the research department. Research analysts study the financials of the companies in detail and prepare valuation reports. They interact with the management of issuing company; get understanding of the strategies and its plans for future. They form a risk-return profile of the company and prepare their reports on the basis of these inputs. This department provides research support not only to the fund management team but also to the investment monitoring department. CONTINUOUS TRACKING Each analyst tracks one or more industry on a regular basis. Industry allocation enables the analyst to develop a better understanding of the critical success factors for a company in that industry and to assess the performance of the industry in future. The underlying idea behind securities evaluation is to understand business strengths of the company and project the company's performance, years down the line in terms of the likely returns to its stockholders. The analysts attempt to understand whether the companies can create and sustain shareholder value. The intrinsic worth of the stock is calculated by discounting future cash flows and the current market price is compared with the intrinsic worth to derive the extent of under-valuation/overvaluation. Based on this and other qualitative analysis a risk-return profile of the security is prepared.
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CRUCIAL FACTORS Factors that are normally examined while arriving at the intrinsic value are: 1. Quality of management of the company 2. General industry scenario 3. Competitive position of the company 4. Financial analysis The department of research prepares periodic report on specified securities and also on specific request made by the fund managers. The department of securities research normally issues a recommendation list for companies for a period of say 1-2 years in form of : Buy Market out performer Market performer Market under performer Sell The frequency of these recommendation list could be weekly/fortnightly/ monthly depending upon the needs of the fund management department. These recommendations are not binding on the fund managers. Whether the fund manager accepts these recommendations or not is his/her prerogative. DUMMY PORTFOLIO - Department of securities research normally maintains dummy / model portfolios. The objective of this portfolio is to be reflective of the research recommendations of the department. These model portfolios are actively managed and are made available to fund managers. This is also used by the fund managers to compare the actual performance of their schemes vis-a-vis the model portfolio.

Department of dealing
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DEALING IN SECURITIES Department of dealing acts as a support function to the fund management activity. It handles activities relating to the secondary market operations and tries to obtain the best possible price for purchase/sale of securities. The department of dealing is responsible for trading in the market. After it receives purchase/ sale requisitions from the fund managers for various schemes, it places orders with various brokers. Dealers also interact with the brokers during and after the trading hours. Since it directly deals with the brokers, it provides feedback to the fund manager on market information.

Portfolio management Process

Portfolio management consists of three major activities: 1. Asset allocation i.e. blending together major asset classes 2. Shift in weighting across major asset classes, and 3. Security selection within asset classes INVESTMENT OBJECTIVES Portfolios are constructed with a view to achieve the objectives specified in the scheme's offer document. The table below illustrates a few funds with their investment objectives as specified in their respective offer documents.

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. . . .

Mutual fund schemes Zurich India Prudence Fund Alliance' 95 Fund

Investment objectives Periodic returns and capital appreciation Long term growth of capital and current

income Mastergain 1992 Capital appreciation UTI Money Market Fund Highest possible current income

Portfolio Construction
If the primary objective of the portfolio is 'stability of principal' then the appropriate investment class is debt instruments. When regular income is the stated portfolio objective, appropriate investments include corporate bonds, government securities and perhaps some dividend paying equity. If the objective of the portfolio is to give capital appreciation then it is not important that the portfolio generate any income at all. The portfolio in such case comprises of common stocks and other equity related instruments. Identifying the asset class is the first step in the portfolio construction process. SECURITY SELECTION The next phase of the portfolio management process entails selection of individual securities and their proper weighting in the portfolio to achieve desired objectives. In blending securities together to form the desired composite, it is necessary not only to consider the risk return characteristics of each security but also to evaluate how these are likely to interact over time. Fund managers use portfolio optimizer for constructing optimal portfolio subject to their respective investment constraints. They use this product for the following purposes:
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Portfolio Management Fee

For constructing, managing, revising and maintaining the portfolios investors are charged with asset management fee. The Asset Management Company may charge the mutual fund with investment and advisory fees which are fully disclosed in the offer document subject to the following: a) One and a quarter of one per cent of the weekly average net assets, outstanding in each accounting year for the scheme concerned, as long as the net assets do not exceed Rs.100 crores, and b) One per cent of the excess amount over Rs.100 crores, where net assets so calculated exceed Rs.100 crores. For schemes launched on a no load basis, the asset management company shall be entitled to collect an additional management fee not exceeding 1% of the weekly average net assets outstanding in each financial year. This ceiling is for all the types of funds. It is observed that plain vanilla funds such as ETFs, index funds charge management fee much below the prescribed limit. Bond funds normally charge lesser fee than aggressive growth funds and sectoral funds.

UNITHOLDERS PROTECTION
MARKET DISCIPLINE THROUGH TRANSPARENCY SEBI (Mutual Fund) Regulations
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The Securities and Exchange Board of India (SEBI) as the regulator of Indian capital market had come out with its first mutual fund regulations in 1993. The need for creation and compliance mechanism for mutual fund industry was expressed by SEBI in these guidelines. These regulations were revised and enlarged subsequently' in 1996. Apart from sharply focused normative standards the regulatory mechanism laid greater emphasis on market discipline through enhanced transparency and disclosure requirements. INTEREST OF UNITHOLDERS IS SUPREME With SEBI (Mutual Fund) Regulations, all mutual funds have been brought under-a common regulatory framework to ensure greater degree of transparency in their operations and adherence to a common structure. This act spells out numerous restrictions and requirements designed to protect the interests of the investors, and ensure that, each mutual fund' scheme is managed and operated in the best interest' of its unit holders. These provisions are discussed under the following heads: Legal character of mutual fund Structure of mutual fund Registration of mutual fund Governance of mutual fund Operations of mutual fund Business of mutual fund Disclosure requirements Advertisement Investment restrictions Portfolio liquidity
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 Daily pricing Borrowings by mutual fund Reporting requirements Risk management system Grievance mechanism

Role of AMFI
AMFI, the apex body of all the registered asset management companies was incorporated on August 22, 1995 as a non-profit organization. All the asset management companies that have launched mutual fund schemes are its members. One of the objectives of AMFI is to promote investors' interest by defining and maintaining high ethical and professional standards in the mutual fund industry, The AMFI code of ethics sets out the standards of good practices to be followed by the asset management companies in their operations and in their dealings with investors, intermediaries and public. AMFI code has been drawn up to encourage adherence , to standards higher than those prescribed by the regulations for the benefits of investors in the mutual fund industry.

CHAPTER 16

Recommendations & Suggestions

Mutual fund should develop their own modern research. It will be helpful for better & efficient portfolio management.

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To provide greater liquidity to the investors mutual fund should develop a wide infrastructure of self-sufficient branches. Mutual fund should publish NAVs of their different schemes as frequently as possible. There is an urgent need of exclusive & comprehensive legislation for mutual fund industry. The Government should make a comprehensive Indian Mutual fund act covering all aspects regarding Mutual fund.

CHAPTER 17

CASE STUDY: John Hancock Mutual Funds

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John Hancock Mutual Funds (JH Funds), a subsidiary of Manulife, manages more than $50 billion in variety of open- and closed-end mutual funds and various other investment instruments. In 2004, Manulife acquired John Hancock, and, during its analysis of the various acquired business units, decided that it wanted to elevate JH Funds, then ranked in the high teens among U.S. mutual fund providers in terms of assets under management, to a top-ten provider. Seizing leadership in the online marketing of mutual funds was a prominent part of its plan. JH Funds had been an early pioneer in online mutual fund marketing, going live with jhfunds.com in 1999. That website ran on ATG Dynamo, using an Oracle database and Interwoven Teamsite as a content management system. Dynamo had mostly failed to gain acceptance as a web development platform, and the site's look and feel were showing their age. Requirements JH Funds decided to undertake a complete rewrite of the site, with the following goals: Simpler, more intuitive site navigation A new, fresher look and feel A full-site search function Cleaner integrations with third-party content Migration to a Manulife-standard web platform Improved content management to give business users more control and allow for more up-to-date content Most importantly, the new site had to be up and running within 8 months, by June of the following year, so that it could help JH Funds' sales staff achieve

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their goals for that fiscal year. Quality could not be compromised, but cost was flexible.

Nevo's Solution
JH Funds had already selected a design agency for the project, Torontobased Teehan+Lax (T+L). Nevo immediately set about working with its staff and with JH Funds marketing to conduct full requirements gathering, teasing out the details that T+L's designs necessarily glossed over. In parallel, Nevo began building an implementation team and performing design work, selecting technology platforms, laying out core components like site authentication, and refining the content management system integration strategy. Based on its experience with ASP.NET 2.0's beta version, Nevo recommended using the newly-released development platform, while it suggested moving to SQL Server 2000, as SQL Server 2005, while in full release, was not yet a Manulife standard. While JH Funds was hesitant to continue using Teamsite as a CMS, together with Nevo it decided to hold that component constant amid all the other change. Nevo's site component strategy was to use standard ASP.NET components wherever possible, digging deep into the code to provide customization hooks where necessary. Site authentication was a particularly thorny issue, as JH Funds wanted to unify authentication and site navigation across three logical sites, one each for the public, JH Funds partners, and JH Funds staff. The original jhfunds.com stored many of its pages wholesale in a content management system, depending on content authors to format it properly. The new system wherever possible stored snippets of text in a database and

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formatted the text in code, removing formatting responsibility from business users that lacked web page authoring expertise. With an fairly open budget and a tight time constraint, Nevo avoided the common consulting pitfall of overstaffing. Nevo staffed a team of 1 lead, 2 senior developers, and 2 junior developers, depending on JH Funds staff for database design and testing. We believed that this staffing level was optimal, even ignoring cost; the coordination overhead of additional developer would have actually slowed the work. To meet JH Funds' tight time constraints, Nevo recommended and won approval for deferring some pieces of functionality to a second phase, including the integration of a site search engine.

Results
The redesigned site went live on schedule in June with the deferred functionality following just a few months later, in October. T+L's clean designs impressed everyone involved in the project, and, with Nevo's concerted effort to produce a site faithful to their vision, jhfunds.com went on to win numerous awards, including an Outstanding Website award from the Web Marketing Association and 5 different "best" awards from the Mutual Fund Education Alliance. Nevo's content management vision, while far less publicly visible, was equally successful: within a few months of the initial launch, over 30 members of the JH Funds marketing and product management organizations were creating and editing site content.

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CHAPTER 18

CONCLUSION
In the context of recent development in the Indian capital market, the advent of mutual funds has augured well for small investor who had suffered grievously during the last two years. On the other hand, the genuine & good entrepreneurs did not enter capital market with their public issues because of the near certain failure of new issues during 1987 & early 1988.the lack of investor- confidence in the capital market on the on hand, & the fear of the promoters to enter the new issue market on the other, had corrected immediately, before serious & any irreparable damage could be done t the capital market. Among the many effective measures taken by the government, permitting banks to form a trust-worthy bridge between investors & promoters was a very timely & wise stop. Mutual funds in India provide safety, liquidity & growth to investors. They are safe & readily available conduits for channeling savings into investments yielding income & growth. The funds provide stability to share prices, safety to investors & resources to promoter entrepreneurs. When an economy develops & gains higher levels of affluence, the MFs play a major role in mobilizing savings. The generalization is based on the experience of the US, where the Americans convert almost one billion dollars savings into these funds everyday.MF industry in the US is expected to touch two trillion dollar mark by the end of the year 1996.the changes announced for the MF industry is an attempt to address its present problems. With greater flexibility in operations extend to them, the MF industry is expected to play its desired role to harness savings of the country.

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Indias Top 10 Mutual Fund Companies

HDFC Mutual Fund Inception date June 30th 2000. TATA Mutual Fund Inception date June 30th 1995. SBI Mutual Fund Inception date June 29th 1987. Reliance Mutual Fund Inception date June 30th 1995. DSP black rock Mutual Fund Inception date December 16th 1996. Kotak Mutual Fund Inception date June 23rd 1998. Principal Mutual Fund Inception date November 25th 1994. Sundaram BNP Paribas Mutual Fund Inception date August 24th 1996. Franklin Templeton Mutual Fund Inception date February 19th 1996. Birla sun life Mutual Fund Inception date December 24th 1994.

CHAPTER 19

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BIBLIOGRAPHY
BOOKS REFFERED Mutual fund Yashwant Khatarkar. Financial Markets & Services E.Gordon & K.Natarajan. WEBILOGRAPHY www.google.com www.yahoo.com www.economictimes.com www.wikipedia.com www.sebi.com www.managementparadise.com www.scribd.com

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