AMITY SCHOOL OF BUSINESS AMITY UNIVERSITY

DESSERTATION REPORT ANALYSIS OF MUTUAL FUND

Submitted To: Mrs. Mani Arora Submitted by: Atul Madaan

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Acknowledgment

Any attempt at any level cannot be satisfactorily completed without the support and guidance of learned people. I would like to express my immense gratitude to Mrs Mani Arora for her constant support and motivation that has encouraged me to come up with this project. I am also thankful to the authority of Amity University for providing us with good environment and facilities to complete this project. I also extend my heartfelt thanks to my family and well-wishers who helped me with their guidance from time to time in making this project despite their busy schedules.

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Table of content
s/no Particulars
1
Introduction Introduction of mutual fund Organization of a mutual fund 5 6-7 8

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Objectives
2 Mutual fund industry History Types of mutual fund 3 Advantages and Drawbacks of investing through mutual fund Measure of performance Comparing ICICI Prudential balanced funds with Birla Sun Life MIP Investment in mutual funds 7 8 Investment plans Special schemes Risk Banks v/s mutual funds

9-10 11-14 15-16

4 5

17-18 19-22

23-25 26-29 30-33 34 35

Recent trends in mutual fund industry Introduction to balanced and liquid funds Balanced funds Liquid funds

36-53 54-59

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10

Analysis Future if mutual fund industry Conclusion Suggestions bibliography 60-66 67 68-70 71

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

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Organisation of a Mutual Fund

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

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

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

Asset Management Company (AMC)

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

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

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Objectives
To know the purpose and performance and of investment in mutual fund To know various factors considered by the customers while going to invest in the mutual fund. To study the risk and return relationship with reference to mutual funds To know the form of return on investment

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History
The first mutual funds were established in Europe. One researcher credits a Dutch merchant with creating the first mutual fund in 1774. The first mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in 1868. It is now the Foreign & Colonial Investment Trust and trades on the London stock exchange. Mutual funds were introduced into the United States in the 1890s. They became popular during the 1920s. These early funds were generally of the closed-end type with a fixed number of shares which often traded at prices above the value of the portfolio. The first open-end mutual fund with redeemable shares was established on March 21, 1924. This fund, the Massachusetts Investors Trust, is now part of the MFS family of funds. However, closed-end funds remained more popular than open-end funds throughout the 1920s. By 1929, open-end funds accounted for only 5% of the industry's $27 billion in total assets. After the stock market crash of 1929, Congress passed a series of acts regulating the securities markets in general and mutual funds in particular. The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the Securities and Exchange Commission (SEC) and that they provide prospective investors with a prospectus that discloses essential facts about the investment. The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the Securities and Exchange Commission, which is the principal regulator of mutual funds. The Revenue Act of 1936 established guidelines for the taxation of mutual funds, while the Investment Company Act of 1940 governs their structure. When confidence in the stock market returned in the 1950s, the mutual fund industry began to grow again. By 1970, there were approximately 360 funds with $48 billion in assets. The introduction of money market funds in the high interest rate environment of the late 1970s boosted industry growth dramatically. The first retail index fund, First Index Investment Trust, was formed in 1976 by The Vanguard Group, headed by John Bogle, it is now called the Vanguard 500 Index Fund and is one of the world's largest mutual funds, with more than $100 billion in assets as of January 31, 2011.
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Fund industry growth continued into the 1980s and 1990s, as a result of three factors: a bull market for both stocks and bonds, new product introductions (including tax-exempt bond, sector, international and target date funds) and wider distribution of fund shares. Among the new distribution channels were retirement plans. Mutual funds are now the preferred investment option in certain types of fast-growing retirement plans, specifically in 401(k) and other defined contribution plans and in individual retirement accounts (IRAs), all of which surged in popularity in the 1980s. Total mutual fund assets fell in 2008 as a result of the credit crisis of 2008. At the end of 2010, there were 7,581 mutual funds in the United States with combined assets of $11.8 trillion, according to the Investment Company Institute (ICI), a national trade association of investment companies in the United States. The ICI reports that worldwide mutual fund assets were $4.7 trillion on the same date.

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Types of mutual fund

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

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

Open-ended Fund/ Scheme: An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity. Close-ended Fund/ Scheme: A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme
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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.

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. 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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Balanced Fund: 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.

Money Market or Liquid Fund: 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. Gilt Fund: 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.

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.

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Specific funds/schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert. 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. Load or no-load Fund: A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

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Advantages of investing through Mutual Fund

i) Professional investment management Mutual funds hire full-time, high-level investment professionals. Funds can afford to do so as they manage large pools of money. The managers have realtime access to crucial market information and are able to execute trades on the largest and most cost-effective scale.

ii) Diversification Mutual funds invest in a broad range of securities. This limits investment risk by reducing the effect of a possible decline in the value of any one security. Mutual fund unit-holders can benefit from diversification techniques usually available only to investors wealthy enough to buy significant positions in a wide variety of securities.

iii) Low Cost A mutual fund let's you participate in a diversified portfolio for as little as Rs.5,000/-, and sometimes less. And with no-load fund, you pay little or no sales charges to own them.

iv) Convenience and Flexibility You own just one security rather than many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund managers decide what securities to trade collect the interest payments and see that your dividends on portfolio securities are received and your rights exercised. It also uses the services of a high quality custodian and registrar in order to make sure that your convenience remains at the top of our mind.

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V) Personal Service One call puts you in touch with a specialist who can provide you with information you can use to make your own investment choices. They will provide you personal assistance in buying and selling your fund units, provide fund information and answer questions about your account status. Our Customer service centres are at your service and our Marketing team would be eager to hear your comments on our schemes. vi) Liquidity In open-ended schemes, you can get your money back promptly at net asset value related prices from the mutual fund itself.

DRAWBACK OF INVESTING IN MUTUAL FUNDS

No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutual fund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when they invest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through a mutual fund runs the risk of losing money. Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund. Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit
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on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

Widely used Measures of Performance

The Treynor Measure A ratio of return generated by the fund over and above risk free rate of return during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (RI - RF)/Bi. Ri = Rate of return on portfolio during the period. Rf = Risk free rate of return during the period. Bi = Beta of the portfolio. 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 unfavourable performance.

The Sharpe Measure A ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. It is the total risk of the fund that the investors are concerned about. Sharpe Index (Si) = (Ri - Rf)/Si Ri = Rate of return on portfolio during the period. Rf = Risk free rate of return during the period.

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Where, Si is standard deviation of the fund. A high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative is an indication of unfavourable performance.

Jenson Model Involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk. The surplus between the two returns is called Alpha. Required return of a fund at a given level of risk (Bi) can be calculated as: Ri = Rf + Bi (Rm - Rf) Higher alpha represents superior performance of the fund and vice versa.

Fama Model The Eugene Fama model is an extension of Jenson model. It 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. Required return can be calculated as: Ri = Rf + Si/Sm*(Rm - Rf) Where, Sm is standard deviation of market returns.

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COMPARING ICICI PRUDENCE BALANCE FUNDS WITH BIRLA SUN LIFE MIP.
ICICI Prudential Balanced Fund (G)

Investment Philosophy This fund seeks to optimize the risk-adjusted return by distributing assets between both equity and debt markets. In bullish markets equity allocation can go up to 80%. In bearish markets equity allocation can go down to 65%. This dynamic allocation along with core debt portfolio reduces the volatility of return

Investor Profile This Plan is ideal for Investors seeking exposure to both equity and debt markets through one fund Investors considering reasonable returns with and lower risk through diversification.

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Key Benefits Provides the twin benefits of growth from equity markets and steady income from debt markets. Lower volatility of returns and lower risk through diversification. FUND MANAGER Rahul Goswami Munzal Shah/Mrinal Singh FUND TYPE OPTION ASSET SIZE(Rs CR) MINIMUM INVESTMENT ENTRY LOAD EXIT LOAD Open Ended Growth and Dividend option 269.84 Rs 5000

Nil 1% (Exit Load 1% if units are redeemed / switchedout for a period of up to 1 year from the date of allotment.)

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Birla Sun Life MIP

Birla Sun Life MIP is an open-ended income scheme which seeks to generate regular income through investments in fixed income securities so as to make monthly payment or distribution to Unit-holders with the secondary objective being growth of capital through investments in equity. Birla Sun Life MIP is primarily a debt oriented fund that seeks to ensure an uninterrupted flow to unit holders with an additional objective of capital growth.

FUND MANAGER

Satyabrata Mohanty Nishit Dholakia

FUND TYPE OPTION MINIMUM INVESTMENT ENTRY LOAD EXIT LOAD

Open Ended Growth and Dividend Rs 5000 Nil Exit Load of 0.25% if redeemed within 7 Days from the date of allotment.

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COMPARISON BASIS ICICI PRUDENTIAL BIRLA SUN LIFE INSUANCE

CATEGORY

Hybrid: Equity-oriented

Hybrid- debt oriented conservative Below average Average

RISK GRADE Below Avg. RETURN GRADE RATING TURNOVER (%) BETA 0.89 Average

**** 43.00

**** 12.00

0.74

NAV (As on 30th Aug , 11 ) 52 weeks ( High/Low)

45.78

26.88

49.11/42.79

27.09/25.75

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INVESTMENT PLANS
The term investment plans generally refers to the services that the funds provide to the investors offering different ways to invest. The different investment plans are important consideration in the investment decisions because they determine the level of flexibility available to the investors. Alternate investment plans offered by the fund allow the investor freedom with respect to investing at one time or at regular intervals, making transfers to different schemes within the same fund family or receiving income at specified intervals or accumulating distributions. Some of the investment plans offered are as follows:

Automatic Reinvestment Plans (ARP): In India many funds offered two options under the same scheme the dividend option and growth option. The dividend option or the automatic reinvestment plan a (ARP) allows the investors to reinvest in additional units the amount of dividend or other distribution made by the fund, instead of receiving them in cash. Reinvestment takes place at the ex-dividend NAV. The ARP ensures that the investors reap the benefits of compounding in his investments. Some fund allows reinvestments into reinvestments into other schemes in the fund family. By using an automatic reinvestment plan, an investor is able to easily make use of his or her investment gains to produce further gains, taking advantage of compounding. Over a period of years, the added value produced by automatic reinvestment can turn out to be worth a substantial sum.

Automatic Investment Plans (AIP): These requires the investor to invest a fixed sum periodically, thereby lettering the investor save in a disciplined and phased manner. The mode of investment could be through debit to the investors salary or bank account.

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Such plans are also known as Systematic Investment Plans. But mutual funds do not offer this facility on all schemes. Typically they restrict it to their plain vanilla scheme like diversified equity funds, income funds and balanced funds. SIP works best in equity funds. It enforces saving discipline and helps you profit from market volatility you buy more units when the market is down and fewer when the market is up. This is one of the best ways to save money. By "paying themselves first" many people find they invest more in the long run. Their investments are treated as another part of their regular budget. It also forces a person to pay for investments automatically, which prevents them from being able to spend all of their disposable income. Systematic Withdrawal Plan: Such plans allow the investors to make systematic withdrawal from his fund investment account on a periodic basis, thereby providing the same benefit as regular income. The investor must withdraw a specific minimum amount with the facility to have withdrawal amounts sent to his residence by cheque or credited directly into his bank account. The amount withdrawn is treated as redemption of units at the applicable NAV as specified in the offer document. For example: the withdrawal could be at NAV on the first day of the month of payment. The investor is usually required to maintain a minimum balance in his bank account under this plan. Agents and the investors should understand that the systematic withdrawal plans are different from the monthly income plans, as the former allow investors to get back the principal amount invested while the latter only pay the income part on a regular basis. In short we can say that a systematic withdrawal plan is a financial plan that allows a shareholder to withdraw money from an existing mutual fund portfolio at predetermined intervals. The money withdrawn through a systematic withdrawal plan can be reinvested in another portfolio or used to pay for something else. Often, a systematic withdrawal plan is used to fund expenses during retirement. However, this type of plan may be used for other purposes as well.

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Systematic Transfer Plans (STP): These plans allow the customers to transfer on a periodic basis a specified amount from one scheme to another within the same fund family- meaning two schemes by the same AMC and belonging to the same fund. A transfer will be treated as the redemption of the units from the scheme from which the transfer is made. Such redemption or investment will be at the applicable NAV for the respective schemes as specified in the offer document. It is necessary for the investor to maintain a minimum balance in the scheme from which the transfer is made. Both UTI and other private funds now generally offer these services to the investors in India. The service allows the investors to maintain his investment actively to achieve his objectives. Many funds do not even change any transaction fees for this service.

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Special Schemes
Index Schemes:

The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. An Index also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors. An example to such a fund is the HDFC Index Fund.

Tax saving schemes:

Investors (individuals and Hindu Undivided Families (HUFs)) are being encouraged to invest in equity markets through Equity Linked Savings Scheme (ELSS) by offering them a tax rebate. Units purchased cannot be assigned / transferred/ pledged/ redeemed / switched out until completion of 3 years from the date of allotment of the respective Units. The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS. Subject to such conditions and limitations, as prescribed under Section 88 of the Income-tax Act,1961, subscriptions to the Units not exceeding Rs.10, 000 would be eligible to a deduction, from income tax, of an amount equal to 20% of the amount subscribed. HDFC Tax Plan 2000 is such a fund.

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Real Estate Funds:

Specialized real estate funds would invest in real estates directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets.

Debt Based Schemes: These schemes, also commonly called Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. These schemes are ideal for conservative investors or those not in a position to take higher equity risks, such as retired individuals. However, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk.

Income Schemes: These schemes invest in money markets, bonds and debentures of corporate with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. They therefore distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation. HDFC Income Fund, HDFC Short Term Plan and HDFC Fixed Investment Plans are examples of bond schemes.

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Money Market Schemes:

These schemes invest in short term instruments such as commercial paper (CP), certificates of deposit (CD), treasury bills (T-Bill) and overnight money (Call). The schemes are the least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. These schemes have become popular with institutional investors and high net worth individuals having short-term surplus funds.

Gilt Funds: This scheme primarily invests in Government Debt. Hence the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. HDFC Gilt Fund is an example of such a scheme.

Hybrid Schemes: These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. HDFC Balanced Fund and HDFC Childrens Gift Fund are examples of hybrid schemes.

Constitution: Schemes can be classified as Closed-ended or Open-ended depending upon whether they give the investor the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the scheme.

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Open ended Schemes: The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such schemes thus offer very high liquidity to investors and are becoming increasingly popular in India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at all times, and may stop issuing further subscription to new investors. On the other hand, an open-ended fund rarely denies to its investor the facility to redeem existing units.

Closed ended Schemes: The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with an initial public offer (IPO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

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Risk

The Risk-Return Trade-off:

The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss. Hence it is up to you, the investor to decide how much risk you are willing to take. In order to do this you must first be aware of the different types of risks involved with your investment decision.

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Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of rupees cost averaging (RCA) might help mitigate this risk.

Credit Risk: The debt servicing ability of a company through its cash flow determines the credit risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A AAA rating considered the safest whereas a D rating is considered poor credit quality. A well diversified portfolio might help mitigate this risk.

Inflation Risk: Things you people hear people talk about: Rs. 100 today is worth more than Rs 100 tomorrow. Remember the time when a bus ride cost 50 paise? Mahangai ka jamana hai?

The root cause, inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principle could at the time of the investment. This happens when the inflation grows faster than the return on your investment. A well diversified portfolio with some investment in equities might help mitigate this risk.

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Liquidity Risk:

Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities.

Diversification: The nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might underperforms but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect you principal investment as well as help you meet your return objectives.

Risk vs. Reward

Before you can begin to build a successful investment portfolio, you should understand the basic elements of mutual fund investing and how they can affect the potential value of your investments over the years. When you invest in mutual funds, there is no guarantee that you will end up with more money when you withdraw your investment than you put in to begin with -- and that's a scary prospect. Loss of value in your investment is what is considered risk in investing. Even so, the opportunity for investment growth that is possible through investments in mutual funds far exceeds that concern for most investors. Consider why, At the cornerstone of investing is the basic principal
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that the greater the risk you take, the greater the potential reward. Or stated another way, you get what you pay for and you get paid a higher return only when you're willing to accept more volatility. Risk then, refers to the volatility - the up and down activity in the markets and individual issues that occurs constantly over time. This volatility can be caused by a number of factors interest rate changes, inflation or general economic conditions. It is this variability, uncertainty and potential for loss, that causes investors to worry. We all fear the possibility that a stock or bond we invest in will fall substantially. But it is this very volatility in stocks, bonds and their markets that is the exact reason that you can expect to earn a higher long-term return from these investments than you can from CDs and passbook savings accounts. Different types of mutual funds have different levels of volatility or potential price change, and those with the greater chance of losing value are also the funds that can produce the greater returns for you over time. So risk has two sides: it causes the value of your investments to fluctuate, but it is precisely the reason you can expect to earn higher returns. You might find it helpful to remember that all financial investments will fluctuate. There are very few perfectly safe havens and those simply don't pay enough to beat inflation over the long run. Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers. Measuring the risk in mutual funds Total Risk = Systematic risk + Unsystematic risk. Measured in standard deviation of returns of the fund. Systematic risk - Beta, which represents fluctuations in the NAV of the fund with market. Unsystematic risk can be diversified through investments in a number of instruments.
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Banks v/s mutual funds

BANKS Returns Administrative exp. Risk Investment options Network Liquidity Quality of assets Interest calculation Low High Low Less High penetration At a cost Not transparent Min. Balance between 10th &30th of every month MUTUAL FUNDS Better Low Moderate More Low but improving Better Transparent Everyday

Guarantee

Max. Rs.1 lakh on deposits None

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Recent trends in Mutual Fund industry

The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players. Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way. The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on. The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc.

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Balanced funds & liquid funds

Balanced funds:
A fund that combines a stock component, a bond component and, sometimes, a money market component, in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of stocks and bonds that reflects either a moderate (higher equity component) or conservative (higher fixed-income component) orientation. Balanced mutual funds make it possible by investing in an assortment of investment instruments such as stocks, money markets and bonds etc. Balanced mutual funds are one of the types of various mutual funds available in the market. A balanced fund is geared toward investors who are looking for a mixture of safety, income and modest capital appreciation. The amounts that such a mutual fund invests into each asset class usually must remain within a set minimum and maximum.

Balanced funds may lock into higher equity pie

Come June, balanced funds may have to alter their structure to step up their equity exposures and maintain it at 65 per cent, if they are to avail themselves of the tax benefits extended to equity oriented funds. The recent Budget proposes to tweak the official definition of "equity oriented funds" to include only those funds which have 65 per cent or more of their investments in stocks. Currently, all funds that have a 50 per cent equity exposure are "equity oriented funds". These enjoy exemption from dividend distribution tax and lower rates of tax on short-term capital gains. Balanced funds currently allocate between 60-65 per cent of their assets to stocks. But they have considerable leeway in their objectives to swing between a 40 per cent and a
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60per cent equity exposure. Now, fund houses may have to tweak this structure to "fix" the equity exposure at 65 per cent, if they want their balanced funds to enjoy tax benefits."The tax benefits are substantial. We will be changing the structure of the scheme and increasing the equity exposure, but after we take a formal decision," said Mr N.Sethuram, Chief Investment Officer of SBI Mutual Fund. SBI's Magnum Balanced Fund had a 65 per cent exposure to equities by end-January. Mr Sethuram also feels that the changes will blur the boundary between pure equity funds and balanced funds. "Equity funds can hold up to 30 per cent of their portfolio in cash; balanced funds will now have to hold 65 per cent in stocks. There is not much of a difference between the two," he pointed out. Franklin Templeton, which manages Franklin Templeton India Balanced Fund and FT Dynamic P/E ratio Fund, said it is discussing the proposals with tax consultants before finalising a decision. But the fund already has an equity allocation of 65 per cent on FT India Balanced Fund. "Our exposure to equity has been on the higher side, on account of our conviction about the long-term potential of equities. Having said that, these proposals may impact the asset allocation of balanced funds that wish to offer tax-free dividends to investors," said Mr Sukumar Rajah, CIO of the fund house. With the stocks markets on a dream run, most fund houses have tended to take a bullish view of equities. While most balanced funds had 60-65 per cent in stocks, HDFC Prudence was the only outlier with a 59 per cent equity allocation by end-January. A higher equity allocation may become a permanent feature if fund houses decide to take advantage of the new proposals. But as one fund manager pointed out, "You can have a lower allocation to equities over a month or two, because the 65 per cent limit is reckoned on the average of monthly balances through the year." Funds also have a comfortable three-month window until June 1, to make these changes. That is when these proposals, if passed into law, will take effect 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
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less volatile compared to pure equity funds. These schemes generally have a three-fold objective: i) ii) iii) to conserve the initial principal, to pay current income and to promote long-term growth of both principal and income.

Fund managers achieve these objectives through a diversified portfolio of equities and debt instruments. While equities provide growth, debt instruments provide current income and stability. For the small investor, a balanced fund is the best way to practice asset allocation, which means dividing your portfolio among different investments such as equity and bonds. Fund managers apportion your investment into debt and equity investments within the limits prescribed in the offer document. Current tax laws have accorded a tax-free status to open-ended schemes investing more than 50 per cent in equities. Therefore, if you are looking for tax benefits, take a look at the asset allocation table in the offer document to ensure that the fund invests more than50 per cent in equities.

The balanced fund is ideal:

i) ii) iii) for those seeking a balance between stability and growth with some protection against inflation Those unable to choose between equities and fixed income securities. Those who have never invested in equities, and are eager to take their first step.

WORKING OF BALANCED FUNDS

Balanced mutual funds make it possible by investing in an assortment of investment instruments such as stocks, money markets and bonds etc. Balanced mutual funds are one of the types of various mutual funds available in the market. This article discusses: What is the principle behind balanced mutual fund?
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 What is the objective of the balanced fund? Differentiate between balanced funds and other types of funds Balanced mutual funds are one of the types of various mutual funds available in the market. If you are wondering if there is any fund that can combine benefits of income and capital appreciation, look no further, this is it. Balanced mutual funds make it possible by investing in an assortment of investment instruments such as stocks, money markets and bonds etc. Alternately these are also called as asset allocation funds. The proportion in which the balanced mutual funds allocate their assets is usually 60 % to65 % in stocks and the balance in bonds. The proportion is not disturbed while managing the fund as it is to remain within the pre set minimum and maximum limits. Agreed that mutual funds provide better and safer investment domains for ordinary public, but they are not completely devoid of risks and violent market fluctuation. Balanced mutual funds try to address these concerns in a way unique to mutual funds alone.

Investment in Stocks: One can draw some similarity of balanced funds with well diversified funds. Asset allocated for stocks are diversified into different sectors which are performing with high returns. Fund allocation weightage is determined by the stocks' return potentials. The top stock, for example may get an allocation of say 10% and the lesser the potential the lesser is the percentage allocation of funds. The same pattern is then repeated for another sector of stocks. Sectors are chosen subject to various parameters.

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Investment in Bonds: The allocation to bonds is distributed among bonds issued by governments and banks. Municipal bonds, called as munis, some times find their way into this. This investment provides guaranteed returns at a steady rate over a period. This gives the stability to the entire fund cushioning the violent fluctuations of aggressive stock investment.

Balanced Fund v/s Other Types of Funds: The objective of the fund is to generate income while being able to grow capital. Blend of Growth and Safety: The unique proposition of spreading the investment into two broad divisions of mutual fund investing is hard to find in other class of funds. Freedom to decide allocation: freedom to switch over from one proportion to the other, which is from 60:40 to 40:60 patterns. You can switch over when you perceive a growth opportunity or a threat into the other from the existing. This you can reverse when you perceive the situation leading to it has changed. No other type of fund has this freedom, having chosen the fund; you have to go through the mandate of the fund. Best balanced mutual funds keep allocation flexible and open to changes as per demands of market conditions but subject to regulations by laws of government and SEC (Securities & Exchange Commission). Risky Proposition: Consider a situation when the stock market is having a bull run (long rally). Then you can expect a great appreciation in its principal. Naturally any manager would be tempted to divert as much cash at his command to stocks as possible. It could go as high as 80% with just 20% for debt instruments. Other types of funds differ here because of SEC regulations and funds' own mandate.

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ADVANTAGES OF BALANCED FUNDS

For balanced mutual funds, this is one Budget where the devil is truly in the detail. By tweaking the definition of equity-oriented funds to include only those funds that have invested at least 65 per cent of their assets in equities, the Budget proposals put balanced funds in a quandary. Until now, funds with an equity exposure of 50 per cent or more were defined as "equity-oriented funds". Investors in these funds are exempted from paying long-term capital gains tax; and short-term gains are taxed at a concessional 10 per cent. Equity funds are also exempt from paying dividend distribution tax, at 12.5 per cent for individuals, when they pay out dividends. Balanced funds that would like their investors to enjoy lower rates of tax will now be forced to retain their equity exposure at 65 per cent, or a higher proportion, of their assets. Funds that prefer a conservative equity exposure will have no choice but to fore go the tax benefits. Rather than lose the tax benefits, most balanced fund managers may opt for a permanent higher allocation to equities. The proposals, if passed into law, take effect on June 1.

More equity exposure Given the substantial tax benefits associated with being classified as an `equity-oriented fund', most fund-houses are likely to tweak their balanced funds to fit in with the new objectives. The immediate impact on the asset allocation pattern of balanced funds may not be too significant. With corporate earnings growing at a healthy clip and the stock market on a dream run, most fund-houses have taken a bullish view on equities and maintain a high equity allocation in their respective balanced funds.

Tilted towards equities Of the various long-running balanced funds, Franklin Templeton India Balanced Fund, Magnum Balanced Fund and Kotak Balance already had equity exposures
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of 65 per cent or more by end-January 2006. Others such as Sundaram Balanced and PruICICIBalanced were at a 64 per cent equity exposure and need only to peg it up a whisker to make it over the threshold. Only HDFC Prudence had an equity allocation substantially lower than the threshold, at 59.9 per cent, by end-January. Of course, the equity allocation for this purpose is reckoned on the average monthly balances through the year. Therefore, a fund need not necessarily retain a 65 per cent equity exposure at all times to be eligible for the tax benefits. There could be temporary spikes or a shortfall in the equity allocation over a month or two that could be made up in the rest of the year. Since these proposals take effect only in June, funds have a fairly long, threemonth window to think through and rejig their asset allocation pattern.

Less flexibility But it is the loss of flexibility that this rule entails that is a greater worry for investors in balanced funds. With the proportion of equity investments in a balanced fund straitjacketed at 65 per cent, managers of such funds will have less flexibility to move to debt investments if the equity market appears overheated. Individual investors, on their own, are seldom savvy enough to book profits on their equity portfolio at the right time, given the difficulty of taking a view about stock valuations or the direction of interest rates. Managers of balanced funds are better placed to make this call. Most balanced funds at present have considerable leeway in their asset allocation. Their objectives usually allow equity investments to swing between 40 per cent and 60 per cent of their assets. In practice, though, equity investments account for 60-65 per cent of the assets. This flexibility has stood some funds in good stead. Successful balanced funds such as HDFC Prudence have turned in an impressive performance by making this kind of "tactical" asset allocation call.If the equity exposure in this fund is "fixed" at 65 per cent, the fund may have to load upon stocks, irrespective of whether the fund manager is really comfortable with such an allocation. Investors could lose out on the value addition that comes from fluid asset allocation.
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Balanced funds still attractive Do these proposals make investing in balanced funds an unattractive proposition? Could an investor substitute a balanced fund by investing 65 per cent of his money in equity funds and 35 per cent in debt funds? No, because balanced funds will continue to offer three distinct advantages over this strategy. One, balanced funds periodically re-balance assets between equity and debt difficult for an individual investor to manage on his own. Second, the tax advantages over direct investing. When a fund manager books profits on stocks or bonds to re-balance his portfolio, the fund pays no capital gains tax on these transactions. As an investor, you will have to pay short term capital gains tax, if you rejig your portfolio at short intervals. Third, balanced fund managers will still be able to add some value on asset allocation. They could choose to have a much higher equity exposure than 65 per cent and juggle between the debt and cash components.

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SBI Magnum Balanced Fund

INVESTORS in SBI Magnum Balanced Fund may retain their holdings, as there has been a substantial improvement in the fund's performance over the past three years. The equity portfolio has a neat mix of mid-cap stocks and largecap stocks. Despite a sizeable allocation to large-cap stocks, the fund has performed impressively. The mid-cap stocks in the portfolio have delivered attractive returns as they have enjoyed several bouts of re-rating over the past couple of years. It has outperformed the CRISIL Balanced Fund Index and the BSE-100 by a comfortable margin. Over a five-year period, the NAV has, however, remained largely flat. In the 10 years since launch, the fund has turned in annual returns of 16 per cent; a large part of this owing to the sharp improvement in fund performance since early 2003.The recovery of SBI Magnum Balanced and the move to the top of the ranks along with HDFC Prudence in the balanced funds category is in line with the trend evident in all the SBI-managed funds. The fund has consistently maintained 60-65 per cent of assets in equities. This has helped perk up returns, aided in no small measure by the largely bullish equity market of the past two years. The fund has been aggressively managed and appears to have picked the right themes and stocks to ride the momentum in the market. Even in the large-cap space, the fund has shuffled its portfolio over the past few months. Reliance, SBI and Jet Airways have replaced the likes of ACC, Gujarat Ambuja and NTPC. Among mid-cap stocks, the fund has replaced Pantaloon Retail and Uttam Galva Steels with IVRCL Infrastructure and Adlabs Films. So far, such changes have yielded attractive returns. Suitability: The fund is appropriate for investors who seek a mix of equity and debt and prefer to go through the balanced funds route. This is especially true for investors who do not have the time and inclination to constructa balanced portfolio and ensure that the asset allocation remains in line with their investment objective and risk preferences. Unlike HDFC Prudence, SBI Magnum Balanced Fund still has a small asset base of a tadless than Rs 100 crore. This provides for a high degree of flexibility in
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asset management, coupled with the quality of stock selection, and holds promise of the fund sustaining the momentum in NAV. Investors may opt for the dividend option as payments are exempt from tax. Fund facts: The fund was launched in October 1995. The minimum investment is Rs5, 000. The entry load is 2.25 per cent. There is no exit load. Mr Sachin S. Sawarikar is the manager. Unit holders can retain their exposure in Magnum Balanced Fund. A high exposure to equity during the three-year bull rally has helped SBI Magnum Balanced Fund deliver an impressive performance through most of this period. Over a one-year period, the fund has generated a return of 57 per cent, which makes it one of the top performers in the category. Its returns beat the benchmark Crisil Balanced Index by about 20 percentage points. Over a longer time-frame, however, HDFC Prudence still enjoys a better track record. Suitability: The latter may also be better suited for those who have a conservative risk profile. Prudence has maintained a 60 per cent equity allocation, compared to 65 per cent and more in most other balanced funds. Magnum Balanced, however, had about 75 per cent invested in equity as of April 30.It also frequently makes "tactical" asset allocation calls, with its holdings in equity swinging widely from 62 per cent in November 2005to 86 per cent in March 2006. These calls have, no doubt, paid off for the fund over the past year. The fund may, however, not be suitable for investors who want a stable mix of debt and equity in their portfolios. Notably, most balanced funds may no longer have the flexibility to substantially cut their exposure to equity in volatile times. Already, most have at least 65 per cent of their assets in equity. Recent changes in the definition of "equity-oriented" funds, to determine the tax payable at the hands of the investor, are also likely to ensure that this bias towards equity remains in most cases. According to the new rules, a fund should have at least 65 per cent invested in equity, as against 50 per cent earlier, for investors to enjoy the capital gains and dividend distribution tax benefits of equity.

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Most balanced funds may, therefore, be forced to fix their equity allocation at 65 per cent for a greater part of the year, if they want their investors to enjoy tax benefits. The distinction between these funds and equity is, therefore, likely to blur somewhat. In this context, Magnum Balanced may not have a much higher risk profile than others in its category. Balanced funds may, in general, be better suited for those who want at least a 65 per cent exposure to equity at any given time. Portfolio overview: The fund invests in a good mix of large-cap and mid-cap stocks. About 30 per cent is invested in stocks with a market capitalisation of more than Rs10, 000 crore. The top ten stocks account for about 35 per cent of its assets. Its top three sectors consumer goods, IT and engineering account for about a third of the portfolio. The fund invests mainly in corporate debt. It had about 10 per cent in cash as of April 30. Fund Facts: SBI Magnum Balanced was launched in 1995. It has an asset base of Rs 215crore. It offers dividend and growth options. The minimum investment is Rs 1,000.

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TWO IMPORTANT BALANCED FUNDS FLOATED BY SBI MAGNUM

MAGNUM NRI INVESTMENT FUND FLEXI ASSET PLAN:
Investment Objective: The investment objective of the scheme will be to provide attractive returns to the Magnum holders either through periodic dividends or through capital appreciation through an actively managed portfolio of debt, equity and instruments. Income may be generated through the receipt of coupon payments, the amortization of the discount on the debt instruments, receipt of dividends or purchase and sale of securities in the underlying portfolio.

Asset Allocation: Instrument Corporate Debenture and Bonds/PSU, FI Government guaranteed Bonds including Securitized Debt and In Of which Securitized Debt % of portfolio of plan Up to 90% of the investments in debt instruments Risk profile Medium to High

Not more than 30%of Medium to High the investments in debt instruments Up to 100% of the investments in debt instruments At least 10% and not exceeding 80% at any Low

Government Securities

Equity and equity related instruments

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High

time Derivative Instruments Cash and Call and Money Market Within approved limits Up to 25% Low Low

Scheme Highlights: 1. All Plans have Growth and Dividend Options. 2. The returns under the Growth option to be through capital appreciation only, The Flexi Asset Plan to follow an Asset Allocation Model wherein depending on market conditions/based on certain triggers, the Fund Manager can take a view on the percentage of investments that can be allocated to equity. 3. This Plan would have a minimum of 10% investment in equity related instruments which can be increased up to 80% depending on market fundamentals. 4. The investment universe for equity stocks will be limited to such equity stocks that form a part of BSE-100. 5. The scheme will declare NAV, Sale and Repurchase prices on all business days. 6. All Plans will have separate asset classes and will declare separate NAVs for different options.

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Performance

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MAGNUM BALANCED FUND:

Investment Objective: To provide investors long term capital appreciation along with the liquidity of an open-ended scheme by investing in a mix of debt and equity. The scheme will invest in a diversified portfolio of equities of high growth companies and balance the risk through investing the rest in a relatively safe portfolio of debt.

Asset Allocation:

Instrument Equities Debt Instruments like debentures, bonds, khokhas, etc. Securitized Debt

% of portfolio of plan At least 50% Up to 40%

Risk profile Medium to High Medium to High

Not more than 10%of investments indebt Balance

Medium to High

Money Market Instruments

Low

Scheme Highlights:

1. An open-ended scheme investing in a mix of debt and equity instruments. Investors get the benefit of high expected-returns of equity investments with the safety of debt investments in one scheme.
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2. On an ongoing basis, magnums will be allotted at an entry load of 2.25% to the NAV. 3. Scheme opens for Resident Indians, Trusts, Indian Corporates, on a fully repatriable basis for NRIs and, Overseas Corporate Bodies. 4. Facility to reinvest dividend proceeds into the scheme at NAV available. 5. Switchover facility to any other open-ended schemes of SBI Mutual Fund at NAV related prices. 6. The scheme will declare NAV, Sale and repurchase price on a daily basis. 7. Nomination facility available for individuals applying on their behalf either singly or jointly up to three.

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Performance

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LIQUID FUNDS:
Liquid funds are used primarily as an alternative to short-term fix deposits. Liquid funds invest with minimal risk (like money market funds).Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. Liquid funds score over short term fix deposits. Banks give a fixed rate in the range 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are taxable depending on the tax bracket of the investor, which considerably pulls down the actual return. Dividends from liquid funds are tax-free in the hands of investor, which is why they are more attractive than deposits. Liquidity: Deposits marginally score over liquid funds as far as liquidity is concerned. In bank deposits the investor's bank account is credited as soon as his FDR (fixed deposit receipt) is surrendered to the bank. However, in case of liquid funds the investor has to give are demption request to the fund within the cut off time to receive that days NAV and the cheque is issued to him on the next working day. However, some funds give the facility of crediting the investor's bank account e.g. Franklin Templeton gives this facility to the HDFC bank account holders. Factoring in all these factors, liquid funds do emerge as a better option as compared to fixed deposits. However, while investing money in these funds investors need to carefully evaluate the fund's performance. There is a possibility that liquid funds may not deliver in terms of expected returns owing to market factors. Therefore, if you have Rs 100 to invest, you should probably split the money between a liquid fund and a fixed deposit. Corporates park surpluses in short-term liquid funds TURBULENT markets and expectations of hardening interest rates are forcing corporate to move funds into short-term liquid funds. Liquid and floating rate funds have been receiving higher inflows with the trend strengthening over the last two weeks. The mutual fund industry expects this to maintain momentum till the post-budget trends are visible.
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Return on Liquid Funds:

Liquid funds are used primarily as an alternative to short-term fix deposits. Liquid funds invest with minimal risk (like money market funds). Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. The minimum investment size in a liquid fund varies from Rs. 25,000 to Rs 1 lakh. Liquid funds invest in short-term debt instruments with maturities of less than one year. Therefore, they invest in money market instruments, short-term corporate deposits and treasury. The maturity of instruments held is between three and six months. A liquid fund provides good liquidity, low interest rate risk and the prevailing yield in the market. Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk. Liquid funds have an exit load if the investor redeems before the lock-in period. But in most cases, the lock-in period is quite low - varying from 7 to 10 days. Liquid funds score over short term fix deposits. Banks give a fixed rate in the range 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are taxable depending on the tax bracket of the investor, which considerably pulls down the actual return. Dividends from liquid funds are tax-free in the hands of investor, which is why they are more attractive than deposits. The sole disadvantage liquid fund is that investors cannot take the advantage of higher returns being offered by long-term instruments.

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Liquid Fund floated by SBI Magnum

SBI Premier Liquid Fund:
Investment objective:

The investment objective of the scheme will be to provide attractive returns to the Magnum holders either through periodic dividends or through capital appreciation through an activity managed portfolio of debt and money market instruments. Income may be generated through the receipt of coupon payments, the amortization of the discount on the debt instruments, receipt of dividends or purchase and sale of securities in the underlying portfolio.

Asset Allocation:

Instrument

% of portfolio of plan A

% of portfolio of Risk profile plan B Within SEBI Stipulated limits Within approved limits Upto 25% Medium to High Medium

Of which International Within SEBI Bonds Stipulated limits Derivative instruments Cash & call money Market Instruments Within approved limits Upto 100%

Low

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Scheme Highlights:

1. There are 2 options - Institutional Plan and Super Institutional Plan. Both plans have Growth and Dividend Options. 2. Under Dividend option of both plans, the frequency of dividend payment will be daily, weekly and fortnightly. Daily Dividend under Super Institutional plan will be declared from March 24, 2007 subject to availability of distributable surplus and incompliance with SEBI Regulations from time to time. 3. Daily Dividend will be subject to compulsory reinvestment at applicable NAV irrespective of the amount of investment. 4. Payout and reinvestment facility will be available only under weekly and fortnightly dividend options. The payout facility under weekly and fortnightly dividend options in the Institutional Plan will be offered only to such investors who have a minimum investment of Rs 1 crore in these options. 5. The Fund as a whole will be managed as a single portfolio. Both plans will not charge any entry or exit load and will declare NAV on all calendar days with effect from March 23, 2007. 6. Investors, who wish to exit from the scheme, can do it at applicable NAV, without exit load, on or before March 22, 2007.

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Performance:

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Future of Mutual Fund Industry in India outlook 2015

India has been amongst the fastest growing markets for mutual funds since 2004 witnessing a CAGR of 29 percent in the five year period from 2004 to 2008 as against global average of 4%. The increase in revenue and profitability however has not been commensurate with the AUM growth in last five years. Low share of global assets under management, low penetration levels, limited share of mutual funds in the household financial savings and the climbing growth rates in the last few years are amongst the highest in the world, all points to the future potential of the Indian mutual fund industry. Low customer awareness levels and financial literacy pose the biggest challenge to channelizing household savings into mutual funds. Further fund houses have shown limited focus on increasing the retail penetration and building retail AUM. Most AMC and distributors have a limited focus beyond 20 cities that is manifested in limited distribution channels and investor servicing. The Indian mutual fund industry has largely been product-led and not customer focused with limited focus being accorded by players to innovation and new product development. It will be interesting to understand the key challenges and issues faced and the action outlined for the key stakeholders so as to surpass expectations of industry growth and profitability.

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1.

Challenges and Issues

a) Low Levels of Customer Awareness - Low customer awareness levels and financial literacy pose the biggest challenge to channelizing household savings into mutual funds. The general lack of understanding of mutual fund products amongst Indian investors is pervasive in metros and Tier 2 cities alike and majority of them draw little distinction in their approach to investing in mutual funds and direct stock market investments. A large majority of retail investors lack in understanding of risk return, assets allocation, portfolio diversification concepts. Low awareness of SIPs in India has resulted in a majority of the customers investing in a lump sum manner. b) Limited Focus on Increasing Retail Penetration -The Indian mutual fund industry had limited focus on building retail. AUM and has only recently stepped up efforts to augment branch presence in Tier 2 and Tier 3 towns. Players have historically garnered AUM by targeting the institutional segment that comprises 63 percent of AUM share as at M arch_2008.

c) Limited Focus Beyond the Top 20 The mutual fund industry has continues to have limited penetration beyond the top 20 cities. Cities beyond Top 20 only comprise approximately 10 percent of the industry AUM as per industry practitioners. The retail population residing in Tier 2 and Tier3 towns, even if aware and willing are unable to invest in mutual funds owing to limited access to suitable distribution channels and investor servicing.
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d) Limited Innovation in Product Offerings The Indian mutual fund industry has largely been product led and not sufficiently customer focused. The popularity of NFOs triggered a proliferation of schemes with a large number of non-differentiated products. Despite the regulations for Real Estate Mutual Funds (REMF) being introduced in 2008 the market is still awaiting the first EMF launch potential investors in mutual funds The Indian mutual fund industry offers limited investment options viz. capital guarantee products for the Indian investors a large majority of whom are risk averse .

e) Limited Customer Engagement Mutual fund distributors have been facing questions on their Competence degree of engagement with customer and the value provided to the customer. In the absence of a framework to regulate distributors, both the distributors and the mutual fund houses have exhibited limited interest in continuously engaging with customers post closure of sale as the commissions and incentives had been largely in the form of upfront fees from product sales.

f) Limited Focus of the Public Sector Network on Distribution of Mutual Funds Public sector banks with large captive customer base significant reach Beyond the Top 20 cities in semi-urban and rural areas and the potential to build the retail investor base have so far played a very limited role in Mutual funds distribution.

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g) Multiple Regulatory Frameworks Governing Financial Services Sector Regulatory & compliance requirements vary across verticals within The financial services sector specifically mutual funds, insurance and Pension funds each of which are governed by an independent regulatory Framework, are competing for the share of the customers wallet.

h) Impediments to Mutual Fund Investing- Customers perspective Reasons provided by Survey Respondents for Not Investing in Mutual Funds-as per survey conducted by KPMG in May 2009

Reasons Insufficient funds for investments High Associated risk Complicate Forms KYC documents demanded Too many schemes Complicate product features Other attractive Investments Not properly advised

Percentage of customers 3 7 10 17 23 20 17 3

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In summary, the challenges and issues faced by the Indian mutual fund Industry will need to be addressed at the earliest to ensure long term sustained profitable growth of the industry.

2.

Action Plan for Achieving Transformational Growth Opportunities exist for surpassing the growth potential of the Indian mutual fund industry and making the industry more profitable. There is a need for a collaborative effort across all key stakeholders to harness the future growth potential and reach out to the customer viz. AMCs, distribution channel partners, service providers such as R&T agents, custodians and fund accountants, SEBI, AMFI and media. Some of the key initiatives that are required to be undertaken for Indian Mutual Fund industry to grow and effectively operate in a dynamic environment are briefly explained below. a. Customer Awareness Program Given that customer awareness is the pre requisite for the achievement of the industry growth potential, there is need for planning, financing, executing initiatives aimed at increasing financial literacy and enhancing investor education across the entire country through a sustained collaborative effort across all stakeholders .e.g. Mutual Fund education Fund, mass media campaigns, investor associations, self help groups to facilitate investor workshops in cities and town. b. New Products and pricing to attract Risk Averse Customers The objective of product innovation should be driven by the need to introduce simple products to attract and retain risk averse and first time customers to
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start investing in mutual funds. Focus should be to design simple products around women, children related needs and products to appeal low income group. Encourage introduction of customized ETF for retail and institutional customers. Further, commodity related, crop related and agriculture oriented products may be conceptualized and developed by catering to segment specific needs. c. Pricing Flexibility Pricing innovations should focus on distributor compensation and administration. Enable flexibility in regulations to allow customers to pay for the advice and service rendered y the distributors through varying arrangement based on the method of purchase, service provided and time frame for payment. d. Public Sector Thrust into Mutual Fund Distribution beyond Tier 2 cities - Training of Public Sector employees on sale of MF and financial planning - Commence sale of MF through the branch network of Post Office, Nationalized Banks, Regional Rural and cooperative banks Boost the presence of Investor Service Centers in smaller cities.

- Focus on increasing customer engagement Pre and Post Completion of the investment. e. Harmonization of Policies across multiple Regulatory Frameworks in the Financial Service Sectors It is proposed that the Government of India should constitute a Steering Committee under the aegis of the Ministry of Finance comprising the financial Services Regulators for mutual funds capital markets, pension, insurance, banking and other verticals along with representation from CBDT .The Committees objective should be defined as
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achieving harmonization in policies and procedures across multiple regulatory frameworks in the Financial Services sector.

3.

Future Outlook in a Dynamic Environment KPMG in India is of the view that Industry AUM is likely to grow in the range of 15 to 25 percent from 2010 to 2015 based on the pace of economic growth. Industry profitability may reduce as revenues shrink and operating costs escalate. Product innovation is expected to be limited. Market deepening is expected. The regulatory and compliance framework for mutual fund is likely to get aligned with other frameworks across financial service sector

4.

Summary There is a perceived need to review risk and performance analysis capabilities and governance structures to meet responsibilities and the increasing demand for transparency. AMCs therefore need to reorient their business towards fulfilling customers needs. This requires creating a collaborative network of experts in funds management and financial advice, innovative product range, efficient service industry and supporting technology. The mutual fund industry today needs to develop products to fulfil customer needs and help customers understand how its products cater to their needs. Given that the industry needs to collectively work towards riding over the dynamic and relatively less favourable economic environment at present, the next phase for the industry is likely to be characterized by a strong focus on customer centricity.
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CONCLUSION & SUGGESTIONS

CONCLUSION:
VAST POTENTIAL: Currently, the investments in Mutual Funds are very low. As per my survey, only 12% of the people surveyed invest in Mutual Funds. When applied to all of India, this figure is expected to be lesser. Thus, it presents a vast potential for the growth and development of Mutual Fund industry in India. The Indian Consumer market represents a large market with a middle class of nearly300million. The economy boasts of a young population, coupled with rising salaries, tremendous potential with an ever-increasing demand for lifestyle products. According to A.C. Nielsons global online consumer confidence survey Indian consumers are The Most optimistic: The World Over, and are ranked among the top 5 countries who are ready to purchase what they desire and invest in Mutual Funds and Shares, way ahead of their Asian counterparts. India has the third largest investor base in the world and one of the worlds lowest transaction costs based on screen-based transactions, paperless trading and a T+2 settlements cycle.

HIGH SATISFACTION RATE: The survey shows that 75% of those who invest in Mutual Funds shall continue to do so. This is a positive sign depicting that people are satisfied with their investments in Mutual Funds. Thus, it shows that the retention of customers is not that difficult a task than their acquisition.

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SUGGESTIONS:
The first and foremost necessity to be successful in acquiring more customers to invest in Mutual Funds is to overcome the various barriers and challenges Posed by the customers and the environment.

CREATE AWARENESS: The biggest challenge faced by all the sellers and distributors of Mutual Funds is that Most of the people are not aware of mutual funds and how they work Many consider Mutual Funds to be very risky and prefer to invest directly in share market while the truth is that Mutual Funds are lesser risky than a direct individual investment in equity as they present the benefits of calculated diversification which is no possible for an individual retail investor. Thus, any step towards creating awareness about Mutual Funds and its working will be in favour of the SBI MUTUAL FUND as well as the entire Mutual Fund industry. Whoever adopts aproactive approach in this direction and pioneers the initiative shall get the initiators advantage, which will help acquire that player, a major chunk of the market. Some of the steps that can be taken to create awareness and attract interest and participation can be:

1. ADVERTISING- both electronic and print: Any awareness building advertisement should not be aimed at selling any of the products of the Bank. An ad that is issued in public interest and public awareness and that just mentions the issuers/sponsors name is held in great respect by people and helps acquire a favourable social image as a better corporate citizen. Such an image is very essential as people are more willing to hand their money to organizations with such a public rapport and trust. A very widespread and less expensive way of such an advertisement is the use of popular Radio Channels like Radio Mirchi, Red FM and Radio City etc. They have a high popularity rate and a mass reach to all classes of population. Such an advertising strategy is used by Share khan, where it sponsors informative fillers about various financial and economic concepts like inflation,
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investments etc. in simple layman language to make it more interesting to know and learn. This has lead to a wide spread recognition recollection of the brand Share khan. The advertisements should reach the people through more popular channels, which are viewed, largely by people and not only business channels and magazines like CNBC or Business World.

2. BROCHURES AND PAMPHLETS: An easy to understand, well designed, brief and crisply presented pamphlet or a Brochure can act as a silent guide to make customers aware of the Mutual Funds and its working. Such Brochures should be placed at the customer dealing counters at the Bank to attract interest and lead to action.

3. COLLECT DATABASE FROM SOURCES: Like database of members of various elite clubs and societies that shall give SBI MUTUAL FUND a vast pool of data on potential customers. TELE CALLING can be done to these potential customers.

4. TARGET THE YOUTH: They are the future. Tying up with professional institutions like IITs, BSchools etc. and conducting workshops and seminars on Mutual Funds and Capital markets will help build a strong customer base for the future as these are the people who shall have enough disposable income in years to come, thanks to the high pay packages they shall be offered.

5. DSAs: Hire Direct Selling Agents and form alliances with more brokerage houses.

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6. CREATE TRUST AND CONFIDENCE: Consistent and Serious efforts should be made to create a feeling of trust among the customers. They should not feel that the Relationship Manager or the Financial Planning Manager is trying to pitch them the service to mint his own commission. The SBIs MUTUAL FUND representative should be able to carry the spirit and ideology of the SBI MUTUAL FUND with him. They should be able to make the customers understand and accept that their money is going in safe hands and shall be managed by experienced and well-qualified professionals.

7. EFFICIENT FUND MANAGEMENT: A study conducted by Price Waterhouse Cooper (PWC) on risk management by mutual funds has posted interesting as well as worrying results. According to the survey, as many as 50 percent of the respondent mutual funds are not managing risk properly. Also, about 50 percent of the respondents did not have documented risk procedures or dedicated risk managers. It is unfortunate that the fund managers are not taking due care for minimizing the risk and are in a race to post higher and higher returns during the phase of bull-run. They should understand that the investors forget the high returns posted in any specific period very soon but they take hell lot of time to forget the burns. The fund managers should disclose what they are doing at the hedging front. They should come up and tell their investors as to what they do at times of high fluctuations. Normally it has been seen that they outperform the broad market indices during the bull runs and under perform the indices during the bear phases. Poor performance, poor servicing to clients and failure of third party service providers, are the three major risk factors identified in the survey by PWC. (Source: www.mutualfundindia.com)Thus SBI MUTUAL FUND should make sure that the funds it is investing in are efficiently managed and justify their claims. The in-house research centre of SBIMUTUAL FUND MF can conduct a thorough risk and return analysis of various funds to arrive at the real situation.

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Bibliography
Websites:
http://www.moneycontrol.com/bestportfolio/wealth-managementtool/investments#port_top http://www.rediff.com/getahead/2005/jun/20fund.htm

http://www.mutualfundsindia.com/

http://en.wikipedia.org/wiki/Mutual_funds_in_India

Books Referred: Indian Financial System,2E by Dr. S Gurusamy

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