mohammed ismail. h no- 216311672026
TRANSCRIPT
-
7/28/2019 Mohammed Ismail. h No- 216311672026
1/92
ABSTRACT:
As in the past couple of years, equity markets showing range-bound movement, gilt funds
that invest in government bonds (G-secs) could be a good investment. The credit risk is next tonil as the government has zero risk of defaulting, but the interest rate risk rises as the market
price of debt security varies with fluctuating interest rates. Gilt funds are a very important part of
asset allocation with their inverse correlation to stocks and they could contribute significantly to
the yield enhancement of a portfolio. In this study, I have analyzed top 10 performing gilt funds
selected (on the basis of their three years return) out of the 63 gilt funds available in the Indian
mutual fund industry at present. My analysis is concentrated on six months to three years return
of the funds and risk, risk- return, market sensitivity of this funds to find out that which gilt fund
will offer best return to the investor considering the risk factor of investment
DEPARTMENT OF MBA Page
1
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
2/92
INTRODUCTION
Many times the investors go on acquiring assets in an ad hoc & unplanned manner & the
result is high risk, low return profile that they may face. All such assets of financial nature such
as gold, silver, real-estate, building, insurance policies, post office certificate. NSC or NSS would
constitute his portfolio & the wise investor not only plans his portfolio as per risk return profile
or preferences but manages his portfolio efficiently so as to secure the highest return for the
lowest risk possible at that level of investment. This is in short the portfolio management. The
basic principle is that the higher the risk, the higher is the return &investor should have clear
perception of elements of risk & return when he makes investments. Risk return analysis is
essential for the investment & portfolio management. An investor considering investment is
securities is faced with the problem of choosing from among a large no. of securities. His choice
depends upon the risk return characteristics of individual securities.
There was a time when portfolio management was an exotic term. The scenario has changed
drastically. It is now a familiar term and is widely practiced in India. The theories and concepts
relating to portfolio management now find their way to the front pages of financial newspapers
and the cover pages of investment journals in India. Indian capital markets have become active.
The Indian stock markets are steadily moving towards higher efficiency, with rapid
computerization, increasing market transparency, better infrastructure, better customer service
etc. The markets are dominated by large institutional investors with their diversified portfolios. A
large no of mutual funds has been set up the county since 1987. With this development
investment in securities has gained considerable momentum. Professional portfolio management
DEPARTMENT OF MBA Page
2
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
3/92
backed by competent research begun to be practiced by mutual funds, investment consultants and
big brokers. The Securities Exchange Board of India (SEBI). The Stock Market Regulatory body
in India is supervising the whole process. With the advent of computers the whole process of
portfolio management has become quite easy. The computer can absorb large volumes of data
perform computations accurately and quickly give out results in desired form. The trend towards
liberalization and globalization of the economy has promoted free flow of capital across
international border. Portfolio now includes not only domestic securities but also foreign
securities such as Options and Futures in the field of investment management and trading in
derivative securities. Their valuation etc.., has broadened its scope.
DEPARTMENT OF MBA Page
3
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
4/92
Need of the study
The main purpose of doing this project was to know about mutual fund and its
functioning.
This helps to know in details about mutual fund industry right from its inception stage,
growth and future prospects.
It also helps in understanding different schemes of mutual funds.
My study depends upon prominent funds in India and their schemes like equity, income,
balance as well as the returns associated with those schemes.
The project study was done to ascertain the asset allocation, entry load, exit load,
associated with the mutual funds.
Ultimately this would help in understanding the benefits of mutual funds to investors.
DEPARTMENT OF MBA Page
4
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
5/92
OBJECTIVES
To evaluate investment performance of selected mutual funds in terms of risk and
return.
To evaluate and create an ideal portfolio consisting the best mutual fund schemes
which will earn highest possible returns and will minimize the risk.
Basically to understand the concept of portfolio management and its relation tomutual funds.
Also to analyze the performance of mutual fund schemes on the basis of various
parameters.
DEPARTMENT OF MBA Page
5
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
6/92
SCOPE OF THE PROJECT
The funds are selected to which ICICI Prudential is advisor. The Schemes were
categorized and selected on evaluating their performance and relative risk.
The scope of the project is mainly concentrated on the different categories of the
mutual funds such as equity schemes, debt funds, balanced funds and equity
linked savings schemes etc.
The ideal portfolio is created by analyzing the risk pattern of the schemes and
distributing the overall risk to earn maximum returns.
DEPARTMENT OF MBA Page
6
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
7/92
METHODOLOGY
Research Methodology is a term made up of two words, research & methodology.
Research means search for knowledge. It is a scientific and systematic search for potential
information on a specific topic. It is an art of scientific investigation. It is careful investigation or
inquiry especially for search of new fact in any branch of knowledge.
Research is a systematic method of finding solutions to problems. According to Clifford
woody, research comprises of defining and redefining problem, formulating hypothesis or
suggested solutions, collecting, organizing and evaluating data, reaching conclusions, testing
conclusions to determine whether they fit the formulated hypothesis
For the purpose of study, both primary and secondary data has been collected. Theobservational method and survey research method is used to collect the primary data.
The necessary data has also been collected from official records and other published
sources. The collected data is classified, tabulated, analyzed and interpreted later.
DEPARTMENT OF MBA Page
7
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
8/92
Data can be of two types primary and secondary data. Primary data are those which are
collected afresh and for the first time, and it is in original form. Primary data can be collected
either through experiment or through survey. The researcher has chosen the survey method for
data collection.
The two types of data collection:
Primary data
Secondary data
Primary data;
Primary data is personally developed data and it gives latest information and offers much greater
accuracy and reliability.
There are various sources for obtaining primary data i.e., Mail survey, personal interview,
Field survey, panel research and observation approach etc.
The study to maximum extent dependent on primary data, which is collected by way of
structures personal interview with customers.
Methods that can be used for collection of primary data are as follows:
Direct personal observation: Under this method, the investigator presents himself personally
before the informant and obtains first hand information. This method provides greater degree ofaccuracy.
Telephone survey: Under this method the investigator, instead of presenting himself before the
informants, contacts them on telephone and collects information from them.
Indirect personal interview: Under this method, instead of directly approaching the informants,
the investigator interviews several third persons who are directly or indirectly concerned with the
subject matter of the enquiry and who are in possession of the requisite information. This
method is highly suitable where the direct personal investigation is not practicable either because
the informants are unwilling or reluctant to supply the information or where the informationdesired is complex or the study in hand is extensive.
Questionnaire method: Under this method, the investigator prepares a questionnaire containing a
number of questions pertaining to the field of enquiry. Under this method, the investigator
directly contact the person and collect the information through questionnaire related to the data.
The aims and objectives of collecting the information, and requesting the respondents to
DEPARTMENT OF MBA Page
8
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
9/92
cooperate by furnishing the correct replies and fill the questionnaire with correct information.
The success of this method depends upon the proper drafting of the questionnaire and the
cooperation of the respondents.
Secondary data;
Secondary data is the published data. It is already available for using and its saves time. The mail
source of secondary data are published market surveys, government publications advertising
research report and internal source such as sales, sales records orders, customers complaints and
other business record etc. the study has also depended on secondary data to little extent, which is
collected through internal source.
Methods that can be used for collection of secondary data are as follows:
Published sources: There are a number of national organisations and international agencies,
which collect and publish statistical data relating to business, trade, labour, price, consumption,production, etc. These publications of the various organisations are useful sources of secondary
data.
Unpublished sources: The records maintained by private firms or business houses who may not
like to release their data to any outside agency are known as unpublished sources of collection of
secondary data.
Limitations
This report gives an insight about mutual funds and mutual fund schemes but with few
limitations as follows:
The big question is how to judge a mutual fund before investing? It is important for an
investor to consider a fund s performance over several years.
The report only analyses equity mutual fund schemes of only some funds and there are
around 34 AMCs offering wide range of scheme but to analyze them is a tedious task.
This information is mainly regarding of those mutual funds were collected to which Icici
prudential funds is an advisor.
DEPARTMENT OF MBA Page
9
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
10/92
Different fund managers adopt different strategies to improve performance. While one
fund manager may have invested in speculative stocks may over a period, another one
who have invested in speculative stocks may have struck gold in that year to outperform
the former by a long way.
Lack of proper knowledge and awareness about advantages and disadvantages associated
with various schemes among the investor.
Usually there is a tendency among investors to ignore the consistency of returns over a
period of time rather they focus on absolute returns generated in the short term.
Mutual Funds Overview:
There are a lot of investment avenues available today in the financial market for an
investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and
Bonds where there is low risk but low return. He may invest in Stock of companies where the
risk is high and the returns are also proportionately high. The recent trends in the Stock Market
have shown that an average retail investor always lost with periodic bearish tends. People began
opting for portfolio managers with expertise in stock markets who would invest on their behalf.
Thus we had wealth management services provided by many institutions. However they proved
too costly for a small investor. These investors have found a good shelter with the mutual funds.
A mutual fund, also referred to as an open-end fund, is an investment company that
spreads its money across a diversified portfolio of securities -- including stocks, bonds, or money
market instruments. Shareholders who invest in a fund each own a representative portion of
those investments, less any expenses charged by the fund.
DEPARTMENT OF MBA Page
10
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
11/92
Mutual funds have been around for a long time, dating back to the early 19th century. The
first modern American mutual fund opened in 1924, yet it was only in the 1990s that mutual
funds became mainstream investments, as the number of households owning them nearly tripled
during that decade. With recent surveys showing that over 88% of all investors participate in
mutual funds, you're probably already familiar with these investments, or perhaps even own
some. In any case, it's important that you know exactly how these investments work and howyou can use them to your advantage.
A mutual fund is a special type of company that pools together money from many
investors and invests it on behalf of the group, in accordance with a stated set of objectives.
Mutual funds raise the money by selling shares of the fund to the public, much like any other
company can sell stock in itself to the public. Funds then take the money they receive from the
sale of their shares (along with any money made from previous investments) and use it to
purchase various investment vehicles, such as stocks, bonds and money market instruments. In
return for the money they give to the fund when purchasing shares, shareholders receive an
equity position in the fund and, in effect, in each of its underlying securities. For most mutualfunds, shareholders are free to sell their shares at any time, although the price of a share in a
mutual fund will fluctuate daily, depending upon the performance of the securities held by the
fund.
Mutual fund investors make money either by receiving dividends and interest from their
investments, or by the rise in value of the securities. Dividends, interest and profits from the sale
of any securities (capital gains) are passed on to the shareholders in the form of distributions.
And shareholders generally are allowed to sell (redeem) their shares at any time for the closing
market price of the fund on that day.
Concept Of Mutual Funds:
A mutual fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The ownership of the fund is thus
joint or mutual; the fund belongs to all investors. A single investors ownership of the fund is
in the same proportion as the amount of the contribution made by him or her bears to the total
amount of the fund.
Mutual Funds are trusts, which accept savings from investors and invest the same in
diversified financial instruments in terms of objectives set out in the trusts deed with the view to
reduce the risk and maximize the income and capital appreciation for distribution for the
members. A Mutual Fund is a corporation and the fund managers interest is to professionally
DEPARTMENT OF MBA Page
11
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
12/92
manage the funds provided by the investors and provide a return on them after deducting
reasonable management fees.
The objective sought to be achieved by Mutual Fund is to provide an opportunity for lower
income groups to acquire without much difficulty financial assets. They cater mainly to the
needs of the individual investor whose means are small and to manage investors portfolio in amanner that provides a regular income, growth, safety, liquidity and diversification
opportunities.
Definitions:
Mutual funds are collective savings and investment vehicles where savings of small (or
sometimes big) investors are pooled together to invest for their mutual benefit and returns
distributed proportionately.
A mutual fund is an investment that pools your money with the money of an unlimitednumber of other investors. In return, you and the other investors each own shares of the fund.
The fund's assets are invested according to an investment objective into the fund's portfolio of
investments. Aggressive growth funds seek long-term capital growth by investing primarily in
stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also
called capital appreciation funds.
Why Select Mutual Funds?
The risk return trade-off indicates that if investor is willing to take higher risk then
correspondingly he can expect higher returns and vise versa if he pertains to lower risk
instruments, which would be satisfied by lower returns. For example, if an investor opt for bank
FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital
protected funds and the profit-bonds that give out more return which is slightly higher as
compared to the bank deposits but the risk involved also increases in the same proportion.
Thus investors choose mutual funds as their primary means of investing, as Mutual funds
provide professional management, diversification, convenience and liquidity. That doesnt mean
mutual fund investments risk free.
DEPARTMENT OF MBA Page
12
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
13/92
This is because the money that is pooled in are not invested only in debts funds which are
less riskier but are also invested in the stock markets which involves a higher risk but can expect
higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives
market which is considered very volatile.
History Of Mutual Funds 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 (UTI Monopoly):
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial DevelopmentBank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700
crores of assets under management.
Second Phase 1987-1993 (Entry Of Public Sector Funds):
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Can
bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual
Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established
its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase 1993-2003 (Entry Of Private Sector Funds):
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged withFranklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
DEPARTMENT OF MBA Page
13
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
14/92
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other
mutual funds.
Fourth Phase Since February 2003:
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registeredwith SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the
erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management
and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private sector funds, the
mutual fund industry has entered its current phase of consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421
schemes.
Recent Trends in Mutual Funds Industry
The Indian Mutual fund industry, despite all that has been said about it is still in a nascent stage
and has extremely bright future ahead. The industry is still one-tenth size of the banking deposits
in the country.
The private sector mutual fund industry in its resent avatar is barely 7 years old. The total asset
under management over the past 4 to 5 tears has almost remain stagnant around the Rs 100, 000
crore mark.
This has put a question mark in front of the claims that mutual funds are growing part of the
financial savings and planning industry in India. It holds scope for growth. In India this industry
began with the setting up of the Unit Trust Of India (UTI) in 1964 by the government of India inorder to mobiles small saving. During the past 37 years, UTI has grown to be a dominant player
in the industry with assets with over Rs 76,547 crore as of March2000. However, trouble hit UTI
has lost its dominant position in the industry and the asset under management has slipped
drastically to Rs 46,396 crore.
DEPARTMENT OF MBA Page
14
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
15/92
Private sector mutual funds, which were permitted along with foreign partners in 1993, now
enjoy a dominant position in the country. Kothari Pioneer Mutual fund was the first fund to be
established in the private sector with foreign fund. The private sector now controls around RS
45,818 crore assets under management, almost half the size of the industry.
The mutual fund industry has become a fastest growing sector in the countrys capital andfinancial market with an average compounded growth rate of 20 percent over the past five years.
This is despite increasing competition with more than 30 asset management companies for
investors money. As on June 2002, the industry has Rs 100,703 crore asset under management
spread across 36 funds with more than 390 schemes.
Substantial development have made; spurred on by changes and amendments in regulation as the
mutual fund regulation that established a comprehensive legal framework for the mutual fund
industry to develop coherently. The securities and Exchange Board Of India (SEBI) came out
with comprehensive regulation in 1993 which defined the structure of the mutual fund and asset
management Companies for the first time.
The industry is in the process of evolving into a bigger and better investment medium for all
market segment, Say Kavita Hurry, CEO ING Investment Management, further, currently, ING
Investments manages around Rs.364 crore as on June 2002.
Structure Of Mutual Funds
DEPARTMENT OF MBA Page
15
ST. XAVIERS PG COLLEGE
Sponsor
Company
Establishes MF as a
Trust
Registers MF with
SEBIManaged by a
Board of TrusteesMutual Fund
Hold Unitholders
Fund in MF
Ensure Compliance toSEBI Enter intoAgreement with MC
Asset Management
Company
Registrars and
Transfer Agents
Custodian
Bankers
Float, MF Funds
Managers Fund as
Per SEBI guidelines& AMC Agreement
Provides Necessary
Custodian Services
Provide Banking
Services
Provide Registrars
Services and act astransfers Agents
Appointed by
Board of
Trustees
Appointed by
Trustees
Appointed by
AMC
Appointed by
AMC
-
7/28/2019 Mohammed Ismail. h No- 216311672026
16/92
The formation and operations of mutual funds in India is solely guided by SEBI (Mutual
Fund) Regulations, 1993, which came into force on 20 January 1993. The regulations have since
been replaced by the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996,
through a notification on 9 December 1996.
The above figure gives an idea of the structure of Indian mutual funds. A mutual fund
comprises four separate entities, namely sponsor, mutual fund trust, AMC and custodian. They
are of course assisted by other independent administrative entities like banks, registrars and
transfer agents. We may discuss in brief the formation of different entities, their functions and
obligations.
The sponsor for a mutual fund can by any person who, acting alone or in combination with
another body corporate establishes the mutual fund and gets it registered with SEBI. The sponsor
is required to contribute at least 40 per cent of the minimum net worth (Rs 10 crore) of the asset
DEPARTMENT OF MBA Page
16
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
17/92
management company. The sponsor must have a sound track record and general reputation of
fairness and integrity in all his business transactions.
As per SEBI Regulation, 1996, a mutual fund is to be formed by the sponsor and registered
with SEBI. A mutual fund shall be constituted in the form of a trust and the instrument of trust
shall be in the form of a deed, duly registered under the provisions of the Indian RegistrationAct, 1908, executed by the sponsor in favour of trustees named in such an instrument.
The board of trustees manages the mutual fund and the sponsor executes the trust deeds in
favor of the trustees. The mutual fund raises money through sale of units under one or more
schemes for investing in securities in accordance with SEBI guidelines. It is the job of the mutual
fund trustees to see that the schemes floated and managed by the AMC appointed by the trustees,
are in accordance with the trust deeds and SEBI guidelines. It is also the responsibilities of the
trustees to control the capital property of mutual funds schemes.
The trustees have the right to obtain relevant information from the AMC, as well as aquarterly report on its activities. They can also dismiss the AMC under specific condition as per
SEBI regulations.
At least half the trustees should be independent persons. The AMC or its employees
cannot act as a trustee. No person who is appointed as a trustee of a mutual fund can be
appointed as a trustee of any other mutual fund unless he is an independent trustee and prior
permission is obtained from the mutual fund in which he is a trustee. The trustees are required to
submit half-yearly reports to SEBI on the activities of the mutual fund. The trustees appoint a
custodian and supervise their activities. The trustees can be removed only with prior approval of
SEBI.
Benefits Of Mutual Fund Investments
1. Professional Management:
Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of companies
and selects suitable investments to achieve the objectives of the scheme.
2. Diversification:
Mutual Funds invest in a number of companies across a broad cross-section of industries and
sectors. This diversification reduces the risk because seldom do all stocks decline at the same
time and in the same proportion. You achieve this diversification through a Mutual Fund with far
less money than you can do on your own.
DEPARTMENT OF MBA Page
17
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
18/92
3. Convenient Administration:
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad
deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save
your time and make investing easy and convenient.
4. Return Potential:
Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they
invest in a diversified basket of selected securities.
5. Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to directly investing in the
capital markets because the benefits of scale in brokerage, custodial and other fees translate into
lower costs for investors.
6. Liquidity:
In open-end schemes, the investor gets the money back promptly at net asset value related prices
from the Mutual Fund. In closed-end schemes, the units can be sold on a stock exchange at the
prevailing market price or the investor can avail of the facility of direct repurchase at NAV
related prices by the Mutual Fund.
7. Transparency:
You get regular information on the value of your investment in addition to disclosure on thespecific investments made by your scheme, the proportion invested in each class of assets and
the fund manager's investment strategy and outlook.
8. Flexibility:
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically invest or withdraw funds according to your needs and
convenience.
9. Affordability:
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fund
because of its large corpus allows even a small investor to take the benefit of its investment
strategy.
Structure And Constituents Of Fund
DEPARTMENT OF MBA Page
18
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
19/92
Figure 1: Types Of Mutual Funds Schemes
Source: Secondary Data
Mutual fund schemes may be classified on the basis of its structure and its investment objective.
1. By Structure:
A. Openended funds:
An open end fund is one that is available for subscription all through the year. These do not
have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices. The key feature of open-end schemes is liquidity.
DEPARTMENT OF MBA Page
19
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
20/92
B. Closed-ended funds:
A closed end funds has a stipulated maturity period which generally raging from 3 to 15 years.
The funds are open for subscription only during a specified period. Investors can invest in the
scheme at the time of the initial public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where they are listed. In order to provide an exist route to theinvestors, 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.
C. Interval Funds:
Interval funds combine the features of open-ended schemes. They are open for sale or
redemption during pre-determined intervals at NAV related prices.
2. By Nature:
A. Equity Funds:
These funds invest a maximum part of their corpus into equities holdings. The structure of the
fund may vary different for different schemes and the fund managers outlook on different
stocks. The Equity Funds are sub-classified depending upon their investment objective, as
follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-
return matrix.
B. Debt Funds:
The objective of these Funds is to invest in debt papers. Government authorities, private
companies, banks and financial institutions are some of the major issuers of debt papers. By
investing in debt instruments, these funds ensure low risk and provide stable income to the
investors. Debt funds are further classified as:
DEPARTMENT OF MBA Page
20
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
21/92
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are associated with
Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds,
corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum
exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly
high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. These
funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial
Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidityand preservation of capital. These schemes invest in short-term instruments like Treasury Bills,
inter-bank call money market, CPs and CDs. These funds are meant for short-term cash
management of corporate houses and are meant for an investment horizon of 1day to 3 months.
These schemes rank low on risk-return matrix and are considered to be the safest amongst all
categories of mutual funds.
C. Balanced Funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities
and fixed income securities, which are in line with pre-defined investment objective of the
scheme. These schemes aim to provide investors with the best of both the worlds. Equity part
provides growth and the debt part provides stability in returns.
The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and invest both in equities and fixed income
securities in the proportion indicated in their offer documents. In a rising stock market, the NAV
of these schemes may not normally keep pace, or fall equally when the market falls. These are
ideal for investors looking for a combination of income and moderate growth.
D. Money Market Funds:
The aim of money funds is to provide easy liquidity, preservation of capital and moderate
income. These schemes generally invest in safer short-term instruments such as treasury bills,
certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes
may fluctuate depending upon the interest rate prevailing in the market. These are ideal for
Corporate and individual investors as a means to park their surplus funds for short periods.
DEPARTMENT OF MBA Page
21
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
22/92
E. Load Funds:
A Load Funds is one that charges a commission for entry of exit. That is, each time you buy or
sell units in the fund, a commission will be payable. Typically entry exit loads range from 1% to
2%. It could be corpus is put to work.
F. No-Load Funds:
A No-Load Fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a no load is
that the entire corpus is put to work.
3. Schemes in Mutual Funds:
I. Tax Saving Schemes
These schemes offer tax rebates to the investor under specific provisions of the Indian Income
Tax laws as the Government offers tax incentives for investment in specified avenues.
Investments in Equity Linked Saving Schemes (ELSS) and Pension Schemes are allowed as
deduction u/s 88 of the Income Tax Act. The Act also provide opportunities to investors to save
capital gains u/s 54EA and 54EB by investing in Mutual Funds, provided the capital asset has
been sold to April 1, 2000 and the amount is invested before September 30, 2000.
II. Industry Specific Schemes:
Industry Specific Schemes invest in the industries specified in the offer document. The
investment or these funds is limited to specific like InfoTech, FMCG and Pharmaceuticals etc.
III. Index Schemes:
Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or
the NSE
DEPARTMENT OF MBA Page
22
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
23/92
IV. Sectoral Schemes:
Sectoral Funds are those, which invest exclusively in a specified industry or a group of industries
or various segments such as A Group shares or initial public offerings.
These are the funds/schemes which invest in the securities of only those sectors or industries asspecified 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.
Advantages Of Mutual Funds:
If mutual funds are emerging as the favorite investment vehicle, it is because of the many
advantages they have over other forms and the avenues of investing, particularly for the investorwho has limited resources available in terms of capital and the ability to carry out detailed
research and market monitoring. The following are the major advantages offered by mutual
funds to all investors:
1. Portfolio Diversification:
Each investor in the fund is a part owner of all the funds assets, thus enabling him to hold a
diversified investment portfolio even with a small amount of investment that would otherwise
require big capital.
2. Professional Management:
Even if an investor has a big amount of capital available to him, he benefits from the professional
management skills brought in by the fund in the management of the investors portfolio. The
investment management skills, along with the needed research into available investment options,ensure a much better return than what an investor can manage on his own. Few investors have
the skill and resources of their own to succeed in todays fast moving, global and sophisticated
markets.
3. Reduction/Diversification Of Risk:
DEPARTMENT OF MBA Page
23
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
24/92
When an investor invests directly, all the risk of potential loss is his own, whether he places a
deposit with a company or a bank, or he buys a share or debenture on his own or in any other
from. While investing in the pool of funds with investors, the potential losses are also shared
with other investors. The risk reduction is one of the most important benefits of a collective
investment vehicle like the mutual fund.
4. Reduction Of Transaction Costs:
What is true of risk as also true of the transaction costs. The investor bears all the costs of
investing such as brokerage or custody of securities. When going through a fund, he has the
benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit
passed on to its investors.
5. Liquidity:
Often, investors hold shares or bonds they cannot directly, easily and quickly sell. When theyinvest in the units of a fund, they can generally cash their investments any time, by selling their
units to the fund if open-ended, or selling them in the market if the fund is close-end. Liquidity
of investment is clearly a big benefit.
6. Convenience And Flexibility:
Mutual fund management companies offer many investor services that a direct market investor
cannot get. Investors can easily transfer their holding from one scheme to the other; get updated
market information and so on.
7. Tax Benefits:
Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit
holders. However, as a measure of concession to Unit holders of open-ended equity-oriented
funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional
rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total
Income will be admissible in respect of income from investments specified in Section 80L,
including income from Units of the Mutual Fund. Units of the schemes are not subject to
Wealth-Tax and Gift-Tax.
Disadvantages Of Mutual Funds:
1. No Control Over Costs:
An investor in a mutual fund has no control of the overall costs of investing. The investor pays
investment management fees as long as he remains with the fund, albeit in return for the
DEPARTMENT OF MBA Page
24
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
25/92
professional management and research. Fees are payable even if the value of his investments is
declining. A mutual fund investor also pays fund distribution costs, which he would not incur in
direct investing. However, this shortcoming only means that there is a cost to obtain the mutual
fund services.
2. No Tailor-Made Portfolio:
Investors who invest on their own can build their own portfolios of shares and bonds and other
securities. Investing through fund means he delegates this decision to the fund managers. The
very-high-net-worth individuals or large corporate investors may find this to be a constraint in
achieving their objectives. However, most mutual fund managers help investors overcome this
constraint by offering families of funds- a large number of different schemes- within their own
management company. An investor can choose from different investment plans and constructs a
portfolio to his choice.
4. Managing A Portfolio Of Funds:
Availability of a large number of funds can actually mean too much choice for the investor. He
may again need advice on how to select a fund to achieve his objectives, quite similar to the
situation when he has individual shares or bonds to select.
5. The Wisdom Of Professional Management:
That's right, this is not an advantage. The average mutual fund manager is no better at picking
stocks than the average nonprofessional, but charges fees.
6. No Control:
Unlike picking your own individual stocks, a mutual fund puts you in the passenger seat of
somebody else's car
7. Dilution:
Mutual funds generally have such small holdings of so many different stocks that insanely great
performance by a fund's top holdings still doesn't make much of a difference in a mutual fund'stotal performance.
8. Buried Costs:
Many mutual funds specialize in burying their costs and in hiring salesmen who do not make
those costs clear to their clients.
DEPARTMENT OF MBA Page
25
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
26/92
Types of Returns on Mutual Fund:
There are three ways, where the total returns provided by mutual funds can be enjoyed by
investors:
Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly allincome it receives over the year to fund owners in the form of a distribution.
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.
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.
Return Risk Matrix:
Risk Factors Of Mutual Funds:
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.
DEPARTMENT OF MBA Page
26
ST. XAVIERS PG COLLEGE
Mutua
l
Funds
Equit
y
Bank FD
Postal
Savings
Ventur
e
Capital
HIGHER RISK
HIGHIER RETURNS
LOWER RISK
HIGIER RETURNS
LOWER RISK
LOWER RETURNS
HIGHIER RISK
MODERATE RETURNS
-
7/28/2019 Mohammed Ismail. h No- 216311672026
27/92
-
7/28/2019 Mohammed Ismail. h No- 216311672026
28/92
Changes in government policy and political decision can change the investment environment.
They can create a favorable environment for investment or vice versa.
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.
Profile of MIDEAST INVESTMENTS PVT LTD.
Mideast investments Private Limited, a member of National Stock Exchange of
India, stands to ensemble the province of trading in shares through its vibrant
environment created among various professionals working to strive the need of its clients.
Incepted in the year 1996, since inception the company has been at the foray of creating
DEPARTMENT OF MBA Page
28
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
29/92
high end values, and enumerated its services for each and every category of client it
handles.
Promoted basically by business conglomerates from different facets of business families,
and promoters having a clear vision of the corporate culture have been a czar, to the
financial industry. With every promoter being professionally qualified and well
experienced in the field of finance, the company is at a store of making high regards in
the field of finance and stock broking services.
Ensembles the direct approach to its clients in any kind of query, service and operational
activity, the staff working around to provide such services are highly qualified
professionals with dignity towards end clients for the sake of providing services and
enlisted by the management of the organization. The company has well qualified staff to
cater all kinds of different needs of its clients.
Having various categories of clients viz., Individuals, High Networth Individuals,
Corporate Entities, Domestic Financial Institution and etc., the company grosses up to
make a unique blend of services to offer to each and every category of client it serves.
Apart from broking services, advisory services relating to trading in shares are
exclusively being managed by industry experts working as full timers to proved enriched
services.
With its huge database of more than 2000 individual clients, 50 plus corporate entities
and around 120 High Networth Individuals, the company is making efficient efforts to
add more client base to its present operations. With a broad view, the company is making
exponential efforts to provide vast amount of services across the nation through PAN
india presence, an initiative for the current fiscal,
DEPARTMENT OF MBA Page
29
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
30/92
Since inception turnovers ranging from 650 crores have sky marked to 900 crores till the
financial year 2011-2012, during the year the company has started operations relating to
Training, Research and Development keeping emphasis exclusively in development of
financial sector, as the need of present hour is to generate human skill in the arena of
finance.
With vibrant services, the company has been on a verge of taking a pride in introducing
SHARIAH Based Trading through its terminals being connected to NSE of India
Limited., with latest technology in use, Mideast stands to its spa of services presently
being offered. On introduction of these specialized services, the company has added
extensive amount of MUSLIM client base appropriating nearly 80% out of the total 2000
individual client data base.
On sprawling view, with use-age of latest technology for various purposes viz., Trading,
Charting and etc., the company is always ahead of the competitive edge and promises to
deliver the catastrophic mode of investment and returns to be generated for all categories
of clients.
It has been an enduring experience working with MIDEAST INVESTMENTS PVT LTD,
during the course of internship and the amount of knowledge being shared together is
enormous in the field of finance.
OVERVIEW
MIDEAST INVESTMENTS has significant volumes in the segment of Equity at
National Stock exchanges aggregating Rs. 750 Cr per annum. The advantages of the
company having more than 200 ready customers base that will help us in reach out to the
DEPARTMENT OF MBA Page
30
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
31/92
people with trust they have in us over a decade. The company understands customer need
very well as already enjoying highest customer satisfaction in services which is the key
area.
STOCK BROKERAGE
The companys managers have over 10000 man-hours of ringside broking experience,
which is being utilized to hilt by fully computerized VAST access at its Hyderabad
Office. MIDEAST INVESTMENTS Pvt. Ltd. is a corporate member of the National
Stock Exchange of India Limited, which is Indias largest exchange transacting over US
$68 billion (Rs 2,38,000 Cr) annually.
EQUITY RESEARCH:
Based on fundamental and technical strengths of Indian Corporations and the market
environment MIDEAST provides consultancy for investments. MIDEAST assists
individuals to maximize their earnings through stock market investment and Mutual
Fund as other financial instruments. Scientifically through their portfolio management
services.
NRI PLACEMENT AND RELATED SERVICES:
The analysis of opportunities for NRIs the primary and secondary market is a focus area
of MIDEAST Investments with the boom in the stock market, evaluation of companies to
invest becomes critical particular for NRIs for trading in these markets. Hence
MIDEAST provides the services.
Our Vision
DEPARTMENT OF MBA Page
31
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
32/92
"To become a globally renowned organization that provides state of the art trading
solutions and infrastructure and to grow with latest technology and services, by
delivering the best solutions by best-in-class people."
Our Mission
"To achieve our objectives in an environment of fairness, honesty, and courtesy
towards our clients, employees, vendors and society at large."
ACCEPTANCE OF TERMS AND CONDITIONS / BROKER NORMS
The following should be read carefully and accepted prior to becoming a
Constituent for online trading i.e. for trading availing the facilities and/or any
information, or any part thereof, as the case may be, as may be made available from time
to time on the Web-Site and/or entering into any securities dealings through the Contact
India whether by use of any of the facilities available on the Web-Site, or by any other
means whatsoever. Please read the following, which contains important information
DEPARTMENT OF MBA Page
32
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
33/92
concerning use of the Web Site. The use of the Web Site is conditional upon and subject
to, acceptance of and compliance with, the Terms. And whereas for offline the
Constituent can avail the facilities subject to acceptance of and compliance with the terms
contained herein.
End User shall be responsible for obtaining and maintaining all telephone, computer
hardware and other equipment needed for access to and use of this Site and all charges
related thereto. MIDEAST INVESTMENTS PVT LTD shall not be liable for any
damages to the End User's equipment resulting from the use of this Site.
Mutual Funds
Mutual fund is a trust that pools money from a group of investors (sharing common
financial goals) and invest the money thus collected into asset classes that match the stated
investment objectives of the scheme. Since the stated investment objectives of a mutual fund
scheme generally forms the basis for an investor's decision to contribute money to the pool, a
mutual fund can not deviate from its stated objectives at any point of time.
Every Mutual Fund is managed by a fund manager, who using his investment management skills
and necessary research works ensures much better return than what an investor can manage on
DEPARTMENT OF MBA Page
33
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
34/92
his own. The capital appreciation and other incomes earned from these investments are passed on
to the investors (also known as unit holders) in proportion of the number of units they own.
History of mutual funds
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the
initiative of the Government of India and Reserve Bank of India. The history of mutual funds in
India can be broadly divided into four distinct phases
First Phase 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development
Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The
first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700
crores of assets under management.
Second Phase 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC).
SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by
Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank
Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC
established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of
DEPARTMENT OF MBA Page
34
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
35/92
Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all mutual funds, except
UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual
Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting
up funds in India and also the industry has witnessed several mergers and acquisitions. As at the
end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The
Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other
mutual funds.
Fourth Phase since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated
into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets
under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of
Unit Trust of India, functioning under an administrator and under the rules framed by
Government of India and does not come under the purview of the Mutual Fund Regulations.
DEPARTMENT OF MBA Page
35
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
36/92
-
7/28/2019 Mohammed Ismail. h No- 216311672026
37/92
Organization of a Mutual Fund
DEPARTMENT OF MBA Page
37
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
38/92
Sponsor :
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. The sponsor of a fund is akin to promoter of a company as he gets the
fund registered with SEBI. The sponsor will form a Trust and appoint a Board of Trustees. The
sponsor will also generally appoint as Asset Management Company as fund managers. The
sponsor, either directly or acting through the Trustees, will also appoint a Custodian to hold the
fund asset. All these appointments are made in accordance with SEBI Regulations.
Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the
eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds)
Regulations, 1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from
the operation of the Schemes beyond the initial contribution made by it towards setting up of the
Mutual Fund.
DEPARTMENT OF MBA Page
38
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
39/92
Trust :
The Mutual Fund in India is constituted in the form of a public Trust created under the Indian
Trustees Act, 1882. The fund sponsor acts as the settler of the trust, contributing to its initial
capital, and appoints Trustees to hold the asset 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, units being the evidence of their beneficial interest in the fund.
It should be understood that a mutual fund is just a pass-through vehicle. Under the Indian
trusts Act, or the fund has no independent legal capacity itself, rather it is the Trustee or Trustees
who have the legal capacity and therefore all acts in relation to the trust are taken on its behalf by
the Trustees. The Trustees hold the unit holders money in a fiduciary capacity, i.e the money
belongs to the unit holders and is entrusted to the fund for the purpose of investment. In legal
parlance, the investor or the unit-holders are the beneficial owners of the investment held by
the Trust, even as these investments are held in the name of the trustees on a day to - day
basis.
Being public Trusts, mutual fund can invite any number of investors as beneficial owners in their
investment schemes.
DEPARTMENT OF MBA Page
39
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
40/92
Trustee:
The trust the mutual fund may be a Board of Trustees a body of individuals, or a Trust
company a corporate body. Most of the funds in India are managed by Board of Trustees.
While the board of Trustees is governed by the provisions of the Indian Trusts Act, where the
Trustee is a corporate body, it would also be required to comply with the provisions of the
companies Act, 1956. The Board or the Trustee Company, as an independent body, act as
protector of the unit holders interests. The Trustee doesnt directly manage the portfolio of
securities. For this specialist function, they appoint an Asset Management Company. They
ensure that the fund is managed by the AMC as per the defined objectives and in accordance
with the Trust Deed and SEBI regulations.
The trust is created through a document called the Trust Deed that is executed by the fund
sponsor in favour of the Trustees. Trust Deed is required to be stamped as registered under the
provisions of the Indian Registration Act and registered with SEBI. Clauses in the Trust Deed,
inter alia, deal with the establishment of the Trust, the appointment of Trustees, their powers and
duties, and the obligations of the Trustees towards the unit-holders and AMC. These clauses also
specify activities that the fund/ AMC cannot undertake. The third schedule of the SEBI (MF)
Regulations, 1996 specifies the contents of the Trust Deed.
The Trustees being the primary guardians of the unit-holders funds and assets, a Trustee has to
be a person of high repute and integrity. SEBI has laid down a set of conditions to be fulfilled by
the individuals being proposed as trustees of mutual funds independent and non - independent.
Besides specifying the disqualifications, SEBI has also set down the Right and obligations of
the Trustees. Broadly, the Trustees must ensure that the investors interests are safeguarded and
DEPARTMENT OF MBA Page
40
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
41/92
that the AMCs operations are along professional lines. They must also ensure that the
management of the fund is in accordance with SEBI Regulations. To ensure the independence of
the trustee company, SEBI mandates a minimum of two-third independent directors on the board
of the trustee company.
Asset Management Company (AMC) :
The role of an AMC is to act the investment manager of the Trust. The sponsors or the trustees,
if so authorized by the Trust Deed, appoint the AMC. The AMC so appointed is required to be
approved by SEBI. Once approved, the AMC functions under the supervision of its own Board
of Directors, and also under the directions of the Trustees and SEBI. The Trustees are
empowered to terminate the appointment of the AMC and appoint a new AMC with the prior
approval of SEBI and unit-holders
The AMC would, in the name of the Trust, float and then manage the different investment
schemes as per SEBI Regulations and as per the Investment Management Agreement it signs
with the Trustees. Mutual fund Regulations,1996 describes the issues relevant to appointment,
eligibility criteria, and restrictions on business activities and obligations of the AMC.
The AMC of a mutual fund must have a net worth of at least Rs. 10 crores at all times. Directors
of the AMC, both independent and non independent, should have adequate professional
experience in financial services and should be individuals of high moral standing, a condition
also applicable to other key personnel of the AMC. The AMC cannot act as a trustee of any other
mutual fund. Besides its role as the fund manager, it may undertake specified activities such as
advisory services and financial consulting, provided these activities are run independently of one
another and the AMCs resources are properly segregated by activity. The AMC must always act
DEPARTMENT OF MBA Page
41
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
42/92
in the interest of the unit-holders and report to the trustees with respect to its activities. To ensure
the independence of the asset management company, SEBI mandates that a minimum of 50% of
the directors of the board of the asset management company should be independent directors.
Registrar and Transfer Agent :
The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the
Mutual Fund. The Registrar processes the application form; redemption requests and dispatches
account statements to the unit holders. The Registrar and Transfer agent also handles
communications with investors and updates investor records.
Custodian :
Mutual funds are in the business of buying and selling of securities in large volumes. Handling
these securities in terms of physical delivery and eventual safekeeping is therefore a specialized
activity. The custodian is appointed by the Board of Trustees for safe keeping of physical
securities or participating in any clearing systemthrough approved depository companies on
behalf of mutual fund in case of dematerialized securities. A custodian must fulfill its
responsibilities in accordance with its agreement with the mutual fund. The custodian should be
an entity independent of the sponsers and is required to be registered with SEBI.
DEPARTMENT OF MBA Page
42
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
43/92
Concept of mutual fund
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets
of the fund in the same proportion as his contribution amount put up with the corpus (the total
amount of the fund). Mutual Fund investor is also known as a mutual fund shareholder or a unit
holder.
Any change in the value of the investments made into capital market instruments (such as shares,
debentures etc) is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the
market value of the Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is
calculated by dividing the market value of scheme's assets by the total number of units issued to
the investors.
DEPARTMENT OF MBA Page
43
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
44/92
For example:
If the market value of the assets of a fund is Rs. 100,000
A. The total number of units issued to the investors is equal to 10,000.
B. Then the NAV of this scheme = (A)/(B), i.e. 100,000/10,000 or 10.00
C. Now if an investor 'X' owns 5 units of this scheme
D. Then his total contribution to the fund is Rs. 50 (i.e. Number of units held multiplied bythe NAV of the scheme)
Association of Mutual Funds in India (AMFI)
With the increase in mutual fund players in India, a need for mutual fund association in India
was generated to function as a non-profit organisation. Association of Mutual Funds in India
(AMFI) was incorporated on 22nd August, 1995. AMFI is an apex body of all Asset Management
Companies (AMC) which has been registered with SEBI. Till date all the AMCs are that have
launched mutual fund schemes are its members. It functions under the supervision and guidelines
of its Board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to a
professional and healthy market with ethical lines enhancing and maintaining standards. It
follows the principle of both protecting and promoting the interests of mutual funds as well as
their unit holders.
DEPARTMENT OF MBA Page
44
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
45/92
The objectives of Association of Mutual Funds in India
The Association of Mutual Funds of India works with 30 registered AMCs of the country. It has
certain defined objectives which supports the guidelines of its Board of Directors. The objectives
are as follows:
This mutual fund association of India maintains high professional and ethical standards in
all areas of operation of the industry.
It also recommends and promotes the top class business practices and code of conduct
which is followed by members and related people engaged in the activities of mutual
fund and asset management. The agencies who are by any means connected or involved
in the field of capital markets and financial services also involved in this code of conduct
of the association.
AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund
industry.
Association of Mutual Fund of India does represent the Government of India, the Reserve
Bank of India and other related bodies on matters relating to the Mutual Fund Industry.
It develops a team of well qualified and trained Agent distributors. It implements a
programme of training and certification for all intermediaries and other engaged in the
mutual fund industry.
AMFI undertakes all India awareness programme for investors in order to promote
proper understanding of the concept and working of mutual funds.
At last but not the least association of mutual fund of India also disseminate
informations on Mutual Fund Industry and undertakes studies and research either
directly or in association with other bodies.
DEPARTMENT OF MBA Page
45
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
46/92
STUCTURE OF THE INDIAN MUTUAL FUNDS INDUSTRY:
Structure wise mutual fund industry can be classified into three categories;
Unit trust of India
The Indian mutual fund industry is dominated by the unit trust of India, which has a total corpus of 51000 crore
collected from over 20 million investors. The UTI has many fund/ schemes in all categories in equity, balanced,
debt, money market etc. With some being open ended and some being closed ended. The unit scheme 1964
commonly referred to as US64,which is a balanced fund, is the biggest scheme with a corpus of about 10000
crore.
Public sector mutual fund
The second largest categories of mutual funds are the ones floated by nationalized banks .can bank asset
management floated by canara bank and sbi funds management floatedby state bank of india are the largest of
these. Gicamc floated by general insurance corporation.
On line trading is a great idea to reduce management expenses from the current 2%of total assets to about 0.75%of
the total asset. 72% of the crore-customer base of mutual fund in the top 50-broking firms in theus is expected to
trade on line by 2003
Private Sector Mutual fund
The third largest categories of mutual funds are the ones floated by the private sector domestic mutual funds and
the private sector foreign mutual funds. The largest of these in private sector domestic mutual funds are Reliance
mutual fund, JM capital management company ltd. Tata mutual, Axis mutual fund, Birla sun life asset
management pvt. Ltd. and in private foreign mutual funds these are alliance capital asset management private ltd,
DEPARTMENT OF MBA Page
46
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
47/92
Franklin Templeton Investments, Sun F&C asset management private ltd, Lurich asset management company
pvt ltd. The aggregate corpus of the assets managed by this category of amcs is about 42000 cr.
Future of Mutual Funds in India
Financial experts believe that the future of Mutual Funds in India will be very bright. AUM of 41
mutual fund houses in India rose to Rs681,708crore at the end of March, 2011 and Rs.664,824
crore in 2012, according to AMFI data. In the coming 10 years the annual composite growth rate
is expected to go up by 13.4%. Since the last 5 years, the growth rate was recorded as 9%
annually. Based on the current rate of growth, it can be forecasted that the mutual fund assets
will be double by 2015.
GLOBAL SCENARIO OF MUTUAL FUND:
The money market mutual fund segment has a total corpus of 1.48 trillion in theU.S.
Out of the top 10 mutual fund worldwide, eight are worldwide sponsored. Only fidelity
and capital are non-bank mutual funds in this group.
In the U.S. the total numbers of schemes is higher than that of the listed companies
Internationally, mutual funds are allowed to go short. In India fund managers do not
have such leeway.
In the U.S. about 9.7 million households will manage their assets online by the year
2003, such a facility is not yet of avail in India andjeevan bima sahayoga MC floated
by the LIC are some of the other prominent ones. The aggregate corpus of the funds managed by thiscategory of AMCc is around 8300 cr.
DEPARTMENT OF MBA Page
47
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
48/92
Some of the major benefits of investingin them are:
Theseessentially investment vehicles where people with similar investment objective come
together to pool their money and then invest accordingly. Each unit of any scheme represents the
proportion of pool owned by the unit holder (investor). Appreciation or reduction in value of
investments is reflected in net asset value (NAV) of the concerned scheme, which is declared by
the fund from time to time. Mutual fund schemes are managed by respective Asset Management
Companies (AMC). Different business groups/ financial institutions/ banks have sponsored these
AMCs, either alone or in collaboration with reputed international firms. Several international
funds like Alliance and Templeton are also operating independently in India. Many more
international Mutual Fund giants are expected to come into Indian markets in the near future.
The benefits on offer are many with good post-tax returns and reasonable safety being the
hallmark that we normally associate with them.
Number of available options
Mutual funds invest according to the underlying investment objective as specified at the timeof
launching a scheme. So, we have equity funds, debt funds, gilt funds and many others thatcater
to the different needs of the investor. The availability of these options makes them a good option.
While equity funds can be as risky as the stock markets themselves, debt funds offer the kind of
security that is aimed for at the time of making investments. Money market funds offer the
liquidity that is desired by big investors who wish to park surplus funds for very short-term
periods. Balance Funds cater to the investors having an appetite for risk greater than the debt
funds but less than the equity funds.
DEPARTMENT OF MBA Page
48
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
49/92
The only pertinent factor here is that the fund has to be selected keeping the risk profile of the
investor in mind because the products listed above have different risks associated with them. So,
while equity funds are a good bet for a long term, they may not find favor with corporate or High
Networth Individuals (HNIs) who have short-term needs.
Diversification
Investments are spread across a wide cross-section of industries and sectors and so the risk is
reduced. Diversification reduces the risk because all stocks don t move in the same direction at
the same time. One can achieve this diversification through a Mutual Fund with far less money
than one can on his own.
Professional Management
Mutual Funds employ the services of skilled professionals who have years of experience to back
them up. They use intensive research techniques to analyze each investment option for the
potential of returns along with their risk levels to come up with the figures for performance that
determine the suitability of any potential investment.
Potential of Returns
Returns in the mutual funds are generally better than any other option in any other avenue over a
reasonable period of time. People can pick their investment horizon and stay put in the chosen
fund for the duration. Equity funds can outperform most other investments over long periods by
placing long-term calls on fundamentally good stocks. The debt funds too will outperform other
options such as banks. Though they are affected by the interest rate risk in general, the returns
generated are more as they pick securities with different duration that have different yields and
so are able to increase the overall returns from the portfolio.
DEPARTMENT OF MBA Page
49
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
50/92
Liquidity
Fixed deposits with companies or in banks are usually not withdrawn premature because there is
a penal clause attached to it. The investors can withdraw or redeem money at the Net Asset
Value related prices in the open-end schemes. In closed-end schemes, the units can be transactedat the prevailing market price on a stock exchange. Mutual funds also provide the facility of
direct repurchase at NAV related prices. The market prices of these schemes are dependent on
the NAVs of funds and may trade at more than NAV (known as Premium) or less than NAV
(known as Discount) depending on the expected future trend of NAV which in turn is linked to
general market conditions. Bullish market may result in schemes trading at Premium while in
bearish markets the funds usually trade at Discount. This means that the money can be
withdrawn anytime, without much reduction in yield. Some mutual funds however, charge exit
loads for withdrawal within a period. Besides these important features, mutual funds also offer
several other key traits. Important among them are:
Well Regulated
Unlike the company fixed deposits, where there is little control with the investment being
considered as unsecured debt from the legal point of view, the Mutual Fund industry is very well
regulated. All investments have to be accounted for, decisions judiciously taken. SEBI acts as a
true watchdog in this case and can impose penalties on the AMCs at fault. The regulations,
designed to protect the investors interests are also implemented effectively.
Transparency
Being under a regulatory framework, mutual funds have to disclose their holdings, Investment
pattern and all the information that can be considered as material, before all investors. This
means that the investment strategy, outlooks of the market and scheme related details are
disclosed with reasonable frequency to ensure that transparency exists in the system. This is
unlike any other investment option in India where the investor knows nothing as nothing is
disclosed.
DEPARTMENT OF MBA Page
50
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
51/92
Flexible, Affordable and a Low Cost affair
Mutual Funds offer a relatively less expensive way to invest when compared to other avenues
such as capital market operations. The fee in terms of brokerages, custodial fees and other
management fees are substantially lower than other options and are directly linked to the
performance of the scheme. Investment in mutual funds also offers a lot of flexibility with
features such as regular investment plans, regular withdrawal plans and dividend reinvestment
plans enabling systematic investment or withdrawal of funds. Even the investors, who could
otherwise not enter stock markets with low investible funds, can benefit from a portfolio
comprising of high-priced stocks because they are purchased from pooled funds.
As has been discussed, mutual funds offer several benefits that are unmatched by other
investment options. Post liberalization, the industry has been growing at a rapid pace and has
crossed Rs. 1,00,000.00 Crore size in terms of its assets under management. However, due to the
low key investor awareness, the inflow under the industry is yet to overtake the inflows in banks.
Rising inflation, falling interest rates and a volatile equity market make a deadly cocktail for the
investor for whom mutual funds offer a route out of the impasse. The investments in mutual
funds are not without risks because the same forces such as regulatory frameworks, government
policies, interest rate structures, performance of companies etc. that
Rattles the equity and debt markets, act on mutual funds too. But it is the skill of the managing
risks that investment managers seek to implement in order to strive and generate superior returns
than otherwise possible that makes them a better option than many others.
DEPARTMENT OF MBA Page
51
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
52/92
Dis - Advantages of mutual funds
1. High Expense Ratios and Sales Charges
If you're not paying attention to mutual fund expense ratios and sales charges, they can
get out of hand. Be very cautious when investing in funds with expense ratios higher than
1.20%, as they will be considered on the higher cost end. Be weary of 12b-1 advertising
fees and sales charges in general. There are several good fund companies out there that
have no sales charges. Fees reduce overall investment returns.
2. Management Abuses
Churning, turnover and window dressing may happen if your manager is abusing his or
her authority. This includes unnecessary trading, excessive replacement and selling the
losers prior to quarter-end to fix the books.
3. Tax Inefficiency
Like it or not, investors do not have a choice when it comes to capital gain payouts in
mutual funds. Due to the turnover, redemptions, gains and losses in security holdings
throughout the year, investors typically receive distributions from the fund that are an
uncontrollable tax event.
4. Poor Trade Execution
If you place your mutual fund trade anytime before the cut-off time for same-day NAV,
you'll receive the same closing price NAV for your buy or sell on the mutual fund. For
investors looking for faster execution times, maybe because of short investment horizons,
day trading, or timing the market, mutual funds provide a weak execution strategy.
DEPARTMENT OF MBA Page
52
ST. XAVIERS PG COLLEGE
-
7/28/2019 Mohammed Ismail. h No- 216311672026
53/92
Types of mutual funds:
Risk Hierarchy of Different Mutual Funds
Thus, different mutual fund schemes are exposed to different levels of risk and
investors should know the level of risks associated with these schemes before
investing. The graphical representation hereunder provides a clearer picture of the
relationship between mutual funds and levels of risk associated with these funds:
DEPARTMENT OF MBA Page
53
ST. XAVIERS PG COLLEGE