73626435 Customer Perception on Performance of Mutual Fund With Special Refrence to Reliance Mutual Funds

8/3/2019 73626435 Customer Perception on Performance of Mutual Fund With Special Refrence to Reliance Mutual Funds

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A

PROJECT REPORTON

CUSTOMER PERCEPTION ON PERFORMANCE OF MUTUAL FUND WITH SPECIAL

REFRENCE TO RELIANCE MUTUAL FUNDS

(In partial fulfillment for the award of degree of)

Master of Business AdministrationOFRajasthan Technical University, Kota

Jitendra

Virahyas


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[email protected]

SUBODH INSTITUTE OF MANAGEMENT&CAREERSTUDIES, JAIPUR(2009-2010)

STUDENT DECLARATION

I, xxxxx hereby that I have completed the project report entitled customer perception onperformance of mutual fund with special reference to reliance mutual funds from

R.M.F Jaipur.Submitted in partial fulfillment of the requirement for the degree of masters ofbusinessadministrative of RTU, Kota is my original work and not submitted for the rewardof anydegree, diploma, fellowship or any other similar title and it will not be used e

lsewhere.

I further declare that the information presented in this project is true and original to the bestof my knowledge.

Date: xxxxPlace: Jaipur (MBA IV Sem)


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ACKNOWLEDGEMENT

I am indeed very happy to acknowledge the numerous personalities involved in lendingtheir help to make my project a successful one.

Firstly, I would like to thank Reliance Mutual Fund for providing me the opportunity to workon this project.

I would like to thank my corporate guide Mr. H. Shan and all other staff of Reliance Moneyfor helping me in learning the lessons of professional management. His able guidance andvaluable inputs have helped me a lot in successfully completing this project.

I express my sincere gratitude to my institute guide Mr. Jitendra Virahyas who t

ook a lot ofpersonal interest in supervising this project and guiding me. She has been a great source ofinspiration in the task of completion of this project work. Her profound advice,timelyguidance has been of immense value to me.

I express my thanks to all the members of Reliance Mutual Fund, who gave me fullfledged support throughout my project. I express my gratitude to all those people, who havedirectly or indirectly helped me in the completion of this project

xxxxMBA IV Sem


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PREFACE

Recently from the past few years, the financial service sector industry has shown a rapidrising trend. With the advent and augmentation of several privately sponsored hi

gher returnfinancial products viz. unit linked life insurance, mutual funds, post office etc. Are turningthe investors towards themselves than to the schemes of investing in security markets. Inthe present economic scenario, the investor has wide options available that aresafe andgive reasonable return too. This has been major factor in popularity of mutual funds, ULIPs,Securities, Post Office deposits, NSC etc.

Reliance Mutual Fund is one of the largest market players in Indias Mutual Fund I

ndustrys.Right from its launch it has made an impression in market and become successful

only in10 Years. Indeed, Mutual Fund is growing and accepting in present scenario sincepeopleis realizing risk coverage but also as a potential investment opportunity. Thisproject is aneffort to study of the customer perception on performance of mutual fund with specialreference to reliance mutual funds like real state, equity, fixed deposit in themarket aswell as to study its financial performance in the financial market.


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CONTENTS

COVER PAGESTUDENT DECLARATIONACKNOWLEDGEMENT

PREFACE

Page No.

1.INDUSTRY PROFILE 1

2.INTRODUCTION TO THE ORGANIZATION 44

3.RESEARCH METHODOLOGY 68

3.1. TITLE OF THE STUDY 68

3.2. OBJECTIVES OF THE STUDY 68

3.3. TYPE OF RESEARCH 69

3.4. SAMPLE SIZE AND METHOD OF SELECTING SAMPLE 70

3.5. SCOPE OF STUDY 72

3.6. LIMITATION OF STUDY 73

4.FACTS AND FINDINGS 74

5.ANALYSIS AND INTERPRETATION 76

6.SWOT ANALYSIS 94

7.CONCLUSIONS 96

8.RECOMMENDATION AND SUGGESTIONS 97

9.APPENDIX 100

10.BIBLIOGRAPHY 105


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CHAPTER 1 -INDUSTRY PROFILE

1.1 OVERVIEW OF MUTUAL FUND INDUSTRY1.1.1 INTRODUCTION TO MUTUAL FUNDSMutual 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 statedinvestment objectives of the scheme. Since the stated investment objectives of amutualfund scheme generally form the basis for an investor's decision to contribute money to thepool, 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 managementskills and necessary research works ensures much better return than what an inve

stor canmanage on his own. The capital appreciation and other incomes earned from theseinvestments are passed on to the investors (also known as unit holders) in proportion of thenumber of units they own.

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When an investor subscribes for the units of a mutual fund, he becomes part owner of theassets of the fund in the same proportion as his contribution amount put up withthe corpus(the total amount of the fund). Mutual Fund investor is also known as mutual fund

shareholder or a unit holder. Any change in the value of the investments made into capitalmarket 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 Funds scheme'sassets net of its liabilities. NAV of a scheme is calculated by dividing the market value ofscheme's assets by the total number of units issued to the investors.

Structure of a Mutual Fund

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TYPES OF MUTUAL FUNDS

There are many types of mutual funds available to the investor. However, these different types offunds can be grouped into certain classifications for better understanding.

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WORKING OF MUTUAL FUNDS

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1.1.2 HISTORY OF INDIAN MUTUAL FUNDThe mutual fund industry in India started in 1963 with the formation of Unit Trust of India, atthe initiative of the Government of India and Reserve Bank of India. The historyof mutualfunds 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 bythe Reserve Bank of India and functioned under the Regulatory and administrativecontrolof the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the IndustrialDevelopment Bank of India (IDBI) took over the regulatory and administrative control inplace of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end

of 1988UTI 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 sectorbanks and Life Insurance Corporation of India (LIC) and General Insurance Corporation ofIndia (GIC). SBI Mutual Fund was the first non-UTI Mutual Fund established in June 1987followed by Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug89),

Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda MutualFund(Oct 92). LIC established its mutual fund in June 1989 while GIC had set up itsmutual fundin December 1990.

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At the end of 1993, the mutual fund industry had assets under management of Rs.47,004crores.

Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indianmutual fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was the yearin 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 (nowmerged with Franklin Templeton) was the first private sector mutual fund registered in July1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveandrevised 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 fundssetting up funds in India and also the industry has witnessed several mergers andacquisitions. As at the end of January 2003, there were 33 mutual funds with total assets ofRs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets und

ermanagement 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 bifurcatedinto two separate entities. One is the Specified Undertaking of the Unit Trust of India withassets under management of Rs.29,835 crores as at the end of January 2003, representingbroadly, the assets of US 64 scheme, assured return and certain other schemes. TheSpecified Undertaking of Unit Trust of India, functioning under an administratorand underthe rules framed by Government of India and does not come under the purview of theMutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registeredwith SEBI and functions under the Mutual Fund Regulations. With the bifurcationof theerstwhile 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 SEBIMutualFund Regulations, and with recent mergers taking place among different private s


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ectorfunds, the mutual fund industry has entered its current phase of consolidation and growth.

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The graph indicates the growth of assets over the years.

GROWTH IN ASSETS UNDER MANAGEMENT

1.1.3 CLASSIFICATION OF MUTUAL FUNDS

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financialposition, risk tolerance and return expectations etc. thus mutual funds has Variety of

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flavors, Being a collection of many stocks, an investors can go for picking a mutual fundmight be easy. There are over hundreds of mutual funds scheme to choose from. Itiseasier to think of mutual funds in categories, mentioned below.

BY STRUCTURE

Open-end fund:The term mutual fund is the common name for what is classified as an open-endinvestment company by the SEC. Being open-ended means that, at the end of everyday, the fund issues new shares to investors and buys back shares from investorswishing to leave the fund.

Mutual funds must be structured as corporations or trusts, such as business trusts, and

any corporation or trust will be classified by the SEC as an investment companyif itissues securities and primarily invests in non-government securities. An investmentcompany will be classified by the SEC as an open-end investment company if theydonot issue undivided interests in specified securities (the defining characteristic of unitinvestment trusts or UITs) and if they issue redeemable securities. Registeredinvestment companies that are not UITs or open-end investment companies are closed-end funds. Neither UITs nor closed-end funds are mutual funds (as that term is used in

the US).

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Close-ended Fund/ Scheme:A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fundis open for subscription only during a specified period at the time of launch ofthescheme. Investors can invest in the scheme at the time of the initial public iss

ue andthereafter they can buy or sell the units of the scheme on the stock exchanges wherethe units are listed. In order to provide an exit route to the investors, some close-endedfunds give an option of selling back the units to the mutual fund through periodicrepurchase at NAV related prices. SEBI Regulations stipulate that at least one of thetwo exit routes is provided to the investor i.e. either repurchase facility or through listingon stock exchanges. These mutual funds schemes disclose NAV generally on weekly

basis

Interval Schemes:Interval Schemes are that scheme, which combines the features of open-ended andclose-ended schemes. The units may be traded on the stock exchange or may be openfor sale or redemption during pre-determined intervals at NAV related prices.

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The risk return trade-off indicates that if investor is willing to take higher risk thencorrespondingly he can expect higher returns and vise versa if he pertains to lower riskinstruments, which would be satisfied by lower returns. For example, if an investors opt

for bank FD, which provide moderate return with minimal risk. But as he moves ahead toinvest in capital protected funds and the profit-bonds that give out more returnwhich isslightly higher as compared to the bank deposits but the risk involved also increases inthe same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutualfunds provide professional management, diversification, convenience and liquidity. That

doesnt mean mutual fund investments risk free. This is because the money that ispooled in are not invested only in debts funds which are less riskier but are al

soinvested in the stock markets which involves a higher risk but can expect higherreturns.Hedge fund involves a very high risk since it is mostly traded in the derivatives marketwhich is considered very volatile.

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BY NATURE

Equity (Stock or Income) Funds:Funds that invest in stocks represent the largest category of mutual funds. Generally,the investment objective of this class of funds is long-term capital growth with

someincome. There are, however, many different types of equity funds because there aremany different types of equities. A great way to understand the universe of equity fundsis to use a style box, an example of which is below.

The idea is to classify funds based on both the size of the companies invested in andthe investment style of the manager. The term value refers to a style of investing that

looks for high quality companies that are out of favor with the market. These companiesare characterized by low P/E and price-to-book ratios and high dividend yields.Theopposite of value is growth, which refers to companies that have had (and are expectedto continue to have) strong growth in earnings, sales and cash flow. A compromisebetween value and growth is blend, which simply refers to companies that are neithervalue nor growth stocks and are classified as being somewhere in the middle.

Debt funds:

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

Gilt Funds:11


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Invest their corpus in securities issued by Government, popularly known as Governmentof India debt papers. These Funds carry zero Default risk but are associated withInterest Rate risk. These schemes are safer as they invest in papers backed byGovernment.

Income Funds:Invest a major portion into various debt instruments such as bonds, corporatedebentures and Government securities.

MIPs:Invests maximum of their total corpus in debt instruments while they take minimumexposure in equities. It gets benefit of both equity and debt market. These scheme ranksslightly 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 inshort 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 liquidity andpreservation of capital. These schemes invest in short-term instruments like TreasuryBills, 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 of1day to 3 months. These schemes rank low on risk-return matrix and are considered tobe the safest amongst all categories of mutual funds.

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

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Further the mutual funds can be broadly classified on the basis of investmentparameter viz.

Each category of funds is backed by an investment philosophy, which is pre-defined inthe objectives of the fund. The investor can align his own investment needs with

thefunds objective and invest accordingly.

BY INVESTMENT OBJECTIVE

Growth Schemes:Growth Schemes are also known as equity schemes. The aim of these schemes is toprovide capital appreciation over medium to long term. These schemes normally investa major part of their fund in equities and are willing to bear short-term decline in valuefor possible future appreciation.

Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is toprovide regular and steady income to investors. These schemes generally invest in fixedincome securities such as bonds and corporate debentures. Capital appreciation in suchschemes may be limited.

Balanced Schemes:Balanced Schemes aim to provide both growth and income by periodically distributing apart of the income and capital gains they earn. These schemes invest in both sha

resand fixed income securities, in the proportion indicated in their offer documents(normally 50:50).

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

OTHER SCHEMES

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

Index Schemes:Index schemes attempt to replicate the performance of a particular index such astheBSE Sensex or the NSE 50. The portfolio of these schemes will consist of only thosestocks that constitute the index. The percentage of each stock to the total holding will beidentical to the stocks index weight age. And hence, the returns from such schemeswould be more or less equivalent to those of the Index.

Sector Specific SchemesThese are the funds/schemes which invest in the securities of only those sectorsorindustries as specified in the offer documents. e.g. Pharmaceuticals, Software,FastMoving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these fundsare dependent on the performance of the respective sectors/industries. While thesefunds 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 mustexit at an appropriate time.

1.1.4 ADVANTAGES OF INVESTING IN MUTUAL FUNDSThe advantages of investing in a Mutual Fund extending PMS to the smallinvestors are as under:

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.Professional Management-The investor avails of the services of experienced and skilled professionals whoarebacked by a dedicated investment research team, which analyses the performanceand prospects of companies and selects suitable investments to achieve the

objectives of the scheme.

.Diversification-Mutual Funds invest in a number of companies across a broad cross-section ofindustries and sectors. This diversification reduces the risk because seldom doallstocks decline at the same time and in the same proportion. You achieve thisdiversification through a Mutual Fund with far less money than you can do on yourown.

.Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problemssuch as bad deliveries, delayed payments and unnecessary follow up with brokersand companies. Mutual Funds save your time and make investing easy andconvenient.

.Return Potential Over a medium to long-term Mutual Funds have the potential to provide a higher return as they invest in adiversified basket of selected securities.

.

Low Costs - Mutual Funds are a relatively less expensive way to invest comparedtodirectly investing in the capital markets because the benefits of scale in brokerage,custodial and other fees translate into lower costs for investors.

.Liquidity-In open-ended schemes, you can get your money back promptly at net asset valuerelated prices from the Mutual Fund itself. With close-ended schemes, you can sellyour units on a stock exchange at the prevailing market price or avail of the facility of

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direct repurchase at NAV related prices which some close-ended and intervalschemes offer you periodically.

.Transparency-You get regular information on the value of your investment in addition to discl

osureon the specific investments made by your scheme, the proportion invested in eachclass of assets and the fund manager's investment strategy and outlook.

.Flexibility-Through features such as regular investment plans, regular withdrawal plans anddividend reinvestment plans, you can systematically invest or withdraw fundsaccording to your needs and convenience.

.

Choice of Schemes-Mutual Funds offers a family of schemes to suit your varying needs over a lifetime.

.Well Regulated-All Mutual Funds are registered with SEBI and they function within the provisions ofstrict regulations designed to protect the interests of investors. The operations ofMutual Funds are regularly monitored by SEBI.

1.1.5 DISADVANTAGES IN INVESTING IN MUTUAL FUNDS

Professional Management: Some funds doesnt perform in neither the market, as theirmanagement is not dynamic enough to explore the available opportunity in the market, thusmany investors debate over whether or not the so-called professionals are any better thanmutual fund or investor himself, for picking up stocks.

Costs: The biggest source of AMC income is generally from the entry & exit loadwhichthey charge from investors, at the time of purchase. The mutual fund industriesare thuscharging extra cost under layers of jargon.

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Dilution: Because funds have small holdings across different companies, high returns froma few investments often don't make much difference on the overall return. Dilution is alsothe result of a successful fund getting too big. When money pours into funds that have had

strong success, the manager often has trouble finding a good investment for allthe newmoney.

Taxes: when making decisions about your money, fund managers don't consider yourpersonal tax situation. For example, when a fund manager sells a security, a capital-gaintax is triggered, which affects how profitable the individual is from the sale.It might havebeen more advantageous for the individual to defer the capital gains liability.

1.2 MAJOR MUTUAL FUNDS COMPANIES IN INDIAThe concept of mutual funds in India dates back to the year 1963. The era between 1963and 1987 marked the existence of only one mutual fund company in India with Rs.67bnassets under management (AUM), by the end of its monopoly era, the Unit Trust ofIndia(UTI). By the end of the 80s decade, few other mutual fund companies in India took theirposition in mutual fund market.

The new entries of mutual fund companies in India were SBI Mutual Fund, Can bank

Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund.

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The succeeding decade showed a new horizon in Indian mutual fund industry. By the endof 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds startedpenetrating the fund families. In the same year the first Mutual Fund Regulations came into

existence with re-registering all mutual funds except UTI. The regulations werefurther givena revised shape in 1996.Kothari Pioneer was the first private sector mutual fundcompany inIndia which has now merged with Franklin Templeton. Just after ten years with privatesector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33mutual fund companies in India.

1.2.1 ABN AMRO Mutual FundABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) P

vt.Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. wasincorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMROMutual Fund.

1.2.2 Birla Sun Life Mutual FundBirla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial.Sun Life Financial is a global organization evolved in 1871 and is being represented inCanada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India.

Birla SunLife Mutual Fund follows a conservative long-term approach to investment. Recently itcrossed AUM of Rs. 10,000 crores.

1.2.3 HDFC Mutual FundHDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely HousingDevelopment Finance Corporation Limited and Standard Life Investments Limited.

1.2.4 HSBC Mutual FundHSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets(India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund actsas theTrustee Company of HSBC Mutual Fund.

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1.2.5 ING Vysya Mutual FundING Vysya Mutual Fund was setup on February 11, 1999 with the same named TrusteeCompany. It is a joint venture of Vysya and ING. The AMC, ING Investment Management(India) Pvt. Ltd. was incorporated on April 6, 1998.

1.2.6 Prudential ICICI Mutual FundThe mutual fund of ICICI is a joint venture with Prudential Plc. of America, oneof the largestlife insurance companies in the US of A. Prudential ICICI Mutual Fund was setupon 13th ofOctober, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Companyformed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset ManagementCompany Limited incorporated on 22nd of June, 1993.

1.2.7 State Bank of India Mutual FundState Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshorefund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today itis thelargest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes outof which 15 have already yielded handsome returns to investors. State Bank of India MutualFund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over8 Lakhsspread over 18 schemes.

1.2.8 Tata Mutual FundTata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorsfor TataMutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investmentmanager is Tata Asset Management Limited and its Tata Trustee Company Pvt. Limited.Tata Asset Management Limited's is one of the fastest in the country with more than Rs.7,703 crores (as on April 30, 2005) of AUM.

1.2.9 Kotak Mahindra Mutual FundKotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It ispresently having more than 1, 99,818 investors in its various schemes. KMAMC started itsoperations in December 1998. Kotak Mahindra Mutual Fund offers schemes cateringtoinvestors with varying risk -return profiles. It was the first company to launchdedicated giltscheme investing only in government securities.

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1.2.10 Unit Trust of India Mutual FundUTI Asset Management Company Private Limited, established in Jan 14, 2003, managesthe UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTIAssetManagement Company presently manages a corpus of over Rs.20000 Crore. The sponso

rsof UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank ofIndia (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fundare Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Fundsand Balance Funds.

1.2.11 Reliance Mutual FundReliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The

sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is theTrustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which waschanged on March 11, 2004. Reliance Mutual Fund was formed for launching of variousschemes under which units are issued to the Public with a view to contribute tothe capitalmarket and to provide investors the opportunities to make investments in diversifiedsecurities.

1.2.12 Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by StandardChartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. StandardChartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated withSEBI on December 20, 1999.

1.2.13 Franklin Templeton India Mutual FundThe group, Franklin Templeton Investments is a California (USA) based company with aglobal AUM of US$ 409.2 bn (as of April 30, 2005). It is one of the largest financial servicesgroups in the world. Investors can buy or sell the Mutual Fund through their financialadvisor or mail or through their website. They have Open end Diversified Equityschemes,Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Savingschemes, Open end Income and Liquid schemes, closed end Income schemes and Openend Fund of Funds schemes to offer.

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Morgan Stanley is a worldwide financial services company and its leading in themarket insecurities, investment management and credit services. Morgan Stanley InvestmentManagement (MISM) was established in the year 1975. It provides customized asset

management services and products to governments, corporations, pension funds andnonprofitorganizations. Its services are also extended to high net worth individuals andretailinvestors. In India it is known as Morgan Stanley Investment Management PrivateLimited(MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the firstcloseend diversified equity scheme serving the needs of Indian retail investors focusing on along-term capital appreciation.

1.2.15 LIC Mutual FundLife Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. Itcontributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constitutedas a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Companystarted its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointedJeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers forLIC Mutual Fund.

1.3 MUTUAL FUNDS ?

1.1 WHY SHOULD INVESTORS INVEST IN MUTUAL FUNDS ?An investors avails of the services of experienced and skilled professionals whoare backedby a dedicated investment research team that analyses the performance and prospects ofcompanies and selects suitable investments to achieve the objectives of the scheme.

.Mutual funds invest in a number of across a broad cross section of industries andsectors. This diversification reduces the risk because seldom all the stocks declineat the same time and same proportion.

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.Investing in mutual funds reduces paper work and helps an investor avoid manyproblems such as bad deliveries, delayed payment and unnecessary follow up withbrokers and companies. Mutual funds save your time and make investing easy andconvenient.

.Over a medium to long term, mutual funds have the potential to provide a higherreturn as they invest in a diversified basket of selected securities.

.Mutual funds are relatively less expensive way to invest compared to directlyinvesting in capital markets because the benefits of scale in brokerage, custodial andother fees are translated into lower costs for investors.

.In open ended schemes , investors can get their money back at net assets value

related price .an investor can sell the units on a stock exchange at the prevailingmarket price or avail of the fielding of direct repurchase at NAV related priceswhichsome close ended and interval schemes offer an investor periodically.

.Investors get regular information on the value of investment in disclosure on thespecific investments made by the investors schemes.

.Investors can invest or withdraw funds according to their needs and convenience.

.All mutual funds are registered with SEBI and they function within the provisions ofstrict regulations designed to protect the interests of investors.

EFFICIENCY OF MUTUAL FUNDS

The efficiency of mutual funds should be judged by the following factors. The test ofefficiency or a good mutual fund shall compromise of evaluation of a mutual fundon:

.Stability: -whether a mutual fund is stable or not so far as its schemes areconcerned.

.Liquidity: -whether the schemes offer liquidity by way of their listing on stockexchange.

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.Growth: -whether the mutual funds offer increase in net asset value, consistentgrowth in dividend and capital appreciation.

.Credibility: -previous track record of issuer.

.Returns: -assured or otherwise.

.Management approach: -risk taking, portfolio, diversification, returnmaximization, bonus etc.

1.2 HOW DO WE CHOOSE THE MUTUAL FUNDS.Draw down your investment objective. There are various schemes suitable fordifferent needs. For example retirement plan, capital growth etc. Also get clear

aboutyour time frame for investment and returns. Equity funds are not advisable for shortterm because of their long term nature. You can consider money market and floatingrate funds for short term gains. This equals asking - What kind of mutual fund is rightfor me?

.Once you have decided on a plan or a couple of them, collect as much informationas possible on them from different sources offering them. Funds' prospectus and

advisors may help you in this.

.Pick out companies consistently performing above average. Mutual funds industryindices are helpful in comparing different funds as well as different plans offered bythem. Some of the industry standard fund indices are Nassau 100, Russel 2000,S&P fund index and DSI index with the latter rating the Socially Responsible Fundsonly. Also best mutual funds draw good results despite market volatility.

.Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for allyour short listed funds and how they affect your returns. Best mutual funds havelower cost out go.

.Best mutual funds maximize returns and minimize risks. A number called as SharpeRatio explains whether a fund is risk free based on its expected returns comparedagainst a risk free money market fund.

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.Some funds have the advantage of low minimum initial investments. You can startinvesting even with $250 a month. This is advisable for building asset bases over along period with small regular investments.

1.3 THINGS KEPT IN MIND BEFORE INVESTINGPROSPECTUS

By law, you should receive a prospectus from the fund company before you investin it.Many investors ignore the prospectus, but this is a must read. The mutual fund'sobjectivesare displayed in the prospectus. It tells you the goals of the fund and how it intends toachieve them. You will also find information about the fund's past performance and fees.

Mutual Fund Families

Mutual Fund Glossary

Mutual Fund Fees

The fees are displayed in the prospectus as well as on many mutual fund researchsites.Try to buy funds with low expense ratios and certainly avoid 12b-fees. I have yet to hear avalid argument on why you should ever buy a loaded fund. A loaded fund is a fundthatcarries front-end loads, back-end loads or deferred loads. These loads are basic

ally salescharges. There are plenty of no-load funds to meet your objectives.

GROWTH IN MUTUAL FUNDS SECTOR

Mutual funds are shuddering at the prospect of an economic recovery. But they haveenough time to consolidate their client base.

The Smart Investor Team

Normally a recovery means good news for all, consumers, manufacturers and serviceproviders. But hold on. Mutual funds aren't very enthusiastic, though. Why? Because, thebiggest investors in the domestic mutual fund industry today are large corporateand banks.

These investors have put in more than 50 per cent of total assets of the industry. And, a

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recovery means that corporate may pull out their money to invest in their core activities.Similarly, a revival in credit demand on the back of a recovery means that banksmay needto pull out their investments from mutual funds to meet the demand.

That's perhaps why mutual funds are pulling such long faces at the prospect of arecovery.What if the economy recovers and corporate go on a spending spree? Capacityexpansions, merger and acquisition activity and better credit demand would requirecorporate and banks to encash their existing investments to plough back in theircorebusiness.

Obviously, there is a strong possibility of large scale redemptions. While fundcompaniessee this issue as a matter of concern, they are optimistic about guarding their

currentassets. Says Ved Prakash Chaturvedi, chief executive officer, Tata TDW Mutual Fund,"Despite an economic recovery, the fund industry should be able to retain and infact, growits assets."

Is an economic recovery underway? The outlook on the economy is pretty much positiveand economists are predicting a wide-ranging recovery led by an increase in domesticconsumer demand.

According to the latest data released by the Central Statistical Organization (CSO), theIndian economy grew 4.3 per cent in 2008-09. With the manufacturing and servicessectorsgrowing at 6.0 per cent and 7.1 per cent respectively, the poor performance of theagriculture sector dragged down the overall growth. Growth in the agricultural sectordeclined 3.2 per cent last fiscal. The growth in manufacturing industry was ledby buoyantexports and a boost to construction activity.

This year, again, the manufacturing sector is expected to grow at a faster clip.The overallmanufacturing outsourcing story should mean more business for Indian manufacturingcompanies too.

Construction is again going to be a key driver. So sectors like steel and cementhavealready seen a quantum jump in demand and many loss-making companies such as Ispat,Essar, and the Jindal group have turned profitable. Similarly, many other sectors such asconsumer durables and textiles are seeing demand-led growth. Many of these corpo

rate

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houses are thus focusing on the longer-term targets. Some sectors like steel arealreadytalking of capacity expansion and green field projects. Others like cement havebeen seeingconsolidation. However, as Sanjeev Bafna, senior vice-president.

Corporate finance, Grasim Industries says "It will take 1-2 years for the Indianindustry tostart committing funds into expansions."

But whenever it happens, will corporate queue up for redemptions? And secondly,willbanks and financial institutions, which have invested their surplus funds in mutual funds onthe back of poor credit off take in the last couple of years, divert their moneyinto lending?

The latter, of course, is a definite possibility. Last year, lending behemoth ID

BI was amongthe biggest investors in mutual funds. Others such as ICICI bank and HDFC also figured inthe list of biggest investors.

While Reliance Industries was one of the largest investors in mutual funds, mutual fundsources say that some of the other big investors are from the banking industry.Forinstance, both IDBI and SIDBI are said to have a considerable exposure in rolling oversurplus funds in mutual funds. Other big players in the sector include the Finolex Group,

ICICI Bank, Bank of India, Central bank and LIC Housing Finance.

Clearly, a lot depends on the outlook for the economy. Any revival will result in an increasein credit off take and thus, funds will have to be redirected from the market toindustry. Butthe probability of that happening in the near-term is bleak: there is a huge amount ofliquidity in the banking sector, and further rate cuts will only add to it.

But corporate money pulling out may not be that big a threat. Here is why. Companiestypically park their surplus cash in treasury instruments (liquid fund schemes).And, theydeploy money considered surplus in a slightly longer horizon into medium term funds.Industry experts feel that the economic recovery will have no impact on the flows into liquidfunds.

As a matter of fact, improved cash flow for corporate will only increases the popularity ofliquid funds. Even more, they say that today financially healthy corporate willfind it lessprudent to pull out money from investments like mutual funds to fund expansions

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Also, capital expenditure is never lumped together but is spread over a period of time and

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prudence requires a judicious mix of debt and equity depending on the project size, horizonof returns, gestation period etc. Hence there will not be any sudden withdrawalof fundsfrom the market. Such expenditure is planned in advance and as result, a companycannot

take the risk of a sudden withdrawal of its investment.

Opportunity cost of money

To get a feel of this, look at the opportunity cost of money. Currently, companies havewitnessed around a 500-600 basis points reduction in interest costs on long-termdebt fromabout 16 per cent-plus in 1998-99 to about 10 per cent now, and even lesser fortop ratedcorporate, which can raise money at around 5.5-6.0 per cent per annum. As a result, it is

much more attractive to fund investments by taking on additional debt while continuing toearning a higher return from deploying internal cash into market instruments such as mutualfunds.

Arbitrage between debt vs. funds

But the main reason that the companies prefer raising debt is two-fold. Firstly,debt isavailable at historically low costs and secondly, tax considerations favor debt.Theseinclude a tax benefit on the interest costs, a dividend distribution tax on divi

dend incomeand capital gains tax on long-term capital gains. As a result, while effective cost of debt isless than 4 per cent, the effective tax-adjusted return on mutual fund investment is around5-6 per cent.

Grasim's Bafna says "the biggest factor that will determine an outflow of fundsis the anychange in the tax status of dividends and capital gains tax on long-term capitalgains".Currently, dividends from mutual funds are tax-free in the hands of the investors except fora dividend distribution tax of 12.81 per cent. Long-term capital gains are taxedat 10.25 percent with indexation benefits, and at 20.5 per cent without indexation benefits.

The banking sector, with the considerable amount of liquidity in the system, hasalso been asignificant investor in mutual funds.

For instance, as on March 31, 2003, HDFC had investments of around Rs 1500 croreinliquid funds. According to Mr. Ravi Kumar, Regional

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Head -Global Markets, Stanchart Grindlays "The corporate sector accounts for areasonable chunk of the investments in mutual funds. While there may be some withdrawalof funds, an increase in economic activity will also increase the surplus funds.Therefore,over a period of time, the cash surpluses will find their way back into the mark

et"

NEW FUND OFFER

In the last one-year we have seen surge in the number of Equity IPOs & Mutual Fund NFOslaunched. This is because there is a significant jump in profits of small & medium sizedcompanies & so many loss-making companies have been restructured and now makingprofits. These companies are looking for expansion & to support their future plans thesecompanies are looking at IPO option. This has created good opportunity to invest

in thenew companies, which are growing at fast rate. New Mutual Fund schemes launchedalsogot the more options to invest collected money in various old as well as new companies.This year so many Mutual Fund NFOs have collected money in excess of Rs1000Cr &some of them had even crossed Rs2000Cr mark. Some of the existing schemes withhighest AUMs are looking small if we look at these collections by MF NFOs.

Collection of Mutual Fund NFOs launched in 2005

Scheme NFO Collection (Rs Cr)SBI Magnum Multi Cap Fund 2102

Franklin India Flexi Cap Fund 1950Reliance Equity Opportunities Fund 1761Fidelity Equity Fund 1495Prudential ICICI Infrastructure Fund 1418HDFC Premier Multi - Cap Fund 1328Standard Chartered Classic Equity Fund 1043

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Floating a NFO at the right time when markets are in correction phase & investing thecollected money on correction is proved as very successful strategy in the lastone year.This is evident as newly launched Mutual Fund NFOs have outperformed various indices &

able to generate good returns. The below table indicates good performance givenby MFNFOs. Therefore Its a good idea to invest in NFOs which could create wealth for investorslike you.

Current Scenario of Mutual Fund

India is at the first stage of a revolution that has already peaked in the U.S.the U.S. boastsif an asset base that are much higher than its deposits. In India, mutual fund assets are not

even 10% of the bank deposits, but this trend is beginning to change. Recent figuresindicate that in the first quarter of the current fiscal year mutual fund assetwent up by 115%whereas bank deposit rose up only 17%. This is forcing a large number of banks to adoptthe concept of narrow banking wherein the deposits are kept in Gilts and some otherassets. This improves liquidity and reduces risk. The basic fact lies that bankscannot beignored and they will not completely. Their role closes down as intermediaries cannot beignored. It is just mutual Funds are going to change the way banks do business i

n thefuture.

COMPARISONS OF MUTUAL FUND WITH OTHER DEPOSITSBANKS V/S MUTUAL FUNDS

Banks v/s Mutual Funds

BANKS MUTUAL FUNDSReturns Low BetterAdministrative High Lowexp.

Risk Low Moderate

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Investment LessoptionsNetwork High PenetrationLiquidity At a cost

Quality of assets Not Transparent

Interest Min. bal. between 10th & 30th ofcalculation every month

Guarantee Max. Rs. 1Lakh on deposit

SHARES V/S MUTUAL FUNDS

More

Low put improvingBetterTransparent

Everyday

None

SHARES MUTUAL FUNDSKnow-how is needed Superficial know. Is sufficientHigh cost involved Low CostTime needed one can sleep overProfessional Management.

Insurance Vs Mutual Funds

Both these instruments are designed to serve different purposes and are not comp

arable. Aunit-linked plan from an insurance company is an insurance policy designed to pay a lumpsum on maturity or on death if earlier. Premium paid under these plans is eligible for taxdeduction under Section 88 of the Income Tax Act. On the other hand, mutual funds areinvestment avenues to participate in the growth of financial markets and do notprovide anytax deduction (except ELSS and pension funds).

For a unit-linked insurance plan, providing life cover is the most important function; returnsare just an added benefit, which gets magnified, given the tax rebates. Though unit-linkedplans offer transparency in returns in terms of net asset value and flexibilityin investmentoptions in debt, equity or mixes of both, these advantages remain secondary, whereas for amutual fund, the main objective is to provide returns.

Moreover, unit-linked plans are not as liquid as mutual funds. There is a lock-in of threeyears. Even if one redeems after three years, you would be at a loss because ofhigher

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initial administrative charges. For example, the upfront charges for the first two premiumamounts are as high as 20-27 per cent. Then there is an annual management fee of0.8

1.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is a deduction for riskcover. This goes towards contribution to the sum assured or the life insurance cover, whichis based on mortality rates as calculated by actuaries. Though mutual funds toohave entryand exit loads (maximum 2 per cent) and expenses (maximum 2.5 per cent), these costsare lower than unit-linked plans.1.4 RISK INVOLVED IN MUTUAL FUNDSMutual fund investments are subject to market risks. Please read the offer document

carefully before investing. There is no assurance or guarantee that all the objectives of thefund will be achieved. Past performance of the Sponsors/ Mutual fund/ Schemes/ AssetManagement Company is not necessarily indicative of future results. The name ofthe fund/scheme does not, in any manner, indicate either the quality of the fund, its future prospectsor returns".

It may bethere is greater amount of risk involved in the subject matter; even if the disclaimer

statement(s) are not too lengthier. In fact, these disclaimers, directly or indirectly, give aclear message that investors should be informed, take adequate care and beware of theinherent risks before investing in the mutual fund. Now the issue is what thoseRisks are?

Investor Psychology Risk:31

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The investor psychology is such that most of the investors, be it Mutual Fund Investorsor Direct Capital Market Investors, behave like reactionaries. E.g. they enter the marketwhen the share prices starts rising and they get panicky & exit as soon as shareprices

starts falling. Therefore, whether it is shares of company or mutual fund unit investors,investors resort to selling their investments when market starts looking down. Becauseof this, there will be more than normal demand on Mutual Fund manager to redeemtheunits. To honour the redemption demands of the exiting unit holders during the worstmarket times, Mutual Funds are forced to sell more stocks at the prevailing lowprices.As a result of this, along with the redeeming unit holders, all the other unit holders who

have invested in the fund suffer. This means, irrespective of one being a long-term buyand hold investor or not, he suffers because of investing in Mutual Fund.

Cost Risks:Mutual Funds charge huge fees that they can get away with and that too in the mostconfusing manner possible. The fund managers never intend to make their costs clearto their clients. It would not be painful for the investors to pay for the expenses and costsof the funds when they derive satisfactory returns. But, the irony is that investors have to

pay for the sales charges, annual fees and many other expenses irrespective of how thefund has performed.

Prediction Risks:Nobody can predict the capital market perfectly and can always find good investments.Similarly, the fund manager's predictions of future actions and outcomes are, ofnecessity, subject to error.

Risk of Redemption Restrictions:Whether informed in writing or not, normally the liquidity of schemes investments maybe restricted by the trading volumes settlement period and transfer procedures.

Management Change Risks:It is not uncommon for a Mutual Fund to have changes in its management. The changein the funds management may affect the achievement of the objectives of the fund. Thefund company may, for various reasons, replace a fund manager or may be the fund

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manager himself may resign from his job for any reason. This change will be significantsince the fund manager controls the fund investments.

.Judgment Risks:

Investors may not know more than the fund manager about the investment strategyandwhatever judgment the investor makes will not be fool proof.

.Risks of Blind Diversification:It may happen that a fund is heavily committed to a particular area of the economy atany given time. This is called blind diversification risk and any investor wouldlike toinvest in Mutual Fund that concentrate in asset classes that he himself has notinvested

at his own.

.Risks of changes in the Regulatory Norms:Mutual Funds are constantly regulated by SEBI and investors are subject to riskof thechanges in the norms for the Mutual Funds.

Besides the above risks, Mutual Funds will also have the common risks that anyinvestment has. In fact, risk is present in every decision made with regard to theinvestments in capital markets. Following is the list of some common risks involved

while investing in the capital markets and particularly in the mutual funds:

.Country Risk: This risk arises from the possibility that political events such as war,national elections etc. and financial problems such as rising inflation or naturaldisasters such as an earthquake, a poor harvest etc. will weaken a country'seconomy and cause investments in that country to decline.

.Credit Risk: This is a risk that arises from the possibility that a bond issuerwill fail torepay interest and principal in a timely manner. This risk is also called as default risk.

.Currency Risk: This risk arises from the possibility that returns could be reduced forIndians investing in foreign securities because of a rise in the value of the Indianrupee against dollar, euro or yen etc. This is also known as Exchange Rate Risk.

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.Manager Risk : This risk arises from the possibility that an actively managed mutualfund's investment adviser will fail to execute the fund's investment strategyeffectively, resulting in the failure of the sated objectives.

.Market Risk: This risk arises from the possibility that stock fund or bond fundpricesoverall will decline over short or even extended periods.

Risk Hierarchy of Different Mutual FundsThus, different mutual fund schemes are exposed to different levels of risk andinvestorsshould know the level of risks associated with these schemes before investing. Thegraphical representation hereunder provides a clearer picture of the relationship

between mutual funds and levels of risk associated with these funds:

1.5 SOME IMPORTANT ASPECTS OF MUTUAL FUNDNET PRESENT VALUENet Asset Value (NAV) is the actual value of one unit of a given scheme on any givenbusiness day. The NAV reflects the liquidation value of the fund's investments on that

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particular day after accounting for all expenses. It is calculated by deductingall liabilities(except unit capital) of the fund from the realizable value of all assets and dividing it bynumber of units outstanding.

.Sale Price: -Is the price you pay when you invest in a scheme. Also called OfferPrice. It may include a sales load.

.Repurchase Price: -Is the price at which units under open-ended schemes arerepurchased by the Mutual Fund. Such prices are NAV related.

.Redemption Price: -Is the price at which close-ended schemes redeem their units

on maturity. Such prices are NAV related.

.Sales Load: -Is a charge collected by a scheme when it sells the units. Also called,Front-end load. Schemes that do not charge a load are called No Load schemes.

.Repurchase or Back-end Load: -Is a charge collected by a scheme when it buysback the units from the unit holders.

1.4 GLOBAL SCENARIO IN MUTUAL FUNDSSome basic facts:35


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.The money market mutual fund segment has a total corpus of $ 1.48 trillion in the

U.S. against a corpus of $ 100 million in India..Out of the top 10 mutual funds worldwide, eight are bank-sponsored. Only Fidelity

and Capital are non-bank mutual funds in this group.

.In the U.S. the total number of schemes is higher than that of the listed companieswhile in India we have just 277 schemes

.Internationally, mutual funds are allowed to go short. In India fund managers do nothave such leeway.

.In the U.S. about 9.7 million households will manage their assets on-line by the year

2003, such a facility is not yet of avail in India.

.On-line trading is a great idea to reduce management expenses from the current2% of total assets to about 0.75 % of the total assets.

.72% of the core customer base of mutual funds in the top 50-broking firms in the

U.S. is expected to trade on-line by 2003.(Source: The Financial Express September,)

The money market mutual fund segment has a total corpus of $ 1.48 trillion in th

e U.S.against a corpus of $ 100 million in India. Out of the top 10 mutual funds worldwide, eightare bank- sponsored. Only Fidelity and Capital are non-bank mutual funds in thisgroup.

In the U.S. the total number of schemes is higher than that of the listed companies while inIndia we have just 277 schemes Internationally, mutual funds are allowed to go short. InIndia fund managers do not have such leeway. In the U.S. about 9.7 million households willmanage their assets on-line by the year 2003, such a facility is not yet of avail in India.

On-line trading is a great idea to reduce management expenses from the current 2% oftotal assets to about 0.75 % of the total assets. Internationally, on-line investing continuesits meteoric rise. Many have debated about the success of e-commerce and itsbreakthroughs, but it is true that this aspect of technology could and will change the wayfinancial sectors function. However, mutual funds cannot be left far behind. They haverealized the potential of the Internet and are equipping themselves to perform b

etter. In fact

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in advanced countries like the U.S.A, mutual funds buy-sell transactions have alreadybegun on the net, while in India the Net is used as a source of Information.

Such changes could facilitate easy access, lower intermediation costs and betterservices

for all. A research agency that specializes in internet technology estimates that over thenext four years Mutual Fund Assets traded on- line will grow ten folds from $ 128 billion to $1,227 billion; whereas equity assets traded on-line will increase during the period from $246 billion to $ 1,561 billion. This will increase the share of mutual funds from 34% to 40%during the period. Such increases in volumes are expected to bring about large changes inthe way Mutual Funds conduct their business.

Here are some of the basic changes that have taken place since the advent of theNet

Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutualfunds could bring down their administrative costs to 0.75% if trading is done on-line. As perSEBI regulations, bond funds can charge a maximum of 2.25% and equity funds cancharge 2.5% as administrative fees. Therefore if the administrative costs are low, thebenefits are passed down and hence Mutual Funds are able to attract mire investors andincrease their asset base.

Better advice: Mutual funds could provide better advice to their investors through the Netrather than through the traditional investment routes where there is an additional channel todeal with the Brokers. Direct dealing with the fund could help the investor withtheir financialplanning.

In India, brokers could get more Net savvy than investors and could help the investors withthe knowledge through get from the Net.

New investors would prefer online: Mutual funds can target investors who are youngindividuals and who are Net savvy, since servicing them would be easier on the Net.

India has around 1.6 million net users who are prime target for these funds andthis couldjust be the beginning. The Internet users are going to increase dramatically andmutualfunds are going to be the best beneficiary. With smaller administrative costs more fundswould be mobilized .A fund manager must be ready to tackle the volatility and wi

ll have tomaintain sufficient amount of investments which are high liquidity and low yielding


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investments to honor redemption.

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In the U.S. most mutual funds concentrate only on financial funds like equity and debt.Some like real estate funds and commodity funds also take an exposure to physical assets.The latter type of funds are preferred by corporate who want to hedge their exposure to the

commodities they deal with.

In U.S.A. apart from bullion funds there are copper funds, precious metal fundsand realestate funds (investing in real estate and other related assets as well.).In India, the Canadabased Dundee mutual fund is planning to launch gold and a real estate fund before theyear-end.

In developed countries like the U.S.A there are funds to satisfy everybodys requirement,

but in India only the tip of the iceberg has been explored. In the near future India too willconcentrate on financial as well as physical funds

1.5ORGANIZATION OF A MUTUAL FUND

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1.5.1 SEBIThe Securities Exchange Board of India (SEBI) is the regulatory authority for all the mutualfunds sponsored by the public/private sector banks, financial institutions, private sectorcompanies, non-banking finance companies and foreign institutional investors. SE

BI haslaid down the rules and regulations regarding the obligations of the entities involves in amutual fund, its establishment and launch of different schemes, investments andvaluation,financial reporting, conduct and operations of mutual funds.

1.5.2 SPONSORSponsor is the person who acting alone or in combination with another body corporateestablishes a mutual fund. The sponsor establishes the mutual fund and registersthe same

with SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval ofSEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track recordof business interest in the financial markets. Sponsor must have been profit making in atleast 3 of the above 5 years. Sponsor must contribute at least 40% of the net worth of theInvestment Managed and meet the eligibility criteria prescribed under the Securities andExchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not responsibleor liable for any loss or shortfall resulting from the operation of the Schemes

beyond theinitial contribution made by it towards setting up of the Mutual Fund.

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1.5.3 TRUSTThe Mutual Fund is constituted as a trust in accordance with the provisions of the IndianTrusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian RegistrationAct, 1908.

1.5.4 TRUSTEETrustee is usually a company (corporate body) or a Board of Trustees (body of individuals).The main responsibility of the Trustee is to safeguard the interest of the unitholders andinter alia ensure that the AMC functions in the interest of investors and in accordance withthe Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, theprovisions of the Trust Deed and the Offer Documents of the respective Schemes.At least

2/3rd directors of the Trustee are independent directors who are not associatedwith theSponsor in any manner.

1.5.5 ASSET MANAGEMENT COMPANY (AMC)The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. TheAMC is required to be approved by the Securities and Exchange Board of India (SEBI) toact as an asset management company of the Mutual Fund. At least 50% of the directors ofthe AMC are independent directors who are not associated with the Sponsor in any

manner. The AMC must have a net worth of at least 10 crore at all times.

1.5.6 REGISTRAR AND TRANSFER AGENTThe AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent tothe Mutual Fund. The Registrar processes the application form, redemption requests anddispatches account statements to the unit holders. The Registrar and Transfer agent alsohandles communications with investors and updates investor records.

1.5.7 CUSTODIANA custodian is an agent, bank, trust company, or other organization which holdsandsafeguards an individual's, mutual fund's, or investment company's assets for them.

CODE OF CONDUCT FOR INTERMEDIARIES OF MUTUAL FUNDS:

.Take necessary steps to ensure that the clients interest is protected.

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.Adhere to SEBI Mutual Fund Regulations and guidelines related to selling,distribution and advertising practices. Be fully conversant with the key provisions ofthe offer document as well as the operational requirements of various schemes.

.Provide full and latest information of schemes to investors in the form of offerdocuments, performance reports, fact sheets, portfolio disclosures and brochures,and recommend schemes appropriate for the clients situation and needs.

.Highlight risk factors of each scheme, avoid misrepresentation and exaggeration,and urge investors to go through offer documents/key information memorandumbefore deciding to make investments.

.Disclose all material information related to the schemes/plans while canvassingforbusiness.

.Abstain from indicating or assuring returns in any type of scheme, unless the offerdocument is explicit in this regard.

.Maintain necessary infrastructure to support the AMCs in maintaining high servic

estandards to investors, and ensure that critical operations such as forwarding formsand cheques to AMCs/registrars and dispatch of statement of account andredemption cheques to investors are done within the time frame prescribed in theoffer document and SEBI Mutual Fund Regulations.

.Avoid colluding with clients in faulty business practices such as bouncing cheques,wrong claiming of dividend/redemption cheques, etc.

.Avoid commission driven malpractices such as:

oRecommending inappropriate products solely because the intermediary isgetting higher commissions there from.oEncouraging over transacting and churning of mutual fund investments toearn higher commissions, even if they mean higher transaction costs and taxfor investors..Avoid making negative statements about any AMC or scheme and ensure that

comparisons if any are made with similar and comparable products.

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.Ensure that all investor related statutory communications (such as changes infundamental attributes, exit/entry load, exit options, and other material aspects) aresent to investors reliably and on time.

1.6 MUTUAL FUNDS AND BUDGET 2009-20101.6.1 FIXED INCOME MARKETS TO BENEFIT42


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MEASURES:

.Revenue deficit target reduced to 1% in FY10 from 1.4% in FY09; fiscal deficit target

reduced to 2.5% in FY10 from 3.1% in FY09

.Gross borrowings lower at Rs.1.45 trillion in FY10 from Rs.1.56 trillion in FY09; netborrowing also lower at Rs.1.01 trillion from Rs.1.11 trillion in FY09

.Measures announced to develop bond, currency and derivatives markets that willinclude launching exchange-traded currency and interest rate futures and developinga transparent credit derivatives market with appropriate safeguards.

.Measures announced to enhance tradability of domestic convertible bonds by puttingin place a mechanism that will enable investors to separate embedded equity optionsfrom convertible bonds and trade them separately.

.Measures announced to encourage development of a market-based system forclassifying financial instruments based on their complexity and implicit risks.

.

Proposal announced to exempt from TDS, corporate debt instruments issued indemat form and listed on recognized stock exchanges.

IMPACT:

.Decision of expanding the corporate debt market will help in increased focus towardsbond funds and in a scenario where interest rates are not expected to be adverseinthe medium term, this would further assist in increasing the popularity of bondfundswhich have not been doing well in the last few years.

.Development of the derivatives markets can in turn enhance the development of thestructured products market.

1.6.2EASING IN INCOME TAX SLABSMEASURES:

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Threshold limit of Income Tax exemption for individuals raised as follows Upto Rs.150,000 NILRs.150,001 to Rs.300,000 - 10%Rs.300,001 to Rs.500,000 - 20%Rs.500,001 and above - 30%

IMPACT:

This is expected to increase the disposable income in the hands of the individuals to someextent which could translate into increased retail investments in mutual funds.

1.6.3INCREASE IN SHORT TERM CAPITAL GAINS TAXMEASURES:

Short Term Capital Gains Tax raised from 10% to 15%

IMPACT:

.Since long term capital gains tax has been left unchanged, this hike in short-termcapital gains tax could encourage long-term investments which augur well to thedevelopment of the concept of "long terms" in the Indian Mutual Fund industry, whichis conspicuous by its absence but which is coveted by the fund industry given th

egreater flexibility that this provides in fund management.

.At the same time since the short term capital gains tax is still lower than theincometax slabs of typical capital market investors, it is not expected to cause too manyinvestors to turn away from mutual funds.

.The fact that the dividend distribution tax structure has not changed would meanthatdividend reinvestment plans in liquid schemes will continue to be popular and alsothe liquid plus category will continue to attract inflows as the tax rates therewouldcontinue to be lower than the liquid category.

1.7 MARKET TRENDS44


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Alone UTI with just one scheme in 1964 now competes with as many as 400 odd productsand 34 players in the market. Now with increasing competition and losing marketshare, UTIno longer remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the industry. Newplayers have come in, while others have decided to close shop by either sellingoff ormerging with others. Product innovation is now passed with the game shifting toperformance delivery in fund management as well as service. Those directly associatedwith the fund management industry like distributors, registrars and transfer agents, andeven the regulator have become more mature and responsible.

The industry is also having a profound impact on financial market. UTI has once

been adominant player on the bourses as well as the debt market, but now, new generations ofprivate funds, has gained substantial mass, and are flexing their muscles. Fundmanagersby their selection criteria for stocks have forced corporate governance on the industry. Byrewarding honest and transparent management with higher valuations, a system ofriskreward has been created where the corporate sector is more transparent than before.

Funds have shifted their focus to the recession free sector like pharmaceutical,

FMCG andtechnology sector, funds performances are improving. Funds collection, which averaged atless than Rs 100 bn per annum over five-year period spanning 1993-1998 doubled to Rs210 bn in 1998-1999. In the financial year ending march2000 was mobilization wasaboveRs 300 bn. Total collections for the financial year march 2000 was around Rs 450bn.

What is particularly noteworthy is that bulk of the mobilization has been by theprivatesector mutual funds rather than public sector mutual funds. Indeed private MFs saw a netinflow of Rs 7819.43 crores during the first nine months of the year as againsta net inflowof Rs 604.40 crores in case of public sector funds.

Mutual funds are now also competing with commercial banks in race for retail investorssavings and corporate float money. The power shift towards mutual funds has becomeobvious. The coming few years will show that the traditional saving avenues arelosing outin the current scenario. Many investors are realizing that investments in saving

account aregood as locking up their deposits in a closet. The fund mobilization trends by mutual funds


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in the current year indicate that money is going to mutual funds in a big way.

CHAPTER 2 -INTRODUCTION TO THE ORGANIZATION

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Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act,1882 with Reliance Capital Limited (RCL), as the Settlor/Sponsor.

FOUNDER

Dhirubhai H. Ambani

Founder Chairman,Reliance Industries Limited, India

December 28, 1932 - July 6, 2002

Major Group Companies: Reliance Industries Limited, India's largest private sector

company.

Birthplace: Chorwad, village in Saurashtra (Gujarat), IndiaFather's Name: Hirachand Govardhandas AmbaniMother's Name: Jamunaben Hirachand Ambani

INTRODUCTION

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About Reliance Capital Asset Management Ltd:

Reliance Capital Asset Management Limited (RCAM), a company registered under theCompanies Act, 1956 was appointed to act as the Investment Manager of Reliance Mutual

Fund.

Reliance Capital Asset Management Limited is a wholly owned subsidiary of RelianceCapital Limited, the sponsor. The entire paid-up capital (100%) of Reliance Capital AssetManagement Limited is held by Reliance Capital Limited. Reliance Capital AssetManagement Limited was approved as the Asset Management Company for the MutualFund by SEBI vide their letter no IIMARP/1264/95 dated June 30, 1995. The MutualFundhas entered into an Investment Management Agreement (IMA) with RCAM dated May 12,

1995 and was amended on August 12, 1997 in line with SEBI (Mutual Funds) Regulations,1996. Pursuant to this IMA, RCAM is authorized to act as Investment Manager of RelianceMutual Fund. The net worth of the Asset Management Company including preferenceshares as on March 31, 2005 is Rs.30.13 crores.

RCAM has been registered as a portfolio manager vides SEBI Registration No.INP000000423 and renewed effective 1st August 2003. RCAM has commenced theseactivities. It has been ensured that key personnel of the AMC, the systems, backoffice,bank and securities accounts are segregated activity wise and there exists systems to

prohibit access to inside information of various activities. As per SEBI Regulations, it willfurther ensure that AMC meets the capital adequacy requirements, if any, separately foreach such activity.

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RCAM has been appointed as the Investment Manager of "Reliance India Power Fund", aVenture Capital Fund registered with SEBI vide Registration no.IN/VCF/05-06/062datedJune 16, 2005 but this activity is yet to commence.

2.1 INTRODUCTION -RELIANCE CAPITALReliance Capital has interests in asset management and mutual funds; life and generalinsurance; private equity and proprietary investments; stock broking; depositoryservices;distribution of financial products; consumer finance; and other activities in financial services.

Reliance Mutual Fund is India's biggest Mutual Fund. Reliance Life Insurance isone ofIndia's fastest growing life insurance company and among the top four private sector

insurers. Reliance General Insurance is one of India's fastest growing general insurancecompany and among the top 3three private sector insurers. Reliance Money is oneof theleading retail brokerage houses and distributors of financial products in Indiawith over 3million customers. Reliance Consumer finance has a loan book of over Rs. 8,600 crore atthe end of March 2010.

Reliance Capital has a net worth of Rs. 7,491 crore (US$ 1.5 billion) and totalassets of Rs.24,260 crore (US$ 4.8 billion) as of March 31, 2010

CORPORATE GOVERNANCE

Reliance Capital Limited has maintained the highest standards of corporate governanceprinciples and best practices by adopting the Reliance Anil Dhirubhai Ambani Group Corporate Governance Policies and Code of Conduct as followed by all constituentsin thegroup. These Policies and Code prescribe a set of systems, processes and principlesconforming to the international standards and are reviewed periodically to ensure theircontinuing relevance, effectiveness and responsiveness to the needs of local andglobalinvestors and all other stakeholders.

Reliance Capitals philosophy on Corporate Governance envisages the attainment ofthehighest levels of transparency, accountability and equity, in all facets of itsoperations andin all interactions with its stakeholders, including shareholders, employees, the government,

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lenders and the society. The Company believes that all its operations and actions mustserve the underlying goal of enhancing long-term shareholder value. In our commitment topractice sound governance principles, we are guided by the following core principles:

TransparencyTo maintain the highest standards of transparency in all aspects of our interactionsand dealings.

DisclosuresTo undertake timely dissemination of all price sensitive information and mattersofinterest to our stakeholders.

Empowerment and AccountabilityTo demonstrate the highest levels of personal accountability and to ensure thatemployees consistently pursue excellence in everything they do.

CompliancesTo comply with all the laws and regulations applicable to the company.

Ethical conductTo conduct the affairs of the company in an ethical manner.

2.2 COMMITTES.Audit Committees: -The Audit Committee comprises of four non-executiveDirectors, viz, Shri Rajendra P. Chitale, Shri Amitabh Jhunjhunwala, Shri C. P.Jainand Shri P. N. Ghatalia. Shri Rajendra P. Chitale, an Independent non-executiveDirector, is the Chairman of the Committee. All the members of Audit Committeehave good knowledge of finance, accounts and company law. The Chairman of thecommittee is an eminent chartered accountant and has accounting and relatedfinancial management expertise. The committee held four meetings during the year.The audit committee also advises the management on the areas where internal auditcan be improved. The minutes of the meetings of the audit committee are placedbefore the board. The Company Secretary, Shri V. R. Mohan acts as the Secretaryto the Committee.

.Shareholders / investors grievances committees: -The shareholders/investorsgrievances committee of the Board currently comprises Shri Amitabh Jhunjhunwala

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and Shri Rajendra P. Chitale. The company has appointed M/s. KarvyComputershare Pvt. Ltd. to act as Registrar and Share Transfer Agent of thecompany. The committee also monitors redressal of investors grievances.Particulars of investors grievances received and redressed are furnished in theinvestor information section of this report.

.Nomination / Remuneration Committees: -The Nomination / RemunerationCommittee of the Company comprises of Shri Rajendra P. Chitale, Non-ExecutiveIndependent Director as Chairman, and Shri Amitabh Jhunjhunwala and Shri C. P.Jain, Non-Executive Directors, as its members. The Company Secretary of theCompany is the Secretary of the Committee.

The terms of reference of the Remuneration Committee, interalia, consist ofreviewing the overall compensation policy and structure, service agreements andother employment conditions for the members of the board.

.

Risk Management Committees: -The Risk Management Committee would overseethe establishment and operation of the risk management system, including reviewingthe adequacy of risk management practices for the material risks, such as credit,market, liquidity, legal compliance regulatory and operational risks, on a regularbasis.Depending on the scale, nature and complexity of its business, the Board or theRiskManagement Committee should establish a separate risk management functionresponsible for monitoring and managing the risks that the Financial Institutionfaces.

The organisation and responsibilities of the risk man