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

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A

PROJECT REPORT

ON

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 Administration

OF

Rajasthan Technical University, Kota

Jitendra

Virahya

s


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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 on

performance 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 of business

administrative of RTU, Kota is my original work and not submitted for the reward of any

degree, diploma, fellowship or any other similar title and it will not be used elsewhere.

I further declare that the information presented in this project is true and original to the best

of my knowledge.

Date: xxxx

Place: Jaipur (MBA IV Sem)


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ACKNOWLEDGEMENT

I am indeed very happy to acknowledge the numerous personalities involved in lending

their help to make my project a successful one.

Firstly, I would like to thank Reliance Mutual Fund for providing me the opportunity to work

on this project.

I would like to thank my corporate guide Mr. H. Shan and all other staff of Reliance Money

for helping me in learning the lessons of professional management. His able guidance and

valuable inputs have helped me a lot in successfully completing this project.

I express my sincere gratitude to my institute guide Mr. Jitendra Virahyas who took a lot of

personal interest in supervising this project and guiding me. She has been a great source of

inspiration in the task of completion of this project work. Her profound advice, timely

guidance has been of immense value to me.

I express my thanks to all the members of Reliance Mutual Fund, who gave me full

fledged support throughout my project. I express my gratitude to all those people, who have

directly or indirectly helped me in the completion of this project

xxxx

MBA IV Sem


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PREFACE

Recently from the past few years, the financial service sector industry has shown a rapid

rising trend. With the advent and augmentation of several privately sponsored higher return

financial products viz. unit linked life insurance, mutual funds, post office etc. Are turning

the investors towards themselves than to the schemes of investing in security markets. In

the present economic scenario, the investor has wide options available that are safe and

give 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 Industrys.

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

10 Years. Indeed, Mutual Fund is growing and accepting in present scenario since people

is realizing risk coverage but also as a potential investment opportunity. This project is an

effort to study of the customer perception on performance of mutual fund with special

reference to reliance mutual funds like real state, equity, fixed deposit in the market as

well as to study its financial performance in the financial market.


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CONTENTS

COVER PAGE

STUDENT DECLARATION

ACKNOWLEDGEMENT

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 693.4. 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 INDUSTRY

1.1.1 INTRODUCTION TO 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 form 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 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.

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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 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 Funds 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.

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 of

funds 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 FUND

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 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 fundin December 1990.

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

crores.

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

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund

industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year

in which the first Mutual Fund Regulations came into being, under which all mutual funds,

except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now

merged with 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.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered

with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the

erstwhile UTI which had in March 2000 more than Rs.76,000 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.6


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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 financial

position, 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 fund

might be easy. There are over hundreds of mutual funds scheme to choose from. It is

easier 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-end

investment company by the SEC. Being open-ended means that, at the end of every

day, the fund issues new shares to investors and buys back shares from investors

wishing 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 company if it

issues securities and primarily invests in non-government securities. An investment

company will be classified by the SEC as an open-end investment company if they do

not issue undivided interests in specified securities (the defining characteristic of unit

investment trusts or UITs) and if they issue redeemable securities. Registered

investment 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 fund

is open for subscription only during a specified period at the time of launch of the

scheme. Investors can invest in the scheme at the time of the initial public issue and

thereafter they can buy or sell the units of the scheme on the stock exchanges where

the units are listed. In order to provide an exit route to the investors, some close-ended

funds give an option of selling back the units to the mutual fund through periodic

repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the

two exit routes is provided to the investor i.e. either repurchase facility or through listing

on stock exchanges. These mutual funds schemes disclose NAV generally on weekly

basis

Interval Schemes:

Interval Schemes are that scheme, which combines the features of open-ended and

close-ended schemes. The units may be traded on the stock exchange or may be open

for 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 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 investors 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. 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

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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 some

income. There are, however, many different types of equity funds because there are

many different types of equities. A great way to understand the universe of equity funds

is 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 and

the 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 companies

are characterized by low P/E and price-to-book ratios and high dividend yields. The

opposite of value is growth, which refers to companies that have had (and are expected

to continue to have) strong growth in earnings, sales and cash flow. A compromise

between value and growth is blend, which simply refers to companies that are neither

value 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, 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:

Gilt Funds:

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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 minimumexposure 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 liquidity and

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.

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 investmentobjective 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.

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Further the mutual funds can be broadly classified on the basis of investment

parameter viz.

Each category of funds is backed by an investment philosophy, which is pre-defined in

the objectives of the fund. The investor can align his own investment needs with the

funds objective and invest accordingly.

BY INVESTMENT OBJECTIVE

Growth Schemes:

Growth Schemes are also known as equity schemes. The aim of these schemes is to

provide capital appreciation over medium to long term. These schemes normally invest

a major part of their fund in equities and are willing to bear short-term decline in value

for possible future appreciation.

Income Schemes:

Income Schemes are also known as debt schemes. The aim of these schemes is to

provide regular and steady income to investors. These schemes generally invest in fixed

income securities such as bonds and corporate debentures. Capital appreciation in such

schemes may be limited.

Balanced Schemes:

Balanced Schemes aim to provide both growth and income by periodically distributing a

part of the income and capital gains they earn. These schemes invest in both shares

and 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 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.

OTHER SCHEMES

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Tax Saving Schemes:

Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from

time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity

Linked Savings Scheme (ELSS) are eligible for rebate.

Index Schemes:

Index schemes attempt to replicate the performance of a particular index such as the

BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those

stocks that constitute the index. The percentage of each stock to the total holding will be

identical to the stocks index weight age. And hence, the returns from such schemes

would be more or less equivalent to those of the Index.

Sector Specific Schemes

These are the funds/schemes which invest in the securities of only those sectors or

industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast

Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds

are dependent on the performance of the respective sectors/industries. While these

funds may give higher returns, they are more risky compared to diversified funds.

Investors need to keep a watch on the performance of those sectors/industries and must

exit at an appropriate time.

1.1.4 ADVANTAGES OF INVESTING IN MUTUAL FUNDS

The advantages of investing in a Mutual Fund extending PMS to the small

investors are as under:

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Professional Management-

The investor avails of the services of experienced and skilled professionals who are

backed by a dedicated investment research team, which analyses the performance

and prospects of companies and selects suitable investments to achieve theobjectives of the scheme.

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.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems

such as bad deliveries, delayed payments and unnecessary follow up with brokers

and companies. Mutual Funds save your time and make investing easy and

convenient.

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.

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.

Liquidity-

In open-ended schemes, you can get your money back promptly at net asset value

related prices from the Mutual Fund itself. With close-ended schemes, you can sell

your 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 interval

schemes offer you periodically.

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

on the specific investments made by your scheme, the proportion invested in each

class of assets and the fund manager's investment strategy and outlook.

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.

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 of

strict regulations designed to protect the interests of investors. The operations of

Mutual 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 their

management is not dynamic enough to explore the available opportunity in the market, thus

many investors debate over whether or not the so-called professionals are any better than

mutual fund or investor himself, for picking up stocks.

Costs: The biggest source of AMC income is generally from the entry & exit load which

they charge from investors, at the time of purchase. The mutual fund industries are thus

charging extra cost under layers of jargon.

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Dilution: Because funds have small holdings across different companies, high returns from

a few investments often don't make much difference on the overall return. Dilution is also

the 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 all the new

money.

Taxes: when making decisions about your money, fund managers don't consider your

personal tax situation. For example, when a fund manager sells a security, a capital-gain

tax is triggered, which affects how profitable the individual is from the sale. It might have

been more advantageous for the individual to defer the capital gains liability.

1.2 MAJOR MUTUAL FUNDS COMPANIES IN INDIA

The concept of mutual funds in India dates back to the year 1963. The era between 1963

and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn

assets under management (AUM), by the end of its monopoly era, the Unit Trust of India

(UTI). By the end of the 80s decade, few other mutual fund companies in India took their

position 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 end

of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started

penetrating 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 were further given

a revised shape in 1996.Kothari Pioneer was the first private sector mutual fund company in

India which has now merged with Franklin Templeton. Just after ten years with private

sector players penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33

mutual fund companies in India.

1.2.1ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt.

Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was

incorporated on November 4, 2003. Deutsche Bank A G is the custodian of ABN AMRO

Mutual Fund.

1.2.2 Birla Sun Life Mutual Fund

Birla 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 in

Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun

Life Mutual Fund follows a conservative long-term approach to investment. Recently it

crossed AUM of Rs. 10,000 crores.

1.2.3HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing

Development Finance Corporation Limited and Standard Life Investments Limited.

1.2.4HSBC Mutual Fund

HSBC 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 acts as theTrustee Company of HSBC Mutual Fund.

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1.2.5 ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee

Company. It is a joint venture of Vysya and ING. The AMC, ING Investment Management

(India) Pvt. Ltd. was incorporated on April 6, 1998.

1.2.6Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the largest

life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of

October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The Trustee Company

formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset Management

Company Limited incorporated on 22nd of June, 1993.

1.2.7State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore

fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the

largest Bank sponsored Mutual Fund in India. They have already launched 35 Schemes out

of which 15 have already yielded handsome returns to investors. State Bank of India Mutual

Fund has more than Rs. 5,500 Crores as AUM. Now it has an investor base of over 8 Lakhs

spread over 18 schemes.

1.2.8Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsors for Tata

Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment

manager 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 Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is

presently having more than 1, 99,818 investors in its various schemes. KMAMC started its

operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering to

investors with varying risk - return profiles. It was the first company to launch dedicated gilt

scheme investing only in government securities.

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1.2.10 Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages

the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI Asset

Management Company presently manages a corpus of over Rs.20000 Crore. The sponsors

of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB), State Bank of

India (SBI), and Life Insurance Corporation of India (LIC). The schemes of UTI Mutual Fund

are Liquid Funds, Income Funds, Asset Management Funds, Index Funds, Equity Funds

and Balance Funds.

1.2.11 Reliance Mutual Fund

Reliance 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 the

Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was

changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various

schemes under which units are issued to the Public with a view to contribute to the capital

market and to provide investors the opportunities to make investments in diversified

securities.

1.2.12 Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard

Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard

Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated with

SEBI on December 20, 1999.

1.2.13 Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company with a

global AUM of US$ 409.2 bn (as of April 30, 2005). It is one of the largest financial services

groups in the world. Investors can buy or sell the Mutual Fund through their financial

advisor or mail or through their website. They have Open end Diversified Equity schemes,

Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving

schemes, Open end Income and Liquid schemes, closed end Income schemes and Open

end Fund of Funds schemes to offer.

1.2.14 Morgan Stanley Mutual Fund India

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Morgan Stanley is a worldwide financial services company and its leading in the market in

securities, investment management and credit services. Morgan Stanley Investment

Management (MISM) was established in the year 1975. It provides customized asset

management services and products to governments, corporations, pension funds and non-

profit organizations. Its services are also extended to high net worth individuals and retail

investors. In India it is known as Morgan Stanley Investment Management Private Limited

(MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the first close

end diversified equity scheme serving the needs of Indian retail investors focusing on a

long-term capital appreciation.

1.2.15 LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It

contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was constituted

as a Trust in accordance with the provisions of the Indian Trust Act, 1882. . The Company

started its business on 29th April 1994. The Trustees of LIC Mutual Fund have appointed

Jeevan Bima Sahayog Asset Management Company Ltd as the Investment Managers for

LIC 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 who are 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.

Mutual funds invest in a number of across a broad cross section of industries and

sectors. 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 many

problems such as bad deliveries, delayed payment and unnecessary follow up with

brokers and companies. Mutual funds save your time and make investing easy and

convenient.

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.

Mutual funds are relatively less expensive way to invest compared to directly

investing in capital markets because the benefits of scale in brokerage, custodial and

other 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 prevailing

market price or avail of the fielding of direct repurchase at NAV related prices which

some close ended and interval schemes offer an investor periodically.

Investors get regular information on the value of investment in disclosure on the

specific 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 of

strict 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 of

efficiency or a good mutual fund shall compromise of evaluation of a mutual fund on:

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

concerned.

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

exchange.

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Growth: - whether the mutual funds offer increase in net asset value, consistent

growth in dividend and capital appreciation.

Credibility: - previous track record of issuer.

Returns: - assured or otherwise.

Management approach: - risk taking, portfolio, diversification, return

maximization, 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 about

your time frame for investment and returns. Equity funds are not advisable for short

term because of their long term nature. You can consider money market and floating

rate funds for short term gains. This equals asking - What kind of mutual fund is right

for me?

Once you have decided on a plan or a couple of them, collect as much information

as 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 industry

indices are helpful in comparing different funds as well as different plans offered by

them. 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 Funds

only. 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 all

your short listed funds and how they affect your returns. Best mutual funds have

lower cost out go.

Best mutual funds maximize returns and minimize risks. A number called as Sharpe

Ratio explains whether a fund is risk free based on its expected returns compared

against a risk free money market fund.

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Some funds have the advantage of low minimum initial investments. You can start

investing even with $250 a month. This is advisable for building asset bases over a

long period with small regular investments.

1.3 THINGS KEPT IN MIND BEFORE INVESTING

PROSPECTUS

By law, you should receive a prospectus from the fund company before you invest in it.

Many investors ignore the prospectus, but this is a must read. The mutual fund's objectives

are 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 research sites.

Try to buy funds with low expense ratios and certainly avoid 12b-fees. I have yet to hear a

valid argument on why you should ever buy a loaded fund. A loaded fund is a fund that

carries front-end loads, back-end loads or deferred loads. These loads are basically sales

charges. 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 service

providers. But hold on. Mutual funds aren't very enthusiastic, though. Why? Because, the

biggest investors in the domestic mutual fund industry today are large corporate and 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 banks may need

to 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 a recovery.

What if the economy recovers and corporate go on a spending spree? Capacity

expansions, merger and acquisition activity and better credit demand would require

corporate and banks to encash their existing investments to plough back in their core

business.

Obviously, there is a strong possibility of large scale redemptions. While fund companies

see this issue as a matter of concern, they are optimistic about guarding their current

assets. Says Ved Prakash Chaturvedi, chief executive officer, Tata TDW Mutual Fund,

"Despite an economic recovery, the fund industry should be able to retain and in fact, grow

its assets."

Is an economic recovery underway? The outlook on the economy is pretty much positive

and economists are predicting a wide-ranging recovery led by an increase in domestic

consumer demand.

According to the latest data released by the Central Statistical Organization (CSO), the

Indian economy grew 4.3 per cent in 2008-09. With the manufacturing and services sectors

growing at 6.0 per cent and 7.1 per cent respectively, the poor performance of the

agriculture sector dragged down the overall growth. Growth in the agricultural sector

declined 3.2 per cent last fiscal. The growth in manufacturing industry was led by buoyant

exports and a boost to construction activity.

This year, again, the manufacturing sector is expected to grow at a faster clip. The overall

manufacturing outsourcing story should mean more business for Indian manufacturing

companies too.

Construction is again going to be a key driver. So sectors like steel and cement have

already 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 as

consumer durables and textiles are seeing demand-led growth. Many of these corporate

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houses are thus focusing on the longer-term targets. Some sectors like steel are already

talking of capacity expansion and green field projects. Others like cement have been seeing

consolidation. However, as Sanjeev Bafna, senior vice-president.

Corporate finance, Grasim Industries says "It will take 1-2 years for the Indian industry to

start committing funds into expansions."

But whenever it happens, will corporate queue up for redemptions? And secondly, will

banks and financial institutions, which have invested their surplus funds in mutual funds on

the back of poor credit off take in the last couple of years, divert their money into lending?

The latter, of course, is a definite possibility. Last year, lending behemoth IDBI was among

the biggest investors in mutual funds. Others such as ICICI bank and HDFC also figured in

the list of biggest investors.

While Reliance Industries was one of the largest investors in mutual funds, mutual fund

sources say that some of the other big investors are from the banking industry. For

instance, both IDBI and SIDBI are said to have a considerable exposure in rolling over

surplus 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 increase

in credit off take and thus, funds will have to be redirected from the market to industry. But

the probability of that happening in the near-term is bleak: there is a huge amount of

liquidity 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. Companies

typically park their surplus cash in treasury instruments (liquid fund schemes). And, they

deploy 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 liquid

funds.

As a matter of fact, improved cash flow for corporate will only increases the popularity of

liquid funds. Even more, they say that today financially healthy corporate will find it less

prudent to pull out money from investments like mutual funds to fund expansions because

borrowed funds are so cheap.

Also, capital expenditure is never lumped together but is spread over a period of time and26


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prudence requires a judicious mix of debt and equity depending on the project size, horizon

of returns, gestation period etc. Hence there will not be any sudden withdrawal of funds

from the market. Such expenditure is planned in advance and as result, a company cannot

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 have

witnessed around a 500-600 basis points reduction in interest costs on long-term debt from

about 16 per cent-plus in 1998-99 to about 10 per cent now, and even lesser for top rated

corporate, 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 to

earning a higher return from deploying internal cash into market instruments such as mutual

funds.

Arbitrage between debt vs. funds

But the main reason that the companies prefer raising debt is two-fold. Firstly, debt is

available at historically low costs and secondly, tax considerations favor debt. These

include a tax benefit on the interest costs, a dividend distribution tax on dividend income

and capital gains tax on long-term capital gains. As a result, while effective cost of debt is

less than 4 per cent, the effective tax-adjusted return on mutual fund investment is around

5-6 per cent.

Grasim's Bafna says "the biggest factor that will determine an outflow of funds is the any

change in the tax status of dividends and capital gains tax on long-term capital gains".Currently, dividends from mutual funds are tax-free in the hands of the investors except for

a dividend distribution tax of 12.81 per cent. Long-term capital gains are taxed at 10.25 per

cent with indexation benefits, and at 20.5 per cent without indexation benefits.

The banking sector, with the considerable amount of liquidity in the system, has also been a

significant investor in mutual funds.

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

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Head - Global Markets, Stanchart Grindlays "The corporate sector accounts for a

reasonable chunk of the investments in mutual funds. While there may be some withdrawal

of 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 market"

NEW FUND OFFER

In the last one-year we have seen surge in the number of Equity IPOs & Mutual Fund NFOs

launched. This is because there is a significant jump in profits of small & medium sized

companies & so many loss-making companies have been restructured and now making

profits. These companies are looking for expansion & to support their future plans these

companies are looking at IPO option. This has created good opportunity to invest in the

new companies, which are growing at fast rate. New Mutual Fund schemes launched also

got 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 with

highest 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 1950

Reliance Equity Opportunities Fund 1761

Fidelity Equity Fund 1495

Prudential ICICI Infrastructure Fund 1418

HDFC Premier Multi - Cap Fund 1328

Standard Chartered Classic Equity Fund 1043

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Floating a NFO at the right time when markets are in correction phase & investing the

collected money on correction is proved as very successful strategy in the last one 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 given by MF

NFOs. Therefore Its a good idea to invest in NFOs which could create wealth for investors

like 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. boasts

if 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 figures

indicate that in the first quarter of the current fiscal year mutual fund asset went up by 115%

whereas bank deposit rose up only 17%. This is forcing a large number of banks to adopt

the concept of narrow banking wherein the deposits are kept in Gilts and some other

assets. This improves liquidity and reduces risk. The basic fact lies that banks cannot be

ignored and they will not completely. Their role closes down as intermediaries cannot be

ignored. It is just mutual Funds are going to change the way banks do business in the

future.

COMPARISONS OF MUTUAL FUND WITH OTHER DEPOSITS

BANKS V/S MUTUAL FUNDS

Banks v/s Mutual Funds

BANKS MUTUAL FUNDS

Returns Low Better

Administrativeexp.

High Low

Risk Low Moderate

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Investmentoptions

Less More

Network High Penetration Low put improving

Liquidity At a cost Better

Quality of assets Not Transparent Transparent

Interestcalculation

Min. bal. between 10th & 30th ofevery month

Everyday

Guarantee Max. Rs. 1Lakh on deposit None

SHARES V/S MUTUAL FUNDS

SHARES MUTUAL FUNDS

Know-how is needed Superficial know. Is sufficient

High cost involved Low Cost

Time needed one can sleep over

Professional Management.

Insurance Vs Mutual Funds

Both these instruments are designed to serve different purposes and are not comparable. A

unit-linked plan from an insurance company is an insurance policy designed to pay a lump

sum on maturity or on death if earlier. Premium paid under these plans is eligible for tax

deduction under Section 88 of the Income Tax Act. On the other hand, mutual funds are

investment avenues to participate in the growth of financial markets and do not provide any

tax deduction (except ELSS and pension funds).

For a unit-linked insurance plan, providing life cover is the most important function; returns

are just an added benefit, which gets magnified, given the tax rebates. Though unit-linked

plans offer transparency in returns in terms of net asset value and flexibility in investment

options in debt, equity or mixes of both, these advantages remain secondary, whereas for a

mutual 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 three

years. Even if one redeems after three years, you would be at a loss because of higher

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initial administrative charges. For example, the upfront charges for the first two premium

amounts are as high as 20-27 per cent. Then there is an annual management fee of 0.8-

1.25 per cent and a flat fee of Rs 15-20 per month. Finally, there is a deduction for risk

cover. This goes towards contribution to the sum assured or the life insurance cover, which

is based on mortality rates as calculated by actuaries. Though mutual funds too have entry

and exit loads (maximum 2 per cent) and expenses (maximum 2.5 per cent), these costs

are lower than unit-linked plans.

1.4 RISK INVOLVED IN MUTUAL FUNDS

Mutual 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 the

fund will be achieved. Past performance of the Sponsors/ Mutual fund/ Schemes/ Asset

Management Company is not necessarily indicative of future results. The name of the fund/

scheme does not, in any manner, indicate either the quality of the fund, its future prospects

or returns".

It may be interpreted that under

there 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 a

clear message that investors should be informed, take adequate care and beware of the

inherent risks before investing in the mutual fund. Now the issue is what those Risks are?

Investor Psychology Risk:

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The investor psychology is such that most of the investors, be it Mutual Fund Investors

or Direct Capital Market Investors, behave like reactionaries. E.g. they enter the market

when the share prices starts rising and they get panicky & exit as soon as share prices

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. Because

of this, there will be more than normal demand on Mutual Fund manager to redeem the

units. To honour the redemption demands of the exiting unit holders during the worst

market times, Mutual Funds are forced to sell more stocks at the prevailing low prices.

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 buy

and 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 most

confusing manner possible. The fund managers never intend to make their costs clear

to their clients. It would not be painful for the investors to pay for the expenses and costs

of 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 the

fund 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, of

necessity, subject to error.

Risk of Redemption Restrictions:

Whether informed in writing or not, normally the liquidity of schemes investments may

be 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 change

in 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 significant

since the fund manager controls the fund investments.

Judgment Risks:

Investors may not know more than the fund manager about the investment strategy and

whatever 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 at

any given time. This is called blind diversification risk and any investor would like to

invest in Mutual Fund that concentrate in asset classes that he himself has not investedat his own.

Risks of changes in the Regulatory Norms:

Mutual Funds are constantly regulated by SEBI and investors are subject to risk of the

changes in the norms for the Mutual Funds.

Besides the above risks, Mutual Funds will also have the common risks that any

investment has. In fact, risk is present in every decision made with regard to the

investments 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 natural

disasters such as an earthquake, a poor harvest etc. will weaken a country's

economy and cause investments in that country to decline.

Credit Risk: This is a risk that arises from the possibility that a bond issuer will fail to

repay 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 for

Indians investing in foreign securities because of a rise in the value of the Indian

rupee 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 mutual

fund's investment adviser will fail to execute the fund's investment strategy

effectively, resulting in the failure of the sated objectives.

Market Risk: This risk arises from the possibility that stock fund or bond fund prices

overall will decline over short or even extended periods.

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:

1.5 SOME IMPORTANT ASPECTS OF MUTUAL FUND

NET PRESENT VALUE

Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given

business 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 deducting all liabilities

(except unit capital) of the fund from the realizable value of all assets and dividing it by

number of units outstanding.

Sale Price: - Is the price you pay when you invest in a scheme. Also called Offer

Price. It may include a sales load.

Repurchase Price: - Is the price at which units under open-ended schemes are

repurchased 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 buys

back the units from the unit holders.

1.4 GLOBAL SCENARIO IN MUTUAL FUNDS

Some basic facts:-

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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 companies

while in India we have just 277 schemes

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 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

% 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 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 companies while in

India 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 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 current 2 % of

total assets to about 0.75 % of the total assets. Internationally, on- line investing continues

its meteoric rise. Many have debated about the success of e- commerce and its

breakthroughs, but it is true that this aspect of technology could and will change the way

financial sectors function. However, mutual funds cannot be left far behind. They have

realized the potential of the Internet and are equipping themselves to perform better. In fact

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in advanced countries like the U.S.A, mutual funds buy- sell transactions have already

begun 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 better services

for all. A research agency that specializes in internet technology estimates that over the

next 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 in

the way Mutual Funds conduct their business.

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

Net

Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutual

funds could bring down their administrative costs to 0.75% if trading is done on- line. As per

SEBI regulations, bond funds can charge a maximum of 2.25% and equity funds can

charge 2.5% as administrative fees. Therefore if the administrative costs are low, the

benefits are passed down and hence Mutual Funds are able to attract mire investors and

increase their asset base.

Better advice: Mutual funds could provide better advice to their investors through the Net

rather than through the traditional investment routes where there is an additional channel to

deal with the Brokers. Direct dealing with the fund could help the investor with their financial

planning.

In India, brokers could get more Net savvy than investors and could help the investors with

the knowledge through get from the Net.

New investors would prefer online: Mutual funds can target investors who are young

individuals 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 and this could

just be the beginning. The Internet users are going to increase dramatically and mutual

funds are going to be the best beneficiary. With smaller administrative costs more funds

would be mobilized .A fund manager must be ready to tackle the volatility and will have to

maintain sufficient amount of investments which are high liquidity and low yielding

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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 funds and real

estate funds (investing in real estate and other related assets as well.).In India, the Canada

based Dundee mutual fund is planning to launch gold and a real estate fund before the

year-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 will

concentrate on financial as well as physical funds

1.5ORGANIZATION OF A MUTUAL FUND

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1.5.1 SEBI

The Securities Exchange Board of India (SEBI) is the regulatory authority for all the mutual

funds sponsored by the public/private sector banks, financial institutions, private sector

companies, non- banking finance companies and foreign institutional investors. SEBI haslaid down the rules and regulations regarding the obligations of the entities involves in a

mutual fund, its establishment and launch of different schemes, investments and valuation,

financial reporting, conduct and operations of mutual funds.

1.5.2 SPONSOR

Sponsor is the person who acting alone or in combination with another body corporate

establishes a mutual fund. The sponsor establishes the mutual fund and registers the samewith SEBI. Sponsor appoints the Trustees, custodians and the AMC with prior approval of

SEBI and in accordance with SEBI Regulations. Sponsor must have a 5-year track record

of business interest in the financial markets. Sponsor must have been profit making in at

least 3 of the above 5 years. 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.

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1.5.3 TRUST

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian

Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration

Act, 1908.

1.5.4 TRUSTEE

Trustee 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 unit holders and

inter alia ensure that the AMC functions in the interest of investors and in accordance with

the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the

provisions 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 associated with the

Sponsor 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. The

AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to

act as an asset management company of the Mutual Fund. At least 50% of the directors of

the 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 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.

1.5.7 CUSTODIAN

A custodian is an agent, bank, trust company, or other organization which holds and

safeguards 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 of

the offer document as well as the operational requirements of various schemes.

Provide full and latest information of schemes to investors in the form of offer

documents, 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 memorandum

before deciding to make investments.

Disclose all material information related to the schemes/plans while canvassing for

business.

Abstain from indicating or assuring returns in any type of scheme, unless the offer

document is explicit in this regard.

Maintain necessary infrastructure to support the AMCs in maintaining high service

standards to investors, and ensure that critical operations such as forwarding forms

and cheques to AMCs/registrars and dispatch of statement of account and

redemption cheques to investors are done within the time frame prescribed in the

offer 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:

o Recommending inappropriate products solely because the intermediary is

getting higher commissions there from.

o Encouraging over transacting and churning of mutual fund investments to

earn higher commissions, even if they mean higher transaction costs and tax

for 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 in

fundamental attributes, exit/entry load, exit options, and other material aspects) are

sent to investors reliably and on time.

1.6 MUTUAL FUNDS AND BUDGET 2009-2010

1.6.1 FIXED INCOME MARKETS TO BENEFIT

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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; net

borrowing also lower at Rs.1.01 trillion from Rs.1.11 trillion in FY09

Measures announced to develop bond, currency and derivatives markets that will

include launching exchange-traded currency and interest rate futures and developing

a transparent credit derivatives market with appropriate safeguards.

Measures announced to enhance tradability of domestic convertible bonds by putting

in place a mechanism that will enable investors to separate embedded equity options

from convertible bonds and trade them separately.

Measures announced to encourage development of a market-based system for

classifying financial instruments based on their complexity and implicit risks.

Proposal announced to exempt from TDS, corporate debt instruments issued in

demat form and listed on recognized stock exchanges.

IMPACT:-

Decision of expanding the corporate debt market will help in increased focus towards

bond funds and in a scenario where interest rates are not expected to be adverse in

the medium term, this would further assist in increasing the popularity of bond fundswhich have not been doing well in the last few years.

Development of the derivatives markets can in turn enhance the development of the

structured products market.

1.6.2 EASING IN INCOME TAX SLABS

MEASURES:-

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Threshold limit of Income Tax exemption for individuals raised as follows -

Up to Rs.150,000 NIL

Rs.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 some

extent which could translate into increased retail investments in mutual funds.

1.6.3 INCREASE IN SHORT TERM CAPITAL GAINS TAX

MEASURES:-

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-term

capital gains tax could encourage long-term investments which augur well to the

development of the concept of "long terms" in the Indian Mutual Fund industry, which

is conspicuous by its absence but which is coveted by the fund industry given the

greater flexibility that this provides in fund management.

At the same time since the short term capital gains tax is still lower than the income

tax slabs of typical capital market investors, it is not expected to cause too many

investors to turn away from mutual funds.

The fact that the dividend distribution tax structure has not changed would mean that

dividend reinvestment plans in liquid schemes will continue to be popular and also

the liquid plus category will continue to attract inflows as the tax rates there would

continue to be lower than the liquid category.

1.7 MARKET TRENDS

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Alone UTI with just one scheme in 1964 now competes with as many as 400 odd products

and 34 players in the market. Now with increasing competition and losing market share, UTI

no longer remains a formidable force to reckon with.

Last six years have been the most turbulent as well as exiting ones for the industry. New

players have come in, while others have decided to close shop by either selling off or

merging with others. Product innovation is now passed with the game shifting to

performance delivery in fund management as well as service. Those directly associated

with the fund management industry like distributors, registrars and transfer agents, and

even the regulator have become more mature and responsible.

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

dominant player on the bourses as well as the debt market, but now, new generations of

private funds, has gained substantial mass, and are flexing their muscles. Fund managers

by their selection criteria for stocks have forced corporate governance on the industry. By

rewarding honest and transparent management with higher valuations, a system of risk

reward 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 and

technology sector, funds performances are improving. Funds collection, which averaged at

less than Rs 100 bn per annum over five-year period spanning 1993-1998 doubled to Rs

210 bn in 1998-1999. In the financial year ending march2000 was mobilization was above

Rs 300 bn. Total collections for the financial year march 2000 was around Rs 450 bn.

What is particularly noteworthy is that bulk of the mobilization has been by the private

sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net

inflow of Rs 7819.43 crores during the first nine months of the year as against a net inflow

of Rs 604.40 crores in case of public sector funds.

Mutual funds are now also competing with commercial banks in race for retail investors

savings and corporate float money. The power shift towards mutual funds has become

obvious. The coming few years will show that the traditional saving avenues are losing out

in the current scenario. Many investors are realizing that investments in saving account are

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

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, IndiaDecember 28, 1932 - July 6, 2002

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

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 the

Companies 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 Reliance

Capital Limited, the sponsor. The entire paid-up capital (100%) of Reliance Capital Asset

Management Limited is held by Reliance Capital Limited. Reliance Capital Asset

Management Limited was approved as the Asset Management Company for the Mutual

Fund by SEBI vide their letter no IIMARP/1264/95 dated June 30, 1995. The Mutual Fund

has 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 Reliance

Mutual Fund. The net worth of the Asset Management Company including preference

shares 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 these

activities. It has been ensured that key personnel of the AMC, the systems, back office