IDBI Report

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INTRODUCTION

The Industrial Development Bank of India (IDBI) was establish on

1st July, 1964 under the Industrial Development Bank of India Act, as a

wholly owned Subsidiary of the Reserve Bank of India. In terms of the

public Financial Institutions Laws (Amendment) Act, 1975,the ownership

of the IDBI has been transferred to the Central Government with effect

from 16th February 1976. It is deal with all the problems of Industrial

financing and development and to enforce a system of priorities in

promoting industrial growth. Unlike commercial banking, which had a

fairly long history in must development countries, development banking

is of a comparatively recent origin. The role played by Government and

the central banks in establishing development banks in Asian Countries

has bees much more comprehensive than the institutions in the developed

countries of the west.

In India after independence, many financial and development

institutions the Industrial finance corporation, the Industrial Credit and

investment corporation, the National Industrial Development

Corporation, the Refinance corporation and the National and state small

Industries corporations have been established to serve the needs of IndianIndustry. But all their institutions have not been able to make substantial

contributions to the Industrial progress as envisaged in our five-year

plans.

The Industrial Development Bank of India (IDBI) was established

on July 1, 1964 as a wholly owned subsidiary of the Reserve Bank of

India (RBI - the Central Bank of the country) under an Act of Parliament.

In view of the manifold increase in its activities and diverse

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responsibilities, the ownership of IDBI was transferred to Government of

India (GoI) in February 1976 and it was made the principal financial

institution for co-ordination the activities of institutions engaged in

financing, promotion or development of industry in the country as also

for providing credit and other facilities for the development of industry.

Later, in 1995, IDBI made its first public offering of equity shares, after

the IDBI Act was amended in 1994 to permit public ownership up to 49%

of its issued capital. Government of Indias shareholding in IDBI today

stands at around 58%.

IDBI played a pioneering role, particularly in the pre-reform era

(1964-91), in catalyzing broad-based industrial development in the

country in keeping with its Government-ordained 'development banking'

charter. IDBIs activities were not confined merely to long-term project

lending to industry; instead, these covered a host of services undertaken

in pursuit of broader development goals aligned to Government of Indiasvaried socio-economic objectives in the realm of industry. The latter

encompassed, among others, balanced industrial growth through

development of identified backward areas, modernization of specific

industries, employment creation, identification and encouragement to

new entrepreneurs along with support services for creating a deep and

vibrant domestic capital market, including apposite institutionaldevelopment.

A slew of financial sector reforms unveiled by the Government

since 1992, aimed at domestic deregulation and greater global integration,

posed new challenges for DFIs like IDBI in pursuit of their DFI mandate.

IDBI sought to address the environmental challenges and the

opportunities they represent by evolving an array of fund and fee-based

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services to provide an integrated solution to the entire gamut of financial

and corporate advisory requirements of its clients, extending IDBIs

business platform to other geographical areas and related new business,

besides undertaking innovative resource-raising initiatives in domestic

and foreign markets, both wholesale and retail.

Total assistance sanctioned under all products by IDBI aggregated

Rs. 28.89 billion in 2002-03. Disbursements during the same year

amounted to Rs. 39.24 billion. Cumulative assistance sanctioned and

disbursed by IDBI since its inception upto end-March 2003 stood at

around Rs. 2250 billion (USD 48 billion) and Rs. 1700 billion (USD 36

billion) respectively.

IDBI is a fundamentally strong, consistently profit-earning and

dividend-paying organization. The Bank continues to maintain a sound

capital base as represented by the Capital Adequacy Ratio (CAR), basedon the calculation of risk-weighted assets, as per RBI norms. As against

the RBI stipulation of 9% for Total CAR, the CAR as at end-March 2003

was 18.7%.

The reasons is that their institutions were neither intended nor

equipped to carry the major burden of financing industrial expansion andgrowth in various directions. Their capital resources are relatively

meager, and the statutory framework with which they operate is

restrictive. The Industrial Development Bank of India was established

mainly with a view to overamaking the limitations of these institutions.

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H The Functions of the Industrial Development Bank of India are:

To grant loans and/or to subscribe to the debentures of Industrial

concerns, with the provision that such loan, advances oz debentures

may, if so desired by the bank;

To refinance loans given by specified financial institutions to

Industrial concern.

To subscribe to or purchase stock, share or bonds of any Industrial

concern or financial institution or to underwrite stocks, share, bonds,

debentures, etc., of any of them;

To guarantee loans floated by industrial concerns, as also the deferred

payment credits for exports; and

To undertake marketing and investment research and surveys or carry

out techno-economic studies.

As an open financial institution, the IDBI has been assigned a

special role for planning, promoting and developing industries to fill vital

gaps in the industrial structure; providing technical and administrative

assistance for promotion, management and expansion of Industry; and

undertaking market and Investment research and surveys as also techo-

economic studies in connection with development of industry. Beside itsHead office at Mumbai, Calcutta, Guwahati, Chenndi and New Delhi and

49 branch offices in various states.

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The Future

IDBI bank looks confidently into the future to face and thrive in

the intense competitive environment that is emerging. The bank has now

gained experience and has in place the strategies required for gaining a

leadership position. With cutting edge relevant technology, aggressive

marketing, innovation, tight control over costs and with its motivated

workforce, the bank is all set to emerge as a model global corporate

citizen in the days ahead.

IDBI, the tenth largest development bank in the world has

promoted world class institutions in India. A few of such institutions built

by IDBI are The National Stock Exchange (NSE), The National

Securities Depository Services Ltd. (NSDL), Stock Holding Corporation

of India (SHCIL) etc. IDBI is a strategic investor in a plethora of

institutions, which have revolutionized the Indian Financial Markets.

IDBI promoted idbi bank to mark the formal foray of the IDBI

Group into commercial Banking. This initiative has blossomed into a

major success story. IDBI bank, which began with an equity capital base

of Rs.1000 million (Rs.800 million contributed by IDBI and Rs.200million by SIDBI), commenced its first branch at Indore in November

1995. Thereafter in less than seven years the bank has attained a

frontranking position in the Indian Banking Industry.

IDBI bank successfully completed its public issue in February 99

which led to its paid-up capital expanding to Rs.1400 million. The

promoters holding consequent to this public issue stood reduced to 71%

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with IDBI holding 57% and SIDBI 14% of the paid up capital of IDBI

Bank. This is in line with the requirement of RBI which stipulates that

eventually the promoters holding should be brought down to 40%.

Future Prospects

The present liberalized industrial and financial sector environment

makes it imperative for the Development Financial Institutions (DFIs) to

reinvent them in the changed business environment. One alternative is to

diversify business activities so that dependence on industry sector is

reduced. A strategic migration into a viable commercial banking model

could be one way to achieve such diversification. Commercial banking

would, inter alia, provide a wide retail reach, making it possible to raise

low-cost funds, the benefits of which would be passed on to our clients.

Such a transformation would also enable the Bank to acquire a wider

array of assets, which would thereby facilitate maintaining overall asset

quality at the required level.

While advent of new technology has obviated the need to have a

widespread branch network, it is important to build an appropriate

technology platform to attract and retain customers. It would also be

necessary to acquire a critical mass of banking assets to be able to

expeditiously derive the benefits of diversification.

In the immediate future, IDBI envisions a continued strategic focus

on corporate and wholesale banking segments, building upon its secular

core competence in term lending and project finance. This would also

enable IDBI to offer an integrated financial solution to its corporate

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clients. The Bank would strive to be a major player in the infrastructure

finance area, besides retaining leadership status in industrial finance.

IDBI would dedicate itself towards exploring new markets and industries

(including constituents of the burgeoning services sector), offer new

customized products and services, access newer sources of finance and

generate innovative and gainful business solutions for its corporate

clientele.

IDBI would also consider entering into mutually beneficial

alliances with financial players, both domestic and international. These

business nuptials would centre around sharing of resources, markets,

technology and skills to enhance shareholder value on both sides. IDBIs

diversification charter would emphasize ring fencing and adding synergy

to its core competence in project finance.

In view of the felt need to impart operational flexibility anddiversified charter to IDBI, Government of India has sought to repeal the

IDBI Act, 1964, by introducing the Industrial Development Bank

(Transfer of Undertaking and Repeal) Bill 2002 in the Lok Sabha. The

Bill, which is awaiting Parliamentary approval, is aimed at converting

IDBI into a Company under the Companies Act and enabling it to

undertake banking business. The corporate form is considered to be moreappropriate as it would enable the Bank to operate in a flexible manner.

These initiatives are in consonance with IDBIs long-term strategy

of achieving a top-drawer status in the emerging configuration of

institutional finance and assuming a globally relevant character.

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INTRODUCTION OF MUTUAL FUND

A Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. The money thus collected

is invested by the fund manager in different types of securities depending

upon the objective of the scheme. These could range from shares to

debentures to money market instruments. The income earned through

these investments and the capital appreciation realized by the scheme are

shared by its unit holders in proportion to the number of units owned by

them (pro rata). Thus a Mutual Fund is the most suitable investment for

the common man as it offers an opportunity to invest in a diversified,

professionally managed portfolio at a relatively low cost. Anybody with

an investible surplus of as little as a few thousand rupees can invest inMutual Funds. Each Mutual Fund scheme has a defined investment

objective and strategy.

A mutual fund is the ideal investment vehicle for todays complex

and modern financial scenario. Markets for equity shares, bonds and other

fixed income instruments, real estate, derivatives and other assets have

become mature and information driven. Price changes in these assets are

driven by global events occurring in faraway places. A typical individual

is unlikely to have the knowledge, skills, inclination and time to keep

track of events, understand their implications and act speedily. An

individual also finds it difficult to keep track of ownership of his assets,

investments, brokerage dues and bank transactions etc.

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A mutual fund is the answer to all these situations. It appoints

professionally qualified and experienced staff that manages each of these

functions on a full time basis. The large pool of money collected in the

fund allows it to hire such staff at a very low cost to each investor. In

effect, the mutual fund vehicle exploits economies of scale in all three

areas - research, investments and transaction processing. While the

concept of individuals coming together to invest money collectively is

not new, the mutual fund in its present form is a 20th century

phenomenon. In fact, mutual funds gained popularity only after the

Second World War. Globally, there are thousands of firms offering tens

of thousands of mutual funds with different investment objectives. Today,

mutual funds collectively manage almost as much as or more money as

compared to banks.

A draft offer document is to be prepared at the time of launching

the fund. Typically, it pre specifies the investment objectives of the fund,

the risk associated, the costs involved in the process and the broad rules

for entry into and exit from the fund and other areas of operation. In

India, as in most countries, these sponsors need approval from a

regulator, SEBI (Securities exchange Board of India) in our case. SEBIlooks at track records of the sponsor and its financial strength in granting

approval to the fund for commencing operations.

A sponsor then hires an asset management company to invest the

funds according to the investment objective. It also hires another entity to

be the custodian of the assets of the fund and perhaps a third one to

handle registry work for the unit holders (subscribers) of the fund.

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In the Indian context, the sponsors promote the Asset Management

Company also, in which it holds a majority stake. In many cases a

sponsor can hold a 100% stake in the Asset Management Company

(AMC). E.g. Birla Global Finance is the sponsor of the Birla Sun Life

Asset Management Company Ltd., which has floated different mutual

funds schemes and also acts as an asset manager for the funds collected

under the scheme.

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What is Mutual Fund?

Invest / Pool Profit/LossTheir money from Portfolio

Of investments

Investing a Profit/LossNumber of from individual

Stocks/Bonds Of investments

A Mutual Fund is a common pool of money in to which investors

with common investment objective place their contributions that are to be

invested in accordance with the stated investment objective of the

scheme. The investment manager would invest the money collected from

the investor in to assets that are defined/ permitted by the stated objective

of the scheme. For example, an equity fund would invest equity and

equity related instruments and a debt fund would invest in bonds,

debentures, gilts etc.

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Investors

Mutual Fund Co.(Pool of money)

Market(Fluctuates)


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Benefits of Mutual Funds:-

1. Universal Benefits

Affordability:

A mutual fund invests in a portfolio of assets, i.e. bonds, shares,

etc. depending upon the investment objective of the scheme. An investorcan buy in to a portfolio of equities, which would otherwise be extremely

expensive. Each unit holder thus gets an exposure to such portfolios with

an investment as modest as Rs.500/-. This amount today would get you

less than quarter of an Infosys share! Thus it would be affordable for an

investor to build a portfolio of investments through a mutual fund rather

than investing directly in the stock market.

Diversification:-

The nuclear weapon in your arsenal for your fight against Risk. It

simply means that you must spread your investment across different

securities (stocks, bonds, money market instruments, real estate, fixed

deposits etc.) and different sectors (auto, textile, information technology

etc.). This kind of a diversification may add to the stability of your

returns, for example during one period of time equities might

underperform but bonds and money market instruments might do well

enough to offset the effect of a slump in the equity markets. Similarly the

information technology sector might be faring poorly but the auto and

textile sectors might do well and may protect your principal investment as

well as help you meet your return objectives.

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Variety

Mutual funds offer a tremendous variety of schemes. This variety

is beneficial in two ways: first, it offers different types of schemes to

investors with different needs and risk appetites; secondly, it offers an

opportunity to an investor to invest sums across a variety of schemes,

both debt and equity. For example, an investor can invest his money in a

Growth Fund (equity scheme) and Income Fund (debt scheme) depending

on his risk appetite and thus create a balanced portfolio easily or simply

just buy a Balanced Scheme.

Professional Management:-

Qualified investment professionals who seek to maximize returns

and minimize risk monitor investor's money. When you buy in to a

mutual fund, you are handing your money to an investment professional

that has experience in making investment decisions. It is the Fund

Manager's job to (a) find the best securities for the fund, given the fund's

stated investment objectives; and (b) keep track of investments and

changes in market conditions and adjust the mix of the portfolio, as and

when required.

Tax Benefits

Any income distributed after March 31, 2002 will be subject to tax

in the assessment of all Unit holders. However, as a measure of

concession to Unit holders of open-ended equity-oriented funds, income

distributions for the year ending March 31, 2003, will be taxed at a

confessional rate of 10.5%.

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In case of Individuals and Hindu Undivided Families a deduction

upto Rs. 9,000 from the Total Income will be admissible in respect of

income from investments specified in Section 80L, including income

from Units of the Mutual Fund. Units of the schemes are not subject to

Wealth-Tax and Gift-Tax.

Regulations:-

Securities Exchange Board of India (SEBI), the mutual funds

regulator has clearly defined rules, which govern mutual funds. These

rules relate to the formation, administration and management of mutual

funds and also prescribe disclosure and accounting requirements. Such a

high level of regulation seeks to protect the interest of investors.

1. Benefits of Open-ended Schemes

Liquidity

In open-ended mutual funds, you can redeem all or part of your

units any time you wish. Some schemes do have a lock-in period where

an investor cannot return the units until the completion of such a lock-in

period.

Convenience: -

An investor can purchase or sell fund units directly from a fund,

through a broker or a financial planner. The investor may opt for a

Systematic Investment Plan (SIP) or a Systematic Withdrawal

Advantage Plan (SWAP). In addition to this an investor receives

account statements and portfolios of the schemes.

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Flexibility: -

Mutual Funds offering multiple schemes allow investors to switch

easily between various schemes. This flexibility gives the investor a

convenient way to change the mix of his portfolio over time.

Transparency :

Open-ended mutual funds disclose their Net Asset Value (NAV)

daily and the entire portfolio monthly. This level of transparency, where

the investor himself sees the underlying assets bought with his money, is

unmatched by any other financial instrument. Thus the investor is in the

know of the quality of the portfolio and can invest further or redeem

depending on the kind of the portfolio that has been constructed by the

investment manager.

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Structure of Mutual Fund

Sponsor:

Sponsor is the person who acting alone or in combination with

another body corporate establishes a mutual fund. Sponsor must

contribute at least 40% of the networth 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

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SEBI

AMC

Fund Manager

Mutual Fund

Schemes

Investor

SponsorTrustee

Operations

Market/Sales Market/Sales

Distributor


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of the Schemes beyond the initial contribution made by it towards setting

up of the Mutual Fund.

Trust:

The Sponsor constitutes the Mutual Fund as a trust in accordance

with the provisions of the Indian Trusts Act, 1882. The trust deed is

registered under the Indian Registration Act, 1908.

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.

Asset Management Company (AMC):-

The Trustee as the Investment Manager of the Mutual Fund

appoints the AMC. 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 networth of at least 10 crore at all times.

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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.

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TYPES OF MUTUAL FUNDS

In the investment market, one can find a variety of investors with

different needs, objectives and risk talking capacities.

MUTUAL FUND

On the basis of On the basis ofExecution and yield and investment

Operation pattern

Close- Open - Income Growth Balance

Ended Ended Fund Fund Fund

Specialised Money TaxationFund Market Fund

Mutual Fund schemes can broadly be classified into many types asgiven below:

Close-ended Funds:-

The unit capital of a close-ended product is fixed as it makes a one-

time sale of fixed number of units. These schemes are launched with an

initial public offer (IPO) with a stated maturity period after which the

units are fully redeemed at NAV linked prices. In the interim, investors

can buy or sell units on the stock exchanges where they are listed. Unlike

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open-ended schemes, the unit capital in closed-ended schemes usually

remains unchanged. After an initial closed period, the scheme may offer

direct repurchase facility to the investors. Closed-ended schemes are

usually more illiquid as compared to open-ended schemes and hence

trade at a discount to the NAV. This discount tends towards the NAV

closer to the maturity date of the scheme.

Features: - The main features of the close-ended funds are:

The period and/or the target amount of the fund are definite and fixed

beforehand.

Once the period is over and/or the target is reached, the door is closed

for the investors. They cannot purchase any more units.

These units are publicly traded through stock exchange and generally,

there is no repurchase facility by the fund.

The main objective of this fund is capital appreciation.

The whole fund is available for the entire duration of the scheme and

there will not be any redemption demands before its maturity.

At the time of redemption, the entire investment pertaining to a

closed-end scheme is liquidated and the proceeds are distributed

among the unit holders.

Open-ended Funds:-

An open-end fund is one that is available for subscription all

through the year. These do not have a fixed maturity. Investors can

conveniently buy and sell units at Net Asset Value ("NAV") related

prices. The key feature of open-end schemes is liquidity.

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Features: - The main features of the Open-ended funds are:

There is complete flexibility with regard to one's investment or

disinvestment.

These units are not publicly traded but the Fund is ready to repurchase

them and resell them at any time.

The investor is offered install liquidity in the sense that the unit can be

sold on any working day to the Fund.

The main objective of this fund is income generation. The inventors

get dividend, right or bonuses as rewards for their investment.

Generally, the listed prices are close to their Net Asset Value. The

Fund fixes a different price for their purchases and sales.

On The Basis Of Income

Income Funds:-

The aim of income funds is to provide regular and steady income

to investors. Such schemes generally invest in fixed income securities

such as bonds, corporate debentures and Government securities. Income

Funds are ideal for capital stability and regular income.

Features: - The main features of the Income funds are:

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The investor is assured of regular income at periodic intervals, says

Half- yearly or years and so on.

The main objective of this type fund is to declare regular dividends

and not capital appreciation.

The pattern of investment is oriented towards high and fixed income

yielding securities like debentures, bonds etc.

This is best suited to the old and retired people who may not have any

regular income.

It concerns itself with short run gains only.

Growth Funds:-

The aim of growth funds is to provide capital appreciation over the

medium to long- term. Such schemes normally invest a majority of their

corpus in equities. It has been proven that returns from stocks, have

outperformed most other kind of investments held over the long term.

Growth schemes are ideal for investors having a long-term outlook

seeking growth over a period of time.

Features: - The main features of the Growth funds are:

The Growth oriented fund aims at meeting the investors' need for

capital appreciation.

The Investment strategy therefore, conforms to the Fund objective by

investing the fund predominantly on equities with high growth

potential.

The Fund tries to get capital appreciation by taking much risk and

investing on risk bearing equities and high growth equity shares.

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The Fund may declare dividend, but its principal objective is only

capital appreciation.

This is best suited to salaried and business people who have high risk

bearing capacity and ability to defer liquidity. They can accumulate

wealth for future needs.

Balance Funds:-

The aim of balanced funds is to provide both growth and regular

income. Such schemes periodically distribute a part of their earning and

invest both in equities and fixed income securities in the proportion

indicated in their offer documents. In a rising stock market, the NAV of

these schemes may not normally keep pace, or fall equally when the

market falls. These are ideal for investors looking for a combination of

income and moderate growth.

Specialised Funds:-

Index schemes:-

The primary purpose of an Index is to serve as a measure of the

performance of the market as a whole, or a specific sector of the market.

An Index also serves as a relevant benchmark to evaluate the

performance of mutual funds. Some investors are interested in investing

in the market in general rather than investing in any specific fund. Such

investors are happy to receive the returns posted by the markets. As it is

not practical to invest in each and every stock in the market in proportion

to its size, these investors are comfortable investing in a fund that they

believe is a good representative of the entire market. Index Funds are

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launched and managed for such investors. An example to such a fund is

the HDFC Index Fund.

Tax Saving schemes:

Investors (individuals and Hindu Undivided Families HUFs) are

being encouraged to invest in equity markets through Equity Linked

Savings Scheme (ELSS) by offering them a tax rebate. Units purchased

cannot be assigned / transferred/ pledged / redeemed / switched out

until completion of 3 years from the date of allotment of the respective

Units.

Money Market Funds:

The aim of money market funds is to provide easy liquidity,

preservation of capital and moderate income. These schemes generally

invest in safer short-term instruments such as treasury bills, certificates of

deposit, commercial paper and inter-bank call money. Returns on these

schemes may fluctuate depending upon the interest rates prevailing in the

market. These are ideal for corporate and individual investors as a means

to park their surplus funds for short periods.

Load Funds

A Load Fund is one that charges a commission for entry or exit.

That is, each time you buy or sell units in the fund, a commission will be

payable. Typically entry and exit loads range from 1% to 2%. It could be

worth paying the load, if the fund has a good performance history.

No-Load Funds

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A No-Load Fund is one that does not charge a commission for

entry or exit. That is, no commission is payable on purchase or sale of

units in the fund. The advantage of a no load fund is that the entire corpus

is put to work.

Net Asset Value (NAV): -

The net asset value of the fund is the cumulative market value of

the assets fund net of its liabilities. In other words, if the fund is dissolved

or liquidated, by selling off all the assets in the fund, this is the amountthat the shareholders would collectively own. This gives rise to the

concept of net asset value per unit, which is the value, represented by the

ownership of one unit in the fund. It is calculated simply by dividing the

net asset value of the fund by the number of units. However, most people

refer loosely to the NAV per unit as NAV, ignoring the "per unit". We

also abide by the same convention.

Calculation of NAV

The most important part of the calculation is the valuation of the

assets owned by the fund. Once it is calculated, the NAV is simply the

net value of assets divided by the number of units outstanding. The

detailed methodology for the calculation of the asset value is givenbelow.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued

Amount due on unpaid assets

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Expenses accrued but not paid

For liquid shares/debentures, valuation is done on the basis of the

last or closing market price on the principal exchange where the security

is traded

For liquid and unlisted and/or thinly traded shares/debentures, the

value has to be estimated. For shares, this could be the book value per

share or an estimated market price if suitable benchmarks are available.

For debentures and bonds, value is estimated on the basis of yields of

comparable liquid securities after adjusting for illiquidity. The value of

fixed interest bearing securities moves in a direction opposite to interest

rate changes Valuation of debentures and bonds is a big problem since

most of them are unlisted and thinly traded. This gives considerable

leeway to the AMCs on valuation and some of the AMCs are believed to

take advantage of this and adopt flexible valuation policies depending onthe situation.

Interest is payable on debentures/bonds on a periodic basis say

every 6 months. But, with every passing day, interest is said to be

accrued, at the daily interest rate, which is calculated by dividing the

periodic interest payment with the number of days in each period. Thus,accrued interest on a particular day is equal to the daily interest rate

multiplied by the number of days since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General

meeting and become due on the record date. There is a gap between the

dates on which it becomes due and the actual payment date. In the

intermediate period, it is deemed to be "accrued".

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Financial Planing

1) Financial Planner - Generalist or Specialist?

It is useful to draw parallels between the family doctor and the

Financial Planner. The family doctor takes care of your physical health.

She is typically a general practitioner (GP), who recommends you to a

cardiologist, surgeon, dentist, and ophthalmologist etc as per your needs.

The Financial Planner takes care of the fiscal (financial) health of

the investor, and ensures orderly bequeathing of wealth to the next

generation. The skill set requirement include-

General awareness of various assets classes and financial products.

Understanding of portfolio management principals.

Understanding of economic cycles and their impact on markets.

Knowledge of income tax.

Knowledge of laws related to ownership of assets, estate planing etc.

Reading of people and their comfort zones.

Expecting a financial planner to be an expert in all the above skills

is like expecting a person to jump between building like Superman,

hypnotise people like Mandrake and shoot like Phantom- an idealistic

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situation. A good financial planner would have all the above skill sets to

an extent. She may also be an expert on some of these skills.

Thus, we can view the financial planner as more of as generalist,

who would fall back on a specialist as per the needs of the situation.

2) Steps to Financial Planing

The certified Financial Planner-Board of Standards (USA)

recommends. The following six broad steps-

Establish and define the client planner relationship.

Gather client data, define client goals.

Analyse and evaluate client's financial status.

Develop and present financial planing recommendations.

Implement the financial planing recommendations.

Monitor the financial planing recommendation.

3) Assets Classes

As seen earlier, investing the entire portfolio in debt is not

necessarily a prudent option. Inflation and re-investment risks can wreak

havoc to the life of such investors. Prudence therefore lies in investing in

a mix of asset classes.

The performance of different assets class hinges on how of

economy performs. Economies tend move in cycles- often referred to as

business cycles. From a trough the economy expands, then reaches a

peak, and then contracts into a trough.

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The financial planner's reading of the economic environment is

important. For instance, while economy is becoming, equity investment

would generate good returns. But in a contractionary phase in the

business cycle, debt investments may be more prudent.

Financial planners need to be able to anticipate the cycles. To draw

an analogy, it is difficult the day to day temperature and rainfall- but the

seasonal cycle can be predicted. So also financial planners may not be

able to read the short-term fluctuations, but the long term business cycle

need to be factored in the financial plans they make.

One categorization of assets would be debt and equity. In India,

even gold is an important asset category. Besides, real estate could be

another component of a client's asset portfolio.

An asset categorization relevant for a fund distributor is liquid

schemes, Gilt Schemes, Balanced Schemes, Index Schemes, Bond

Schemes, Diversified Schemes, Equity Schemes, and Sectoral or

Focussed Schemes, etc.Every asset class and mutual fund type implies a risk- return

tradeoff. Generally, one has to take a greater risk for a chance to earn a

higher return. The AMFI Mutual Fund Testing Programme Workbook

provides a useful comparison of investment alternatives.

Return Safety Volatility Liquidity ConveniencesEquity High Low High High or Low

Moderate

FI Bonds Moderate High Moderate Moderate High

Co.Debenture

Moderate Moderate Moderate Low Low

Co. FDs Moderate Low Low Low Moderate

BankDeposits

Low High Low High High

PPF Moderate High Low Moderate HighLife Low High Low Low Moderate

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Insurance

Gold Moderate High Moderate Moderate Low

Real Estate High Moderate High Low Low

Mutual

Funds

High High Moderate High High

Notes: - Table reproduced with permission of the Association of Mutual

Funds of India.

4) Asset Allocation: -

The optimum asset allocation for a client would depend on her

wealth cycle and life cycle.

The Wealth Cycle

People typically go through three-wealth cycle phases-

Accumulation / sowing: -

Where the person's saving is much more than current needs. So she

is in a position to set apart something for the future.

Distribution / Reaping / Harvesting: -

Where the person's needs cannot be fully met by current savings.

The gap would need to be met out of savings or loans.

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Transition: -

This is a phase between the accumulation and distribution phases,

when the distribution needs are very clearly in the person's radar,

although the harvesting may not have commenced.

Windfall: -

This is a phase that touches people's lives occasionally. It could be

winning from a lottery, super- normal profits booked on investments,

inheritance etc.

The risk-based asset allocation would be different foe each phase.

The AMFI Mutual Fund Testing Programme Workbook proposes the

following mix:

Accumulation: -

Asset Allocation

Diversified equity, sector and balanced funds 65-80%

Income and gift funds 15-30%

Liquid funds and bank deposits 5%

Distribution: -

Asset Allocation

Diversified equity and balanced funds 15-30%

Income funds 65-80%

Cash funds 5%

Note: - Tables reported with permission of the Association of Mutual

Funds of India.

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A thumb-rule often followed is that age of the client would

determine the share of debt in the portfolio. Thus, a 30-year old person

would have 30% debt, an 80-year old person would have 80% debt in her

portfolio. The thumb rule should not be stretched too much- else a person

who lives beyond 100 would end up short-selling equity-hardly an age for

such all portfolio management style! The approach is referred to as

strategic asset allocation.

During the transaction stage, the investor would be well advised to

park increasing proportions of money in liquid assets. Once the expected

goals have passed, the investor can go back the distribution suggested by

strategic asset allocation.

The windfall situation is interesting. When the client wins a lottery,

she realise there are so many so- called friends or relatives - includingmany who have not bothered to maintain contact for several years.

Money in the bank is always a temptation for a splurge (person

accustomed to travel by train, deciding to buy a Mercedes Benz!) or

altruism.

It would be prudent not to blow up the money, nor invest all themoneys at the same time. The moneys could first be invested in a safe

and liquid avenue (liquid schemes for instance). Progressively, the

moneys can be invested in equity or other investments, as per the

preferred asset allocation. Through progressive investments, the investor

can avail of the benefits of SIP.

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Thus, during the transition and windfall stages, the investor's asset

allocation would be temporary at variance from that suggested by the

strategic asset allocation approach.

The Life Cycle

Birth, childhood, graduation, early employment, marriage,

children, education/ marriage of children and retirement - these are the

phases that people normally go through. The asset allocation and

investment choices that are made would need to keep the life cycle in

mind.

Thus in the early stages of one's professional career, the investment

mix would be more like that set our above for the 'Accumulation' phase in

the wealth cycle. Towards retirement, it would be more like the

'Distribution' phase in the wealth cycle. The investment mix would need

to specifically provide for expected spikes in expenses in between

('Transition' phase), such as for buying house, marriage of children etc.

An aggressive growth fund would find a place in the portfolio ofyounger investors with a propensity to take risk.. Older investors would

find the equity portion of their portfolio dominated by equity income

funds. As seen earlier, close to a large and sure fund outflow for people

who are in the transition phase (some requirement of funds in the radar),

moneys would be transferred to money market or other debt funds. Thus,

scheme selection becomes a function of both risk profile and cash flow

needs of an investor.

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5) Financial plan Investing and Goal-

oriented Investing

A financial plan sets out a complete road map for the investor to

realize her dreams. It would consider the requirement of funds at various

points of time in future, current wealth, expected earnings in future, and

mix of investments, the return on which would help realize the dreams.

By combining all dreams and funding possibilities, a financial plan

optimizes the dream fulfillment. It provides the investor a cockpit view of

her entire financial landscape. She knows right the dreams that are likely

to be fulfilled, and the dreams that are only 'day dreaming exercises'. If

required, she can review her future before failed dreams become a

nightmare. Similarly, on the investment side, she gets the complete

picture in terms of her debt-equity exposure.

The alternative to investing as per financial plan is goal- oriented

investment. In a goal oriented investment process, each dream is viewed

in isolation and investments are made to fulfill the dream. Thus each

dream has an identified set of investments made the intention of funding

the dreams. For instance, it is decided that the daughter's marriage would

be funded out of gold, while the extra land would be sold to fund the

son's education.

6) Scheme selection: -

The parameters to compare scheme were set out in above. Risk

profile, asset allocation and relative risk levels in different investments

were discussed earlier in this chapter. Based on these, the financial

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planner would advise the investor on distribution of investment across

different schemes. In effect, the financial planner would recommend a

model portfolio most appropriate for the investor.

ICICI

Prudential ICICI Asset Management Company, (55%: 45%) a joint

venture between Prudential Plc, UK's leading insurance company andICICI Bank Ltd, India's premier financial institution.

The joint venture was formed with the key objective of providing

the Indian investor mutual fund products to suit a variety of investment

needs. The AMC has already launched a range of products to suit

different risk and maturity profiles.

Prudential ICICI Asset Management Company Limited has a

networth of about Rs. 69.89 crore (1 crore = 10 million) as of March 31,

2002. Both Prudential and ICICI Bank LTD have a strategic long-term

commitment to the rapidly expanding financial services sector in India.

PruICICI will conduct its business with

Honesty and trustworthiness in all interactions.

A pioneering spirit and excellence in action.

Collaboration and teamwork.

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An understanding of customer needs and the desire to satisfy them.

The highest service standards.

A consistently above average performance.

SPONSORS: -

Prudential plc is a leading international financial services group

providing retail financial products and services and fund management to

many millions of customers worldwide. As a group Prudential plc has, as

of 31 December 2002, over GBP155 billion of funds under management,

more than 12 million customers and over 15,000 employees, worldwide.

Prudential is focused on the Internet generation and is one of the

first financial service organisations to use the Internet on a fully

integrated basis. In October 1998, Prudential launched a "branches" bank

based on the Internet. The bank has in a short span of its existence

become a leading banking service provider in the UK. Infect in the first

six months of its existence it garnered over 5 billion (US$ 8 billion) in

deposits from over 500,000 customers. Development of superior products

and services that offer value for money and security while producing

superior financial returns, enables Prudential to maximise the value of its

shareholder's investment and to establish lasting relationships with

customers and policy holders.

ICICI Ltd (Since Merged into ICICI Bank Ltd) was established in

1955 by the World Bank, the Government of India and the Indian

Industry, to promote industrial development of India by providing project

and corporate finance to Indian industry.

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Since inception ICICI has grown from a development bank to a

financial conglomerate and has become one of the largest public financial

institutions in India. ICICI Bank is Indias second largest bank with an

asset base of Rs.106, 812 crore. ICICI Bank provides a broad spectrum of

financial services to individuals and companies. This includes mortgages,

car and personal loans, credit and debit cards, corporate and agricultural

finance. The Bank services a growing customer base of more than 7

million customers and 6 million bondholder accounts through a multi-

channel access network. This includes about 450 branches and extension

counters, 1675 ATMs, call centers and Internet banking (Source: Press

Release dated May 23, 2003 at www.icicibank.com ). ICICI Bank posted

a net profit of Rs.1, 206 crore for the year ended March 31, 2003. ICICI

Bank is the only Indian company to be rated above the country rating by

the international rating agency Moodys and the only Indian company to

be awarded an investment grade international credit rating. The Bank

enjoys the highest AAA (or equivalent) rating from all leading Indianrating agencies. ICICI Bank was originally promoted in 1994 by ICICI

Limited, an Indian financial institution, and was its wholly owned

subsidiary.

Prudential ICICI offer employees an ideal environment to progress

their careers and enhance their skills. At Prudential ICICI, each person is

given a great deal of independence and responsibility to manage their

assignments and make their contributions count.

We strive to provide our people with a professional work

environment and a culture of respect, openness and trust. We seek to

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reward our people commensurate with their contributions at a competitive

standard compared to the industry. Our managers in PruICICI are

measured on how they build an environment that engenders meritocracy

and rewards contribution. Our salary plus bonus compensation

framework provides each person a means of substantially benefiting

through performance related pay.

Birla Sun Life Insurance Company

Birla Sun Life Financial Services offers a range of financial

services for resident Indians and Non Resident Indians. Brought together

by two large, powerful and reputed business houses, the Aditya Birla

Group and Sun Life Financial, it is our aim to offer diverse and top

quality financial services to customers. The Mutual Fund and Insurance

companies provide wealth management and protection products to

customers while the Distribution and Securities companies provide

brokerage and trading services for investment in equities, debt securities,

fixed deposits, etc.

Birla Sun Life Asset Management Company Limited

Birla Sun Life Mutual Fund follows a conservative long-term

approach to investment, which is based on identifying companies that

have good credit-worthiness and are fundamentally strong. It places a lot

of emphasis on quality of management and risk control. This is done

through extensive analysis that includes factory visits and field research.

It has one of the largest team of research analysts in the industry. The

company is one of India's leading, private mutual funds with a large

customer base. It has been recognised nationally with coveted awards.

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HDFC

HDFC was incorporated in 1977 as the first Specialised housing

finance institution in India. HDFC provides financial assistance to

individuals, corporates and developers for the purchase or construction of

residential housing. It also provides property related services (e.g.

property identification, sales services and valuation), training and

constancy. Of these activities, housing finance remains the dominant

activity. HDFC currently has a client base of over 5,00,000 borrowers,

13,00,000 depositors, 1,00,000 shareholders and 52,000 deposit agents.

HDFC raises funds from international agencies such as the World Bank,

IFC (Washington), USAID, CDC, ADB and KfW, domestic term loans

from banks and insurance companies, bonds and deposits. HDFC has

received the highest rating for its bonds and deposits program for the

eighth year in succession. HDFC Standard Life Insurance Company

Limited, promoted by HDFC was the first life insurance company in theprivate sector to be granted a Certificate of Registration (on October 23,

2000) by the Insurance Regulatory and Development Authority to

transact life insurance business in India.

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EQUITY FUNDS

ICICI HDFC BIRLA

Date of inception 04-Oct-94 23-Dec-94 25-Dec-94Corpus pr. Month incrs.

805.80 977.98 810.62

Corpus Cur. Monthin crs.

720.92 986.98 886.32

% change in Corpus -10.53% 0.82% 0.70%

Top 10 Stocks SBI8.66Infosys

6.38HCL Tech5.01Hughes S/W4.91RIL4.43Jai prakash Ind.4.18ABB4.14GE Shipping4.10BHEL3.85Siemens India3.84

Infosys9.78Grasim Ind.

9.76SBI9.10Marutiudyog6.57BHEL6.30Satyam Com6.13RIL5.68Bharat Ele.5.10Zee Tel4.46Indo RamaSynth3.54

SBI8.65Infosys

6.35HCL Tech6.01Hughes S/W3.91RIL5.43Jai prakash Ind.3.18ABB3.14GE Shipping3.10BHEL6.85Siemens India5.84

Total 49.50 66.42 52.46

Total Debt/Cash/CA 1.22 2.23 1.26

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Benchmark NSE 50 NSE 500 NSE 500

NAV as on 1-Jun-04 30.75 52.29 53.46

NAV as on 31-Jun-04

28.87 51.26 53.26

Performance Ranking

NOTE: - All returns bellow 1 yr. Are on simple annualized basis &

above 1 yr. Are on a compound annualized basis.

Last 180

days

Last 1 year Last 2 year Last 3 year

ICICI 110.56 120.88 60.37 NIL

HDFC 115.95 128.89 62.70 37.28

BIRLA 120.6 125.3 63.2 35.32

Interpretation: -

In this chat determined the equity funds of ICICI, HDFC, and Birla

for last 180 days, 1 years, 2 years, & 3 years.

We see that in last 180 days ICICI, HDFC, and Birla has a Equity

Funds i.e. 110.56, 115.55, 120.6 receptively. In last 180 days Birla has a

41

0

20

40

60

80

100

120140

180 days 1 year 2 year 3 year

ICICI

HDFC

BIRLA


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High equity funds i.e 120.6 as compares to ICICI, HDFC i.e. 110.56 &

115.55 receptively it is better for them

In last 1st year H.D.F.C. has high equity funds as compared to

ICICI & Birla i.e. 128.89. In last two years Birla has a High equity fund

i.e. 163.2. Last three years ICICI has not equity funds which is not good

for the firm and HDFC has a high equity funds i.e. 37.28.

Specific risk factor under Equity Oriented schemes ofMutual Funds.

(1) Tax Plan / Tax Saver Scheme: -

Type of

Securities

Investment

Pattern

Credit

Risk

Market

Risk

Interest

Rate Risk

Liquidity

Risk

Equity andEquity relatedinstrument

90% Higher Higher Medium Lower

Debt andMoneyMarketinstrument

10% Lower Medium Higher Lower

Conclusion: -Tax saver scheme would under normal conditions invest a

minimum of 90% or more of its assets in equity and related instruments

and maximum or less than 10% in debt, money market instrument, cashand cash equivalents. The investor's here have to note that the securities,

which provide higher returns, typically, display higher volatility.

Accordingly, the investment portfolio of the scheme would reflect

moderate to high volatility in its equity and equity related investments

and low to moderate volatility in its debt and money market investment.

Tax plan option which is a make up of approximately 90% equity relatedsecurities & 10% debt securities offers a good amount of return and since

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return expectation is high its volatility is also higher and so is the risk.

Credit risk is definitely higher. Similarly, Market risk is high on account

of 90% equity market risk. However interest rate risk is medium since the

equity base is earning good returns and liquidity is not a problem since

both equity debts are easily tradable in market. The overall risk involved

by investing in Tax Plan is medium to higher risk.

(2) Growth Fund: -

Type of

Securities

Investment

Pattern

Credit

Risk

Market

Risk

Interest

Rate Risk

Liquidity

Risk


95% Higher Higher Medium Lower


5% Lower Medium Medium Lower

Conclusion: -

Growth fund which is made up of approximately 95%

Equity & Equity related securities & 5% of debt money market

instruments offers good returns and since the return expectation is high,

its volatility is also higher and so it the risk. According the investment

portfolio of the scheme would reflect moderate to high volatility in its

equity and equity related securities and low to moderate volatility in debt

and money investment. Under this fund, Credit risk is higher. Similarly,

Market risk is also high on account of 95% Equity market risk. However,

Interest Rate Risk is medium since equity base is earning good return &

liquidity is not at all problem as both Equity & Debt securities are easily

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tradable in the market. Growth fund has an overall risk ranging from

moderate to higher risk.

(3) Balanced Fund: -

Option 1: -

Type of

Securities

Investment

Pattern

Credit

Risk

Market

Risk

Interest

Rate Risk

Liquidity

Risk




60% Higher Higher Lower Tedium

Conclusion: -

Balanced Fund may invest approximately in 40% Equity

related securities and 60% Debt & Money market securities. Theinvestment portfolio reflects lower to moderate risk in its equity and

equity related securities and moderate to higher risk in its Debt & money

Market securities. Credit risk is lower. Similarly, Market risk is medium

on account of 40% equity market risk. Interest Rate Risk is medium to

lower since equity base is earning good returns and Liquidity is not at all

problem as Equity and Debt Securities are easily tradable in the market.

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Option: - 2

Type of

Securities

Investment

Pattern

Credit

Risk

Market

Risk

Interest

Rate Risk

Liquidity

Risk


60% Higher Medium Lower Medium



Conclusion: -

Since balance fund is a mixture of Equity and Debt securities

it may invest approximately 60% in equity and related securities and

around 40% in Debt and Money Market securities. Here 60% investment

is made in equity securities the profolio runs higher to moderate risk and

lower to moderate risk in 40% investment in Debt and money market

security. Since the proportion of investment in equity securities is more it

runs higher Credit risk and Market risk. Interest rate risk is medium to

lower since equity bas is earning good returns and Liquidity is not at all

problem in both equity and debt as both are easily tradable in the market.

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Finding

In compassion to MFs people are more interested in investing in

other instruments like bank deposits, post office saving schemes,

PPF, NSC, LIC etc.

People with more good income are not investing in MFs becausethese do not know the concept of NF properly and more area thinks

that MFs now a day's are becoming risky due to unstable equity

market.

People are investing their money for regular income in post office,

Bank Deposits and there sources but they don't

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Suggestions

Considering the above findings the suggestion is: -

Due to lack or less awareness of people about MFS they are not

investing in it. Hence, it is necessary to educate them by arranging

some educational seminar be on MFS to show them how to invest

in MFS? What is the liquidity? What is the risk covered in MFS?

Most of people know only UTI MFs only. Hence, it is necessary to

increase advertisement effort for private MFs & public MFs.

They are have to increase their awareness advertisement campaign

as they do in cash of bonds and fixed deposits so that manned

awareness of MFs increase and inventory can think before investity

in bon do or fixed deposits or equity shares.

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BIBLIOGRAPHY

NO. NAME OF BOOK EDITION AUTHOR

1 Investment Management 4th V.A.Avadhani

2 Investment Management - V.K.Bhalla

3 Capital Market in India - Gordon &

Natarajan

4 Investment Management - V.Gangadhar

Wed Site: -

www.idbibank.com

www.hdfcfund.com

www.pruicici.com

www.birlasunlife.com
http://www.idbibank.com/http://www.hdfcfund.com/http://www.pruicici.com/http://www.birlasunlife.com/http://www.idbibank.com/http://www.hdfcfund.com/http://www.pruicici.com/http://www.birlasunlife.com/