Mutual Fund-Product Designing

8/6/2019 Mutual Fund-Product Designing

1/44

SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POSTGRADUATE DEGREE IN MBA(GENERAL)

SUBMITTED BY:

VIJAY KANT SAHNIMBA-GEN (2005-2007) Roll No. : A1100205240

INDUSTRY GUIDE FACULTY GUIDEMr. Rashim Bagga Mrs. Rashmi Goel Regional Sales Manager-North Deutsche Asset Management (India) Pvt. Ltd.

AMITY BUSINESS SCHOOL, NOIDA AMITY UNIVERSITY UTTAR PRADESHCompany Certificate

(In the LETTER HEAD of the Company)

TO WHOM IT MAY CONCERN


2/44

This is to certify that _____________________, a student of Amity International Business School, Noida, undertook a project on ___________________ at ________________________ from __________to _____________.

Ms./Mr.________________ has successfully completed the project under the guidance of Mr./Ms.____________________. She/He is a sincere and hard-working student with pleasant manners.

We wish all success in her/him future endeavours.

Signature with date (Name) (Designation) (Company Name)

CERTIFICATE

This is to certify that the project work done on Submitted to Amity Business School,Amity University Uttar Pradesh, by Vijay Kant Sahni in partial fulfillment of therequirement for the award of degree of Master of Business Administration, has beenreportedly completed with lot of involvement and diligence under my academic guidanceand supervision.

This work has not been submitted anywhere else for any other degree/diploma.

The original work was carried out during 08th May 2006 to 8th July 2006 in Subros Ltd.

Mrs. Rashmi GoelFaculty,Amity Business School, Amity University,Noida.

Acknowledgement

I would like to take this opportunity to thank various people who have given me their invaluable help. Without their constant help and support this project could not have been completed. First and foremost I would like to express mygratitude to my project guide Mr. Rashim Bagga (Regional Sales Manager) and Professor Rashmi Goel (faculty ABS)for their constant guidance and help.

I also feel obliged to name Mr. Dronacharya Basu (Sales Manager) for his invaluable guidance and support givento me throughout the project


3/44

Lastly I would like to thank my family and friends for extending their faith in me.

Thanking You

TABLE OF CONTENTS

Chapter No. Subject Page No.

Ch.-1.0 Executive Summary 6

Ch.-2.0 Introduction 7

History of Mutual Funds 9

Structure of a Mutual Fund 13

Company Profile 19

Ch.-3.0 History of Mutual Funds in India 24

Ch.-4.0 Performance of Mutual Funds in India 27

Risk In Mutual Fund Investments 39

Ch.-5.0 Effect of Market Dynamics onProduct ( Mutual Fund) Designing 43

Ch.-6.0 Success of IPO in Indian Mutual 50

Fund Industry


4/44

Ch.-7.0 Analysis and Recommendations 66

Ch.-8.0 Bibliography 68

Executive Summary

The Indian Mutual Funds Industry has witnessed a sea change since UTI was first established in 1963. From a singleplayer the number of players has increased to 38 and the number of schemes has spiraled to more than 500. The lastdecade has been a period of rapid growth for the MF industry. The project begins by analyzing the current scenario inthe industry characterized by its history and present status. A comparison of the MF industry with global standards isdone. The project is an analysis of the various market dynamics affecting the mutual fund industry and how thesedynamics affect new product design and innovation of existing ones. In the end, a report has been made on thesuccess of IPOs in the Indian Mutual Fund Industry and its prospects in the future.INTRODUCTION

What is a Mutual Fund?

A mutual fund is a collective investment vehicle formed with the specific objective of raising money from a largenumber of individuals and investing it according to a pre specified objective. The word mutual in a Mutual fund signifies a vehicle wherein the investments accrue pro rata to all the investors in proportion to their investment.

The following are some of the more popular definitions of a Mutual Fund

A Mutual Fund is an investment tool that allows small investors access to a well-diversified portfolio of equities,bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can beredeemed as needed. The fund's Net Asset Value (NAV) is determined each day.

Mutual Funds are financial intermediaries. They are companies set up to receive your money, and then havingreceived it, make investments with the money Via an AMC. It is an ideal tool for people who want to invest but don'twant to be bothered with deciphering the numbers and deciding whether the stock is a good buy or not. A mutual fundmanager proceeds to buy a number of stocks from various markets and industries. Depending on the amount youinvest, you own part of the overall fund.

The beauty of mutual funds is that anyone with an investible surplus of a few hundred rupees can invest and reapreturns as high as those provided by the equity markets or have a steady and comparatively secure investment asoffered by debt instruments.

The diagram below describes broadly the working of a mutual fund:


5/44

Mutual fund vehicle exploits economies of scale in all three areas research, investing and transaction processing.While the concept of individuals coming together to invest money collectively is not new, the mutual fund in itspresent form is a 20 th 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 objective.Today mutual funds collectively manage almost as much as money as banks.

Any mutual fund is as safe or unsafe as the assets that it invests in.

A mutual fund invests in a diversified portfolio of securities. People who buy mutual fund are its owners or shareholders. Their investments provide the money for a mutual fund to buy securities such as stocks and bonds. Amutual fund can make money from its securities in two ways: a security can pay dividends or interest to thefund , or a security can rise in value. A fund can also lose money and drop in value.

Funds diversify the investment portfolio substantially so that default in any single investment will not affect theoverall performance of a fund in a significant manner.

Generally, mutual funds are not guaranteed by anybody. However in the Indian context some of the mutual fundshave floated guaranteed or assured return schemes which guarantee a certain annual return or guarantee a buyback at a specified price after some time. Examples of these include funds floated by the UTI, Canbank Mutual Fund,SBI Mutual Fund, LIC Mutual Fund etc. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectiveswhich are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Boardof India (SEBI) which regulates securities markets before it can collect funds from the public.HISTORY OF MUTUAL FUNDS

Mutual funds have been on the financial landscape for longer than most investors realize. In fact, the industry tracesits roots back to 19th century Europe, in particular, Great Britain. The Foreign and Colonial Government Trust,formed in London in 1868, resembled a mutual fund. It promised the investor of modest means the same advantagesas the large capitalist . . . by spreading the investment over a number of different stocks. Most of these early Britishinvestment companies and their American counterparts resembled todays closed-end funds. They sold a fixednumber of shares whose price was determined by supply and demand. Until the 1920s, however, most middle-incomeAmericans put their money in banks or bought individual shares of stock in a specific company. Investing in capitalmarkets was still largely limited to the wealthiest investors.

1.1. The idea of pooling-in money for the purpose of investing started in Europe in the mid-1800s.2.2. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of Harvard University.


6/44

3.3. The first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924 and after oneyear had 200 shareholders and US$ 3,92,000 in assets.4.4. The entire industry, which included a few closed-end funds, represented less than US$ 10 million in 1924.

A REVOLUTION IN INVESTINGThe 75th anniversary of the first modern mutual fund is rapidly approaching. The Massachusetts Investors Trust wasintroduced in March 1924 and began with a modest portfolio of 45 stocks and $50,000 in assets. This was the first so-called open-end mutual fund. It introduced concepts that would revolutionize investment companies and investing: acontinuous offering of new shares and redeemable shares that could be sold anytime based on the current value of thefunds assets.

THE INDUSTRY REGULATESThe early mutual fund industry was, however, overtaken by events. The 1929 stock market crash and the GreatDepression that followed prompted Congress to enact sweeping laws to protect investors and to regulate the securitiesand financial markets, including the mutual fund industry. First was the Securities Act of 1933. It required for the firsttime something easily recognized by todays investor: a prospectus describing the fund. The Securities Exchange Actof 1934 made mutual fund distributors subject to SEC regulations and placed them under the jurisdiction of theNational Association of Securities Dealers, Inc., which established advertising and distribution rules. The mostimportant laws relating to mutual funds and investor protection were adopted in 1940: the Investment Company Actand the Investment Advisers Act. The Investment Company Act of 1940, enacted with strong industry support, hasbeen remarkable in its effectiveness. The Acts core provisions the requirement that every fund price its assetsbased on market value every day; prohibitions on transactions between a fund and its manager; leverage limits; and astatutory system of independent directorsare unique to

the mutual fund industry. The 1940 Act imposes regulations not only on mutual funds themselves, but also on their investment advisers, principal underwriters, directors, officers and employees. It mandates that mutual funds redeemtheir shares anytime upon shareholder request and requires them to pay redeeming shareholders a price based on thenext calculated net asset value of the funds investment portfolio within seven days of receiving a request for redemption. The Advisers Act requires the registration of all investment advisers to mutual funds with the exceptionof banks. It also imposes a general fiduciary duty on investment advisers and contains several broad antifraudprovisions. It further requires advisers to meet recordkeeping, reporting, disclosure, and other requirements. It is nowonder that a former SEC Chairman once observed, No issuer of securities is subject to more detailed regulationthan mutual funds.


7/44

MUTUAL FUNDS TAKE ROOT AND GROWMutual funds began to grow in popularity in the 1940s and 1950s. In 1940, there were fewer than 80 funds with totalassets of $500 million. Twenty years later, there were 160 funds and $17 billion in assets. The first international stock mutual fund was introduced in 1940; today there are scores of international and global stock and bond funds. Thecomplexion and size of the mutual fund industry dramatically changed as new products and services were added. For example, before the 1970s, most mutual funds were stock funds, with a few balanced funds that included bonds intheir portfolios. In 1972, there were 46 bond and income funds; 20 years later, there were 1,629. Innovations ininvestment and retirement vehicles also swept the industry. In 1971, the first money market mutual funds wereestablished. They offered check writing and higher interest rates than bank savings accounts. In 1974, the EmployeeRetirement Income Security Act (ERISA) was enacted and IRAs were created. In 1976, the first tax-exemptmunicipal bond funds were offered, and three years later, the tax-free money market fund was created. It combinedthe convenience of money market funds and the tax advantages of municipal bond funds. In 1978, the now ubiquitous401(k) retirement plan was created, as well as the individual retirement plan for the self-employed (or SEP-IRA). Themutual fund industry also began to introduce even more diverse stock, bond, and money market funds. Todaysmutual funds run the gamut from aggressive growth funds to global bond funds to single state tax-exempt moneymarket funds to niche funds that may specialize in one segment of the securities market.

SERVICES MATURE TOO

Over the past 50 years, mutual fund investors have come to receive an unparalleled array and level of services. These


8/44

include professional management in global securities markets, portfolio diversification, trading and executionservices, periodic account statements, tax information, daily liquidity and pricing of portfolios, access to fundpersonnel, and custody of fund portfolio assets. Mutual funds are also constantly developing and offering newproducts, services, and distribution channels to meet consumer demands. Much of what we take for granted today toll-free 24-hour telephone access, computerized account information, and shareholder newsletterswas unknown or in its infancy 20 years ago.

How is a mutual fund set up?A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) andcustodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. Thetrustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC)approved by SEBI manages the funds by making investments in various types of securities. Custodian, who isregistered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested withthe general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trusteecompany or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before theylaunch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January15,2002).

The Structure of a Mutual Fund

The Indian mutual fund industry is dominated by the Unit Trust of India which has a total corpus of Rs700bncollected from more than 20 million investors. The UTI has many funds/schemes in all categories ie equity, balanced,income etc with some being open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred toas US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs200bn. UTI was floated byfinancial institutions and is governed by a special act of Parliament. Most of its investors believe that the UTI isgovernment owned and controlled, which, while legally incorrect, is true for all practical purposes.

The second largest category of mutual funds are the ones floated by nationalized banks. Canbank Asset Managementfloated by Canara Bank and SBI Funds Management floated by the State Bank of India are the largest of these. GICAMC floated by General Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of theother prominent ones. The aggregate corpus of funds managed by this category of AMCs is about Rs150bn.

The third largest category of mutual funds are the ones floated by the private sector and by foreign asset managementcompanies. The largest of these are Prudential ICICI AMC and Birla Sun Life AMC. The aggregate corpus of assetsmanaged by this category of AMCs is in excess of Rs250bn.

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


9/44

1.1. Shareholders / Unit Holders: People who put money into mutual funds are called shareholders since their investment buys shares of mutual funds. A shareholder's investment is added together with other shareholders'investments. The resulting pool of money is often very large, in the millions of dollars.2. Board of Directors (40% of boards must be independent directors) : Oversees the funds activities, includingapproval of the contract with the management company and certain other service providers whose contracts usuallyrepresent the

majority of fees paid by fund shareholders.2.3. Mutual Fund Investment Adviser/Management Company: Manages the funds portfolio according to theobjectives described in the funds prospectus.3.4. Distributor: Sells fund shares, either directly to the public or through other firms.4.5. Custodian: Holds the funds assets, maintaining them separately to protect shareholder interests. In other words we can say Custodian is the agency which will have the physical possession of all the securities purchased bythe mutual fund.5.6. Independent Public Accountants

Certify the funds financial reports.

1.7. Transfer Agent : Processes orders to buy and redeem fund shares.2.8. Registrar: A Registrar accepts and processes unitholders' applications, carries out communications with them,resolves their grievances and despatches Account Statements to them. In addition, the registrar also receives andprocesses redemption, repurchase and switch requests. The Registrar also maintains an updated and accurate register of unitholders of the Fund and other records as required by SEBI Regulations and the laws of India. An investor canget all the above facilities at the Investor Service Centres of the Registrar.3.9. Investment Companies (Mutual Funds): Financial firms form new companies expressly for the purpose of investing and follow special Securities and Exchange Commission rules. There are several kinds of investmentcompanies; the most common types being open-end mutual funds, closed-end investment companies, and unitinvestment trusts. There are legal differences between these types of investment companies, but this pamphlet willrefer generically to all such companies as mutual funds.10. Fund Sponsors : The financial firms which form new investment companies are called sponsors. Names of fundsponsors are easily recognized. Their names range from "A" to "Z;" from American Funds to Fidelity, from Franklinto Templeton,and from Twentieth Century to Zweig. Each sponsor may offer several different mutual funds within its family of investment product.4.11. Fund Managers: The fund sponsors hire fund managers who run the business of the mutual fund. Although thisbooklet uses the term fund manager which suggests just one person, in reality several different companies perform


10/44

specialized services for the mutual fund which is governed by a board of directors or a board of trustees.

Investment advisors buy and sell investments, also called securities, for the fund. These advisors are professionalinvestors who use computer programs and rely on years of knowledge in picking investments which have a goodchance of making money.

The custodian, usually a large bank, safeguards the fund's securities and cash held in its portfolio. It also pays outfund money to buy securities and receives money when the fund's securities are sold.

A specialized type of bookkeeping company called a transfer agent keeps track of investor share purchases andredemptions, which are the sales of shares. The transfer agent also distributes dividends and capital gainspayments to shareholders.

The principal underwriter markets and sells the fund's shares to investors. As underwriter, it may sell directly toinvestors or act as a wholesaler dealing with local brokerage houses which contact investors. These professionalstogether manage the affairs of the fund and are paid fees for their services. The fund manager has a key role inoperating the mutual fund.ADVANTAGES OF INVESTING IN A MUTUAL FUND

1.1. Portfolio Diversification: Mutual funds normally invest in a well-diversified portfolio or securities. Eachinvestor I a fund is a part owner of all of the funds assets. This enables him to hold a diversified investment portfolioeven with a small amount of investment, that would otherwise require big capital.2.2. Professional Management: Even if an investor has a big amount of capital available to him, he benefits fromthe professional management skills brought in by the fund in the management of the investors portfolio. Theinvestment management skills, along with the needed research into available investment options, ensure a much better return than what an investor can manage on his own. A mutual fund is usually managed by an individual or a teamchoosing investments that best match the funds objectives. As economic conditions change, the managers oftenadjust the mix of the funds investments to ensure it continues to meet the funds objectives.3.3. Reduction / diversification of risk: Diversification reduces the risk of loss, as compared to investing directlyin one or two shares or debentures or other investments. When an investor invests directly, all the risk of potential lossin his owned. A fund investor also reduces his risk in another way. While investing in the pool of funds with other investors, any loss on one or two securities is also shared with other investors.4.4. Liquidity: Liquidity is the ability to readily access your money in an investment. Often investors hold sharesor bonds they cannot directly, easily and quickly sell . Investment in a mutual fund, on the other hand, is more liquid.An investor can liquidate the investment, by selling the units to the funds if open-end, if selling them in the market if the fund is closed-end, and collect funds at the end of a period specified by the mutual fund or the stock market.Theprice per share at which you can redeem shares is known as the funds net asset value (NAV) . NAV is the currentmarket value of all the funds assets, minus liabilities, divided by the total number of outstanding shares.5.5. Variety Within the broad categories of stock, bond, and money market funds, you can choose among a varietyof investment approaches. Today, there are about 8,200 mutual funds available in the U.S., with goals and styles to fitmost objectives and circumstances.6.6. Reduction of transaction Costs: A direct investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costsbecause of larger volumes, a benefit passed on to its investors. In other words we can say that since , Mutual fundsusually hold dozens or even hundreds of securities like stocks and bonds and the total cost is distributed over allsecurities therefore cost per unit declines.7.7. Convenience and Flexibility: Mutual fund management companies offer may investor services that a directmarket investor cannot get. Investors can easily transfer their holdings from one scheme to the other; get updatedmarket information, and so on. You can purchase or sell fund shares directly from a fund or through a broker,financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by personal computer. Youcan also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by thefund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, taxinformation, and 24-hour phone and computer access to fund and account information.8.8. Protecting Investors: Not only are mutual funds subject to exacting internal standards, they are also highly


11/44

regulated by the federal government through the

U.S. Securities and Exchange Commission (SEC). As part of this government regulation, all funds must meetcertain operating standards, observe strict antifraud rules, and disclose complete information to current and

potential investors. These laws are strictly enforced and designed to protect investors from fraud and abuse.But these laws obviously can not help you pick the fund that is right for you or prevent a fund from losingmoney. You can still lose money by investing in a mutual fund. A mutual fund is not guaranteed or insured bythe FDIC or SIPC, even if fund shares are purchased through a bank. For more information about how fundsare regulated and supervised.

1.9. Well regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strictregulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored bySEBI.2.10. Choice of schemes: Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.3.11. Transparency: You get regular information on the value of your investment in addition to disclosure on thespecific investments made by your scheme, the proportion invested in each class of assets and the fund manager'sinvestment strategy and outlook.4.12. Affordability : Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual fundbecause of its large corpus allows even a small investor to take the benefit of its investment strategy.

.13. 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.DISADVANTAGES OF INVESTING IN MUTUAL FUND

1.1. No Guarantees: No investment is risk free. If the entire stock market declines in value, the value of mutualfund shares will go down as well, no matter how balanced the portfolio. Investors encounter fewer risks when theyinvest in mutual funds than when they buy and sell stocks on their own. However, anyone who invests through amutual fund runs the risk of losing money.2.2. No control over costs: An investor in a mutual fund has no control over the overall cost of investing. He paysinvestment management fees as long as he remains with the fund, although in return for the professional managementand research. Fees are usually payable as a percentage of the value of his investment, whether the fund value is risingor declining. A mutual fund investor also pays funds distribution cost, which he would not incur in direct investing.However, this shortcoming only means that there is a cost to obtain the benefits of mutual fund services. However,this cost is often less than the cost of direct investing by the investors.3.3. No tailor-made portfolios: Investors who invest on their own can build their own portfolios of shares, bondsand other securities. Investing through funds means he delegates this decision to the fund managers. The very high-net-worth individuals (HNIs) or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual funds help investors overcome this constraint by offering families of schemes alarge no of different schemes within same fund. An investor can choose from different investment plans andconstruct a portfolio of his choice.4.4. Managing a portfolio of funds: availability of a large no of funds can actually mean too much choice for theinvestor. He may again need advice on how to select a fund to achieve his objectives, quite similar to the situationwhen he has to select individuals shares or bonds to invest in.5.5. Fees and commissions: All funds charge administrative fees to cover their day-to-day expenses. Some fundsalso charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if you don't use a broker or other financial adviser, you will pay a sales commission if you buy shares in a Load Fund.6.6. Taxes: During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of thesecurities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive,even if you reinvest the money you made.7.7. Management risk: When you invest in a mutual fund, you depend on the fund's manager to make the rightdecisions regarding the fund's portfolio. If the manager does not perform as well as you had hoped, you might notmake as much money on your investment as you expected..


12/44

Asset Management Company (AMC)A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset management company (AMC) andcustodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. Thetrustees of the mutual fund hold its property for the benefit of the unitholders. Asset Management Company (AMC)approved by SEBI manages the funds by making investments in various types of securities. Custodian, who isregistered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested withthe general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must beindependent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must beindependent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, UnitTrust of India (UTI) is not registered with SEBI (as on January 15, 2002).

Every Mutual Fund has an Asset Management Company (AMC) associated with it. The AMC is responsible for managing the investments for the various schemes operated by the Mutual Fund. The Trust oversees the performanceof the AMC. The AMC employs professionals to manage the funds. The AMC may be assisted by a custodian and aregistrar.

AMCs are obliged to make investments in compliance with SEBI regulations. SEBI regulations specify certainrestrictions and limits for investments that can be made by a mutual fund. Further, SEBI regulations require that everyscheme of a fund should have an investment objective and an investment pattern.

DEUTSCHE ASSET MANAGEMENT

Deutsche Asset Management, a member of the Deutsche Bank Group, is a leading financial powerhouse inglobal asset management . With over 5000 highly qualified professionals covering local, regional and global marketsin the worlds major financial centers, they serve clients in more than 40 countries who have entrusted them with over EUR 535.6 billion in assets.

Their diverse institutional client base includes pension funds, insurance companies, corporations, local governmentauthorities and charities. They are committed to producing consistent, risk-controlled performance for their clientsand adding value through all stages of the investment process.

Their retail business encompasses the following leading brands: the award-winning DWS Investments in EuropDWS Scudder , one of the largest and most experienced investment management organisations in the United States;and Deutsche Asset Management , one of the leading asset managers in the Asia Pacific region.

Established in 2002, Deutsche Asset Management India (DeAM India) is responsible for client servicing and fundmanagement across India. The successive launch in January 2003 of four products across debt and equity assetclasses, witnessed a mobilization of around Rs. 500 crores. Building upon this success over the past three years, their product range today consists of 10 domestic fund schemes with assets under management of Rs. 3500 crores.

As part of their commitment to strengthen their mutual fund business in Asia, they have introduced the renownedretail brand of the Deutsche Bank Group to India: DWS Investments .

DWS Investments a proud heritage spanning over 50 years in Germany and over 10 years of steady growth in Europe.Today, DWS Investments is the leading mutual fund company in Germany, capturing close to 25% market share. InEurope, they are among the top players in the international fund market.

Not only is DWS a leader in terms of size but also in terms of performance. In fact, they have been voted Germanystop fund manager by Standard & Poors for the last 12 years in a row, a feat no other investment company has ever achieved. The superior quality of DWS Funds is recognized by independent fund rating agencies across all key


13/44

markets in Europe as well. This success serves as an excellent foundation to carry over our expertise to the Indianmarket.

Being a leader also means being prepared to meet the challenges of the future. We are strongly positioned to bring our know-how to new markets and to actively pursue our vision: the extension of our No. 1 mutual funds market positionand brand leadership to the Asian region.

The introduction of DWS brand in India is an important step towards realizing our vision. This new beginning alsomarks the introduction of our new appearance and claim: st choice for your money., which symbolizes our driving

force and our guiding aspiration to continue to deliver performance excellence, innovation products and first-classservice.

Investors in India can now profit the know-how and expertise of a world-class financial services provider with aproven success story in mutual fund management.

Global Network

Facts & Figures

DWS Investments is present in 11 European countries and, since February 2006, also in USA with the launch of DWSScudder. They manage assets in total of over EUR 241 billion for investors globally. With well over 500 fundsworldwide, DWS Investments offers investors a palette of products covering a broad range of regions and sectors.Their 600 investment experts deliver topnotch, award-winning solutions for every investment style and profile. As

part of Deutsche Bank Group, DWS Investments is connected to a network of expertise from one of the largest banksin the world.

Since 1956, DWS Investments has pursued a consistent strategy, one that focuses on quality, innovation, performanceand trust. Our global expertise local know-how enables DWS Investments to provide top-rate solutions in investmentmanagement, keeping a finger on the pulse of the market today, to determine what investors want tomorrow.DEUTSCHE ASSET MANAGEMENT, INDIA

The India office was established in the second quarter of 2002 and covers marketing, client servicing and fundmanagement .DeAM, India started its operations in January 2003 with launch of four products across debt and equityasset class. The launch witnessed mobilization of around 500 crores in January 2003, over the last six quarters they

have successfully launched new products and as of august 2004 their product portfolio consists of eight domestic


14/44

mutual funds with assets under management of Rs. 26 crores .They take full advantage of the global researchplatform and a team of five investment professionals in India to manage the mutual funds.

Going forward, they intend to launch more new products in line with opportunities presented by the Indian marketsand core product range requirements. They are also witnessing growth in terms of distribution and people/functionalresources. They are adding people in client services and have also setup a fully operational product developmentfunction. They currently have employee strength of 23 in Deutsche Asset Management (I) Pvt ltd. Their presentproduct offering is as under:

Equity schemesDWS Investment Opportunity Fund DWS Alpha Equity Fund DWS Tax Saving Fund

Debt SchemesDWS Fixed Term Fund DWS Fixed Maturity Plan 385 Days Series DWS Insta Cash Plus Fund DWS Short MaturityFund DWS Premier Bond Fund DWS Dynamic Bond Fund DWS Floating Rate Fund DWS Money Plus Fund

Hybrid SchemesDWS MIP Fund A DWS MIP Fund B

DEUTSCHE MUTUAL FUND

Incorporated 28/10/2002

Ownership Private

Ownership pattern Foreign 100%Domestic 0%

Sponsor Deutsche Asset Management (Asia )s

Total Asset (Rs Cr) 4,688.31 as on 4/30/2006

Equity Funds (Open End) 2

Debt Funds (Open End) 3

Short Term Debt (Open End) 5

Hybrid Funds (Open End) 1

Closed-End Funds 8

Chief Executive Officer Sandeep Dasgupta

Chief Investment Officer

Investor Relations Officer Ashutosh Sharma

Address 2nd Floor,222 Kodak House Dr. D.N RoadFort Mumbai-400001

Telephone 91 [22] 56584600/56584000


15/44

Fax 91 [22] 22074411

URL www.deutschemutual.com

Email [email protected]

HISTORY MUTUAL FUND INDUSTRY IN INDIA:

Mutual Funds in India (1964-2000):The origin of mutual fund industry in India is with the introduction of the concept of mutual fund by UTI in theyear 1963. Though the growth was slow, but it accelerated from the year 1987 when non-UTI players entered theindustry.

The end of millennium marks 36 years of existence of mutual funds in this country. The ride through these 36 yearsis not been smooth. Investor opinion is still divided. While some are for mutual funds others are against it.

UTI commenced its operations from July 1964 .The impetus for establishing a formal institution came from the desireto increase the propensity of the middle and lower groups to save and to invest. UTI came into existence during aperiod marked by great political and economic uncertainty in India. With war on the borders and economic turmoilthat depressed the financial market, entrepreneurs were hesitant to enter capital market. The already existingcompanies found it difficult to raise fresh capital, as investors did not respond adequately to new issues. Earnestefforts were required to canalize savings of the community into productive uses in order to speed up the process of industrial growth. The then Finance Minister, T.T. Krishnamachari set up the idea of a unit trust that would be "opento any person or institution to purchase the units offered by the trust. However, this institution as we see it, is intendedto cater to the needs of individual investors, and even among them as far as possible, to those whose means are small."

His ideas took the form of the Unit Trust of India, an intermediary that would help fulfill the twin objectives of mobilizing retail savings and investing those savings in the capital market and passing on the benefits so accrued tothe small investors.

UTI commenced its operations from July 1964 "with a view to encouraging savings and investment and participationin the income, profits and gains accruing to the Corporation from the acquisition, holding, management and disposal of securities." Different provisions of the UTI Act laid down the structure of management, scope of business, powersand functions of the Trust as well as accounting, disclosures and regulatory requirements for the Trust.

One thing is certain the fund industry is here to stay. The industry was one-entity show till 1986 when theUTI monopoly was broken when SBI and Canbank mutual fund entered the arena. This was followed by theentry of others like BOI, LIC, GIC, etc. sponsored by public sector banks. Starting with an asset base of Rs0.25bn in 1964 the industry has grown at a compounded average growth rate of 26.34% to its current size of Rs1130bn.

The period 1986-1993 can be termed as the period of public sector mutual funds (PMFs). From one player in 1985 thenumber increased to 8 in 1993. The party did not last long. When the private sector made its debut in 1993-94, thestock market was booming.The opening up of the asset management business to private sector in 1993 saw international players like MorganStanley, Jardine Fleming, JP Morgan, George Soros and Capital International along with the host of domestic playersjoin the party. But for the equity funds, the period of 1994-96 was one of the worst in the history of Indian MutualFunds.


16/44

In the past decade, Indian mutual fund industry had seen a dramatic imporvements, both qualitywise as well asquantitywise. Before, the monopoly of the market had seen an ending phase, the Assets Under Management (AUM)was Rs. 67bn. The private sector entry to the fund family rose the AUM to Rs. 470 bn in March 1993 and till April2004, it reached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the deposits of SBIalone, constitute less than 11% of the total deposits held by the Indian banking industry. The main reason of its poor growth is that the mutual fund industry in India is new in the country. Large sections of Indian investors are yet to beintellectuated with the concept. Hence, it is the prime responsibility of all mutual fund companies, to market theproduct correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to the development of the sector.Each phase is briefly described as under.

First Phase - 1964-87Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of Indiaand 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 administrativecontrol in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI hadRs.6,700 crores of assets under management.

Second Phase - 1987-1993 (Entry of Public Sector Funds)Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Canbank Mutual Fund (Dec 87),Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assetsunder management.

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 Indianinvestors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations cameinto being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile KothariPioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.The1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual FundRegulations 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 theindustry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual fundswith total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under managementwas way ahead of other mutual funds.

Fourth Phase - since February 2003This phase had bitter experience for UTI. It was bifurcated into two separate entities. One is the SpecifiedUndertaking of the Unit Trust of India with AUM of Rs.29,835 crores (as on January 2003). The SpecifiedUndertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd,sponsored by SBI, PNB, BOB and LIC. It is 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 AUM and with thesetting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers takingplace among different private sector funds, the mutual fund industry has entered its current phase of consolidation andgrowth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421schemes.

GROWTH IN ASSETS UNDER MANAGEMENT


17/44

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of Indiaeffective from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of Indiahas therefore been excluded from the total assets of the industry as a whole from February 2003 onwards.

Performance of Mutual Funds in India

For 30 years it goaled without a single second player. Though the 1988 year saw some new mutual fund companies,but UTI remained in a monopoly position.

The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarelyunderstood, and of course investing was out of question. But yes, some 24 million shareholders was accustomed withguaranteed high returns by the begining of liberalization of the industry in 1992. This good record of UTI becamemarketing tool for new entrants. The expectations of investors touched the sky in profitability factor. However, peoplewere miles away from the praparedness of risks factor after the liberalization.

The Assets Under Management of UTI was Rs. 67bn. by the end of 1987. Let me concentrate about the performanceof mutual funds in India through figures. From Rs. 67bn. the Assets Under Management rose to Rs. 470 bn. in March1993 and the figure had a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices started falling in the year 1992. Thosedays, the market regulations did not allow portfolio shifts into alternative investments. There were rather no choiceapart from holding the cash or to further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in the secondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock market scandal, the losses bydisinvestments and of course the lack of transparent rules in the whereabout rocked confidence among the investors.Partly owing to a relatively weak stock market performance, mutual funds have not yet recovered, with funds tradingat an average discount of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a transparent and competitve environment in mutualfunds. Some of them were like relaxing investment restrictions into the market, introduction of open-ended funds, andpaving the gateway for mutual funds to launch pension schemes.

The measure was taken to make mutual funds the key instrument for long-term saving. The more the variety offered,the quantitative will be investors. At last to mention, as long as mutual fund companies are performing with lower


18/44

risks and higher profitability within a short span of time, more and more people will be inclined to invest until andunless they are fully educated with the dos and donts of mutual funds.THE INDUSTRY TODAYThe mutual fund industry has enjoyed substantial growth by avoiding the bumps in the road that have occurred inother financial services sectors. The principles that exemplify the industrys longstanding commitment to shareholders ensuring strong regulation, educating investors, and promoting opportunities for long-term investinghave guidedthe industry for the past 50 years, and will continue to do so in the future.

Recent Trends in Mutual Fund Industry

The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fundcompanies and the decline of the companies floated by nationalized banks and smaller private sector players.

Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to thestock market boom prevailing then. These banks did not really understand the mutual fund business and they justviewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from theparent organizations. The performance of most of the schemes floated by these funds was not good. Some schemeshad offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a fewexceptions, they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quicklyrealized that the AMC business is a business, which makes money in the long term and requires deep-pocketedsupport in the intermediate years. Some have sold out to foreign owned companies, some have merged with othersand there is general restructuring going on.

The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They canbe credited with introducing many new practices such as new product innovation, sharp improvement in servicestandards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry


19/44

to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years inresponse to the competition provided by these.

Current Asset Under Management (AUM):

(Source: AMFI Database)Future ScenarioThe asset base will continue to grow at an annual rate of about 30 to 35 % over the next few years as investors shifttheir assets from banks and other traditional avenues. Some of the older public and private sector players will either close shop or be taken over.

Out of ten public sector players five will sell out, close down or merge with stronger players in three to four years. Inthe private sector this trend has already started with two mergers and one takeover. Here too some of them will downtheir shutters in the near future to come.

But this does not mean there is no room for other players. The market will witness a flurry of new players entering the

arena. There will be a large number of offers from various asset management companies in the time to come. Somebig names like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously. One important reason for itis that most major players already have presence here and hence these big names would hardly like to get left behind.

The mutual fund industry is awaiting the introduction of derivatives in India as this would enable it to hedge its risk and this in turn would be reflected in its Net Asset Value (NAV).

SEBI is working out the norms for enabling the existing mutual fund schemes to trade in derivatives. Importantly,many market players have called on the Regulator to initiate the process immediately, so that the mutual funds canimplement the changes that are required to trade in Derivatives.


20/44

Global ScenarioSome basic facts-

1.1. 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.2.2. Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only Fidelity and Capital are non-bank mutual funds in this group.3.3. In the U.S. the total number of schemes is higher than that of the listed companies while in India we have just277 schemes4.4. Internationally, mutual funds are allowed to go short. In India fund managers do not have such leeway.5.5. In the U.S. about 9.7 million households will manage their assets on-line by the year 2003, such a facility isnot yet of avail in India.6.6. On- line trading is a great idea to reduce management expenses from the current 2 % of total assets to about0.75 % of the total assets.7.7. 72% of the core customer base of mutual funds in the top 50-broking firms in the U.S. are expected to tradeon-line by 2003.

(Source: The Financial Express September, 99)

Internationally, online investing continues its meteoric rise. Many have debated about the success of e- commerceand its breakthroughs, but it is true that this aspect of technology could and will change the way financial sectorsfunction. However, mutual funds cannot be left far behind. They have realized the potential of the Internet and areequipping themselves to perform better.

In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have already begun onthe 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 agencythat specializes in internet technology estimates that over the next four years Mutual Fund Assets traded online willgrow ten folds from $ 128 billion to $ 1,227 billion ; whereas equity assets traded on-line will increase during theperiod from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from 34% to 40% during theperiod.

(Source: The Financial Express September ,99 )

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

1. Lower Costs: Distribution of funds will fall in the online trading regime by 2003. Mutual funds could bringdown their administrative costs to 0.75% if trading is done online. As per SEBI regulations, bond funds can charge amaximum of 2.25% and equity funds can charge 2.5% as administrative fees. Therefore if the administrative costs arelow , the benefits are passed down and hence Mutual Funds are able to attract mire investors and increase their assetbase.1.2. Better advice: Mutual funds could provide better advice to their investors through the Net rather than throughthe traditional investment routes where there is an additional channel to deal with the Brokers. Direct dealing with thefund could help the investor with their financial planning.2.3. In India , brokers could get more Net savvy than investors and could help the investors with the knowledgethrough get from the Net.3.4. New investors would prefer online: Mutual funds can target investors who are young individuals and who


21/44

are Net savvy, since servicing them would be easier on the Net.4.5. India has around 1.6 million net users who are prime target for these funds and this could just be thebeginning. 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 thevolatility and will have to maintain sufficient amount of investments which are high liquidity and low yieldinginvestments to honor redemption.5.6. Net based advertisements: There will be more sites involved in ads and promotion of mutual funds. In theU.S. sites like AOL offer detailed research and financial details about the functioning of different funds and their performance statistics. a is witnessing a genesis in this area . There are many sites such as indiainfoline.com andindiafn.com that are doing something similar and providing advice to investors regarding their investments.

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

For instance, a cable manufacturer who needs 100 tons of Copper in the month of January could buy an equivalentamount of copper by investing in a copper fund. For Example, Permanent Portfolio Fund, a conservative U.S. basedfund invests a fixed percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on various bourses aroundthe world, short term and long-term U.S. treasuries etc.

In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real estate funds (investing in realestate and other related assets as well.).In India, the Canada based Dundee mutual fund is planning to launch a goldand 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.

Association of Mutual Fund in India

One of the most effective industry bodies today is probably the Association of Mutual Funds in India (AMFI). Ithas been a forum where mutual funds have been able to present their views, debate and participate in creating their

own regulatory framework. The association was created originally as a body that would lobby with the regulator toensure that the fund viewpoint was heard. Today, it is usually the body that is consulted on matters long beforeregulations are framed, and it often initiates many regulatory changes that prevent malpractices that emerge fromtime to time. This year some of the major initiatives were the framing of the risk management structure, a code of conduct and registration structure for mutual fund intermediaries, which were subsequently mandated by SEBI. Inaddition, this year AMFI was involved in a number of developments and enhancements to the regulatory framework.AMFI works through a number of committees, some of which are standing committees to address areas where thereis a need for constant vigil and improvements and other which are adhoc committees constituted to address specificissues. These committees consist of industry professionals from among the member mutual funds. There is now somethought that AMFI should become a self-regulatory organization since it has worked so effectively as an industrybody.

With the increase in mutual fund players in India, a need for mutual fund association in India was generated tofunction as a non-profit organisation. Association of Mutual Funds in India (AMFI) was incorporated on 22ndAugust, 1995.

AMFI is an apex body of all Asset Management Companies (AMC) which has been registered with SEBI. Till date allthe AMCs are that have launched mutual fund schemes are its members. It functions under the supervision andguidelines of its Board of Directors.

Association of Mutual Funds in India has brought down the Indian Mutual Fund Industry to a professional andhealthy market with ethical lines enhancing and maintaining standards. It follows the principle of both protecting and

promoting the interests of mutual funds as well as their unit holders.


22/44

Mutual Funds give returns in two ways - Capital Appreciation or Dividend Distribution.

1.1. Capital Appreciation : An increase in the value of the units of the fund is known as capital appreciation. Asthe value of individual securities in the fund increases, the fund's unit price increases. An investor can book a profit byselling the units at prices higher than the price at which he bought the units.2.2. Dividend Distribution : The profit earned by the fund is distributed among unit holders in the form of dividends. Dividend distribution again is of two types. It can either be re-invested in the fund or can be on paid to theinvestor.

Types of Mutual Funds Schemes in India

A. By Structure

1.1. Open - Ended Schemes : 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") relatedprices. The key feature of open-end schemes is liquidity.2.2. Close - Ended Schemes : A closed-end fund has a stipulated maturity period which generally ranging from 3to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at thetime of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchangeswhere they 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 Regulationsstipulate that at least one of the two exit routes is provided to the investor.3.3. Interval Schemes : Interval funds combine the features of open-ended and close-ended schemes. They areopen for sale or redemption during pre-determined intervals at NAV related prices.

B. By Investment Objective

1. Growth Schemes : 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, haveoutperformedmost other kind of investments held over the long term. Growth schemes are ideal for investors having a long-termoutlook seeking growth over a period of time.1.2. Income Schemes : The aim of income funds is to provide regular and steady income to investors. Suchschemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.Income Funds are ideal for capital stability and regular income.2.3. Balanced Schemes : A balanced fund is one that has a portfolio comprising debt instruments, convertiblesecurities, preference and equity shares. Their assets are generally held in more or less equal proportions betweendebt/money market securities and equities. By investing in a mix of this nature, balanced funds seek to attain theobjectives of income, moderate capital appreciation and preservation of capital, and are idea for investors with aconservative and long term orientation. In a rising stock market, the NAV of these schemes may not normally keeppace, or fall equally when the market falls. These are ideal for investors looking for a combination of income andmoderate growth.3.4. Money Market Schemes : The aim of money market funds is to provide easy liquidity, preservation of capitaland 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 fluctuatedepending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as ameans to park their surplus funds for short periods.4.5. Gilt Fund: These funds invest exclusively in government securities. Government securities have no defaultrisk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the casewith income or debt oriented schemes. Government Securities (G-secs or Gilts)

Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowingprogram approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity


23/44

ranging from 1 year to 20 years.

Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations(OMO) . OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and therebythe interest rates to desired levels The other types of Government Securities are: Inflation linked bonds Zero coupon bonds State Government Securities (State Loans)

D. Other Schemes1.1. Tax Saving Schemes : These schemes offer tax rebates to the investors under specific provisions of the IndianIncome Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made inEquity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income TaxAct, 1961. The Act also provides opportunities to investors to save capital gains u/s 54EA and 54EB by investing inMutual Funds, provided the capital asset has been sold prior to April 1, 2000 and the amount is invested beforeSeptember 30, 2000.2.2. Index Funds : Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&PNSE 50 index (Nifty), etc. These schemes invest in the securities in the same weightage comprising of an index.NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by thesame percentage due to some factors known as "tracking error" in technical terms. Necessary disclosures in thisregard are made in the offer document of the mutual fund scheme. There are also exchange traded index fundslaunched by the mutual funds which are traded on the stock exchanges.3.3. Sector Funds: Sector funds have portfolios comprising of investments in only one industry or sector of themarket such as Information Technology. Pharmaceuticals or fast moving consumer goods that have recently beenlaunched in India. Since sector funds do not diversify into multiple sectors, they carry a higher level of sector andcompany specific risk than diversified equity funds.4.4. Load and No-Load Funds: A Load Fund is one that charges a commission for entry or exit. That is, eachtime you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to2%. It could be worth paying the load, if the fund has a good performance history. A No-Load Fund is one that doesnot 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.

C. By Risk

1.1. Equity Funds: Equity funds invest a major portion of their corpus in equity shares issued by companies,acquired directly in initial public offerings or through secondary market. Equity funds would be exposed to the equityprice fluctuation risk at the market level, at the industry or sector level and at the company specific level. The issuersof equity shares offer no guaranteed repayment as in case of debt instrument.2.2. Debt Funds: These Funds invest a major portion of their corpus 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. These schemes aim to provide capital preservation and consistentincome, and aren't limited to any one kind of debt. Their returns range from 10 to 13 per cent. Most have agood mix of retail and corporate investors. Among other things, risk arises from the quality of paper held andfrom unjustifiably large exposures to particular companies or sectors (See Side Show: Check List for DebtFund Investors). Income schemes usually offer the best returns among those investing in various forms of debt. However, these superior returns do come at the cost of slightly higher risk.

1.1. Money Market Funds2.2. Hybrid Fund3.3. Real Estate Funds


24/44

Parameters which can be compared across different funds of the same category before investing:1.1. Average Returns: An investor should look at the returns given by the fund over a period of time. Care shouldbe taken to see whether all dividends and bonuses have been accounted for. The higher and more consistent thereturns the better is the fund.2.2. Volatility: In addition to the returns one should also look at the volatility of the returns given by the fund.Volatility is essentially the fluctuation of the returns about the mean return over a period of time. A fund givingconsistent returns is better than a fund whose returns fluctuate a lot.3.3. Corpus size : A Large corpus is generally considered good because large funds have lower costs, as expensesare spread over large assets but at the same time a large corpus has some inefficiencies too. A large corpus maybecome unwieldy and thus difficult to manage.4.4. Performance VIS A VIS Benchmark Other Schemes: An investor should not

only look at the returns given by the scheme he has invested in but also compare it with benchmarks like BSESensex, S & P Nifty, T-bill index etc depending on the asset class he has invested in. For a true picture it isadvised that the returns should also be compared with the returns given by the other funds in the samecategory. Thus it is prudent to consider all the above-mentioned factors while comparing funds and not rely onany one of them in isolation. This is important because as of today there is no standard method for evaluationof un-traded securities.

5. Net Asset Value (NAV): Net Asset Value (NAV) is the actual value of one unit of a given scheme on anygiven business day. The NAV reflects the liquidation value of the fund's investments on that particular day after accounting for allexpenses. It is calculated by deducting all liabilities (except unit capital) of the fund from the realisable value of allassets and dividing it by number of units outstanding.1.6. Load: The charge collected by a Mutual Fund from an investor for selling the units or investing in it. When acharge is collected at the time of entering into the scheme it is called an Entry load or Front-end load or Sales load.The entry load percentage is added to the NAV at the time of allotment of units. An Exit load or Back-end load or Repurchase load is a charge that is collected at the time of redeeming or for transfer between schemes (switch). Theexit load percentage is deducted from the NAV at the time of redemption or transfer between schemes. Some schemesdo not charge any load and are called "No Load Schemes"

Risk In Mutual Fund Investments

Risk is a term that is bandied about almost casually in the financial media. This should come as no surprise. Risk andthe management of risk are at the core of investment success. Without a solid understanding of risk and the principlesfor mitigating it, you might as well be buying a series of lottery tickets.

The basic concept of risk is simple. It is the potential for change in the price or value of some asset or commodity.Note that we do not need to think of risk as restricted to the potential for loss. There is upside risk and there isdownside risk as well.

Types of Risk

After a bond is first issued, it may be traded. If a bond is traded before it matures, it may be worth more or less thanthe price paid for it. The price at which a bond trades can be affected by several types of risk.

1. Interest Rate Risk: Think of the relationship between bond prices and interest rates as opposite ends of aseesaw. When interest rates fall, a bonds value usually rises. When interest rates rise, a bonds value usuallyfalls. The longer a bonds maturity, the more its price tends to fluctuate as market interest rates change.However, while longer-term bonds tend to fluctuate in value more than shorter-term bonds, they also tend tohave higher yields (see page 24) to compensate for this risk. Unlike a bond, a bond mutual fund does not have

a fixed maturity. It does, however, have an average portfolio maturity the average of all the maturity dat


25/44

of the bonds in the funds portfolio.

In general, the longer a funds average portfolio maturity, the more sensitive the funds share price will be to changesin interest rates and the more the funds shares will fluctuate in value.

Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in theinterest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interestrates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to thepossibility of large price movements up or down in debt and money market securities and thereby to possibly largemovements in the NAV.

2. Credit Risk: Credit risk refers to the creditworthiness of the bond issuer and its expected ability to payinterest and to repay its debt. If a bond issuer is unable to repay principal or interest on time, the bond is said to be indefault. A decline in an issuers credit rating, or creditworthiness, can cause a bonds price to decline. Bond fundsholdingthe bond could then experience adecline in their net asset value. In short, how stable is the company or entityto which you lend your money when you invest? How certain are you that it will be able to pay the interest you arepromised, or repay your principal when the investment matures?

1.3. Prepayment Risk: Prepayment risk is the possibility that a bond owner will receive his or her principalinvestment back from the issuer prior to the bonds maturity date. This can happen when interest rates fall, giving theissuer an opportunity to borrow money at a lower interest rate than the one currently being paid. (For example, ahomeowner who refinances a home mortgage to take advantage of decreasing interest rates has prepaid the mortgage.)As a consequence, the bonds owner will not receive any more interest payments from the investment. This alsoforces any reinvestment to be made in a market where prevailing interest rates are lower than when the initialinvestment was made. If a bond fund held a bond that has been prepaid, the fund may have to reinvest the money in abond that will have a lower yield.

2.4. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broadoutside influences. When this happens, the stock prices of both an outstanding, highly profitable company and afledgling corporation may be affected. This change in price is due to "market risk".

3.5. Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceedsthe earnings on your investment, you run the risk that you'll actually be able to buy less, not more. Typically a higher inflation rate means higher interest rates. The interest rates prevailing in an economy at any point of time are nominalinterest rates, i.e., real interest rates plus a premium for expected inflation. Due to inflation, there is a decrease inpurchasing power of every rupee earned on account of interest in the future; therefore the interest rates must include apremium for expected inflation. In the long run, other things being equal, interest rates rise one for one with rise ininflation

4.6. Investment Risks : The sectoral fund schemes, investments will be predominantly in equities of selectcompanies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.

5.7. Liquidity Risk : Thinly traded securities carry the danger of not being easily saleable at or near their realvalues. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.


26/44

6.8. Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefitsmay impact the business prospects of the companies leading to an impact on the investments made by the fund. Sincethe government is the biggest borrower in the debt market, the level of borrowing also determines the interest rates.On the other hand, supply of money is done by the Central Bank by either printing more notes or through its OpenMarket Operations (OMO).

7.9. Demand/Supply of money: When economic growth is high, demand for money increases, pushing theinterest rates up and vice versa. RBI can change the key rates (CRR, SLR and bank rates) depending on the state of the economy or to combat inflation. RBI fixes the bank rate which forms the basis of the structure of interest rates andthe Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determines the availability of credit andthe level of money supply in the economy. (CRR is the percentage of its total deposits a bank has to keep with RBI incash or near cash assets and SLR is the percentage of its total deposits a bank has to keep in approved securities. Thepurpose of CRR and SLR is to keep a bank liquid at any point of time. When banks have to keep low CRR or SLR, itincreases the money available for credit in the system. This eases the pressure on interest rates and interest rates movedown. Also when money is available and that too at lower interest rates, it is given on credit to the industrial sector that pushes the economic growth)

National And International Risks

National and world events can profoundly affect investment markets.

1.1. Economic risk is the danger that the economy as a whole will perform poorly. When the whole economyexperiences a downturn, it affects stock prices, the job market, and the prices of consumer products.2.2. Industry risk is the chance that a specific industry will perform poorly. When problems plague one industry,they affect the individual businesses involved as well as the securities issued by those businesses. They may alsocross over into other industries. For example, after a national downturn in auto sales, the steel industry may suffer financially.3.3. Tax risk is the danger that rising taxes will make investing less attractive. In general, nations with relativelylow tax rates, such as the United States, are popular places for entrepreneurial activities. Businesses that are taxedheavily have less money available for research, expansion, and even dividend payments. Taxes are also levied oncapital gains, dividends and interest. Investors continually seek investments that provide the greatest net after-taxreturns.


27/44

Effect of Market Dynamics on Product ( Mutual Fund) Designing

A. Inflation Rate: Inflation is a situation in the economy where, there is more money chasing less of goods andservices. In other words, it means there is more supply/availability of money in the economy and there is less of goods and services to buy with that increased money. Thus goods and services commands a higher price thanactual as more people are willing to pay a higher value to buy the same goods.

Types of inflation:1.1. Modest Inflation (2-3%)2.2. Creeping Inflation (5-!0%)3.3. Running Inflation (Over 10%)

Ways Of Measuring Inflation1.1. Consumer Price Index (CPI) This measures the consumer prices of a basket of commodities in differentcities.2.2. Wholesale Price Index (WPI) This measures the different prices of a basket of commodities in thewholesale markets.

Causes of inflation1.1. Excess Money Supply2.2. Hoarding & Black Marketing3.3. Excess of demand over supply4.4. Fluctuations in the exchange rate

Effect of inflation1.1. No real growth in the output of the economy per se. Its simply more money chasing few goods and service.2.2. Rising price of raw materials, labour cost, shortage of skilled labour 3.3. Higher indirect taxes imposed by the government4.4. Reduces incentives to save and to invest.5.5. Devaluation in the currency6.6. Fall in the standard of living: Rich become richer and poor become poorer

Control inflation

1.1. monetary policy (increase or decrease the money supply),2.2. fiscal policy (change the amount of taxes and governmental spending), and various controls on prices, tariffs,and monopolies3.3. Encourage measures to increase the productivity in the economy,4.4. Use government borrowing programs to suckout the excess liquidity5.5. Use CRR/SLR margin requirements to maintain the required liquidity in the economy etc6.6. 'progressive' tax systems

Impact on Market

1.1. Investment Impact : Banks must charge higher interest rates on loans to compensate for inflation; thisdecreases net investment via shifting the supply curve for loans back.2.2. Equity market: equities are the best bet to overcome inflation in the long run. "Inflation isnt linked to theequity market as it is to the debt market,". However, it is often found that low-inflation periods are marked by fallingequity prices.3.3. Debt Market Falling inflation is often accompanied by falling interest rates. Declining interest rates will forceyou to manage your debt investments actively. "You will need to spread your monies in several baskets and withvarying degrees of liquidity," known as income ladder. . Invest in instruments of different maturities, so that somereturns can be reinvested in higher paying options as and when the rates go up.


28/44

4.4. International trade : If the rate of inflation is higher than that abroad, a fixed exchange rate will beundermined through a weakening balance of trade. higher rate of domestic inflation than that experienced in other economies can lead to increased imports and reduced exports and can create potential problems for stable exchangerates.5.5. Commodity market: Also suffer from rising in price due to increase in money supply or increasing demand.

B. Interest Rate

The risk to the earning or market value of a portfolio due to uncertain future interest rate. Generally, interest rates and debt security value are inversely related; as interest rates rise, the resale value of adebt security falls, and vice versa Interest rate risk is measured by comparing weighted average duration of asset with weighted average of liabilities. If Asset duration > Liability duration. Increase in the interest rate and vice versa. If average maturity of fund increases interest rate increases and individual investing in long term bond losemore as compared t o the short term fund. If the interest rate fall long term fund will appreciate and short term funddepreciate.

Investor perspective As the interest rate increases the cost of holding the bonds decreases. Since investor is able to realize greater

yield by switching to other investment that reflect increase in interest rate.

Borrower perspective1.1. In a rising rate environment, loan customers may not be able to meet interest payments because of the increasein the size of the payment or a reduction in earnings. The result will be a higher level of problem loans.2.2. Inflationary expectations . Most economies generally exhibit inflation, meaning a given amount of moneybuys fewer goods in the future than it will now. The borrower needs to compensate the lender for this.3.3. If the interest rate falls the people generally start buying the stock to get more at less amount. Theconsumption level increases.

Market perspective1.1. Output and unemployment If interest rates increase then investment decreases, causing a fall in nationalincome. Note that if interest rates are high, that means the broad economy is doing well and thus people will bewilling to borrow money at higher interest rates.2.2. Supply and Demand Interest rate levels are a factor of the supply and demand of credit: an increase in thedemand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely,an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them3.3. Inflation

Inflation will also affect interest rate levels. The higher the rate of inflation, the more interest rates are likely torise. This occurs because lenders will demand higher interest rates as compensation for the decrease in the

purchasing power of the money they will be repaid in the future.

CREDIT RISK

Credit risk, in short, represents how stable is the company or entity to which you lend your money when you invest?How certain are you that it will be able to pay the interest you are promised, or repay your principal when theinvestment matures?The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cash flowsdetermines the Credit Risk faced by you . This credit risk is measured by independent rating agencies likeCRISIL who rate companies and their paper. A AAA rating is considered the safest whereas a D rating is

considered poor credit quality. A well-diversified portfolio might help mitigate this risk.


29/44

There is no credit risk attached with government paper, but that is not the case with debt securities issued bycompanies. The ability of a company to meet its obligations on the debt securities issued by it is determined by thecredit rating given to its debt paper. The higher the credit rating of the instrument, the lower is the chance of the issuer defaulting on the underlying commitments, and vice-versa. A higher-rated debt paper is also normally much moreliquid than lower-rated paper.

While assessment of MFs usually takes the form of performance rankings, based largely on the measurementof risk and return, more sophisticated variants of MF evaluation include credit risk rating (CRR) for debtfunds and grading of management quality of fund houses.While CRR covers only debt funds, management quality gradings (MQG) rate the asset management companies,encompassing all schemes of the same.

The CRR of a debt fund is a symbolic indicator of the relative credit quality of the fund's investment portfolio.Specifically, the ratings address the relative expected loss a fund can suffer because of the default risk. Thefocus of credit risk assessment is on the downside risk. To measure the expected loss (or downside), raters use theirown estimates of the default risk associated with each rating category. The raters make their assessment of the implicitrating of the fund's investments that are not rated. While the credit quality of the securities that the fund is invested inis the focus of the credit risk calibration, a complete evaluation requires the measurement of the likely impact of various qualitative factors associated with the scheme being examined, such as published investment objective; fund'sinvestment guidelines/policies and style; quality of fund's management; its systems and controls; internal appraisalsystems; portfolio composition and its diversification; fund's disclosure standards and accounting quality.

In this context, the portfolio composition of a scheme is of paramount significance. The understanding of the outlook for each sector the fund has invested in is critical. Typically, a fund invests in many sectors and each sector has itsown dynamics and complexities. Further, they could all be in different stages of the business cycle. Understanding thesectoral sensitivities is very important for an analyst to understand the industry's prospects. Sectoral sensitivities, inturn affect the performance of the companies operating in these sectors and consequently their ability to service thedebt. Hence, an analyst would need to make a judgment on whether the extent of portfolio diversification is adequate,keeping in mind the future business scenario.

DEMOGRAPHIC AND PSYCHOGRAPHIC PROFILE

Over the long term, the changing demographic profile of India and the expected improvement in income levels willalso lead to an explosion in demand for a range of goods and services. This is expected to benefit a w

Documents

Mutual Fund-Product Designing