Unit - V Mutual Funds

8/8/2019 Unit - V Mutual Funds

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Lohithkumar B

Mutual Fund



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Few quotes«

We simply attempt to be fearful when others are greedy and to begreedy when others are fearful.

Price is what you pay, value is what you get.

By Warren Buffet

I am more concerned about the return of my money than the return onmy money.

By Will Rogers

Value Investing is solely concerned with getting the most profit at thelowest cost.

Anonymous

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Mutual Fund Concept

A Mutual Fund is a trust that pools the savings of anumber of investors who share a common financial goal.

The money thus collected is then invested in capitalmarket instruments such as shares, debentures and othersecurities.

The income earned through these investments and thecapital appreciation realized are shared by its unit holdersin proportion to the number of units owned by them.

Thus a Mutual Fund is the most suitable investment forthe common man as it offers an opportunity to invest in adiversified, professionally managed basket of securities at arelatively low cost.

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Mutual Fund - BasicsThe definition of a mutual fund is a form of collective investment that pools money from

many investors and invests their money in stocks, bonds, dividends, short-termmoney market instruments, and/or other securities. In a mutual fund, the fundmanager trades the fund's underlying securities, realizing capital gains or losses, andcollects the dividend or interest income. The investment proceeds are then passedalong to the individual investors.

Benefits Diversification helps manage risk

Each share-holder ¶owns· a fraction of the same portfolio (collection of securities)

Returns flow through - dividends, splits

Tax efficient

Distributed by brokers -Charge broking, agency commission

Slab based fee Trailing commissions if investor remains for a longer period

Fund Loads

Front-end Load

Back-end Load (reduces after a period)

No-load funds (usually sold directly to investors)

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Why Mutual Fund?

Investment Barrier

How many can you buy?

Continuous call on market

Information search

Transaction costs

Risk concentration

More stocks exposure for a givensum

Sharing of risk

Professional support

Research and informationefficiency

Ability to take part in privateplacement deals

Transaction cost efficiency

Convenient

Well diversified

Professional fund managementservices at low cost

Tax efficient

Well regulated

BUT, no control over whatsecurities are bought / sold

Expenses are passed on to

investors (for marketing, salesloads, management etc)

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Comparison by nature of investment and by performance(a) Comparison by nature of investment(b) Comparison by Current Performance

Mutual Funds VS. Other Financial Products

Investment

Objective

Risk

Tolerance

Investment

Horizon

Equity Capital Appreciation High Long Term

FI Bonds Income Low Medium to Long Term

Corporate Debenture Income High-Medium-Low Medium to Long Term

Company Fixed Deposits Income High-Medium-Low Medium

Bank Deposits Income Generally Low Flexible-All Terms

PPF Income Low Long Term

Life Insurance Risk Cover Low Long Term

Gold Inflation Hedge Low Long Term

Real Estate Inflation Hedge Low Long Term

Mutual Funds Capital Growth,

Income

High-Medium-Low Flexible-All Terms

The Investor Perspective : FUND VS.,OTHER PRODUCTS

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Banking

Board of

Trustee

Mutual Fund - Concept

Investors - Institutional, Retail

M F Asset management Company

Broker - Agents

Security Issuers / Exchange

RegulatorBroking

/ Custody

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Mutual Fund Interaction Diagram

Suppliers Customers

Environment

Research

Legal &Compliance

Investment

Back-office

MarketingFund

management

Mutual Fund Company

Dealing

Asset

management

Committee /

Top

management

Regulator -

domesticSRO

Financial

Media

Cash

manage

ment

Client Servicing

Back-office Front-office

Info

Vendors

Companies

Industryassociations

Brokerage

Custodians

Banks

Lawyers

Global Admin

managers

Investors

Agents/

Financial

advisors

Info

vendors

Marketmakers

Regulator(s) -

internationalInternet

Stock

exchanges

Call

centres

Accounting

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Mutual Fund Operation Flow Chart

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Working of Mutual Fund

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Mutual Fund Structure

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Mutual Fund StructureThe SEBI (Mutual Funds) Regulations 1993 define a mutual fund (MF) as a fund

established in the form of a trust by a sponsor to raise monies by the Trusteesthrough the sale of units to the public under one or more schemes for investing insecurities in accordance with these regulations.

These regulations have since been replaced by the SEBI (Mutual Funds)Regulations, 1996. The structure indicated by the new regulations is indicated asunder.

A mutual fund comprises four separate entities, namely sponsor, mutual fundtrust, AMC and custodian. The sponsor establishes the mutual fund and gets itregistered with SEBI.

The mutual fund needs to be constituted in the form of a trust and the instrument

of the trust should be in the form of a deed registered under the provisions of theIndian Registration Act, 1908.

The sponsor is required to contribute at least 40% of the minimum net worth (Rs.10 crore) of the asset management company. The board of trustees manages the MFand the sponsor executes the trust deeds in favour of the trustees. It is the job of the

MF trustees to see that schemes floated and managed by the AMC appointed bythe trustees are in accordance with the trust deed and SEBI guidelinesJanuary 11 12



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Organization of a Mutual Fund

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Definitions: Units

Unit Investment Trust:

Diversification: of securities held

Convenience: Trust pays regular income (annual/semi-annual etc)

Low minimum investment: Easy to buy units based on capacity Low expenses: Pre-defined portfolio.

Liquidity: Can be sold any time and converted to cash

Reinvestment: Interest and principal can be reinvested in the same ordifferent portfolio.

Different from mutual funds. Portfolio of securities is pre-defined andfixed for a predetermined period of time.

When the trust matures, the securities held are liquidated and theproceeds are distributed to unit holders in cash/kind.

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Mutual funds - NAV

Net Asset Value

Basis for pricing

For Loads

For Management Fees Calculation

Market Value of securities - (A)

Non capital Liabilities - (B)

Outstanding share capital - (C)

NAV equals ( A - B ) / C

Indicator of fund performance

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Net Asset Value Example

Example: NAV

± XYZ Mutual Fund owns assets totaling$10M and liabilities equal to $500,000 with500,000 shares outstanding

± Therefore, NAV is:$10,000,000 - $500,000 / 500,000

$19/share

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Advantages of Mutual Funds

Professional Management Diversification Convenient Administration

Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated

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Drawbacks of Mutual Funds1. Professional Management- Some funds doesn·t perform in neither the market, as theirmanagement is not dynamic enough to explore the available opportunity in the market, thusmany investors debate over whether or not the so-called professionals are any better than mutualfund or investor him self, for picking up stocks.

2. Costs ² The biggest source of AMC income, is generally from the entry & exit load which they

charge from an investors, at the time of purchase. The mutual fund industries are thus chargingextra cost under layers of jargon.

3. Dilution - Because funds have small holdings across different companies, high returns from afew investments often don't make much difference on the overall return. Dilution is also the resultof a successful fund getting too big. When money pours into funds that have had strong success,the manager often has trouble finding a good investment for all the new money.

4. Taxes - when making decisions about your money, fund managers don't consider yourpersonal tax situation. For example, when a fund manager sells a security, a capital-gain tax istriggered, which affects how profitable the individual is from the sale. It might have been moreadvantageous for the individual to defer the capital gains liability.

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Frequently Used Terms

Net Asset Value (NAV)Net Asset Value is the market value of the assets of thescheme minus its liabilities. The per unit NAV is the netasset value of the scheme divided by the number of units

outstanding on the Valuation Date.

Sale PriceIs the price you pay when you invest in a scheme. Alsocalled Offer Price. It may include a sales load.

Repurchase PriceIs the price at which a close-ended scheme repurchases itsunits and it may include a back-end load. This is also calledBid Price.

» Contd«

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Frequently Used Terms

Redemption PriceIs the price at which open-ended schemes repurchase theirunits and close-ended schemes redeem their units onmaturity. Such prices are NAV related.

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

Repurchase or ¶Back-end· LoadIs a charge collected by a scheme when it buys back theunits from the unit holders.

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Types of Mutual Fund Schemes

Wide variety of Mutual Fund Schemesexist to cater to the needs such as financial

position, risk tolerance and returnexpectations etc.

The figure in the next slide gives an

overview into the existing types ofschemes in the Industry.

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Types of Schemes

By Structure ± Open Ended Schemes ± Close Ended Schemes ± Interval Schemes

By Investment Objectives ± Growth Schemes ± Income Schemes ± Balance Schemes ± Money Market Schemes

Other Schemes ±

Tax Saving Schemes Special Schemes

± Index Schemes ± Sector Specific Schemes

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Types of SchemesType of

Mutual Fund

Schemes

StructureInvestment

Objective

Special

Schemes

Open Ended

Funds

Close Ended

Funds

Interval Funds

Growth Funds

Income Funds

Balanced Funds

Money Market

Funds

Industry Specific

Schemes

Index

SchemesSectoral

Schemes

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Types of Schemes

OPEN ENDED

OPEN FOR ALL THE YEAR

MIN SUBS AMT 50CR

NO DURATION

REFUNDED IF MIN SUBS NOTACHIEVED

REPURCHASED ANY TIME

REDEEMED AT NAV & LOADFACTOR RANGES (4% TO 6%)

AS REPURCHSED SO NOT LISTEDAT STOCK EX

TRADED AS PERMITTED LOT

DIVID MAY /MAY NOT

SWITCHOVER ALLOWED

CLOSE ENDED

OPEN FOR FIXED PERIOD

MIN SUBS AMT 20CR

DURATION (5TO7 YEARS)

REFUNDED IF MIN AMT NOTACHIEVED

MAY BE REPURCHASED(AFTER 2 TO 3 YRS)

REDEMPTION SPECIFIED &

DONE AT NAV - SERVICECHARGE

LISTED AT STOCK EX

DIVID MAY/MAY NOT BE

SWITCHOVER ALLOWED

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Types of Funds (Equity)

1. Growth

- Goal is capital appreciation

2. Maximum Growth

- Highly speculative, seeking large profits from capital gains

a. Often buy stocks of small, unseasoned companiesb. Highly speculative

3. Income- CURRENT income is main objective

a. Interest incomeb. Dividend income

4. Balanced Funds- Objective is to earn both capital gains and current income

a. High-grade common stocks (60 - 75%)b. Fixed income securities (25 - 40%)

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Types of Funds (Bond)

Bond FundsObjective is to invest in bonds

a. Income is primary objective

b. Two advantagesLiquidityDiversification

5. Small Companya. Invest in small companies that usually have sales of$100 million or less.

6. International

a. Can invest in one region or area of the worldb. Can invest in specific country

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Money Market FundsOffers the individual investor access to high-yielding money market instruments without havingto pay $100,000 denominations

a. Bank CD·s

b. Treasury Billsc. Commercial Paper

Types of Funds

Dual FundsClosed-end Funds with two types of shares

a. INCOME shares (Senior) which receive twotimes income as Juniorb. CAPITAL shares (Junior) which receive twotimes the capital gains as Senior

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Specialty Funds - Single Industry

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Specialty Funds - Single Industry

a. Option tradingb. Commodity fundsc. Oil drillingd. Cattle fundse. Electronics

f. Goldg. Chemicalsh. Health

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Special Services

1. Saving PlansInvestor adds funds on a regular basis

2. Automatic Reinvestment PlansDividends and capital gains are reinvested in additional shares

3. Regular IncomeThrough withdrawal plans, the investor can receive periodic

repayment or income Shares or Dollars4. Conversion Privileges

Allows the investor the right to switch from one fund to anothera. Must confine switches within the same family of fundsb. Usually no transfer charges

5. Check Writing Privileges

a. Shareholders have the right to write checks drawn onthe Mutual Fund accountb. Normally checks must be written for at least $500c. Almost all Money Funds have this privilege

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What are the different plans that mutual funds offer?

To cater to different investment needs, Mutual Funds offer various investment options.Some of the important investment options include:

Growth OptionDividend is not paid-out under a Growth Option and the investor realizes only thecapital appreciation on the investment (by an increase in NAV).

Dividend Payout OptionDividends are paid-out to investors under the Dividend Payout Option. However, theNAV of the mutual fund scheme falls to the extent of the dividend payout.

Dividend Re-investment OptionHere the dividend accrued on mutual funds is automatically re-invested in purchasingadditional units in open-ended funds. In most cases mutual funds offer the investor anoption of collecting dividends or re-investing the same.

Retirement Pension OptionSome schemes are linked with retirement pension. Individuals participate in theseoptions for themselves, and corporates participate for their employees.

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What are the different plans that mutual funds offer?

Insurance OptionCertain Mutual Funds offer schemes that provide insurance cover toinvestors as an added benefit.

Systematic Investment Plan (SIP)Here the investor is given the option of preparing a pre-determined numberof post-dated cheques in favour of the fund. The investor is allotted units ona predetermined date specified in the offer document at the applicable NAV.

Systematic Withdrawal Plan (SWP)As opposed to the Systematic Investment Plan, the Systematic WithdrawalPlan allows the investor the facility to withdraw a pre-determined amount /units from his fund at a pre-determined interval. The investor's units will beredeemed at the applicable NAV as on that day.

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Choosing a mutual fund

The first step to investing in Mutual Fund is to definethe objective of investing. You should clearly lay downthe purpose for which you desire to invest. There areseveral schemes tailor made to meet certain personal

financial goals (children's education, marriage,retirement etc.) which can be availed of. You shoulddefine the tenure of investment and the risk appetiteyou have. Thereafter, you can select a fund type thatbest meets your need i.e. income schemes, liquid

schemes, tax saving schemes, equity schemes etc. Giventhe plethora of fund options available to you, you canthen choose the particular fund that you are comfortablewith.

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Choosing a mutual fundYou can choose the fund on various criteria but primarily these

can be the following:

The track record of performance of schemes over the lastfew years managed by the fund

Quality of management and administration

Parentage of the Mutual Fund Quality and adequacy of disclosures Service levels The price at which you can enter/exit (i.e. entry load /

exit load) the scheme and its impact on overall return

The market price of the units of the scheme (whereavailable) to see the discount/premium that the marketassigns to the stated NAV of the scheme

Independent rating of the schemes, if available

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Choosing a mutual fund

Investment Objective: Investor Needs

a) Regular Incomeb) Pure growth oriented

c) Balanced fundd) Tax savinge) Period of schemef) Liquidityg) Transparency in fund accounting

h) Investor service

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Efficiency of Mutual Funds

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Stability Liquidity

Growth

Credibility of issuer

Returns

Mutual fund performance jinx

Management approach

Market impact costs

Efficiency

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Efficiency of Mutual Funds

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Average Annual Total Return(for periods ending December 31, 1997)

Series 1 Year 3 Years 5 Years 10 Years

Standard & Poor's 500 Index 33.35%/yr. 31.13%/yr. 20.25%/yr. 18.04%/yr.

Domestic Stock Funds 24.30%/yr. 24.78%/yr. 16.69%/yr. 15.78%/yr.

Average Annual Shortfall 9.05%/yr. 6.35%/yr. 3.56%/yr. 2.26%/yr.

Source: Morningstar (2,726 mutual funds with collective assets of $1.5 trillion)

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Risk Return Matrix




Risk Return Matrix

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The risk return trade-off indicates that if investor is willing to take higherrisk then correspondingly he can expect higher returns and vise versa if hepertains to lower risk instruments, which would be satisfied by lowerreturns. For example, if an investors opt for bank FD, which providemoderate return with minimal risk. But as he moves ahead to invest in

capital protected funds and the profit-bonds that give out more returnwhich is slightly higher as compared to the bank deposits but the riskinvolved also increases in the same proportion.

Thus investors choose mutual funds as their primary means of investing,as Mutual funds provide professional management, diversification,

convenience and liquidity. That doesn·t mean mutual fund investmentsrisk free. This is because the money that is pooled in are not invested onlyin debts funds which are less riskier but are also invested in the stockmarkets which involves a higher risk but can expect higher returns. Hedgefund involves a very high risk since it is mostly traded in the derivativesmarket which is considered very volatile.

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What are the types of risks?

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Risk is an inherent aspect of every form of investment.For Mutual Fund investments, risks would includevariability, or period-by-period fluctuations in totalreturn. The value of the scheme's investments may beaffected by factors affecting capital markets such asprice and volume volatility in the stock markets,interest rates, currency exchange rates, foreigninvestment, changes in government policy, political,

economic or other developments.

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Market risk: At times the prices or yields of all the securities in a particular marketrise or fall due to broad outside influences. When this happens, the stock prices ofboth an outstanding, highly profitable company and a fledgling corporation may beaffected. This change in price is due to 'market risk'.

Inflation risk: Sometimes referred to as 'loss of purchasing power'. Whenever therate of inflation exceeds the earnings on your investment, you run the risk that you'll

actually be able to buy less, not more.

Credit risk: In short, how stable is the company or entity to which you lend yourmoney when you invest? How certain are you that it will be able to pay the interestyou are promised, or repay your principal when the investment matures?

Interest rate risk: Changing interest rates affect both equities and bonds in manyways. Bond prices are influenced by movements in the interest rates in the financialsystem. Generally, when interest rates rise, prices of the securities fall and wheninterest rates drop, the prices increase. Interest rate movements in the Indian debtmarkets can be volatile leading to the possibility of large price movements up ordown in debt and money market securities and thereby to possibly large movementsin the NAV.

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Investment risks: In the sectoral fund schemes, investments will bepredominantly in equities of select companies in the particularsectors. Accordingly, the NAV of the schemes are linked to the equityperformance of such companies and may be more volatile than amore diversified portfolio of equities.

Liquidity risk: Thinly traded securities carry the danger of not beingeasily saleable at or near their real values. The fund manager maytherefore be unable to quickly sell an illiquid bond and this mightaffect the price of the fund unfavorably. Liquidity risk ischaracteristic of the Indian fixed income market.

Changes in the government policy: Changes in Government policyespecially in regard to the tax benefits may impact the businessprospects of the companies leading to an impact on the investmentsmade by the fund.

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Regulatory Authorities (SEBI)

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The Indian mutual fund industry witnessed robust growthand stricter regulation from SEBI since 1996. Themobilization of funds and the number of players operatingin the industry reached new heights as investors startedshowing more interest in mutual funds. Safeguarding theinterests of investors is one of the duties of SEBI.Consequently, SEBI (Mutual Funds) Regulations, 1996 andcertain other guidelines have been issued by SEBI that setsuniform standards for all mutual funds in India.



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Regulatory Authorities (SEBI)

To protect the interest of the investors, SEBI formulates policies andregulates the mutual funds. It notified regulations in 1993 (fully revisedin 1996) and issues guidelines from time to time. MF either promoted bypublic or by private sector entities including one promoted by foreignentities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the fundsby making investments in various types of securities. Custodian,registered with SEBI, holds the securities of various schemes of the fundin its custody.

According to SEBI Regulations, two thirds of the directors of TrusteeCompany or board of trustees must be independent.

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MFs in India are governed by the guidelines like

Unit Trust of India Act, 1963 and UTI Guidelines Guidelines from the central government

Regulatory bodies guidelines e.g., RBI guidelines forMFs.

SEBI (MUTUAL FUNDS) Regulations, 1993 replaced in1996.

Relevant provisions of the Companies Act, 1956

The Indian Trust Act. 1882.

The Income Tax Act, 1961.

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SEBI Guidelines

Investors in mutual fund schemes are exposed to high riskboth of default and market risk. Hence there is a need for astrong regulatory framework for mutual fund activities.

SEBI (Mutual Fund) Regulations, January 1993 ² A

formal regulatory framework for all mutual funds exceptUTI.

SEBI new regulations 1996 eliminated many of therigidities contained in the 1993 regulations andintroduced new provisions like: Disclosure, Transparency,Obligations on the part of MFs, AMC·s, Trustees and KeyPersonnel.

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SEBI(MUTUALFUND)Regulation - 1993

1.Registration of Mutual Fund2. Constitution and Management of Mutual Fund

(a) Trustees

(b) Asset Management Company (AMC)

(c) Custodian3. Schemes of Mutual Funds

4. Investment Objectives, Restrictions and ValuationPolicies.

5. General Obligation of Mutual Fund6. Inspection and Disciplinary Procedures

7. Procedure for Action in Case of Default

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Limit on Investments

1. No mutual fund scheme is allowed to invest more than5% of its corpus in the shares of a particular company.

2. All the schemes of MF put together cannot invest inmore than 5% of the paid up capital of a particular

company.3. It cannot invest more than 15% of its funds in a

particular industry share, unless it is clearly specifiedin the issue document.

4. To make sure that the mutual fund investment isproperly diversified.

5. Not manipulate the prices of their group companies bythe sponsored entities.

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SEBI(Mutual Funds) Regulations, 1996Mutual Funds in India are governed by the SEBI (Mutual Fund)

Regulations 1996 as amended from time to time. The contents of the actare discussed as hereunder:

- Preliminary- Registration of Mutual Fund

- Constitution and Management of Mutual Fundand Operation of Trustees, etc.

- Constitution and Management of Asset- Management Company and Custodian

- Schemes of Mutual Fund- InvestmentObjectives and Valuation Policies- GeneralObligations- Inspection and Audit- Procedure for Action in Case of Default



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SEBI(Mutual Funds) Regulations, 1996

Schedule I: Forms

Form A - Application for the Grant of Registration of Mutual Fund

Form B - Certificate of Registration

Form C - Trusteeship of the Mutual Fund

Form D - Asset Management Company

Schedule II: Fees

Schedule III: Contents of the Trust DeedSchedule IV: Contents of the Investment Agreement

Schedule V: Code of Conduct

Schedule VI: Advertisement Code

Schedule VII: Restrictions on Investments

Schedule VIII: Investment Valuation NormsSchedule IX: Accounting Policies and Standards

Schedule X: Initial Issue Expenses

Schedule XI: Annual Report

Schedule XII: Half-Yearly Financial Results




SEBI (Mutual Funds) (Amendment) Regulations, 2006



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1. All MFs must have approval of Controller ofCapital Issues and with SEBI with in 90 days ofestablishment.

2. Sponsor Institutions ² corpus ² 2 crores- later

converted to scheme subscription.3. Such funds shall not take any activity relating toimmoveable property except for their ownpurpose.

4. Restrictions in investment of shares (5%)5. Not keep deposits with the other companies.6. 80% income will be distributed to shareholders.7. Separate accounts for all the schemes.

Guidelines Issued by the MoF of GoI

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Regulatory Framework

Well Regulated - Strictly Regulated Industry.

Regulation is comprehensive, sensitive and supportiveof healthy development of industry. In most areas itmatches with the best internationally.

Pro-active initiatives from the regulator. The Regulationis constantly reviewed and amended periodically.Guidelines on a variety of subjects such as valuation,

benchmarking, disclosure issued regularly to match withbest practices.

Yearly inspection of all mutual funds ² a support to thehealthy development.

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Regulatory Framework

Self regulatory process is in built in Mutual Fund structure and set up.

While Mutual Fund functions in terms of the Trust Deed the AMC functions in terms of the Investment Management Agreement as approved by SEBI.

Separate Auditors for Asset Management Company and for Mutual Fund.

Trustees are first level Regulators.

Their general and specific duties and responsibilities are well spelt out.

Predominance of independent (2/3rd) trustees - Role of independent Trustees.

Quarterly compliance test and Certification by Trustees.

AMCs to record investment decisions and investment management process.

Partner relationship of SEBI with AMFI close interactive working style

AMFI acts as a catalyst and initiator of many new standards and refinements of systemsand rocedures.

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To promote and protect the interests of Mutual Funds andtheir unit holders.

To define and maintain high ethical and professionalstandards in the industry.

To enhance public awareness of Mutual Funds.

To represent industry views and suggestions to theRegulator, Government and the Central Bank

Role and activities of ASSOCIATION OFMUTUAL FUNDS IN INDIA

AMFI is the industry association of all mutual funds operating in India. It isnot a Self-Regulatory Organization. It is a non-profit organization whoseobjectives are:

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Role and activities of ASSOCIATION OFMUTUAL FUNDS IN INDIA

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The Association of Mutual Funds in India (AMFI)reassures the investors in units of mutual funds that themutual funds function within the strict regulatoryframework. Its objective is to increase public awareness

of the mutual fund industry.AMFI also is engaged in upgrading professionalstandards and in promoting best industry practices indiverse areas such as valuation, disclosure,transparency etc.



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Improvements in Operational Area

Standard Offer document with comparative data. Refinement in the Calculation of NAV.

Daily release of NAVs before 8.00 P.M and posting themon AMFI website.

Uniform methodology for Valuation of Non-TradedSecurities ² debt & equities.

Valuation of Government Securities.

Setting up Valuation Committee at the AMCs level.

Identification, Provisioning and Disclosure of Non-Performing Assets.

Disclosure standards - Mandatory disclosure of fullportfolio twice a year.

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Standard Offer document with comparative data. Refinement in the Calculation of NAV.

Daily release of NAVs before 8.00 P.M and posting themon AMFI website.

Uniform methodology for Valuation of Non-TradedSecurities ² debt & equities.

Valuation of Government Securities.

Setting up Valuation Committee at the AMCs level.

Identification, Provisioning and Disclosure of Non-Performing Assets.

Disclosure standards - Mandatory disclosure of fullportfolio twice a year.

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Quarterly and even monthly disclosure of portfolio by manyfunds.

Keeping investors informed ² Audited reports to be sent toinvestors within a stipulated time ² periodic communicationto investors.

Release of redemption cheques within stipulated time andpayment of penal interests for delayed payment.

Advertisement guidelines- general and those relating toPerformance Advertisement.

Adoption of technology for quicker service - Online

Transaction. Suitable benchmarks being developed for different types of

schemes. Minimum level of risk management system being worked

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Mutual Funds Industry in India

The origin of mutual fund industry in India is with theintroduction of the concept of mutual fund by UTI in theyear 1963. Though the growth was slow, but it acceleratedfrom the year 1987 when non-UTI players entered theindustry.

In the past decade, Indian mutual fund industry had seen adramatic improvements, both quality wise as well asquantity wise. 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 familyrose the AUM to Rs. 470 bn in March 1993 and till April2004, it reached the height of 1,540 bn.

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100% growth in the last 6 years.

Number of foreign AMC's are in the queue to enter theIndian markets like Fidelity Investments, US based, withover US$1trillion assets under management worldwide

We have approximately 29 mutual funds which is muchless than US having more than 800. There is a big scope forexpansion.

Mutual fund can penetrate rural market like the Indianinsurance industry with simple and limited products.

SEBI allowing the mfs to launch commodity mutual funds.

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The mutual fund industry can be broadly put into four phasesaccording to the development of the sector. Each phase is brieflydescribed as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act ofParliament. It was set up by the Reserve Bank of India and functionedunder the Regulatory and administrative control of the Reserve Bankof India. In 1978 UTI was de-linked from the RBI and the IndustrialDevelopment Bank of India (IDBI) took over the regulatory and

administrative control in place of RBI. The first scheme launched byUTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700crores of assets under management.

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SecondP

hase -19

87-199

3 (E

ntry ofP

ublic Sector Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Can bank MutualFund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in 1989 and GIC in1990. The end of 1993 marked Rs.47,004 as assets under 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 fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was the yearin which the first Mutual Fund Regulations came into being, under which all mutual funds,except UTI were to be registered and governed.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive andrevised Mutual Fund Regulations in 1996. The industry now functions under the SEBI(Mutual Fund) Regulations 1996.

The number of mutual fund houses went on increasing, with many foreign mutual fundssetting up funds in India and also the industry has witnessed several mergers andacquisitions

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FourthP

hase - since February 200

3

This phase had bitter experience for UTI. It was bifurcated into two separateentities. One is the Specified Undertaking of the Unit Trust of India with AUM ofRs.29,835 crores (as on January 2003). The Specified Undertaking of Unit Trust ofIndia, functioning under an administrator and under the rules framed byGovernment of India and does not come under the purview of the Mutual FundRegulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. Itis registered with SEBI and functions under the Mutual Fund Regulations. Withthe bifurcation of the erstwhile UTI which had in March 2000 more thanRs.76,000 crores of AUM and with the setting up of a UTI Mutual Fund,

conforming to the SEBI Mutual Fund Regulations, and with recent mergerstaking place among different private sector funds, the mutual fund industry hasentered its current phase of consolidation and growth. As at the end ofSeptember, 2004, there were 29 funds, which manage assets of Rs.153108 croresunder 421 schemes.

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GROWTH IN ASSETS UNDER MANAGEMENT

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145657

47733

134554564126139417225 65

100594

6243070623

90587

103453

79464

0

20000

40000

60000

80000

100000

120000

140000

160000

6 5 6 9 7 4 7 9 8 4 8 7 8 9 9 3 9 4 9 9 2 0 0 0 2 0 0 1

2 0 0 2 2 0 0 3

' F e b - 2 0 0 4

Growth in Assets Under Management

Compounded Annual Growth Rate -1965 to Feb 2004. 24.20%

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Emerging issues in mutual funds in India

1. Rating of Mutual Fund schemes2. New norms for classification of NPA

MALEGAN COMMITTEE RECOMMENDATIONS

Principal and interest is not received for six months ² declare it as

NPADisclose NPAs by MF on half yearly basis to unit holders

3. Influence of technology

4. Indices for mutual funds(4 indices for gilt funds & other forbalanced funds, monthly income plans, liquid plans)

5. Product innovation

6. Fund of Funds

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Mutual funds - Global Scenario

Some basic facts :The money market mutual fund segment has a total corpus of $ 1.48trillion in the U.S. against a corpus of $ 100 million in India.

Out of the top 10 mutual funds worldwide, eight are bank- sponsored.

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

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

In the U.S. about 9.7 million households will manage their assets on-lineby the year 2003, such a facility is not yet of avail in India.

On- line trading is a great idea to reduce management expenses fromthe current 2 % of total assets to about 0.75 % of the total assets.



Thank you

Documents

Unit - V Mutual Funds