Mutual fund analysis on debt schemes with special reference to kotak bond fund

International Management Institute Kolkata

Summer Internship Report

On

Analyzing the Debt Schemes of Kotak Asset management company limited with Special Reference to Kotak Bond Fund

Name: Sourav Kumar Mahato

PGDM 2015-17

Kotak Mahindra Asset Management Company Limited

Corporate Internship Mentor

Name: Deepak Kumar Kaushik

IMI-K Faculty Mentor

Name: Chanchal Chatterjee

Start Date for internship: 01st April 2016

End Date Internship: 10th June 206

Report Submission Date: 25th June 2016

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Serial Number Contents Page number1 Certificate by the Mentor 32 Declaration Certificate 43 Acknowledgement 54 Objective of the Report 65 Selection of Topic 66 Objective of the Study 77 Methodology of the Project 78 Scope of the Study 79 Limitation of the study 8

10 Kotak Mahindra Group of Companies 811 Vision and mission 912 About Debt Portfolio Management 913 Classification of Debt Securities 914 Debt Market Instruments 10-1115 Basic Characteristics of Debt Securities 11-1216 Risk in Investing in Bonds 1317 Investment Policies and Restrictions 1318 Minimum Portfolio Diversification Norms 1419 Introduction to Mutual Fund 1520 Emergence of Mutual Fund 1521 History of Mutual Fund 15-2022 Mutual Fund Framework 2123 Disadvantage of Mutual Fund 2324 Classification of Mutual Fund 2425 Offer document by Fund Houses 2626 Accounting for Mutual Fund 2727 Measuring and Evaluating Funds Performance 3028 The Risk-Return Tradeoff 3229 Debt market review 3330 About Kotak Bond Fund 3431 Fund Overview 3432 Investment objective and Strategy 3533 Asset allocation and 3634 Return Matrix 3735 Return Analysis 3836 Portfolio action (FY2015-2016) 40-4737 Monthly dividend (FY2015-2016) 4838 Glossary 49-5239 Bibliography 53

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Certificate by Mentor

This is to certify that the contents of this report entitled “Mutual Fund Analysis on Debt

Schemes with Special Reference to Kotak Bond Fund” by

______________________________________ submitted to International Management

Institute Kolkata for the Partial fulfilment of the requirement of the Degree “Post Graduate

Diploma in Management (PGDM)” is the original Work which has been carried out under my

supervision. I hereby certify the authenticity of the Data and Facts mentioned in the report.

Deepak Kumar Kaushik Date: - ……………………….

(Manager)

Kotak Mahindra Asset Management Company Limited

235/2A, A. J. C. Bose Road, 3rd Floor, the Millennium

Kolkata – 700020.

+91 - 33 - 2282 2411/14

+91 - 33 - 2282 1102

Mobile- 9007977767/9830988500,

[email protected]

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Declaration

I, Sourav Kumar Mahato (15PGDM074), to the best of our knowledge hereby declare that the

project report entitled “Mutual Fund Analysis on Debt Schemes with Special Reference to Kotak

Bond Fund” submitted to the International Management Institute, Kolkata is a record of an

Original work done by us under the guidance of Dr. Chanchal Chatterjee. This Project work is

submitted in the partial fulfilment of the academic requirement.

The project report has been submitted to Kotak Mutual Fund and International Management

Institute Kolkata.

Date: -……………......... Sourav Kumar Mahato (15PGDM074)

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Acknowledgement

It is a matter of great pleasure for us in submitting the project report on “Mutual Fund Analysis

on Debt Schemes with Special Reference to Kotak Bond Fund” for the fulfilment of the

requirement of the academic course.

This successful project report has been made possible through the direct cooperation and

guidance of various people for whom we wish to express our appreciation and deep gratitude.

Words seem to be inadequate to express our thanks to Mr. Deepak Kaushik for his valuable

guidance, untiring efforts and immense encouragement during the entire course of the study.

We are highly obliged to Mr. Sachin Sood, Mr. Anupam Patnaik, Mr. Somnath Chakraborty,

Mr. Krishanu Bannerjee, Mr. Kamal Agarwal, and other members of Kotak Mutual Fund

Kolkata Office, who had helped us to procure primary data to complete our project.

I would like to thank Dr. Chanchal Chatterjee for helping me completing the project.

Last but not the least I am very grateful to all those who helped us in one way or the other at

every stage of our work.

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Objective of the Project

Theoretical Knowledge without Practical Experience is of no use. So, without Practical implementations, theory remains no use. Hence we need to gain the Practical Experience. And what better would be, then a Project work for the same.

Also as a part of our PGDM curriculum, we need to undergo for the Summer Internship programmed for minimum of 8 Weeks, in a company.

I selected area of MUTUAL FUND INDUSTRY, which pools the funds & reduces risk by investing in different diversified assets. I studied as to how this industry proves to an option for the investors, by studying the performance of mutual funds for few months considering their Net Asset Values.

Hence this is a project work on a “Debt Portfolio Analysis with special reference to Kotak Bond Fund”.

Selection of TopicGenerally, when we decide to study the investment options available in today’s complex & risky scenario, we should thoroughly evaluate the option upon various factors. These factors should include:

The Past Performance of the option under study Risk adjusted returns from the invested plan The Economic Factors Fund House

When observed the above parameters for the evolution of The Financial Performance of the option under study, then immediate concept that clicks our mind is MUTUAL FUNDS. So for this, I have selected to study Debt Scheme Analysis as investment option.

Study of Debt Fund includes: -

Study of Debt, Bonds, Securities, etc. Risk Measurement & risk diversifications Analyzing a Particular Scheme.

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Objective of the Study How to find the RIGHT SCHEME to buy & Redeem at RIGHT TIME, thereby mobilizing the

saving aptly. How to get good return on investment How to achieve Capital appreciations To analyze the performance of Various Schemes of the Fund House.

Methodology of the ProjectDefining objective won’t suffice unless & until a proper methodology is to achieve the objectives.

1. The methodology of the project here is to analyze the investments Opportunities available for the investors & study the returns & risk involved in various investment opportunities.

2. Study of investment management, risk management & portfolio Diversification.3. The methodology of the project here is to analyze the Mutual Fund performance based

on: - NAV (Net Asset Value): - It tracked the daily NAV’s of the Mutual Funds to compute

the performance. Total Return Basis: By taking into account dividends distributed by the funds

between the two NAV s change to arrive at a total return. Portfolio turnover Ratio: This means the Amount of Buying & selling done by a fund. Study Financial & Legal obligations of Mutual Funds.

Scope of the StudyThe study encompasses different aspects from point of view of investors as follows.

1. Investment portfolio selection2. types of Mutual Funds3. Expected returns on investment4. Investment in Tax Saving Schemes.

Despite various problems, India Could still have a lot of profitable opportunities to offer in this sector. And given the fact it is the major emerging market to open up. It is equally important that, even if its various Fund Investments can harness a small part of the total funds available internationally, Indian Foreign Exchange reserves will shoot up. According to World Bank Study, portfolio investment in the emerging markets will rise (Actual figures are yet not published for the same).

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Limitations of the Study This project is not funded one, hence it gets restricted to a mere in depth study & few

guidelines for investors. This study is carried out in pursuance of curriculum MBA, which is mandatory for period

of two months; hence exhaustive data is not available upon which conclusion can be relied upon.

NAV are prone to environmental factors 7 which would influence the value during trading. Investments in Securities carry risks & Mutual Fund units are no exception.

Risk being erosion in the Market value of the Investment of decrease in the percentage dividends declared by the Mutual Fund. The risk factors inherent in a Mutual Fund Schemes are the schemes, market risk, & the investment experience of the Asset Management Company.

Factors affecting the Market Price of Investment may be due to Market forces, performance of the companies, Govt. Policies, Interest rates & so on.

Study for all the existing Mutual Fund Schemes is not feasible, Sample schemes of all Mutual Fund Types are considered for the Study.

Kotak Mahindra Group of CompaniesThis Group Consists Following Companies: -

Kotak Mahindra Bank Limited (KMBL) Kotak Mahindra Old Mutual Life Insurance Ltd Kotak Securities Kotak Mahindra General Insurance Company Ltd. Kotak Investment Banking (KMCC) Kotak Mahindra Prime Ltd(KMPL) Kotak International Business Kotak Private Equity Group(KPEG) Kotak Realty Fund Kotak Mahindra Asset Management Company(KMAMC): - Kotak Mahindra Asset

Management Company offers a complete bouquet of asset management products and services that are designed to suit the diverse risk return profiles of each and every type of investor. KMAMC and Kotak Mahindra Bank are the sponsors of Kotak Mahindra Pension Fund Ltd, which has been appointed as one of six fund managers to manage pension funds under the New Pension Scheme (NPS).

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Company’s Vision and MissionTo be the most trusted Global Indian Financial Services brand and the most preferred financial services employer with focus on creating value.

The Global Indian Financial Services Brand: -Our customers will enjoy the benefits of dealing with a global Indian brand that best understands their needs and delivers customized pragmatic solutions across multiple platforms.

We will be a world class Indian financial services group. Our technology and best practices will be bench-marked along international lines while our understanding of customers will be uniquely Indian.

We will be more than a repository of our customers' savings. We, the group, will be single window to every financial service in a customer's universe.

The Global Indian Financial Service Brand The Most Preferred Financial Employer in Financial Services The Most Trusted Financial Services Company Value Creation

DEBT PORTFOLIO MANAGEMENT

Debt portfolio has to contend with the construction & management of portfolio debt instrument, the primary objective of generating income. Just as the inquiry fund manager has to go through a stock selection process, a debt fund manager has to select from whole universe of debt securities he wants to invest in.

Classification of Debt Securities

Many instruments give regular income. However, in the context of debt mutual funds, manager invest only in market-trader instrument (not in loans as done by the bank) debt instrument may be secured by the assets of the borrowers as in case of corporate, or be unsecured as is the case with Indian Financial Bond.A Debt is issued by a borrower & is often known by the issuer category thus giving us Government security & Corporate Securities or FI Bonds. Debt instrument are also distinguished by their maturity profile. Thus, instrument issued with short term maturities, typically under one year maturities are classified as Money Market Securities instrument carrying Long then one year maturities are generally called Debt Securities.Most debt securities are interested bearing. However, there are securities that are discounted securities or zero coupon bonds that are generally fixed that pay interest on a Floating Rate basis. There are lots of new instruments coming in the debt markets.

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Instruments in the Indian Debt MarketThe objective of a debt is to provide investors with a stable income stream. Hence, a debt fund invests mainly in instrument that yields a fixed rate of return & where the principal is secured. The debt market in Indian offers the following instruments for investment for by Mutual Funds.

Certificates of DepositsCertificates of Deposit (CD) are issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Banks CDs have a maturity period of 91 days to one year, while those issued by FI s have maturities between one & three years.

Collateralized Borrowing and Lending Obligation (CBLO)A collateralized borrowing and lending obligation (CBLO) is a money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of the loan. Collateralized borrowing and lending obligations (CBLOs) are used by those who have been phased out of or heavily restricted in the interbank call money market.

Commercial PaperCommercial Paper (CP) is a short term, unsecured issued by corporate bodies (Public & Private) to meet short-term working capital requirement. Maturity varies between 3 months & 1 year. This instrument can be incorporated in Indian. CP s can be issued to NRI s on non-repairable & non- transferable basis.

Corporate DebenturesThe debentures are usually issued by manufacturing companies with physical assets, as secured instruments; in the form of certificates they are assigned a credit rating by rating agencies. Trading in Debentures is generally based on the current yield & market values are based on yield of maturity. All publicly issued Debentures is listed on exchange.

Floating Rate BondsThese are short to medium term bearing instruments issued by the financial intermediaries & corporate. The typical maturity of these bonds is 3 to 5 years. FRB s issued by Financial Institutions are generally unsecured while those from private corporate are secured. The FRB s are pegged to different reference as much as T- bill or bank deposits rates. The FRB s issued by the Government of Indians are in the form of Stock Certified of issued by credit to SGL accounts maintained by the RBI.

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Government SecurityThese are medium to long term interest bearing obligations issued through the RBI by the Government of India & State Governments. The RBI decides the cut-off on the basis of bids received during the auctions. These are issued where the rates are pre-specified & the investor s only bids for the quality. In most cases, the coupon is paid semiannually with bullet redemption features.A large part of the trading is concentrated in those government securities that are eligible for repost (repurchase) transition, i.e. sale of a security with a parallel agreement to repurchase the same at a future date. The RBI acts as the depository; its public debt office maintains an SGL account for various banks & Financial Institution, & issues or transfers the securities in the form of book entries made in SGL accounts. If a fund does not have an SGL account, it may open a constitution account with any RBI- registered bank.

Treasury BillsT- Bills are shortly obligation issued through the RBI by the Government of India at a discount the RBI Issues T-Bills for different tenures: 14 days, 91 days & 364 days. These treasury bills are issued through an auction procedure. The yield is determined on the basis bids tendered & accepted.

Bank/ FI BondMost of the institutional bonds are in the form of promissory notes transferable by endorsement & delivery. These are negotiable, issued by the Financial Institution such as IDB/ ICICI/ IFCI or by commercial bank. These instruments have been issued both as regular income bonds & as discounted long term instruments (deep discount bonds).

Public Sector Undertaking (PSU) BondsPSU Bonds are medium & long term obligation issued by Public sector companies in which the government shareholding is generally greater than 51%. Some PSU Bonds carry tax exemptions. The maximum maturity is 5 years for Taxable bonds & 7 years for Tax- Free Bonds. PSU bonds are generally, not guaranteed by the government & are in the form of promissory notes transferable by endorsement & delivery. PSU bonds in Electronic form (Demat) are eligible report transactions.

Basic Characteristics of Bonds or Debt SecurityA debt fund or a bond fund generally invest a large part of its corpus in longer term fixed income in debit securities issued by government, companies or Banks/ FI s. A small part is invested in money market. In Indian context, long dated government securities, corporate debentures & FI Bonds from the bulk of debt fund portfolios.

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Bonds have the following four keys characteristics set at the time of issue: Par Value: This is the principal amount that investors will be paid upon Maturity of the

bonds, & is also known as the face value. Coupon: This is the annual rate of interest paid on the par value of the Bond to the

investor. Maturity: This refers to the term of the bond that is, the date on which the Bond that is,

the date on which the issuer has to repay the principle amount of the Bond. Call or Provision: These are included in some bond contracts to allow the issuer the

option to redeem the bonds before Maturity thereby allowing refinance of debt at lower interest rates.

Measuring of Bond Yields: Returns on a fixed income security is generally computed in the form of Current Yield or a Yield to Maturity.Current Yield: This relates interest on a Bond to its Current Market Price by dividing the annual coupon interest by the current market price.

Yield to Maturity (YTM): This is a sophisticated technique of bond analysis. Posen defines YTM (also known as the bonds IRR) as the annual rate of return & investors would realize if he a bond at a particular price, & received the principal at maturity. YTM allows investors to compare bond with different coupons, maturities & price & is quoted for trading purposes. The relationship between the price & YTM of a bond is expressed by the following formula: PRICE= Coupon / (1+ YTM) + Coupon2 / (1+ YTM) 2. +(Coupon Principle) / (1+ YTM) nThe inverse relation between price & YTM is important in bond portfolio management.

Yield Curve: This is the graph showing yields for bonds various maturities, using a benchmark group of bond, such as the Government Securities. This is also known as the Term Structure of Interest Rates (TRIR). This yields curve usually upwards sloping become longer maturities generally offer higher yields. This is because longer term debt carries higher risk on account of inflation & other economic factors. The yield curve is important indicators of expected trends in interest rates.

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Risk in Investing in Bond1) Interest Rates-Risk: The price of bond will change in a direction opposite to movement in interest rates. When interest rates rise bond price will fall, thus an existing bond portfolio losing valve. A sound analysis of interest rates movement is therefore essential.

2) Reinvestment Risk: A bonds yield to maturity assumes reinvestment of interest received during the term at a constant rate. This not may be possible if interest rate changes & risk is of uncertain cash flow being reinvested at a lower rate.

3) Call Risk: If a bond has been issued with a call provision the issuer may call them back & return the proceeds to the investors whenever interest rates fall, so the borrowing can be replaced with cheaper debt. The investor thus cannot keep a high yield bond.

4) Default Risk: A bond is a subject to the risk that is assured may default on its obligation to make timely principle & interest payments. A fund needs to assess this risk based on the bonds rating & the analysis generated by its research on issuer s cash flows.

5) Inflation Risk: When the inflation rate rises, purchasing power decline. Therefore, the value of interest payment is reduced. Investors will therefore expect higher yields in bonds. Higher interest rate will make the existing bond lose value again.

6) Liquidity Risk: This refer to the ease with which investment in a bond can be liquidated (or sold) at a price near its value. This element is important for a fund because its investments are made on behalf of unit-holder & market conditions may require the fund to liquidate a part of its portfolio within a short time.

Investment Policies and RestrictionInvestment Policy:Investment Policies of each scheme are dictated by its investment objective as stated in the offer document. In practice the board policy guidelines are included in the offer documents while the day to day policies are laid down by the AMC management for the fund manager to conform to fund manager do have some flexibility in alerting the strategy in the light of changing market condition & inspecific selection.Investment strategy of an equity fund will lay down guideline on which sectors & what kind of companies to invest in, what percentage will be held in the form of cash or money market

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securities or how much in debt securities. Usually minimum & maximum allocation of funds to each class- Equity & Cash is specified.Investment policies of a debt fund will also lay down guidelines on the portfolio & their average maturity. Minimum & Maximum percentage of Cash / money market instruments in the portfolio has to be specified too.Investment policy of balanced funds will specify the minimum & maximum asset allocations to equity & debt / cash besides the normal guidelines for the equity & debt components. Investment policies of the money market funds will largely specify the type of instrument preferred & their profile.

Investment Restriction by SEBI:While the AMC management the AMC determines the investment policies & its fund manager must also comply with the restriction imposed by regulator-mostly SEBI & in case of money market fund the RBI. SEBI s main objective in laying down restriction on AMC s is to ensure investor protection. The objective is attained by:

1. Maintaining minimum level of diversification in Mutual Fund Investments.2. Ensuring that the Investor s funds are used to favor a few or associated invested in

approved securities only. To attain this Regulatory objectives, some major restrictions imposed by SEBI.

Minimum Portfolio Diversification NormsInvestment in equity shares or equity related instruments of a single company are restricted to 10% of the NAV as a scheme. However, the limit of 10 % does not apply in case of sector/industry specified schemes subject to adequate discloser in the offer documents. The basic objective here is to ensure that a fund a fund has an adequately diversified portfolio unless the specified objective if the scheme is to limit the investments.

Similarly, for debt schemes, SEBI restricts the investment in rated investment grade debt instrument issued by a single issuer is not allowed to exceed 10% of the NAV subject to approval of board of AMC & trustee company?

These restrictions do not apply to & money & government securities. SEBI s restriction on the investment in unlisted share to a minimum of 10 % of the NAV of a scheme for closed end scheme. In case of open ended the limits may be made more stringent to 5% of the NAV of the scheme as there is continuous purchase by investors in such a scheme.

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INTRODUCTION TO MUTUAL FUNDSThe Concept of Mutual Fund IndustryA Mutual Fund is a common pool money into which investor place their contribution that is to be investors in accordance with a stated objective. The ownership of the joint or Mutual, the fund belongs to the contribution make a single investor s ownership of the fund to the total amount of the fund. A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective. A Mutual Fund used the money collected from investors to buy those assets, which are specifically permitted by its stated investment objective. Thus an equity fund would buy equity asset- ordinary shares, preferences share, warrants etc. a bond fund would buy debt instrument such as debentures, bonds, or government securities. It is these assets, which are owns by the investor in the same proportion as their contribution bears to the total contribution of all investor put together.Since each owner is a part owner of a Mutual Fund, it is necessary to establish the value of his part. In other words, each share or unit that investors hold needs to be assigned a value. Since the unit held by investors evidence the ownership of the funds asset, the value of total asset of the fund. When divided by the total number of units issued by the Mutual Fund gives us the value of one unit. This is generally called the net asset value (NAV) of the number of unit held.

Emergence of Mutual FundMutual Funds now represent perhaps the most appropriate investment opportunity for most investor, as financial markets become more sophisticated & complex. Investors need a Financial Intermediary who provides the required knowledge & professional expertise on successful investing. It is no wonder then in the birthplace of Mutual Fund the U.S.A. the fund industry has already overtaken the banking industry more funds being under Mutual Fund Management than deposited with the bank.The Indian Mutual Fund Industry is a fast growing segment of the economy. The Industry consists of 36 Mutual Funds including Unit Trust of India. With 397 schemes spread over variety products the industry today manages assets close to Rs. 97,000 crores.The Indian Mutual Fund Industry has already started opening up, of many of exciting investment opportunity to Indian investors. We have started witnessing the phenomenon of more saving now being entrusted to the funds than to the banks. Mutual Funds as still a new Financial Intermediary in India. Hence it is important that the investors should make proper analysis of the available scheme in the market. The investment advisor & even the fund employees acquire better knowledge of what Mutual Funds are. What, they can do for investor

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& what they cannot & how they function differently from other intermediaries such as the banks. The association of Mutual Funds in India has commissioned a workbook, as the basic compellation of the minimum knowledge requires by both fund distributors & the employees. The workbook provided by AMFI can serve as a guide distributors & employees.

History of Mutual Funds in IndiaThe Indian Mutual Fund Industry began with the formation of the Unit Trust of India (UTI) in 1964 by the Government. UTI was formed as a non-profit organization governed under a special legislation, the Unit Trust of India Act, 1963. It had a monopoly up to 1987 & during this period, UTI launched a series of equity & debt schemes & established itself as a household name with assets under management of Rs. 4563 crore & unit holder accounts of slightly under 3 Million by mid-1987. UTI s growth continued up to 1996 when the strong entry of private sector players saw its share of the market reducing sharply although UTI continues to be a dominant force in the Indian Financial Services industry with assets of over Rs. 67,000 crores as of December 31, 1999.In 1987, the Industry saw the entry of Public Sector Mutual Funds, i.e. funds promoted by public sector banks & financial institutions, such as SBI, Canara Bank, LIC & IDBI. Predictably they were given the brand of them promoters such as SBI Mutual Fund, Canara bank Mutual Fund, and LIC Mutual Fund & IDBI Mutual Fund. Other Public Sector Mutual Funds also entered the market but UTI continued to remain the dominant player with a share of 84% in 1991-92.The Government first allowed private sector participation in 1993 & the subsequent entry of a large number of players has made the industry very competitive. The diagram below shows the three segments & a few of the players in each segment.UTI was started, at the initiative of the Reserve Bank of India & the Government of India. The objective then was to attract the small investors & introduce them to market investment. Since, then the History of Mutual Funds in India can be broadly divided into three distinct phases.

Phase I: 1964 87 (Unit Trust of India)This phase spans from 1964 to 1988. In 1963, UTI was established by an act of Parliament & given a monopoly. Operationally, UTI was set up by the Reserve Bank of India, but was later de-linked from the RBI. The first & still one of the largest schemes, launched by the UTI was Unit Scheme 1964. Over the years, US-64 attracted & probably still has the largest number of investors in any single investments schemes.

First Phase (1964- 1987): -Establishment of UTI in 1963: -In 1978, UTI was delinked from the RBI & the Industrial Development Bank of India (IDBI) & took over the regulatory & administrative control in place of RBI. The first scheme launched by UTI was

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Year: -1987-1988Amount Mobilized-2175 Crores INRAsset Under Management-670 Crores INRMobilization as % of GDP-3.1%

Unit Scheme in 1964.At the end of 1988 UTI had Rs.6, 700 crores of assets under Mgmt. UTI had grown large as evidence by the following statistics:

Phase II: 1987-1993 (Entry of Public Sector Funds)1987, Marked the entry of non-UTI public sector Mutual Funds, bringing in competition. With the opening of economy, many public sector bank & financial institution was allowed to establish Mutual Funds. The State Bank of India established the first non-UTI Mutual Fund- SBI Mutual Fund- in November 1987. This was followed by Can Bank Mutual Fund (launched in December, 1987), LIC Mutual Funds (launched in 1989) & Indian Bank Mutual Funds (launched in 1990) followed by Bank of India Mutual Fund, GIC Mutual Fund & PNB Mutual Fund.

The private sector players, after an indifferent start in the early years, have made a strong impression especially in the larger cities, with a high quality of fund management, sales & customer service. This sector has dented UTI’s dominance resulting in a falling market share towards the end of the last millennium.

Asset Under Management: -June 30, 2000 September 31, 2001

UTI 57.09% 53.60%Bank Sponsored 3.66% 3.78%

Institutions 4.12% 4.46%Private Sector 35.13% 38.16%

Total 100.00% 100.00%Total Amount (in

crores)97953 91811

Open End Close End Assured Return

Total

Income 85 28 29 142

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June 30, 2000

UTIBank SponsoredInstitutionsPrivate Sector

September 31, 2001

UTIBank SponsoredInstitutionsPrivate Sector

Growth 96 15 ---- 111Balanced 31 04 ---- 035

Liquid 28 ---- ---- 028Gilt 24 ---- ---- 024

ELSS 19 52 ---- 071Total 283 99 29 411

Second Phase (1987-1993) / Entry of Public Sector Funds: -1987 marked the entry of Non- UTI, Public Sector Mutual Fund setup by Public Sector Banks & LIC of India & General Insurance Corporation of India (GIC) SBI Mutual Fund was the First Non-UTI Mutual Fund established in June 1987 followed by Canara bank Mutual Fund (Dec.1987), Punjab National Bank Mutual Fund (Aug.1989), Indian Bank Mutual Fund (Nov.1989), Bank of India (Jan.1990), Bank of Baroda Mutual Fund (Oct. 1992). LIC established its Mutual Fund in June 1989 while GIC had setup its Mutual Fund in Dec. 1990. At the end of 1993, The Mutual Fund Industry had assets under Mgmt. Of Rs. 47,004 Crores.

Gilt Funds1. Next only to money market fund in risk order2. Gilts- government securities with medium to long term maturities over one year3. Investment in government paper called dated securities4. Negligible risk of default5. Risk arising out of changes in market price of debt securities6. Debt securities prices fall when interest rate rise.

Debt Funds1. Invest in debt securities issued not only by government but also Corporate & financial

institutions2. Target low risk & stable income3. Higher price fluctuation risk as compared to money market funds due to significantly

higher maturity period exposures4. Higher credit risk than gilt funds due to corporate profile5. Do not target capital appreciation; generate high current income & distribution

substantial part of surpluses to investors.

Third Phase (1993-2003) / Entry of Private Sector Funds: - 1993, the entry of Private Sector a new era started in the Indian Mutual Fund Industry,

giving the Indian Investor a wider choice of Fund Family

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All Figures are in Crores (INR)

Also 1993, was the year in which the First Mutual Fund Regulation came into being, under which all Mutual Fund expects UTI were to be register & Governed. The Kothari Pioneer (now merged with Franklin Templeton) was the First Private Sector Mutual Fund registered in July 1993.

In 1993 SEBI (MF) Regulations were substituted by a more Comprehensive & revised MF Regulations in 1996.

At the end of Jan.2003 there were 33 MF with Total Assets of Rs.1,21,80 5 Crore. The UTI with Rs.44, 541 Crores of Asset under Mgmt. was way ahead of other MF Industry has witnessed several Merges & Acquisitions.

Fourth Phase (Since Feb. 2003): - In Feb.2003, UTI was bifurcated into two separate entities.

1. One is the specified Undertaking of the UTI with assets under Mgmt. of Rs. 29,835 Crores as at end of Jan.2003, functioning under an administrator & under the rules framed by Govt. of India & does not come under preview of MF Regulation.

2. The second is UTI MF Ltd. Sponsored by SBI, PNB, BOB & LIC. It is Registered with SEBI & Functions under the MF Regulations.

Bifurcation of UTI in Mar.2000 more than Rs. 76,000 Crores of assets Under Mgmt. & with the setting up of a UTI MF conforming to the SEBI MF Regulations.

At the end of Sept.2004, there were 29 Funds which Manages assets of Rs. 1, 53,108 Crores under 421 Schemes.

Place of Mutual Fund in Financial MarketIndian household started allocating more of their saving to the capital market in 1980 s with the investment flowing into equity & Debt instrument beside the conventional mode of the bank deposits.Until 1992 Primary Market investors were assured good return as the price of the new equity issues was controlled. After Introduction of free pricing of shares & with greater volatility in the Stock Markets, many investors who bought overpriced shares lost money & withdrew from the markets altogether. Even those investors who continued as direct investors in the Stock Market realized that the key to the successful investing on the capital markets lay in the building a diversified portfolio that in turn require substantial capital. Besides selecting securities with growth & income was not possible for all investor. Under similar circumstances in other countries, Mutual Fund had emerged as Professional Intermediaries.Besides providing the expertise in stock market, investing these funds allows investing in small amount& yet holding a diversified portfolio to limit risk. In India, Unit Trust of India occupied

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this place as the only capital market intermediary Institution is emerging in India, as elsewhere as a good alternative to direct investing in the Capital Market.Mutual Funds serves as a link between the saving public & the capital market in that they mobilized saving from investors & bring them to borrower in the Capital Market. By the Very nature of their activities & by virtue of being knowledgeable & informed investors, they influence the Stock Market & play an active role in promoting good corporate governance, investor protection & the health of capital market. Mutual Fund have imparted much needed liquidity into the financial system & challenged the hitherto dominant role of banking & financial institution in the Capital Markets.

Mutual Fund Operation Flow Chart:

Mutual Fund Framework- INDIA

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Investors

Fund Managers

Securities

Returns

The Advantages of Mutual Fund Portfolio Diversification: Each Investor in a Fund is a part of the funds entire asset, thus

enabling him to hold a diversified investment Portfolio even with a small amount of investment, which would otherwise require big capital.

Professional Management: Even if an investor has a big amount of Capital available to him, he benefits from the professional management Skill brought in by the fund in the management of the investor s portfolio. The investment management skills, along with the needed research into available investment option, ensure a much better return than what an Investor can manage on his own. Few investors have the skill & resource of their own to success in today s fast moving, global & sophisticated markets.

Reduction / Diversification of Risk: When an investor invests directly, all the risk of Potential loss is his own, weather he places deposits with a company or bank, or buys a share debenture on his own or in any other instrument benefits of a collective investment vehicle are from the Mutual Fund.

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Convenienence

Tax Benefits

Professional Management

Diversification

Liquidity

Reduction of Transaction Costs: What is true of risk is also the transaction costs. The investors bear all the cost of investing such as brokerage or custody of securities. When through a fund, he has the benefit of economic of scale; the fund pays lesser costs because of large volume, a benefit passed on to is investor.

Liquidity: Often, investors hold share or bonds they cannot directly, easily & quickly sell. When they invest in the units of a fund, they can generally, case their investment any time, by selling their units to the fund if open-ended, or selling them in the market if the fund is closed end. Liquidity of investment is clearly a big benefit.

Open-ended -Assures liquidity -As liquid as the banks. Close-ended -Buying and selling can be done through the stock exchange

Conventional & Flexibility: Mutual Fund Management companies offer many investors services that a direct market investor cannot get. Investors can easily transfer their holding form one scheme to the other, get updated market information, easy to Invest, Reduces excessive Paperwork etc.

Safety: SEBI & RBI have a control over Mutual Fund Making investment in Mutual Fund a safe investment. A very good example here quoted can be of Government of India coming to rescue of UTI s US- 64 Schemes.

Affordability: -Provides an opportunity for a small investor -Invest as less as an amount of

Wide Choice: -Offers a Varieties of Schemes -Meet the investment needs of all Investors

Mutual Fund- A Packaged Product

22

The Disadvantages of Mutual FundNo Control Over Costs: An investor in a Mutual Fund has no control Over the overall cost of investing. He pays investment management fees as long as he remains with the funds, in return for the professional management & research. Fees are payable even while the value of his investment may be declining. A mutual fund investor also pays fund distribution costs, which he would not incur in direct investing.

No Tailor-made Portfolios: Investors who invest on their own can build their own portfolios of shares, bonds & other securities. Investing through Funds means he delegates this decision to the fund manager. The very high -net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives.

Managing a Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in.

Developing a Model Portfolio Work with Investor to develop long-term goals Determine Asset Allocation of the investment Determine the sector distribution Select specific Fund Manager & their schemes Model Portfolio Creativity & forecasting

23

Classification of Mutual Fund

Types of Mutual FundBy Constitution OPEN-END: No fixed maturity Variable Corpus Not Listed Buy from and sell to the Fund Entry/Exit at NAV related prices CLOSED-END: Fixed Maturity Fixed Corpus Generally Listed Buy and sell in the Stock Exchanges Entry/Exit at the market prices

Load or Non-Load Funds Tax Exempt or Non-Tax Exempt

By Nature of Investments Financial Assets (Equity/Debt/Money Market) Physical Assets (Metal/ Real Estate)

Diversified Growth Funds: Diversified Debt Funds

Focused Debt Funds: Sector / Specialized / Offshore Municipal bonds/ infrastructure cost bond fund Mortgaged backed

High yield debt funds: Assured Return Funds - Indian variety Liquid Funds

By Investment objective / patterns1. Growth – Equity2. Income – Debt3. Balanced - Equity and Debt4. Money Market - Liquid Debt5. Tax Saving – Equity6. Specialized – Equity

24

7. Assured Return - Equity and Debt8. Mutual Fund can also be classified as open/ closed ended Mutual Fund

Open Ended Mutual Fund Close Ended Mutual FundUnits available for the sale & repurchase UnavailableInvestor can buy or redeem units from the Mutual Fund itself

Investors can buy units from fund only at IPO subsequently buying & selling at the Stock Exchange

Unit Capital is variable Unit capital is fixedPricing at NAV +/- depending on load charges Prices may be quoted at premium or discount

on the exchange depending on perception about fund’s future performance

Investors rights and Obligations: -Investors Rights1. Proportionate right to beneficial ownership of scheme s assets2. Right to obtain information from trustees3. Entitled to receive divided warrants within 30 days of declaration of Dividend.4. Inspect major documents of the funds5. Appointment of the AMC can be terminated by 75% of the unit holders of the scheme

present & voting6. Right to approve of changes in fundamental attributes of a close ended schemes so that

they can redeem7. Receive Annual Reports & A/C Statements

Legal limitations to Investors Rights1. Unit holders cannot use the Trust.2. Can imitate legal proceeding against trustees.3. Buyers beware.4. Sponsor of Mutual Funds have no obligation to meet any shortfall in the assured return-

unless explicitly guaranteed in the offer document.5. No rights to a prospective investor.

Minimum portfolio diversification1. Equity schemes- single company under 10% of NAV, not applicable to index & sector

funds.2. Debts funds- single issuer not more than 15% of NAV, can be relaxed to 20% with

approval of trustees % AMC.

25

3. Unrated as well as rated but below investment grade, not more than 10% of NAV per issuer.

4. All such issuers put together not more than 25% of NAV.

Investors Obligations1. Carefully study the offer document before investing2. Monitor his investment in a scheme by referring Financial statements, performance

updates & research report sent by the AMC3. Complaints readdress4. SEBI entertains complaints Required sponsor to appoint compliance office who has to

give due diligence certificate can remove AMC with 75% vote to this effect. No recourse to any company law.

Offer Documents by Mutual Fund HousesContents of an offer document

Summary information- at a glance Type of scheme growth / income / balanced Name of AMC Price of units If assured return-name of guarantor Opening & Closing dates of the schemes Disclaimer clause of SEBI Details of the sponsor & the AMC Description of the scheme & the investment philosophy Terms of issue Historical statistics Investors rights & services Abridged offer document/key information memorandum with application form.

Significance Legal document that protects and governs the right of the investor to information Is the primary vehicle for the investment decision? Is the operating document and describes the fundamental attributes of schemes? One of the most important sources of information for the prospective investor Is a reference document for the investor to look for relevant information at any time?

26

Mandatory Information Details of the Sponsor Description of the scheme and investment objective/strategy Terms of issue Historical statistics Investors Rights and Services

Key Information Memorandum that is distributed with the application formis an abridged version of the offer documents.

Investment Options & Features Options

-Growth -Dividend and Dividend Reinvestment

Plans -Systematic Investment Plan - SIP

-Value Averaging Plan - VAP -Systematic Withdrawal Plan - SWP -Systematic Transfer Plan - STP

Other -Nomination facility

Accounting for Mutual FundBalance Sheet of a Mutual Fund is different from that of a bank. All the Funds belong to the investors & are held in fiduciary capacity for them.

NAV: Investor s subscriptions are unit capital rather than deposits or liability. Investments made on behalf of investors are reflected on assets side There are liabilities but of strictly short term nature.

NAV= (Market value of investment + Receivables + Other Accrued income + Other Assets) (Accrued Expense + Other Payables + Other Liabilities) / No: of Units Outstanding as at NAV date.

NAV of all schemes to be calculated & published daily. Close- Ended schemes that are not mandatory required to be listed on Stock Exchange may declare NAV once in a month or quarter as permitted by SEBI.

Mutual Fund NAV is affected by four set of factors -Purchase & sale of investment securities

27

-Valuation of all investment securities held -Others assets & liabilities -Units sold or redeemed

Other assets include any income due to the fund but not actual received as on the valuation date. Other liabilities include similar liabilities include similar liabilities. These are to be accounted for on an accrual basis. Major expenses like Management fee to be accrued on a daily basis. If non-accrual does not affect the NAV by more than 1% then it may not be accrued for that valuation date.

Non-recording of addition /sales of investments transaction or Sales/purchase of units can be postponed to the next valuation date in case such non-recording is not impacting the NAV by more than 2%.

NAV = Net assets of scheme / No of units Outstanding (I.e. Market value of investments+ Receivables+ Other accrued income+ Other assets- accrued expenses- Other Payables- Other liabilities/No. of units outstanding as at the NAV date)

How is NAV Computed Market value of Equities - Rs.100 crores - Asset Market value of Debentures - Rs.50 crores - Asset Dividends Accrued - Rs.1 crore - Income Interest Accrued - Rs.2 crores - Income Ongoing Fee payable - Rs.0.5 crore - Liability Amount payable on shares purchased -Rs.4.5 crore - Liability No. of units held in the Fund: 10 crore units

NAV per unit = [(100+50+1+2) -(0.5+4.5)]/10 = [153-5]/10 = Rs. 14.80NAV- Other Information

Open end funds to declare NAV daily NAV to be published at least weekly Close end Schemes (which are not listed) may publish NAV monthly/quarterly with prior

approval from SEBI (MIP) NAV has to consider up to date transactions Non - recorded transactions not to affect NAV calculation by more than 2%

NAV is influenced by-

28

1. Purchase and sale of Investment2. Valuation of Investment3. Other assets and Liabilities4. Units sold or redeemed.

Change in NAV-For NAV Change in absolute term= (NAV at end of the Period-NAV at Beginning of Period) *100/NAV at Beginning of Period

NAV Change in annualized terms= (NAV Change in %age in absolute terms) *365/No. of Days.

Loads- Entry Loads or Front Ended Load (Now Discontinued)

Paid at the time of Purchase. Sale Price =NAV/1-Sales Load (if any)

Exit Load or Back Ended Load Paid at the time of Exit Redemption Price =NAV/ (1+Exit Load)

Contingent Deferred Sales Load Deferred Exit Load depends on the Time Period Also Known as Deferred Load

Sale Price Sale price is the price at which units are sold to the Investors. Sale Price =NAV +Entry Load Computation of Sale Price =NAV/(1-Load)

For Example: -

Market value of Equities - Rs.100 crores - Asset Market value of Debentures - Rs.50 crores - Asset Dividends Accrued - Rs.1 crore - Income Interest Accrued - Rs.2 crores - Income Ongoing Fee payable - Rs.0.5 crore - Liability Amount payable on shares purchased -Rs.4.5 crore - Liability No. of units held in the Fund: 10 crore units

NAV per unit = [(100+50+1+2) -(0.5+4.5)]/10

29

Assuming an Entry Load of 2% in NAV Computation

Sale Price=14.80/ (1-0.02)

=15.10

= [153-5]/10 = Rs. 14.80

Measuring and Evaluating Funds Performance

Necessary for Measuring Mutual Fund PerformanceWhen an investing entrusts his saving to Mutual Fund naturally he hopes to increase wealth by seeing the value of his investment grow. Having understood the conceptual & operation aspects of Mutual Funds it is important to analyze the issues involved in the evaluation of Fund performance.

The Investor Perspective: - The investor would naturally be interested in tracking through the value of as investment whether invests directly in the markets or indirectly through Mutual Funds. He would have to make intelligent decisions on whether he gets an acceptable return on his investment in the funds selected by him. Or if he needs to switch to another fund, he therefore needs to understand the basis of appropriate performance measurement for the fund & acquire the basic knowledge of the different measures of evaluating the performance well or not, &make the right decisions.

The Adviser’s Perspective: - If you were an intermediary recommend A Mutual Fund to a potential investor he would accept you to give him proper advice on which funds have a performance track record. If you want to be an effective investment adviser, then you too have to know how to measure & evaluate the performance of the different funds that are available to the investor. The need to compare different fund’s performance required the advisor to have the knowledge of the correct & appropriate measure of evolution the fund performance.

Performance Measures Peer Group Companies The Income Ratio Industry Exposure & Concentration NPA s Besides NAV Growth Expenses Ratio Concepts of benchmarking for performance evolution Performance benchmarking in the Indian Contest Active Fund Performance against market indices as bench Mark Debt Fund-interest rate on alternative investment as bench Mark.

30

Total Return Index Money Market Funds Short Term Govt. Instrument Interest rates as benchmarks. Tracking a fund’s performance Newspaper, Periodicals, Research, Annual Report,

Prospectus, Reports from Tracking agencies, Internet & Interpretation of Data.

Other Parameters Expense ratios - indicates fund efficiency and cost effectiveness Portfolio Turnover ratio - measures amount of buying and selling done by the fund Transaction cost Fund size Cash holdings

Working of Mutual Fund and their PerformanceIt needs to be certified that MF invest their funds in Capital market instruments such as Shares, Debentures, Bonds, & Money Market Instruments & therefore the NAV of such investments will reflect the market values of underlying assets. TheseMarket values fluctuate & therefore the NAV of the MF Schemes also fluctuate. All the capital market instruments have varying degrees of risk, the Degree of risk being the highest in equities & the risk factor is highlighted in the respective offer documents as well as in the abridged offer documents.The investors therefore are in the full knowledge & understanding of the risks involved in various schemes. As per SEBI Regulation all MF disclose their portfolio periodically & all open-ended Funds offer exit option to investors at NAV based price.

Risk, Tolerance, Return Expected Focus

Suitable Products Benefits Offered by Mutual Fund

Low Debt Bank/Company FD, Debt Funds

Liquidity, Better Post-Tax Return

Medium Partially Debt, Partially Equity

Diversified Funds Balanced Funds, FD’s, Shares, etc.

Liquidity, Better Management Diversification

High Equity Equity Funds (Sector as well as Diversified)

Diversification, Expertise in Stock Picking, Liquidity Tax Free Dividend

31

The Risk Return Tradeoff

Introduction to Bond FundBond market which is also known as debt market or credit market is a financial market where participant can issue new debt known as primary market or buy and sell debt securities known as secondary market. This is usually in the form of bonds but it may include notes, bills, etc. and the primary goal of the bond market is to provide funding for public and private Expenditures.The various types of bond Markets includes corporates, Government Agency, Municipal, Mortgage backed, Asset backed and Funding.The participant of the bond market is considered to be very similar to the participants in most of the financial market and are either buyers of the funds or the sellers of the funds and often both the participants include Institutional Investors, Government, Traders, Individual.Just because the specificity of individual bond issue and the lack of liquidity in many smaller issue, the majority of outstanding bonds are held by the institutions like pension fund, Banks and Mutual Funds.

Indian Debt Market as on April 29, 2016Security Type No. of Securities Market Capitalization (Cr) % of Total

Government Securities 113 26825814.81 45.15PSU Bonds 1105 4984682.3 8.39State Loans 1965 15554381.14 26.18

Treasury bills 49 3580939.34 6.03Local bodies 17 29750 0.05

Financial Institutions 208 997859.23 1.68Bank Bonds 559 2990407.87 5.03

32

Risk

Potential for Return

Debt Funds

Hedge Funds

Growth Sectoral

Balanced

Liquid Funds

Corporate bonds 3140 4441718.86 7.48Supranational Bonds 10 4997.44 0.01

Mutual Funds 6 7502 0.01Preference shares 1 1250 0

Debt Market Review for the Month till April, 2016In comparison to the last year Data It has been noticed that there has been seen a huge increase (49.45%) in the issue size of Supra Institutional Bonds (A supra institutional Entity is formed by two or more central Governments with the purpose of promoting Economic development for the member Countries and those institutions finance their activities by issuing supra Institutional Bonds) Because of the tie ups with other Countries for the economic Growth.The Corporate Debt has also got increased by 21.34% which shows that the investors are increasing their investment in the “CORPORATIONS”. Also there has been slight decrease in the

Government bonds (-7.85%) which has happened due to the change in the interest rates by the Reserve Bank of India. Also there has been increase in the investment in the state Government Bonds (20.09%) which will happen only if the return is high or Fresh issue of Securities has been made by the Government.

About Kotak Bond FundKotak Bond is an open ended debt scheme which was launched on 25th November 1999, with an investment objective to create a portfolio of debt and money market instruments of different maturities so as to spread the risk across a wide maturity horizon and different kinds of issuers in the debt market. The investment objective of the Kotak Bond Fund is to create a portfolio of Debt and money market instrument of different Maturities so as to spread the risk across a wide maturity horizon and different kind of issuers in the debt market. The scheme

33

Government Se-curities

45%

PSU Bonds8%

State Loans26%

Treasury bills6%

Local bodies0%

Financial Insti-tutions

2% Bank Bonds5%

Corporate bonds7%

Supranational Bonds0%

Market Share of Different SecuritiesGovernment SecuritiesPSU BondsState LoansTreasury billsLocal bodiesFinancial InstitutionsBank BondsCorporate bondsSupranational BondsMutual FundsPreference shares

offers a play on interests rates by managing duration actively. Duration is increased if the view is that of falling interests rates and vice-versa. The scheme also seeks to provide stable returns in the long term by managing credit risk actively. The Portfolio is well diversified with a mix of good credit quality debentures, bonds and government securities. It is suitable for investors who seek the high accrual offered by long term Papers, have a view on interest rates and have a long term Investment horizon.

Fund Overview

Kotak Bond fund has been ranked 3rd in debt long term by CRISIL for the quarter ended March, 2016. This Fund is an open ended debt scheme which was launched on November 25 th,1999 with the aim to create a portfolio of debt and the money market instruments. This fund is suitable for the investor who are seeking income over a long investment horizon and investment in debt and money market securities. This scheme is being managed by Mr. Abhishek Bisen. He is also managing other debt schemes such as Kotak Balance Fund (April 15, 2008); Kotak Monthly Income Plan (April 15, 2008); Kotak Bond (Plan A) (April 15, 2008); Kotak Gilt Investment (Regular and PF Trust) (April 15, 2008); Kotak Global Emerging Market Fund (April 15, 2008); Kotak Multi Asset Allocation Fund (January 21, 2011); Kotak Equity Savings Fund (October 13, 2014); Kotak Gold ETF (July 27, 2007); Kotak Gold Fund (March 25, 2011).

The Asset Under Management of Kotak bond Fund as on April 30th, 2016 is Rs. 4164.57 Crores and the AAUM as on April 30th, 2016 is RS. 4294.17 Crores. The benchmark for this scheme is “CRISIL COMPOSITE BOND FUND INDEX”. There is no Entry or the Exit Load for this fund but the units issued on the Reinvestment of dividend shall not be subject to Exit Load. The minimum investment for his plan is Rs. 5000 and the Additional Investment of Rs. 1000 in multiples of Re.1.

The Standard deviation for this scheme is 4.38% which shows that the risk is moderate in this scheme and make this scheme less risky as compared to other debt Scheme Provided by Kotak Mahindra Asset Management Company Limited. Coming to the yield on Maturity, The YTM of this scheme is 8.09%. The Portfolio Modified duration for this scheme is 8.19 years and Average Maturity is 16.17 Years which means that the securities which the company is holding has average maturity time of 16.17 Years.

Investment Objective

The Investment aims to create a portfolio of debt instrument of different maturities so as to spread the risk across a wide maturity horizon and different kind of issuers in the debt market. The wholesale plan is targeted at big ticket investors and corporates.

34

Investment Strategy

In the figure, Matrix shows the risk associated with the scheme and the tenure of the scheme after which the maturity will arrive. Kotak Bond fund comprises of the mixture of all the debt instruments available in the debt market as it is considered to be the debt fund with high standard deviation which carries low risk. Investors prefer debt funds because: -

1. No TDS on Debt Fund Earnings

2. Returns are associated with the markets3. SWP, SIP, STP instead of Lump Sum4. Look out for lower Expense ratio payment5. Consider Exit Load

Kotak bond fund comprises of the various debt fund such as debt instruments, Debentures and bonds, Corporate Debt/Financial Institutions, PSU’s, Government dated Securities, Commercial Papers/Certificate of Deposits.

On an average more than 80% of the allocation of the funds is done using Government securities which carries a fixed amount of interest and these are the long term papers with a maturity period of 15-20 years. Next comes the Debentures, CP’s, CD’s and bonds which

35

1 Month 3 Month 6 Month 1 Year 2 year 3 Year 5 year0123456789

10

0.2

4.7 4.4

7.2

9.4

6.3

9.1

0.4

33.6

6.6

8.6

6.2 6.5

Fund Return vs Category average (Debt long Term)

Fund return Category Avg.

account for 13%-15% of the portfolio. Then comes the term deposits, reverse repo and Net Current Assets which accounts for the rest of the investment in the Portfolio.

Asset Allocation

The major part of assets is being allocated in the Debt securities which account for nearly 97% of assets (April 2015 -April 2016) and other assets account for 3% of the allocation.

Top 5 instruments of Kotak Bond Plan

Instrument % Allocation Valuation (INR Crores)GOI Securities 54.29% 2651.17

Central Government loan 14.34% 700.27State Development loan 13.03% 636.30

Non-Convertible Debenture 7.83% 382.37Debenture 4.24% 207.05

Scheme Facts

Launch Date 25-Nov-1999

Structure An Open Ended Debt Scheme

Benchmark CRISIL Composite Bond Fund Index

Minimum initial investment Rs.5000 and in multiple of 1 for purchase and .01 for switches

Additional Investment Rs.1000 and in multiples of Rs. 1

Standard Deviation 4.11%(as on June 30, 2015) Source: Value Research

YTM 8.29%

Portfolio Modified Duration 8.29 Years

Average Maturity 17.97 YearsThe allocation of the debt fund consists of Government securities which account for more than 50% of share in the Portfolio just because it is considered to be the safest security in the money market because of the nature such as the holder will be exempted from tax and all. Second comes the central government loan and State Development Loan who raise the capital from the market by issuing the commercial papers and Certificate of deposits and giving them a fixed amount of interest on such instruments

Scheme Return vs. Benchmark Return

November 25, 1999 (since inception)

36

25-Nov-99 Mar 31, 2015 to 2016 Mar 31, 2014 to 2015 Mar 31, 2013 to 2014-2

0

2

4

6

8

10

12

14

16

18

9.18

5.32

15.87

1.710

8.24

14.59

4.39

0

7.97

14.57

-0.96

Scheme vs Benchmark

Scheme Returns crisil Composite bond fund crisil 10 year gilt

Here, Kotak Bond fund since its inception (25th November 1999) has given positive and higher YTM (Yield to Maturity) when compared to the benchmark (CRISIL Composite Bond Fund) and the additional benchmark (CRISIL 10-year Gilt). During the period “March 31 st, 2013 to March 31st, 2014”, CRISIL 10 Years Gilt has shown a negative return of (0.96%) but here despite of negative return shown by the benchmark, Kotak bond has shown a positive YTM of 1.71% which shows that fund and Fund Manager is doing well keeping in mind the market Performance. During the year 2015-2016 due to change in the interest rates by the federal reserves, the performance has gone down and Kotak has underperformed in comparison to the benchmark and additional benchmark because maximum allocation of the securities in this scheme is done in the government securities and Government debentures and bonds. So, the change in the interest rates has affected the performance and YTM has come down when the return has been compared to its benchmark. But during the next Financial year, Kotak Bond Fund has outperformed with his benchmark and additional Benchmark because of the changes in the allocation of the securities by the fund Managers in the existing portfolio of the scheme.

Return Analysis

37

38

FY 2009-2010 FY 2010-2011 FY 2011-2012 FY 2012-2013

10.843975

10.49055

10.681175

11.065675

Kotak Bond Fund

Quarterly Dividend Linear (Quarterly Dividend)

FY 2010-2011 FY 2011-2012 FY 2012-2013 FY 2013-2014

10.49055

10.681175

11.065675

10.9851

Kotak Bond Fund


FY 2011-2012 FY 2012-2013 FY 2013-2014 FY 2014-2015

10.681175

11.065675

10.9851

11.08854

Kotak Bond Fund


FY 2012-2013 Fy 2013-2014 FY 2014-2015 FY 2015-2016

11.065675

10.9851

11.08854

10.9496

Kotak Bond Fund


Quarterly Dividend during each Financial Year

The

above graphs show the Average quarterly dividend provided to the investors during each financial year of Kotak Bond Fund. The data shows the increase in the amount of dividend provided by the scheme year on year. The straight line depicts the rise in the dividend yield by the fund and the half straight line depicts the standard deviation which means the standard error taking place will lie on that half straight line. If the dividend lies below or above the line, then it will be called the abnormal return provided by the scheme.

Here, during the financial year 2010-201, the scheme has given an abnormal return on the investment made by the investors that is Rs. 10.49055 which lies below the line of standard deviation (also known as standard error line).

Again, during the financial year 2014-2015, the scheme has given an abnormal return of Rs. 11.08854 which lies above the standard error line. Also during the financial year 2012-2013 Kotak Bond fund has given abnormal return, that is return more than average.

So, here the conclusion derived is that an average return by the scheme helps the industry to grow and manage the assets in a better way.

Portfolio Action as on June 30 th , 2015

39

FY 2009-2010

FY 2010-2011

FY 2011-2012

FY 2012-2013

FY 2013-2014

FY 2014-2015

FY 2015-2016

10.843975

10.49055

10.681175

11.06567510.9851

11.08854

10.9496

Quarterly Dividend (2009 to 2016)

Return (Dividend) 2009-2016Linear (Return (Dividend) 2009-2016)

Portfolio Action as on 30 th June 2015

Bond scheme works on an asset allocation model of 70:30 where Fund Managers take active duration call through Gilt Investment. The Balance is invested in corporate bonds segment in order to provide yield cushion to guard the fund against the volatilities.

As the long bond yield also rose during the month of June, they increased the weight on 30 years SOA Bonds marginally maintaining the gilt exposure at around 83% and the balance continues in the bond. Consequently, the duration also went to 17.97 Years, Modified duration 8.29 Years and the YTM of 8.29%

They continue to stay overweight in 14-30 Years segment in gilts and 7-10 Years in the corporate bonds. They believe that these are the optimal points on the yield curve.

The fund is suitable for the investors who seeks the high accrual offered by long term debt

40

7% 3%

86%

1%3%

Portfolio Composition as on March 30th, 2015

Corporate Debt/Financial Insti-tutionsPublic Sector UndertakingsGovernment Dated securitiesCollateral borrowings and Lending ObligationsNet Current Assets/Liabilities

Top 10 Companies as on June 30th, 20158.30% Central Government SOV 29.12%8.17% Central Government SOV 11.55%9.20% Central Government SOV 11.19%8.15% Central government SOV 9.21%8.24% Central Government SOV 6.50%8.28% Central Government SOV 5.88%1.44% Central Government SOV 3.75%7.95% Central Government SOV 3.41%HPCL Mittal Energy Limited ICRA AA- 2.84%7.88% Central Government SOV 2.61%

securities. It is also viable for those who have a view on the interest rates and have an investment horizon of 12 months and above.

Quarterly AAUM and NAV

(For the month of April 2015 – June 2015)

41

Deposit Plan: Rs. 68.29 Crores

Plan A: Rs. 4048.45 Crores

Direct Plan: Rs. 1027.44Crores

Quarterly Dividend: Rs. 10.6616

Quarterly Dividend direct: Rs. 11.2360

Half yearly Dividend Direct: Rs. 40.0962

Annual Dividend: Rs. 24.1540

Annual Dividend direct: Rs. 20.9515

Plan A bonus plan: Rs. 26.2802

Growth: Rs. 39.425

Growth Direct: Rs. 40.0962

Portfolio Action as on September 30 th , 2015

Bond scheme works on asset allocation model of 70:30 where Fund Managers take active duration call through Gilt investment. The balance is invested in corporate bond segment in order to provide yield cushion to guard the fund against the volatilities.

The month of September was full with suspense and volatilities but the difference was this time yields fell sharply on the back of favorable FOMC and 50bps repo rate cut which was more than expected and RBI kept the room for more cuts open. However, since our portfolio was being made with this kind of outcome for a long period of time, however they increased the duration marginally much during this month. Consequently, the duration also went to 17.88 years, Modified duration 8.50 and YTM of 7.92%.

They continue to stay overweight in the 14-30 years’ segment in Gilt and 7-10 years in the corporate bonds. We believe that these are the optimal points on the yield curve.

Due to 50bps cut in the repo rate by RBI the value of the existing paper in the market has gone up, which is the reason giving extra weight to the Government securities in the portfolio.

42

5%3%

88%

3%1%

Portfolio Composition as on September 30th, 2015


Deposit Plan: Rs. 62.71 Crores


Direct Plan: Rs. 1100.15Crores

Quarterly Dividend: Rs. 10.9396

Quarterly Dividend direct: Rs. 11.5315

Half yearly Dividend Direct: N/A

Annual Dividend: Rs. 25.2363

Annual Dividend direct: Rs. 21.9328

Plan A bonus-plan A: Rs. 27.4578

Growth Plan A: Rs. 41.1911

Growth Direct Plan A: Rs. 41.9743

Top 10 Companies as on September 30th, 2015

7.88% Central Government SOV 29.12%



8.17% Central government SOV 9.21%




HPCL Mittal Pipeline Limited ICRA AA- 3.41%

HPCL Mittal Energy Limited ICRA AA- 2.84%

Bank of India Brickwork BWR AA+ 2.61%


(For the month of June 2015 – September 2015)

43

Portfolio Action as on December 31 st , 2015

Bond scheme works on asset allocation model of 70:30, where Fund Managers take active call through Gilt investment. The balance is invested in corporate bonds segment in order to provide yeild cushion to protect the fund against the volatilities.

The month of december was a volatile month and market was grappling with concerns on fiscal slippage and power bonds the 10 year G-secs yeild remain flat month on month while the less than 10 years yeild came down and more than 10 years went up. However, since our portfolio was overweight on the long bonds it was hurt adversly.

They reduce the risk from the portfolio it was in time probably we should have been more aggressive but we believe that that as absolute levels are high and therefore it’s a risky bet to stay out given such a strong macro.

We were able to sell in time but believe we covered it too soon. We took the Average maturity duration down to 14.65 years, modified duration 7.25

years and YTM of 8.12%

Top 10 Companies as on December 31st, 2015



8.17% Central Government SOV 11.19%7.59% Central government SOV 9.21%

44

4%2%

78%

8%8%

Portfolio Composition as on December 31st, 2015




HPCL Mittal Energy limited SOV 3.75%

Bank of India ICRA AA- 3.41%

8.13% Central Government ICRA AA- 2.84%

8.83% Central Government Brickwork BWR AA+ 2.61%


(For the month of September 2015 – December 2015)

45


Direct Plan: Rs. 5076.33 Crores

Quarterly Dividend Plan A: Rs. 10.8203

Quarterly Dividend Direct Plan A: Rs. 11.4092

Annual Dividend Plan A: Rs. 24.9920

Annual Dividend Direct Plan A: Rs. 21.7654

Bonus Plan - Plan A: Rs. 21.9328

Growth - plan A: Rs. 27.4578


Portfolio Action as on March 31 st , 2015

B o n d s c h e m e w o r k s o n a n a s s e t a l l o c a ti o n m o d e l o f 9 0 : 1 0 , w h e r e F u n d m a n a g e r s t a k e

active duration call through gilt investment and the balance is invested in corporate bond segment.

This is done in order to provide yield cushion to protect the fund against the volatilities while also position the funds to capture duration-related gains. We increase our allocation to G-sec to take advantage of market sell off as we believe that negatives are priced in.

The month of march begin with bullish tone and sustained due to series of events which occurred during the month and led to marvelous rally in the G-sec and bond market.

The curve entered in a bull flattening mode in 10-30 years’ segment as we were anticipating and were positioned to gain therefore we booked some profit ahead of monetary policy and switched in SDL to the tune of 20% of the scheme that not only gave profits but also increase YTM of the fund.

They took at the SDL at 75 bps spread over G-sec and we expect it to compress to 50 bps. This activity led to reduction in duration of the fund.

The fund duration is at 13.43 years, Modified Duration 6.85 Years, and YTM of 8.26%.

46

13%

10%

67%

0%5% 4%1%1%

Portfolio Composition as on March 31st, 2016

Corporate Debt/Financial Insti-tutionsPublic Sector UndertakingsGovernment Dated securitiesCollateral borrowings and Lending ObligationsNet Current Assets/LiabilitiesFuturesReverse RepoTerm Deposites

Quarterly Dividend Plan A: Rs. 11.0420

Quarterly Dividend Direct Plan A: Rs. 11.6430

Annual Dividend Plan A: Rs. 25.7611

Annual Dividend Direct Plan A: Rs. 21.6871

Bonus Plan - Plan A: Rs. 28.0284

Growth - plan A: Rs. 42.0471


Top 10 Companies as on March 31st, 2015




Bharti Enterprises (Holding) Pvt. Ltd. Crisil A1+ 7.59%

8.50% State Government SOV 4.78%

Bank of Maharashtra Crisil A1+ 3.73%






(For the month of December 2015 – March 2016)

Monthly Dividend for the Financial Year 2015-2016

47

1-Apr-1

5

1-May

-15

1-Jun-15

1-Jul-1

5

1-Aug-1

5

1-Sep-15

1-Oct-

15

1-Nov-1

5

1-Dec-

15

1-Jan-16

1-Feb-16

1-Mar-

16

5.1822

2.923

3.8653

6.2894

7.2844

4.5169

1.4333

5.705

2.4429

4.42784.8012

2.7081

3.5811

5.827

6.7489

4.1848

1.3279

5.2856

2.2633

4.1023

Monthly Dividend FY2015-2016

Individual (Per unit) Linear (Individual (Per unit)) Others (Per unit)

The above graph shows the monthly dividend received by the individual investors and the other investors (other investors includes the indirect clients, HUF’s, etc.) The linear dividend per unit is following the downtrend and is decreasing slowly and steadily, But Because the dividend is lying within the standard error bar, there is a low probability that the investors will pull off their investments because of the very low risk associated by the debt fund and that too the dividend is lying within the standard error. The other investors are considered to be the indirect clients who use to make their investment with the help of any other individual such as IFA’s (Independent Financial Advisor), ND’s (National Distributors), etc. and the person use to take a certain amount of commission to service them. This is the main reason why direct dividend use to be higher than indirect dividend.

Glossary

48

Dividend for the month of September and October has not been Declared

Asset Allocation Fund- A Fund that spreads its portfolio among a wide variety of investments, including domestic & foreign Stocks & Bonds some of these funds keep the proportions allocated between different Sectors relatively constant, while others alter the mix to market conditions.

Adjusted NAV- The Net Asset Value of a unit adjusting for all changes caused due to divided declaration, bonus, etc. assuming reinvestment of distributions made to the investors at the prevailing NAV.

Alpha Co-efficient- It is the excess return of fund above risk adjusted market return, given its level of risk as measured by Beta. An Investment with a positive indicates that the fund has underperformed, for the level of risk taken by it.

Annual Report- It is yearly record of a MF Performance in a Current Year. Under SEBI s guidelines, it is distributed to investors &/or Share Holders.

Asset Allocation- It is a means of diversifying the risk associated with a Fund & refers to the distribution of total funds available with the fund into instruments of various types such as Stocks, Bonds etc. based on the Fund’s investments objectives.

Asset-Backed Securities- Securities that represent a participation in, or are secured by & payable from, payments generated by Credit Cards, Motor Vehicle or trade receivables & the like.

Asset Mgmt. Company (AMC)- It is the Investment Manager for a MF. It is a Company set up primarily for managing the investment of MF & makes investment decisions in accordance with the Schemes Objectives, deed of Trust & Other provisions of the Investment Mgmt. Agreement.

Automatic Investment Plan- A Plan introduced in MF that enables the Investor to give the mandate of allotting fresh units at specified intervals (Monthly, Quarterly) against which the investor provide postdated Cheque On the specified dates, the Cheque are realized by the MF & on realization Additional Units are allotted to the investor at the prevailing NAV.

Balanced Funds- A Class of MF that aims at allocating the total assets with it in the portfolio mix of debt as well as equity instruments.

Basis Point- Most often used relating to changes in interest rates. One Basis Point in 1/ 100 of a percentage point; therefore 1000 Basis Points make 1%. A phrase used to describe the difference in Bond Yields. Ex. If Bond a Yields 7.5 & Bond B Yields 7.25. Then the difference is 0.25 is a Basis Point.

Benchmark- It is the platform or the parameter with which a scheme can be compared. For e.g. the performance of an index fund can Benchmarked against the appropriate index specified by it.

Beta - It is the measure of a Relative Sensitivity of a Stock or MF to a Market. The market is assigned an of 1. The higher the, more sensitive the Stock or fund is considered to be

49

Relative to the market as a whole. In other words, funds with more than 1 will react more to any fluctuations (whether upward or downward) in Market than funds with B less than 1.

Bond Fund- A MF whose portfolio consists primarily of corporate, Municipal or Govt. Bonds. These funds generally emphasize income rather than growth.

Capital Appreciation Fund- A MF that seeks maximum Capital Appreciation by investing in Companies that do not pay dividends. These Funds may use techniques involving greater than ordinary risk, such as borrowing money in order to provide leverage, short selling & high portfolio turnover.

Consumer Price Index (CPI)- An inflation tracker, much followed by the mainstream media. It is the measure of the price change in consumer goods & services.

Contingent Deferred Sales Charge (CDSC)- It is the sales load charged by funds in the event of redemption made within a pre-specified period of purchase.

Cut off Time- In respect of all MF regulated by SEBI, fresh subscriptions & redemptions are processed at a particular NAV. Every fund specifies a cut off time in respect of fresh subscription & redemption of units. All requests received before the cut off times are processed at that day s NAV & thereafter at the next day s NAV.

Cyclical Stock- Stock of a company whose performance is generally related (or thought to be related) to the performance of an economy as a whole. Paper, steel & the automotive stocks are thought to be Cyclical because their earnings tend to be hurt when the economy slows & are strong when the economy turns up. Food & Drug Stocks, on the other hand, are not considered Cyclical, as consumers pretty much need to eat & care for their Health regardless of the performance of the economy.

Derivative- A Financial Contract whose value is derived from another underlying asset, such as Stocks, Bonds, Commodities, or a Market Index such as NSE 5O. The most common type of Derivatives is option, future & mortgage-backed Securities.

Diversification- Spreading a risk; MF spread investments among a No. of different Securities to reduce the risk inherent in investing.

Dividend Distribution Tax - A Tax payable by a debt oriented MF (a MF that invests more than 50% of its portfolio in a debt Market) before Dividend is distributed to the unit Holders. The Current Dividend Distribution Tax is 10% plus the 10% surcharge. There is no such Tax Applicable on Open-End Equity Schemes.

Duration- A Calculation of the Average Life of a Bond (or Portfolio of Bonds) i.e. a useful measures of a Bond s Price Sensitivity to interest rate changes. The higher duration No. the greater the risk & reward potential of the Bond.

Dollar- Cost Averaging- The Technique of investing a fixed sum at a regular intervals regardless of Stock Market movements. This reduces average Share Cost to the investor,

50

who acquires more Shares in period of lower Security prices & fewer Shares in period of High prices. In this way, investment risk is spread overtime.

Entry Load - It is the Load Charged by Fund when one invests into other Fund. It increases the price of units to more than the NAV & is expressed as a percentage of NAV.

Equity Linked Savings Scheme (ELSS)- A special product offered by MF. These Schemes invest in equity i.e. Shares & generally have a lock-in period of 3 Yrs. The basic features of ELSS Schemes are: Tax rebate of 20% under Section 88 of the Income Tax Act on an (Maxi.) investment of Rs.10, 000/.

Exit Load - It is the load charged by the Fund, when one redeems the unit from the Fund. It reduces the price of the units to less than the NAV & is expressed as a % of NAV.

Exchange Traded Funds- Exchange traded funds are a hybrid of MF & Stock which track an underlying index. These funds have the flexibility of Trading throughout the day like a Security & also offers benefits like Diversification Professional Mgmt., low expense ratio, etc.

Fixed Income Securities-Bonds & other securities that are used by issuers to borrow money from investors. Typically, the issuer pays the investor a fixed, variable or floating rate of interest must repay the borrowed amount at a specified time in the future (Maturity).

Fund Manager- Appointed by the AMC, he/she is the person who makes all the Final Decisions regarding investments of a Scheme.

Govt. Securities These are medium to long-term obligations issued by RBI on behalf of Govt. of India& various State Govt. The RBI decides the cut-off coupon on the basis of the bids received. These Securities are issued by auction process on certain issues.

Gilt Funds - Funds that invest only in Govt. Securities of different Mature They offer lower returns as the credit risk is virtually absent & there are No chances of Govt. defaulting on its payment obligations.

Growth Style Investing- An investing approach that involves buying Stocks of Companies i.e. generally industry leaders with above average, sustainable growth rates. Typically, Growth Stocks are the Stocks of the fastest growing Companies in the most rapidly growing sector of the Economy Growth Stock valuation level (e.g. Price-to-earnings Ratio) will generally be higher than value Stocks.

Indexation - The Central Govt. specifies an index linked to the wholesale Price Index. The indices of 2 yrs. (Yrs. Of purchase & the yr. of sale) are used for the purpose Price is multiplied by the Index of the yr. of purpose.

Large- Cap Stocks- Stocks issued by large companies. Unless otherwise defined by Fund Manager or an Advisor, a Large-Cap Company is defined as one with a Market

51

Capitalization of $5 Billion or more. Typically, large -cap companies are est. well-known Companies; some may be MNC s.

Mid-cap Stocks- Stocks issued by mid-sized companies, unless otherwise defined by a Fund Manager or the Advisor, a mid-cap company is defined as one with a Market Capitalization between $1.5 Billion & $5 Billion, this is similar to the range of the Std. & poor Mid-Cap 400 Index (S&P 400).

Money Market-It refer to Market for very Short- Term Securities. Money Market instruments are forms of Debt that mature in less than a yr. & are very liquid in nature. Securities such as Treasury bill & call Money makes up the Bulk of trading in Money Market.

Money Market Instruments- Treasury bill, GOI Securities Etc. with an unexpired Maturity less than or up to one yr. Call Money, Certificates of Deposits & any other instrument specified by the RBI.

Mortgage Backed Securities- Certificate backed by pooled Mortgages (e.g. Freddie Mac or Gennie Mae). Issuing agencies buy Mortgages from lending institutions & repackage them as Securities which they sell to investors. Yields, which stem from interest & principal on underlying.

Open-Ended Fund - Funds that do not have any fixed Maturity & are continuously open for subscription & redemption. The key features are Liquidity. One can convenient Buy & Sell the units held at NAV Price.

Statement of Additional Information (SAI) - It conveys information about an open /closed-end fund that is not necessarily needed by investors to make informed investment decision.

Yield to Maturity- Used to determine the Rate of Return on Investor such as a Bond is held to its Maturity date, takes into account purchase price, redemption value, time to Maturity, coupon yield & a time between Interest Payments.

Zero Coupon Bond- A Bond where no Periodic Interest payments are made. The Investor purchase the Bond at a discount price & receives one payment at Maturity. The Maturity value an Investor receives is equal to the Principal invested plus Interest earned Compound Semi-Annually at the Income from Zero-Coupon on Bonds is subject to Taxes annually even though no payments will be made.

52

Bibliography

NISM Work Book Economic Times Kotak AMC Fact Sheet Kotak AMC One Pagers NSE Manuals Complaint Redressal report

Websites: - www.mutualfundindia.com www.amfindia.com www.moneycontrol.com www.assetmanagement.kotak.com www.valueresearchonline.com www.investopedia.com www.rediff.com www.articles.economictimes.indiatimes.com www.thehindubusinessline.com www.capitalmarket.com www.fintotal.com www.fundsupermart.co.in www.nseindia.com www.morningstar.in www.icra.in www.investmentguruindia.com www.business-standard.com www.managementparadise.com

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http://www.managementparadise.com/

http://www.business-standard.com/

http://www.investmentguruindia.com/

http://www.icra.in/

http://www.morningstar.in/

http://www.nseindia.com/

http://www.fundsupermart.co.in/

http://www.fintotal.com/

http://www.capitalmarket.com/

http://www.thehindubusinessline.com/

http://www.articles.economictimes.indiatimes.com/

http://www.rediff.com/

http://www.investopedia.com/

http://www.valueresearchonline.com/

http://www.assetmanagement.kotak.com/

http://www.moneycontrol.com/

http://www.amfindia.com/

http://www.mutualfundindia.com/

Investor Relations

Mutual fund analysis on debt schemes with special reference to kotak bond fund