Current Issues Related to Mutual Funds

A Project Study Report On CURRENT ISSUES RELATED TO MUTUAL FUNDS Submitted in partial fulfillment for the Award of degree of Master of Business Administration

Submitted By: -

Submitted To: -

FAHIM UL HAQ MBA 2nd Semester

Mrs. Mini Amit Arawatia Lect. (MBA Deptt.)

2010-12 ARYA INSTITUTE OF ENGGINERING & TECHNOLOGY Kukas, Jaipur

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PREFACE “THE

KNOWLEDGE

WHICH

IMPLEMENTED IS

IS

NOT

PRACTICALLY

A BURDEN”

India is one of the fastest growing economies in the world due to which the income level of people in India is increasing and along with it the savings and investments are also growing. Due to liberalization and deregulation which was announced in New Industrial Policy 1991, has dismantled barriers in the financial market, allowed the entry of new players and created environment for efficient allocation of resources. One of the important industries in emerging financial market is the mutual fund industry. The mutual fund industry has played a significant role in the development of capital market, growth of corporate sectors and financial intermediation. As mutual fund industry in India is relatively new, the level of awareness among the people is less but with the increase in level of awareness the mutual fund industry is also growing. The government has also announced the regulatory measures for the growth of mutual fund industry and protection of investors in mutual funds. Here we have attempted to study mutual fund industry in India, comparison of mutual fund companies and schemes offered by them and investment behavior of consumers.

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ACKNOWLEDGEMENT

Right from the genesis of the idea to work or the subject to its completion stage has incurred both intellectual and moral depths. Therefore I would like to express on my sincere gratitude’s those who helped me in bringing out this project report in time. My first and foremost note of thanks is due to our institute director, Dr. Arvind Agarwal for creating such a congenial environment to be able to complete the project territories effectively. I would sincerely like to thank to Mr. Rajan Arora, Academic Head of MBA Deptt. & my project guide Mrs. Mini Amit Arawatia, Lect. in MBA Deptt., SBI Mutual fund, for his valuable guidance, constant supervision and motivation during the project period and all staff members of MBA Deptt. A.I.E.T. My last but not the least thanks are due to my parents & my friends for their constant support, strongest motivation and their blessed, which has been a source of inspiration for me at every step of my life.

FAHIM UL HAQ

(Fahim ul haq)

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CONTENTS S.N. 01. 02. 03. 04. 05. 06. 07. 08. 09. 10 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

TOPICS INTRODUCTION OF MUTUAL FUNDS HISTORY OF MUTUAL FUNDS IN INDIA TYPES OF MUTUAL FUNDS DIFFERENT PLANS THAT MUTUAL FUNDS OFFERS INFORMATION OF MUTUAL FUNDS SCHEME RISK FACTOR IN MUTUAL FUNDS & ITS TYPE RECENT TRENDS IN MUTUAL FUNDS INDUSTRY MARKET TRENDS TOP 10 MUTUAL FUNDS COMPANIES COMPARISON OF TWO GROWTH COMPANY: RMF v/s UTIMF BUILDING A FUND PORTFOLIO SEBI REGULATION SYSTEMATIC INVESTMENT POLICY (SIP) MONTHLY INVESTMENT POLICY (MIP) SYSTEMATIC INVESTMENT POLICY MONTHLY INCOME POLICY BUGDET 2011: GOOD NEWS FOR MUTUAL

P.N. 5 10 13 18 20

FUND

INDUSTRY? MUTUAL FUNDS v/s OTHER INVESTMENTS FUTURE SCENARIO CONCLUSION BIBLIOGRAPHY

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INTRODUCTION OF MUTUAL FUND

CONCEPT OF MUTUAL FUND: A mutual fund is a common pool of money into which investors place their contributions that are to be invested in accordance with a stated objective. The ownership of the fund is thus joint or “mutual”; the fund belongs to all investors. A single investor’s ownership of the fund is in the same proportion as the amount of the contribution made by him or her bears to the total amount of the fund. Mutual Funds are trusts, which accept savings from investors and invest the same in diversified financial instruments in terms of objectives set out in the trusts deed with the view to reduce the risk and maximize the income and capital appreciation for distribution for the members. A Mutual Fund is a corporation and the fund manager’s interest is to professionally manage the funds provided by the investors and provide a return on them after deducting reasonable management fees.

DEFINITION: “Mutual funds are collective savings and investment vehicles where savings of small (or sometimes big) investors are pooled together to invest for their mutual benefit and returns distributed proportionately”. “A mutual fund is an investment that pools your money with the money of an unlimited number of other investors. In return, you and the other investors each own shares of the fund. The fund's assets are invested according to an investment objective into the fund's portfolio of investments. Aggressive growth funds seek long-term capital growth by investing primarily in stocks of fast-growing smaller companies or market segments. Aggressive growth funds are also called capital appreciation funds”. 5

What is Mutual Fund?

Why Select Mutual Fund?

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ADVANTAGES OF MUTUAL FUNDS: If mutual funds are emerging as the favorite investment vehicle, it is because of the many advantages they have over other forms and the avenues of investing, particularly for the investor who has limited resources available in terms of capital and the ability to carry out detailed research and market monitoring. The following are the major advantages offered by mutual funds to all investors:

1. Portfolio Diversification: Each investor in the fund is a part owner of all the fund’s assets, thus enabling him to hold a diversified investment portfolio even with a small amount of investment that would otherwise require big capital.

2. Professional Management: Even if an investor has a big amount of capital available to him, he benefits from the professional management skills 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 options, ensure a much better return than what an investor can manage on his own. Few investors have the skill and resources of their own to succeed in today’s fast moving, global and sophisticated markets.

3. Reduction/Diversification Of Risk: When an investor invests directly, all the risk of potential loss is his own, whether he places a deposit with a company or a bank, or he buys a share or debenture on his own or in any other from. While investing in the pool of funds with investors, the potential losses are also shared with other investors. The risk reduction is one of the most important benefits of a collective investment vehicle like the mutual fund.

4. Reduction Of Transaction Costs: What is true of risk as also true of the transaction costs? The investor bears all the costs of investing such as brokerage or custody of securities. When going through a fund, he has the benefit of economies of scale; the funds pay lesser costs because of larger volumes, a benefit passed on to its investors. 7

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

6. Convenience And Flexibility: Mutual fund management companies offer many investor services that a direct market investor cannot get. Investors can easily transfer their holding from one scheme to the other; get updated market information and so on. 7.

Tax Benefits: Any income distributed after March 31, 2002 will be subject to tax in the assessment of

all Unit holders. However, as a measure of concession to Unit holders of open-ended equityoriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%. In case of Individuals and Hindu Undivided Families a deduction up to Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax.

8. Well Regulated: All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI. 9. Transparency: You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

DISADVANTAGES OF MUTUAL FUNDS: 8

1.

No Control Over Costs: An investor in a mutual fund has no control of the overall costs of investing. The investor

pays investment management fees as long as he remains with the fund, albeit in return for the professional management and research. Fees are payable even if the value of his investments is declining. A mutual fund investor also pays fund distribution costs, which he would not incur in direct investing. However, this shortcoming only means that there is a cost to obtain the mutual fund services.

2.

No Tailor-Made Portfolio: Investors who invest on their own can build their own portfolios of shares and bonds and

other securities. Investing through fund means he delegates this decision to the fund managers. The very-high-net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives. However, most mutual fund managers help investors overcome this constraint by offering families of funds- a large number of different schemes- within their own management company. An investor can choose from different investment plans and constructs a portfolio to his choice.

3. 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 to achieve his objectives, quite similar to the situation when he has individual shares or bonds to select.

4. The Wisdom Of Professional Management: That's right, this is not an advantage. The average mutual fund manager is no better at picking stocks than the average nonprofessional, but charges fees.

5. Dilution: Mutual funds generally have such small holdings of so many different stocks that insanely great performance by a fund's top holdings still doesn't make much of a difference in a mutual fund's total performance.

HISTORY OF MUTUAL FUNDS IN INDIA

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The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank. The history of mutual funds in India can be broadly divided into four distinct phases

FIRST PHASE – 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6, 700 crores of assets under management.

SECOND PHASE – 1987-1993 (ENTRY OF PUBLIC SECTOR FUNDS): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47, 004 crores.

THIRD PHASE – 1993-2003 (ENTRY OF PRIVATE SECTOR FUNDS): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As 10

at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of India with Rs.44, 541 crores of assets under management was way ahead of other mutual funds.

FOURTH PHASE – SINCE FEBRUARY 2003: In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29, 835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76, 000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.

FIFTH PHASE . GROWTH AND CONSOLIDATION - 2004 Onwards The industry has also witnessed several mergers and acquisitions recently, examples of which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more international mutal fund players have entered India like Fidelity, Franklin Templeton Mutual Fund etc. There were 29 funds as at the end of March 2006. This is a continuing phase of growth of the industry through consolidation and entry of new international and private sector players. The graph indicates the growth of assets under management over the years.

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(Source: www.amfiindia.com)

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TYPES OF MUTUAL FUNDS SCHEMES IN INDIA Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.

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A).

BY STRUCTURE

1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.

2. Close - Ended Schemes: A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.

3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and closeended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

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B).

BY NATURE

1. Equity Fund: These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows: •

Diversified Equity Funds

•

Mid-Cap Funds

•

Sector Specific Funds

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Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on

the risk-return matrix.

2. Debt Funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as: •

Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.

•

Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

•

MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

•

Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. 15

•

Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

3. Balanced Funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Further the mutual funds can be broadly classified on the basis of investment parameter via; each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.

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C).

BY INVESTMENT OBJECTIVE:

Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money. Load Funds: A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history. No-Load Funds: A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

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DIFFERENT PLANS THAT MUTUAL FUND OFFER Mutual Funds in order to cater to a range of investors, have various investment plans. Some of the important investment plans include: Growth Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. This plan appeals to investors in the high income bracket. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income. Income Plan Under the Income Plan, the investor realises income in the form of dividend. However his NAV will fall to the extent of the dividend. Dividend Re-investment Plan Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same. Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested on behalf of the investor, thus increasing the number of units held by the investors. Systematic Investment Plan (SIP) A Systematic Investment Plan is not a type of mutual fund. It is a method of investing in a mutual fund. That means that, every month, you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000 in your fund. Let's say the NAV on the day you invest in the first month is Rs 20; you will get 50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

Systematic Withdrawal Plan 18

As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a predetermined interval. The investor’s units will be redeemed at the existing NAV as on that day. Retirement Pension Plan Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates for their employees. Insurance Plan Some schemes launched by UTI and LIC offer insurance cover to investors. 401(k) plan A popular contribution program in the USA, available through many employers. Within these tax-sheltered plans, participants often can choose mutual funds as one or more of the investment choices. This plan (or even a variant) is yet to be introduced in India.

INFORMATION OF MUTUAL FUNDS SCHEMES 19

Load or no-load Fund A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs. 10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs. 10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A No-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units. Assured return scheme Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year. Offer document An abridged offer document, which contains very useful information, is required to be given to the prospective investor by the mutual fund. The application form for subscription to a scheme is an integral part of the offer document. SEBI. Has prescribed minimum disclosures in the offer document An investor, before investing in a scheme, should carefully read the offer document. Due care must be given to portions relating to main features of the scheme, risk factors, initial issue expenses and recurring expenses to be charged to the scheme, entry or exit loads, sponsor's track record, educational qualification and work experience of key personnel including fund managers, performance of other schemes launched by the mutual fund in the past, pending litigations and penalties imposed, etc Net Asset Value (NAV) One of the most common terms you come across while investing in mutual funds is its NAV or the net asset value. It is essential to know the NAV when you buy the units of a mutual fund or when you plan to sell them. NAV is defined as a fund's market value per share. Simply put, the NAV of a fund is its price per unit. If the NAV of a fund is Rs 100, it means that you can buy one unit of the fund at Rs 100. If you are investing Rs 1,000 in this fund, you will get 10 units.

Calculating the NAV The NAV of a fund is calculated on a daily basis. It is derived by dividing the total current market value of all the securities in the fund's portfolio (minus the liabilities) by the number of outstanding fund shares. It is calculated based on the closing market prices of the securities in the fund's portfolio. 20

The NAVs of funds change daily and are calculated by the respective fund houses. Some fund houses get the NAVs calculated or their investments valued through independent entities like banks. They are required to adhere to specific regulations and guidelines laid down by the market regulator, the Securities and Exchange Board of India (SEBI), while valuing their investments.

FORMULAE FOR CALCULATING NAV NAV =

ASSETS – LIABILITIES

NUMBER OF UNITS OUTSTANDING

How it works A fund's buy and sell orders are processed at the NAV of the trading date. If you buy an MF scheme before 3 p.m. on a business day, that is the day the markets are open, you get it at the NAV of that day. If you buy it after 3 p.m., you will get it at the NAV of the next business day. Suppose it is Monday and the NAV of a fund is Rs 60. If you buy this fund at 2.30 p.m. on Monday, you will get it at an NAV of Rs 60. But if you buy it at 3.30 p.m., you get it at the NAV of the next day, which is calculated at the end of the day on Monday. NAV and loads The NAV of a fund is also affected by loads. It is reduced by the entry load when you are buying a fund and exit load (if applicable) when you are redeeming the fund, that is, selling the units of the fund. Consider a fund with an NAV of Rs 100, which charges an entry load of 2.25%. If you pay Rs 1,000 to buy 10 units, you will get 9.775 units as only Rs 977.50 is invested. The rest of the money, that is Rs 22.50, is deducted as entry load. Now consider a situation when you own 10 units at Rs 100 per unit. You want to redeem the fund and the exit load is 1%. In this case, the NAV will be Rs 99, so instead of getting back Rs 1,000, you will only get Rs 990. Here, Rs 10 is deducted as exit load. Exit loads are not charged every time. These are usually levied if you redeem the units within a short period of investing, which is six months to a year. The formula used to calculate the repurchase price for a scheme with an exit load is: Repurchase price = NAV x (1 - Exit load) Sale price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Repurchase Price Is the price at which units under open-ended schemes are repurchased by the Mutual Fund. Such prices are NAV related.

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Redemption Price Is the price at which close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load Is a charge collected by a scheme when it sells the units. Also called, ‘Front-end’ load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’Load Is a charge collected by a scheme when it buys back the units from the unitholders.

RISK INVOLVE IN MUTUAL FUNDS 22

Risk is an inherent aspect of every form of investment. For mutual fund investments, risks would include variability, or period-by-period fluctuations in total return. The value of the scheme's investments may be affected by factors affecting capital markets such as price and volume volatility in the stock markets, interest rates, currency exchange rates, foreign investment, changes in government policy, political, economic or other developments.

TYPE OF RISK

Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk.” Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.

Credit Risk: 23

In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures? Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV. Investment Risks: In the sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.

Recent trends in mutual fund industry The most important trend in the mutual fund industry is the aggressive expansion of the foreign owned mutual fund companies and the decline of the companies floated by nationalized banks and smaller private sector players. Many nationalized banks got into the mutual fund business in the early nineties and got off to a good start due to the stock market boom prevailing then. These banks did not really understand the mutual fund business and they just viewed it as another kind of banking activity. Few hired specialized staff and generally chose to transfer staff from the parent organizations. The 24

performance of most of the schemes floated by these funds was not good. Some schemes had offered guaranteed returns and their parent organizations had to bail out these AMCs by paying large amounts of money as the difference between the guaranteed and actual returns. The service levels were also very bad. Most of these AMCs have not been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few exceptions, they have serious plans of continuing the activity in a major way. The experience of some of the AMCs floated by private sector Indian companies was also very similar. They quickly realized that the AMC business is a business, which makes money in the long term and requires deep-pocketed support in the intermediate years. Some have sold out to foreign owned companies, some have merged with others and there is general restructuring going on. The foreign owned companies have deep pockets and have come in here with the expectation of a long haul. They can be credited with introducing many new practices such as new product innovation, sharp improvement in service standards and disclosure, usage of technology, broker education and support etc. In fact, they have forced the industry to upgrade itself and service levels of organizations like UTI have improved dramatically in the last few years in response to the competition provided by these.

Market Trends A lone UTI with just one scheme in 1964 now competes with as many as 400 odd products and 34 players in the market. In spite of the stiff competition and losing market share, UTI still remains a formidable force to reckon with. Last six years have been the most turbulent as well as exiting ones for the industry. New players have come in, while others have decided to close shop by either selling off or merging with others. Product innovation is now passé with the game shifting to performance delivery in fund management as well as service. Those directly associated with the fund management industry like distributors, registrars and transfer agents, and even the regulators have become more mature and responsible. The industry is also having a profound impact on financial markets. While UTI has always been a dominant player on the bourses as well as the debt markets, the new generation of private funds which have gained substantial mass are now seen flexing their muscles. Fund managers, by their selection criteria for stocks have forced corporate governance on the industry. By rewarding honest and transparent management with higher valuations, a system of risk-reward has been created where the corporate sector is more transparent then before. Funds have shifted their focus to the recession free sectors like pharmaceuticals, FMCG and technology sector. Funds performances are 25

improving. Funds collection, which averaged at less than Rs100bn per annum over five-year period spanning 1993-98 doubled to Rs210bn in 199899. In the current year mobilization till now have exceeded Rs300bn. Total collection for the current financial year ending March 2000 is expected to reach Rs450bn. What is particularly noteworthy is that bulk of the mobilization has been by the private sector mutual funds rather than public sector mutual funds. Indeed private MFs saw a net inflow of Rs. 7819.34 crore during the first nine months of the year as against a net inflow of Rs.604.40 crore in the case of public sector funds. Mutual funds are now also competing with commercial banks in the race for retail investor’s savings and corporate float money. The power shift towards mutual funds has become obvious. The coming few years will show that the traditional saving avenues are losing out in the current scenario. Many investors are realizing that investments in savings accounts are as good as locking up their deposits in a closet. The fund mobilization trend by mutual funds in the current year indicates that money is going to mutual funds in a big way. The collection in the first half of the financial year 1999-2000 matches the whole of 1998-99. India is at the first stage of a revolution that has already peaked in the U.S. The U.S. boasts of an Asset base that is much higher than its bank deposits. In India, mutual fund assets are not even 10% of the bank deposits, but this trend is beginning to change. Recent figures indicate that in the first quarter of the current fiscal year mutual fund assets went up by 115% whereas bank deposits rose by only 17%. This is forcing a large number of banks to adopt the concept of narrow banking wherein the deposits are kept in Gilts and some other assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be ignored and they will not close down completely. Their role as intermediaries cannot be ignored. It is just that Mutual Funds are going to change the way banks do business in the future.

NET ASSET VALUE (NAV): 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 an investor holds needs to be assigned a value. Since the units held by investor evidence the ownership of the fund’s assets, the value of the total assets 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 one unit or one share. The value of an investor’s part ownership is thus determined by the NAV of the number of units held. Calculation of NAV: 26

Let us see an example. If the value of a fund’s assets stands at Rs. 100 and it has 10 investors who have bought 10 units each, the total numbers of units issued are 100, and the value of one unit is Rs. 10.00 (1000/100). If a single investor in fact owns 3 units, the value of his ownership of the fund will be Rs. 30.00(1000/100*3). Note that the value of the fund’s investments will keep fluctuating with the market-price movements, causing the Net Asset Value also to fluctuate. For example, if the value of our fund’s asset increased from Rs. 1000 to 1200, the value of our investors holding of 3 units will now be (1200/100*3) Rs. 36. The investment value can go up or down, depending on the markets value of the fund’s assets.

FORMULAE FOR CALCULATING NAV

NAV =

ASSETS – LIABILITIES

NUMBER OF UNITS OUTSTANDING

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RISK FACTORS OF MUTUAL FUNDS

Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk.” Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market. Credit Risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?

Interest Rate Risk: 28

Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV. Investment Risks: In the sectoral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.

WORKING OF MUTUAL FUNDS 29

The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme. Depending on the load structure of the scheme, you have to pay entry or exit load.

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STRUCTURE OF A MUTUAL FUND India has a legal framework within which Mutual Fund have to be constituted. In India open and close-end funds operate under the same regulatory structure i.e. as unit Trusts. A Mutual Fund in India is allowed to issue open-end and close-end schemes under a common legal structure. The structure that is required to be followed by any Mutual Fund in India is laid down under SEBI (Mutual Fund) Regulations, 1996.

The Fund Sponsor: Sponsor is defined under SEBI regulations as any person who, acting alone or in combination of another corporate body establishes a Mutual Fund. The sponsor of the fund is akin to the promoter of a company as he gets the fund registered with SEBI. The sponsor forms a trust and appoints a Board of Trustees. The sponsor also appoints the Asset Management Company as fund managers. The sponsor either directly or acting through the trustees will also appoint a custodian to hold funds assets. All these are made in accordance with the regulation and guidelines of SEBI. As per the SEBI regulations, for the person to qualify as a sponsor, he must contribute at least 40% of the net worth of the Asset Management Company and possesses a sound financial track record over 5 years prior to registration. 31

SEBI REGULATIONS: •

As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors.

•

SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market.

•

The regulations were fully revised in 1996 and have been amended thereafter from time to time.

•

SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors.

•

All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations. The risks associated with the schemes launched by the mutual funds sponsored by these entities are of similar type. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI.

•

SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors.

•

Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme.

•

Further SEBI Regulations, inter-alia, stipulate that MFs cannot guarantee returns in any scheme and that each scheme is subject to 20: 25 condition [I.e. Minimum 20 investors per scheme and one investor can hold more than 25% stake in the corpus in that one scheme].

•

Also SEBI has permitted MFs to launch schemes overseas subject various restrictions and also to launch schemes linked to Real Estate, Options and Futures, Commodities, etc.

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MUTUAL FUND COMPANIES IN INDIA:

The concept of mutual funds in India dates back to the year 1963. The era between 1963 and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust of India (UTI). By the end of the 80s decade, few other mutual fund companies in India took their position in mutual fund market. The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund. The succeeding decade showed a new horizon in Indian mutual fund industry. By the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds started penetrating the fund families. In the same year the first Mutual Fund Regulations came into existence with re-registering all mutual funds except UTI. The regulations were further given a revised shape in 1996. Kothari Pioneer was the first private sector mutual fund company in India which has now merged with Franklin Templeton. Just after ten years with private sector player’s penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund companies in India. Major Mutual Fund Companies in India •

ABN AMRO Mutual Fund

•

Standard Chartered Mutual Fund

•

Birla Sun Life Mutual Fund

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Franklin Templeton India Mutual Fund

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Bank of Baroda Mutual Fund

•

Morgan Stanley Mutual Fund India

•

HDFC Mutual Fund

•

Escorts Mutual Fund

•

HSBC Mutual Fund

Alliance Capital Mutual Fund

•

ING Vysya Mutual Fund

•

•

Prudential ICICI Mutual Fund

•

Benchmark Mutual Fund

•

State Bank of India Mutual Fund

•

Canbank Mutual Fund

•

Tata Mutual Fund

•

Chola Mutual Fund

•

Unit Trust of India Mutual Fund

•

LIC Mutual Fund

•

Reliance Mutual Fund

•

GIC Mutual Fund

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For the first time in the history of Indian mutual fund industry, Unit Trust of India Mutual Fund has slipped from the first slot. Earlier, in May 2006, the Prudential ICICI Mutual Fund was ranked at the number one slot in terms of total assets. In the very next month, the UTIMF had regained its top position as the largest fund house in India. Now, according to the current pegging order and the data released by Association of Mutual Funds in India (AMFI), the Reliance Mutual Fund, with a January-end AUM of Rs 39,020 crore has become the largest mutual fund in India On the other hand, UTIMF, with an AUM of Rs 37,535 crore, has gone to second position. The Prudential ICICI MF has slipped to the third position with an AUM of Rs 34,746 crore. It happened for the first time in last one year that a private sector mutual fund house has reached to the top slot in terms of asset under management (AUM). In the last one year to January, AUM of the Indian fund industry has risen by 64% to Rs 3.39 lakh crore. According to the data released by Association of Mutual Funds in India (AMFI), the combined average AUM of the 35 fund houses in the country increased to Rs 5,512.99 billion in April compared to Rs 4,932.86 billion in March Reliance MF maintained its top position as the largest fund house in the country with Rs 74.25 billion jump in AUM to Rs 883.87 billion at April-end. The second-largest fund house HDFC MF gained Rs 59.24 billion in its AUM at Rs 638.80 billion. ICICI Prudential and state-run UTI MF added Rs 46.16 billion and Rs 57.35 billion re respectively to their assets last month. ICICI Prudential`s AUM stood at Rs 560.49 billion at the end of April, while UTI MF had assets worth Rs 544.89 billion. The other fund houses which saw an increase in their average AUM in April include -Canara Robeco MF, IDFC MF, DSP BlackRock, Deutsche MF, Kotak Mahindra MF and LIC MF.

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Mutual Funds: Systematic Investment Plan

Systematic Investment Plan (SIP) is a convenient way to accumulate wealth in a disciplined manner over a long-term period. It helps you to invest regularly in small installments and thereby build wealth over a period of time. SIP is a method of investing in a mutual funds scheme. Mutual fund schemes are offered by the Asset Management companies (AMC) to customers through a distributor. The Bank acts as a distributor of Mutual Fund products for the AMC to the customers. A customer wanting to invest in a mutual fund scheme can avail of the Systematic Investment Plan option through Axis Bank.

Advantages of SIP Power of Compounding SIP helps you to start investing at an early age to meet the greater expenses of your life. Saving a small sum of money regularly makes money work with greater power of compounding with significant impact on wealth accumulation. Rupee Cost Averaging SIP minimizes the effects of investing in volatile markets. It helps you average out your cost by generating superior returns in the long run. It reduces the risk associated with lump sum investments. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time thus the average cost of your investment is often reduced. Convenience and Regularity SIP gives you the convenience to pay through Axis Bank Electronic clearance service (ECS) or Auto Debit. You can decide the amount and the mutual fund scheme. A fixed amount will automatically get debited from your account on a date specified by you. Disciplined approach towards investment Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation. Disciplined investing is vital to earning good returns over a longer time frame.

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How to invest in SIP? Step 1: Select a mutual fund scheme of your choice with the payment option as SIP Step 2: Decide the Investment periodicity (frequency of making payments). You can choose to make your investment on a monthly or quarterly basis. Step 3: Select the minimum investment amount. For instance, if you choose to invest Rs 12,000 every year with a monthly SIP Option. Therefore you would be investing Rs 1,000 every month in your fund. By the end of a year, you would have invested Rs 12,000 in your fund. Step 4: The amount gets converted into units, depending on the Net Asset Value (NAV). NAV is the market value per unit of a fund. If the NAV in the first month is Rs 20, you will get 50 units. Similarly in the next month if the NAV is Rs 25, you will get 40 units. The following month if the NAV is Rs 18, then you will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. Step 5: The units get accumulated over a period of time. You can stay invested till the time you wish and redeem your units when you wish to exit from the scheme. The units are redeemed at

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Monthly Income Plans: A detailed guide on MIP’s Monthly Income Plans, When you hear it for the first time, you get a feel that it’s some kind of assured and non-risky product which will deliver you uninterrupted monthly income, but it’s not exactly that way. Do you have a lot of cash which you want to park somewhere with expectation of better returns than a Fixed Deposit? Are you looking for some kind of instrument which will give you regular income with decent returns with moderate or low risk? If yes, welcome to the world of Monthly Income Plans, which are also known as MIP’s.

What are Monthly Income Plans? An MIP is nothing, but a debt oriented mutual fund which gives you income, in the form of dividends – simple as that. As MIPs are debt oriented mutual funds, they invest heavily in debt instruments like debentures, corporate bonds, government securities etc. It generally has 75-80% of its money in debt and rest in equity and cash. The income you can get from Monthly income plans is not limited to the monthly option. You can also choose to receive income quarterly, half-yearly or annually. Just like any other mutual fund, the MIP too, comes with two options. 1. MIP with Dividend option: Monthly income plans with dividend option provides you an income in form of dividends. There is an option to receive this income monthly, quarterly, half-yearly and yearly. So you have to choose the option at the time of buying the MIP. Note that while the dividend from MIPs is tax-free in the hands of investors, the company has to 37

pay a dividend distribution tax of around 14% on the dividend before it reaches your hand. So your returns reduce by that much. For example, if company declares a dividend of Rs 3 per unit, they have to pay 42 paisa (14%) as Dividend Distribution Tax and you will only get remaining amount in your hand, on which you don’t have to pay any tax. I hope you know that the NAV of your MIP will come down by Rs 3 after dividend is declared and given to you. So don’t shout your excitement to the entire world when you get dividends, it’s just your own money which you got! 2. MIP with Growth Option: Here, the money is not paid out to you in forms of dividends; instead it keeps growing in the mutual funds. Hence your money is just growing inside the fund itself and you can reap all the benefits at the time of redeeming the funds in future. In this option, you have nothing to do with dividends. Note that you get power of compounding in growth option because your returns also earn in future. Here is an article on difference between dividends vs. growth option in mutual funds to give you a better idea of what I am talking about. Features of Monthly Income Plans 1. Dividends can be declared only from the profits and not from Capital Regulations demand that dividend can be paid only from surpluses and not from the capital investment. What it actually means is that dividends can be declared from earned income only. If you’re initial NAV was Rs 10 and after a month the NAV rose to Rs 10.2, the dividend can only be given out of this 0.2 and not from the initial capital value. This makes sure that Company cannot show to the world that they are constantly giving income in case they have not done well. 2. No guarantee of Regular Income The biggest myth about Monthly income plans is that they provide guaranteed monthly income, which is not true (See this question asked by Krishna on our Forum). While the aim of MIPs is to regularly declare dividends, it might happen at times, that they do not declare any dividends because of bad performance. To top that, there is no regulation or oversight on the MIP’s part to declare regular dividends. So take it on the chin, if you don’t get your income once in a while. 3. MIP’s return are influenced by interest rates and stock market Just because it’s a debt oriented product, it does not mean that they are “safe”. Even MIPs can give negative return, but in extreme cases. The debt portion is influenced by interest rates. When the interest rate falls, the NAV rises as price of bond increases. When interest rate rises, NAV falls. At such times the equity portion of the fund helps to maintain the return. Here is an article on Interest Rates and how they affect Mutual funds . 38

4. MIPs are prone to miss-selling because of a high commission structure MIPs offer lucrative commissions to agents as much as 1-1.5% unlike 0.5-.75% in Equity funds. Due to this it becomes easy to missell MIP’s as they can be labeled as “Safe Funds” and “Monthly Income Plans” which Indians like to hear a lot. “Look what happened after the abolition of entry load in mutual funds in 2009. From the last 1 Year, the corpus of MIP schemes has seen a huge inflow all over India. Last year, the total industry AUM was close to Rs. 3700 crore and today it is well over 24500 crore. In this entire period, equity funds AUM have gone down. Now when the intentions itself are not good, needless to say that the outcome will be right. Many investors are not aware that there is an EXIT Load of 1% in almost all MIPs if you were to withdraw before one year & in some cases even 1.5 years.” – says Hemant Beniwal Taxation of MIP’s MIP’s are debt funds and hence the taxation is same as debt funds. Short Term Capital Gains: Any profit before a year would be Short term capital gains and it would be added to your income and taxed at your slab rate. So for investors who are in higher tax slabs it would be wise not to sell their MIP’s (in case they can) before a year, else there will be a good amount of tax on your profits. Long Term Capital Gains: Any profit you get after 1 yr. in MIP would be taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower. Short Term and Long term Capital Loss : The best thing about MIP’s over FD’s or Post office schemes is that in case you have any loss in MIP’s , you can set it off against the capital gains in the same year or in next 8 yrs. , which makes sure that even losses can be used for tax saving purpose. Dividends : All the dividends received from the MIP’s would be tax-free in hands of investors, but note that companies already pay Dividend distribution tax from the MIP’s Read more on Short term and long term capital gains

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MIP’s save money for bad times Think about ants! They make sure that they save enough food for rainy season, so that they don’t fast in bad times. In the same way MIPs do not declare all the earned income as dividends, instead they declare a part of earned income as dividend and save rest for troubled times in future. This makes sure that when there are bad days in future and MIPs do not see much growth, they can use the money saved, to declare dividends. For instance, in 2008, despite bad markets, 19 funds skipped only up to four monthly dividends. However a lot of MIP’s didn’t perform that well and could not save the part of earned income in a proper way. Hence they had to skip all 12 months dividends. E.g., Canara Robeco MIP Mn Div., which skipped all 12 dividends in 2008 and 9 months dividends in year 2009. See the chart on the right to get more insight on how MIPs missed their dividends. Beware: There is one more option called dividend reinvestment in MIP’s apart from Dividend payout and growth. If the payable dividend is less than Rs 250, then the dividend would be compulsorily reinvested. Who should invest in MIP’s? 1. Investors looking for regular Income If you are retired/semi-retired or just looking to generate some regular income can look at MIP’s as an option. Note that instead of choosing a monthly option of income, I would rather suggest a quarterly or half-yearly option. 2. Conservative investors looking for better returns Are you a conservative investor but still looking for better returns than pure debt options like Fixed deposits or Insurance policies? Well, you can’t get 100% safety with MIP’s, but there are very good change that you would be getting better than FD returns with MIPs. 3. Investors who want to park a big sum of money A lot of people have questions like “Where to park my lump sum money for medium term with lower risk?” If your horizon is very less – like 6 months or a year, MIP’s might not be the best option, but if you want to park it for 2-3 yrs. with low risk, MIPs with growth option can be a suitable instrument.

40

MIP vs. Fixed Deposits/ Fixed Maturity Plans/ POIMS You might get confused between so many debt products and might be wondering how monthly Income Plans compare to Fixed Deposits, Post Office Monthly Income Plans or Fixed Maturity Plans (FMP). There are various parameters on which they all differ. Below is the chart which shows you those differences.

Two ways of getting income from an MIP We will see two different ways of generating monthly/quarterly income through Monthly Income Plans. One is the regular way of choosing dividend option and the option one is starting Systematic Withdrawal Plan from MIP after a year of buying it. Let’s look at both and its pros and cons … 1. Choose dividend option The good point in this option is that you will start getting the income immediately as company starts declaring the dividends and you don’t have to take care of taxation issues. 41

However the bad side is that eventually 14% dividend distribution tax would be paid by company and the stability of income will depend on how often dividends are declared by company. If they skip the dividend you will not be getting the income for that month/quarter.

2. Choosing growth option and start SWP (Systematic Withdrawal Plan) If you use a bit of strategy, you can create a more stable and more tax efficient income by this method. You can choose growth option in MIP and after 1 yr. you can start a SWP (systematic withdrawal plan, opposite of SIP) from your MIP to your bank account. What will happen with this option is that you will not have to depend on companies dividend announcement , as its your decision to liquidate a fixed part of your MIP’s, sell it and get the money in your bank account . Also as you are doing it after 1 yr., there won’t be any exit load and the profits you get out of it would be Long term capital gains , so you only pay 10% on the profits (assuming you don’t want indexation benefits) , which is 4% lesser than the dividend distribution tax . If you have a large amount of investments in MIPs, then this option can save some tax for you, but if your investments aren’t significant enough, it’s not worth the hassle. Some best performing MIP’s in Market One of the readers Sagar asked his query on our forum: “Which is the best Monthly income plan?” While there is no guarantee that the MIP which you choose today will keep performing well always, but I have got a list of MIP’s which have done excellent in past and still look good. You can choose any of these if you are disciplined enough. Once you choose them make sure you concentrate on regularly investing in them without looking at their performance every week or month. Just review them in a year or so. Watch out for the expense ratio of the MIP’s, lower the better.

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BUDGET 2011: GOOD NEWS FOR MUTUAL FUND INDUSTRY?

•

“Currently, only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. To liberalize the portfolio investment route, it has been decided to permit SEBI-registered Mutual Funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes.

•

The Section 115(r) of the Income Tax Act has been amended so that with effect June 1, 2011 all ‘persons’ other than an individual or a Hindu Undivided Family (HUF) will now on be subjected to Dividend Distribution Tax (DDT) at 30 percent instead of 20 percent on income distributed by debt funds defined by SEBI as money market & cash funds and to DDT at 30 percent instead of 25 percent on other debt funds.

•

April 1, 2011 the surcharge of 7.50 percent has been reduced to 5.0 percent which reduces the impact to around 3 percent and 6 percent in the case of cash and other debt funds respectively.

•

There is no change in the position of individuals or HUFs (DDT at 12.5 percent on cash funds and 25 percent on other debt funds).

•

I do not believe that this tax law amendment is a game changer. All it does is take away the small tax arbitrage which existed between debt mutual funds and other competing investment products.

•

Liquid mutual funds will continue to score over bank demand and term deposits not only in terms of their returns but also because demand deposits do not earn a return (all money below 7 days maturity cannot get into a bank term deposit).

•

All other debt funds can also hold assets beyond 91 days which are subjected to asset value volatility gains and losses which will get reflected in their returns proportionate with associated risks.

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New Fund Offers Schemes Name

Open Date

Close Date

Birla Sun Life Gold ETF (G)

25-04-11

09-05-11

HSBC Brazil Fund (D)

15-04-11

29-04-11

HSBC Brazil Fund (G)

15-04-11

29-04-11

ICICI Pru MIP 5 (G)

14-04-11

27-04-11

ICICI Pru MIP 5 (HDiv)

14-04-11

27-04-11

ICICI Pru MIP 5 (MDiv)

14-04-11

27-04-11

ICICI Pru MIP 5 (QDiv)

14-04-11

27-04-11

ING OFPF - Aggressive Plan (D)

19-04-11

03-05-11

ING OFPF - Aggressive Plan (G)

19-04-11

03-05-11

ING OFPF - Cautious Plan (D)

19-04-11

03-05-11

ING OFPF - Cautious Plan (G)

19-04-11

03-05-11

ING OFPF - Conservative Plan (D)

19-04-11

03-05-11

ING OFPF - Conservative Plan (G)

19-04-11

03-05-11

ING OFPF - Prudent Plan (D)

19-04-11

03-05-11

ING OFPF - Prudent Plan (G)

19-04-11

03-05-11

Mutual Fund New Fund Listings Scheme

Fund class

Daiwa Government Securities (G)

Debt - Short

NAV Returns (%) 1003.79

0.38 44

Term Peerless MF Child Plan (G)

Debt - Specialty

0.00

0.00

Motilal Most Shares NASDAQ 100 ETF

Equity Index

106.17

6.17

Kotak Gold Fund (G)

Hybrid

10.46

4.57

Mirae India-China Consumption (G)

Equity Diversified

10.37

3.67

Quantum Mutual Fund launches 'Quantum Gold Savings Fund' An open ended fund of fund scheme which will invest in units of the Quantum Gold Fund (ETF) Quantum Mutual Fund recently announced the launch of the “Quantum Gold Savings Fund”, an open ended fund of fund scheme which will invest predominantly in units of the Quantum Gold Fund (ETF). The New Fund Offer opens on Thursday, April 28, 2011 and will close on Thursday, May 12, 2011. The scheme will reopen for continuous subscription on Thursday, May 26, 2011. The Quantum Gold Savings Fund enables investors to invest in the scheme through lump sum investment or Systematic Investment Plans (available after the scheme reopens).This fund addresses investors who wish to invest in gold, but do not have a Demat or trading account required for investing via Exchange Traded Funds (ETFs).

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RELIANCE MUTUAL FUND v/s UTI MUTUAL FUND

MUTUAL FUND ABOUT RELIANCE MUTUAL FUND Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for launching of various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. RMF is one of India’s leading Mutual Funds, with Average Assets under Management (AAUM) of Rs. 88,388 crores (AAUM for 30th Apr 09) and an investor base of over 71.53 Laces. Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one of the fastest growing mutual funds in the country. RMF offers investors a well-rounded portfolio of products to meet varying investor requirements and has presence in 118 cities across the country. Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors. "Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the balance paid up capital being held by minority shareholders." Sponsor: Reliance Capital Limited. Trustee: Reliance Capital Trustee Co. Limited. Investment Manager: Reliance Capital Asset Management Limited. The Sponsor, the Trustee and the Investment Manager are incorporated under the Companies Act 1956.

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Vision Statement “To be a globally respected wealth creator with an emphasis on customer care and a culture of good corporate governance.” Mission Statement To create and nurture a world-class, high performance environment aimed at delighting our customers. The Main Objectives of the Trust: •

To carry on the activity of a Mutual Fund as may be permitted at law and formulate and devise various collective Schemes of savings and investments for people in India and abroad and also ensure liquidity of investments for the Unit holders;

•

To deploy Funds thus raised so as to help the Unit holders earn reasonable returns on their savings and

•

To take such steps as may be necessary from time to time to realize the effects without any limitation.

OUR SCHEMES A). EQUITY/GROWTH SCHEMES: 1. Reliance Infrastructure Fund(Open-Ended Equity): 2. Reliance Quant Plus Fund/Reliance Index Fund (Open-Ended Equity): 3. Reliance Natural Resources Fund (Open-Ended Equity): 4. Reliance Equity Linked Saving Fund (A 10 Year Close-Ended Equity ): 5. Reliance Equity Advantage Fund (Open-Ended Diversified Equity): 6. Reliance Equity Fund (Open-Ended Diversified Equity) : 7. Reliance Tax Saver (ELSS) Fund (Open-Ended Equity):

8. Reliance Growth Fund (Open-Ended Equity): 9. Reliance Vision Fund (Open-Ended Equity) : 10. Reliance Equity Opportunities Fund (Open-Ended Diversified Equity): 11. Reliance NRI Equity Fund (Open-Ended Diversified Equity): 12. Reliance Long Term Equity Fund (Open-Ended Diversified Equity):

B).

DEBT/INCOME SCHEMES: 47

1. Reliance Monthly Income Plan : 2. Reliance Gilt Securities Fund - Short Term Gilt Plan & Long Term Gilt Plan : 3. Reliance Income Fund : 4. Reliance Medium Term Fund : 5. Reliance Short Term Fund : 6. Reliance Liquid Fund : 7. Reliance Floating Rate Fund : 8. Reliance NRI Income Fund : 9. Reliance Liquidity Fund : 10. Reliance Interval Fund : 11. Reliance Liquid Plus Fund: 12. Reliance Fixed Horizon Fund–I: 13. Reliance Fixed Horizon Fund –II:

14. Reliance Fixed Horizon Fund –III: C). SECTOR SPECIFIC SCHEMES: 1. Reliance Banking Fund : 2. Reliance Diversified Power Sector Fund :

D). RELIANCE GOLD EXCHANGE TRADED FUND:

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UNIT TRUST OF INDIA MUTUAL FUND 'Unit Trust of India was created by the UTI Act passed by the Parliament in 1963. For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens. In mid- 1980s public sector banks were allowed to open mutual funds. The real vibrancy and competition in the MF industry came with the setting up of the Regulator SEBI and its laying down the MF Regulations in 1993.UTI maintained its pre-eminent place till 2001, when a massive decline in the market indices and negative investor sentiments after Ketan Parekh scam created doubts about the capacity of UTI to meet its obligations to the investors. This was further compounded by two factors; namely, its flagship and largest scheme US 64 was sold and re-purchased not at intrinsic NAV but at artificial price and its Assured Return Schemes had promised returns as high as 18% over a period going up to two decades. In order to distance Government from running a mutual fund the ownership was transferred to four institutions; namely SBI, LIC, BOB and PNB, each owning 25%. UTI lost its market dominance rapidly and by end of 2005, when the new share-holders actually paid the consideration money to Government its market share had come down to close to 10%. A new board was constituted and a new management inducted. Systematic study of its problems role and functions was carried out with the help of a reputed international consultant. Once again UTI has emerged as a serious player in the industry. Some of the funds have won famous awards, including the Best Infra Fund globally from Lipper. UTI has been able to benchmark its employee compensation to the best in the market. Besides running domestic MF Schemes UTI AMC is also a registered portfolio manager under the SEBI (Portfolio Managers) Regulations. This company runs two successful funds with large international investors being active participants. UTI has also launched a Private Equity Infrastructure Fund along with HSH Nord Bank of Germany and Shinsei Bank of Japan Vision: To be the most Preferred Mutual Fund. 49

Mission: • The most trusted brand, admired by all stakeholders. • The largest and most efficient money manager with global presence • The best in class customer service provider • The most preferred employer • The most innovative and best wealth creator • A socially responsible organization known for best corporate governance Assets under Management: UTI Asset Management Co. Ltd Sponsor: • • • •

State Bank of India Bank of Baroda Punjab National Bank Life Insurance Corporation of India

Trustee: UTI Trustee Co. Limited.

Reliability UTIMF has consistently reset and upgraded transparency standards. All the branches, UFCs and registrar offices are connected on a robust IT network to ensure cost-effective quick and efficient service. All these have evolved UTIMF to position as a dynamic, responsive, restructured, efficient and transparent entity, fully compliant with SEBI regulations.

OUR SCHEMES A). EQUITY FUND 1. UTI Energy Fund (Open Ended Fund): 2. UTI Transportation And Logistics Fund (Auto Sector Fund) (Open Ended Fund): 3. UTI Banking Sector Fund (Open Ended Fund): 4. UTI Infrastructure Fund (Open Ended Fund): 5. UTI Equity Tax Savings Plan (Open Ended Fund): 6. UTI Growth Sector Fund – Pharma (Open Ended Fund): 7. UTI Growth Sector Fund – Services (Open Ended Fund): 8. UTI Growth Sector Fund – Software (Open Ended Fund): 50

9. UTI Master Equity Plan Unit Scheme (Close Ended Fund): 10.

UTI Master Plus Unit Scheme (Open Ended Fund):

11.

UTI Master Value Fund (Open Ended Fund):

12.

UTI Equity Fund (Open Ended Fund):

13.

UTI Top 100 Fund (Open Ended Fund):

14.

UTI Master share Unit Scheme (Open Ended Fund):

A).

INDEX FUND:

1. UTI Master Index Fund (Open Ended Fund): 2. UTI Gold Exchange Traded Fund (Open Ended Fund): 3. UTI Sunder (Open Ended Fund):

C).

ASSETS FUND

UTI Variable Investment Scheme:

D).

BALANCED FUND:

1. UTI Mahila Unit Scheme (Open Ended Fund): 2. UTI Balanced Fund (Open Ended Fund): 3. UTI Retirement Benefit Pension Fund (Open Ended Fund): 4. UTI CCP (Children Career Plan) Advantage Fund (Open Ended Fund): 5. UTI Charitable, Religious Trust And Registered Society (Open Ended Fund):

E).

INCOME FUND (DEBT FUND)

1. UTI Bond Fund (Open Ended Fund): 2. UTI Floating Rate Fund STP (Open Ended Fund): 3. UTI Gilt Advantage Fund LTP(Open Ended Fund): 4. UTI Gilt Advantage Fund STP (Open Ended Fund): 5. UTI G-SEC STP (Open Ended Fund): 6. UTI G-Sec-Investment Plan (Open Ended Fund):

F).

LIQUID FUND (DEBT FUND):

1. UTI Liquid Cash Plan (Open Ended Fund): 2. UTI Money Market Fund (Open Ended Fund):

DIFFERENCE BETWEEN RMF & UTF 51

RELIANCE MUTUAL FUND

UTI MUTUAL FUND

When Started?

Established in 1995, Currently, number one company in India.

Established in 1964. First mutual fund company in India

How they came into business

Registered with SEBI as trust under Indian Trusts Act, 1882

By the UTI Act passed by the Parliament in 1963.

Minimum investment.

Rs. 500

Rs.1000

Investment.

Equity Bank: 8-15% Software: 8-19% Petroleum Products: 4-8% Pharmaceuticals: 6-10%

Equity Financial Service: 16-22% Energy: 12-18% Consumer goods: 08-14%

invest in 12-20 sectors which include: Auto , Auto Ancillaries, Finance, Industrial Capital Goods, TelecomServices, Power, Construction Project, Hotels, Retailing, Media & Entertainment, Transportation etc UTI Dividend yield Fund, UTI Opportunity Fund,

invest in 7-15 sectors which include: IT, Telecom, Automobile, Cement Products, Derivatives, Textile, Metals etc

Main Funds.

Type of fund offered

Numbers of schemes offered Distribution

Is any other venture?

Equity Fund, Debt Fund, Sector Specific Fund and Gold Exchange Traded Fund. 106 schemes

Reliance Diversified Fund, Reliance Equity Opportunity Fund, Reliance Regular Saving Funds Equity Fund, Index Fund, Asset Fund, Balanced Fund, Debt Fund (Income, Liquid) 107 schemes.

•

•

•

Online and internet based distribution. Reliance outlets and branches.

•

Tie-up with Post offices branches. UTI outlets and branches.

• • • • • •

Life Insurance General Insurance Broking & Distribution Consumer Finance Private Equity Assets Reconstruction.

• • • •

UTI Bank Pan card Bank Recruitment ULIP

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FUTURE PROSPECT OF MUTUAL FUNDS IN INDIA Financial experts believe that the future of Mutual Funds in India will be very bright. It has been estimated that by March-end of 2010, the mutual fund industry of India will reach Rs 40,90,000 crore, taking into account the total assets of the Indian commercial banks. In the coming 10 years the annual composite growth rate is expected to go up by 13.4%. •

100% growth in the last 6 years.

•

Number of foreign AMC’s is in the queue to enter the Indian markets like Fidelity Investments, US based, with over US$1trillion assets under management worldwide.

•

Our saving rate is over 23%, highest in the world. Only channelizing these savings in mutual funds sector is required.

•

We have approximately 29 mutual funds which are much less than US having more than 800. There is a big scope for expansion.

•

'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are concentrating on the 'A' class cities. Soon they will find scope in the growing cities.

•

Mutual fund can penetrate rural like the Indian insurance industry with simple and limited products.

•

SEBI allowing the MF's to launch commodity mutual funds.

•

Emphasis on better corporate governance.

•

Trying to curb the late trading practices.

•

Introduction of Financial Planners who can provide need based advice. Looking at the past developments and combining it with the current trends it can be

concluded that the future of Mutual Funds in India has lot of positive things to offer to its investors.

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FREQUENTLY USED TERMS Net Asset Value (NAV) - Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. Sale Price - Price paid while investing in a scheme. May include sales load. Also called Offer Price. Load - This is the price of buying a unit. Most funds sell units at a premium to its underlying net asset value, and purchase them at the net asset value. When the fund company charges a load when it sells units, it is called entry load. When it charges a load at the time of buying the units back from an investor, it is called exit load. Repurchase Price - Repurchase Price is the price at which a close-ended scheme repurchases its units. May include Backend load. Also called Bid Price. Redemption Price - Redemption Price is the price at which an open-ended scheme repurchases its units and a close-ended scheme redeems its units on maturity. Prices here are NAV related. Sales Load - Sales Load is the charge collected by a scheme when it sells its units. Also called Front End Load. Schemes that do not charge a load are called No Load Schemes. Repurchase or 'Back-end' Load - Repurchase or 'Back-end' Load is a charge collected by a scheme when it buys back the units from the scheme. SIP - SIP or Systematic Investment Plan refers to the practice of investing a constant amount regularly, generally every month. SIP ensures that the investors' acquisition costs are approximated to the average NAV, as when the market will go up more units will be bought and when the markets come down fewer units will be bought. However it does not offer protection from losses. SWP - This is a mirror image of an SIP only here the investor withdraws a constant amount regularly. This is again aimed at getting averaging effect mentioned above. Dividend versus Growth - Among the investors who subscribe to a scheme some might want a regular flow of income while others might prefer their income from the scheme to grow within the scheme itself. The dividend option caters to the first kind of investors by offering the investors divided at regular interval. Each time the dividend is declared the NAV of the scheme will fall. The growth option is for the second kind of investors. Institutional versus Regular - There is a significant difference between time and cost implications between servicing one investor who has invested Rs 1 crore and servicing 1,000 investors who have each invested Rs 10,000 although the AUM is same for both the cases. Thus funds differentiate between the classes of investors on the above grounds by offering different options or plans of the same scheme to different kinds of investors. The institutional plan being offered to the big investors and regular for the small.

CONCLUSION 54

Mutual Funds now represent perhaps most appropriate investment opportunity for most investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who provides the required knowledge and professional expertise on successful investing. As the investor always try to maximize the returns and minimize the risk. Mutual fund satisfies these requirements by providing attractive returns with affordable risks. The fund industry has already overtaken the banking industry, more funds being under mutual fund management than deposited with banks. With the emergence of tough competition in this sector mutual funds are launching a variety of schemes which caters to the requirement of the particular class of investors. Risk takers for getting capital appreciation should invest in growth, equity schemes. Investors who are in need of regular income should invest in income plans. The stock market has been rising for over three years now. This in turn has not only protected the money invested in funds but has also to help grow these investments. This has also instilled greater confidence among fund investors who are investing more into the market through the MF route than ever before. Reliance India mutual funds provide major benefits to a common man who wants to make his life better than previous. India's largest mutual fund, UTI, still controls nearly 80 per cent of the market. Also, the mutual fund industry as a whole gets less than 2 per cent of household savings against the 46 per cent that go into bank deposits. Some fund managers say this only indicates the sector's potential. "If mutual funds succeed in chipping away at bank deposits, even a triple digit growth is possible over the next few years.

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BIBLIOGRAPHY REFERENCE BOOK: FINANCIAL MARKET AND SERVICES Gordon and Natarajan

WEBSITE: www.mutualfundsindia.com www.amfiindia.com www.sebi.com www.indiainfoline.com www.valueresearchonline.com

SEARCH ENGINE: www.google.com www.yahoo.com

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