investment considerations in mutual fund
TRANSCRIPT
INTRODUCTION
Mutual funds have been a significant source of investment in both government and
corporate securities. It has been for decades the monopoly of the state with UTI being the
key player, with invested funds exceeding Rs.300 bn. The state-owned insurance
companies also hold a portfolio of stocks. Presently, numerous mutual funds exist,
including private and foreign companies. Banks mainly state-owned too have established
Mutual Funds. Foreign participation in mutual funds and asset management companies is
permitted on a case by case basis.
UTI, the largest mutual fund in the country was set up by the government in 1964, to
encourage small investors in the equity market. UTI has an extensive marketing network
of over 35, 000 agents spread over the country. The UTI scrips have performed relatively
well in the market, as compared to the Sensex trend. However, the same cannot be said of
all mutual funds.
All Mutual Funds are allowed to apply for firm allotment in public issues. SEBI (1992)
regulates the functioning of mutual funds, and it requires that all Mutual Funds should be
established as trusts under the Indian Trusts Act. The actual fund management activity
shall be conducted from a separate asset management company (AMC). The minimum
net worth of an AMC or its affiliate must be Rs. 50 million to act as a manager in any
other fund. Mutual Funds can be penalized for defaults including non-registration and
failure to observe rules set by their AMCs. Mutual Funds dealing exclusively with money
market instruments have to be registered with RBI. All other schemes floated by Mutual
Funds are required to be registered with SEBI.
In 1995, the RBI permitted private sector institutions to set up Money Market Mutual
Funds (MMMFs). They can invest in treasury bills, call and notice money, commercial
paper, commercial bills accepted/co-accepted by banks, certificates of deposit and dated
government securities having unexpired maturity up to one year
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OBJECTIVE OF THE STUDY
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Objective of the Study
The following objectives are as follows:
To study the growth of mutual fund industry in India
To analyze the features the investors look for in Mutual Fund products
To study the legal and regulatory framework of mutual funds in India.
To identify factors that influences the investor’s fund/scheme selection
To have study a picture of major players in Mutual Fund Industry in India.
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LITERATURE REVIEW
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Mutual Funds
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is invested by the fund manager in
different types of securities depending upon the objective of the scheme. These could
range from shares to debentures to money market instruments.
The flow chart below describes broadly the working of a mutual fund:
The income earned through these investments and the capital appreciation realized by the
scheme is shared by its unit holders in proportion to the number of units owned by them.
Thus a Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed portfolio at a relatively low
cost. The small savings of all the investors are put together to increase the buying power
and hire a professional manager to invest and monitor the money. Each Mutual Fund
scheme has a defined investment objective and strategy.
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Mutual Funds – Investment Objectives
Preservation of Capital & Liquidity-Achieved by investing in very short-term
bonds
Income-Achieved by investing in bonds
Balanced-Achieved by investing in bonds and stocks
Growth-Achieved by investing in stocks
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History of the Mutual Fund Industry in India
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
Dec 1990.
At the end of 1993, the mutual fund industry had assets under management of
Rs.47, 004 crores.
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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.
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 1992 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.
As at the end of Jan 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 Feb 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 Jan 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.
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With recent mergers taking place among different private sector funds, the mutual fund
industry has entered its current phase of consolidation and growth. The graph indicates
the growth of assets over the years.
Fig: - Growth in Assets under Management
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Types of Mutual Funds
Mutual Fund schemes may be classified on the basis of its structure and its investment
objective.
I. By Structure:
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open – End Funds
An open-ended fund or scheme is one that is available for subscription and repurchase on
a continuous basis.
These schemes do not have fixed maturity period. Investors can conveniently buy and
sell units at Net Asset value (NAV) related prices, which are declared on a daily
basis.
The key feature of open-end schemes is liquidity.
In order to determine the value of a share in an open-end fund at any time, the net
Asset Value is used.
Open-end fund also redeem, or buy back, shares from share holders.
Closed – End Funds
A Close-Ended open for subscription only during a specified period, generally at the time
of initial public issue (IPO).
Investors can invest in the scheme at the time of the IPO and thereafter they can buy
or sell the units of the scheme on the Stock exchange where they are listed.
A Closed-end fund has a stipulated maturity period which generally ranging from 3-
15 years. In order to provide an exit route to the investors, some close-ended fund
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give an option of selling back the units to Mutual Fund trough periodic repurchase at
NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided to the
investor. Investor either repurchase facility or through listing on stock exchanges.
These mutual funds schemes disclose NAV generally on weekly basis.
The price of the share in a closed-end fund is determined entirely by market demand, so
shares can either trade below their net asset value (“at a discount”) or above it (“at a
premium”).
Interval Funds
Interval funds combine the features of open-ended and close-ended schemes. They are
open for sale or redemption during pre-determined intervals at NAV related prices.
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II. By Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth fund is to provide capital appreciation over the medium to long-term.
Such schemes normally invest a major part of their corpus in equities.
Such funds have comparatively high risk. These schemes provide different options to
the investors like dividend option, capital appreciation, etc. and the investors may
choose an option depending on their preferences.
Growth schemes are good for investors having a long-term outlook seeking
appreciation over period of time.
Debt Oriented Scheme
The aim of income fund is to provide regular and steady income to investors.
Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments.
Such funds are less risky compared to equity schemes. These funds are not affected
because of fluctuations in equity markets. However, opportunities of capital
appreciation are also limited in such funds.
The NAVs of such are affected because of change in interest rates in the country. If
the interest rates fall, NAVs of such funds are likely to increase in the short run and
vice-versa.
Income funds are ideal for capital stability and regular income.
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Balanced Fund
The aim of balanced fund is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their
offer documents.
They generally invest 40-60% in equity and debt instruments. These funds are also
affected because of fluctuations in share price in the stock markets.
NAVs of such funds are likely to be less volatile compared to pure equity funds.
These are appropriate for investors looking for moderate growth. These are ideal for
investors looking for a combination of income and moderate growth.
Money Market or Liquidity Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation
of capital and moderate income.
These schemes invest exclusively in safer short term instruments such as treasury
bills, certificates of deposit, commercial paper and inter- bank call, government
securities, etc.
Returns on these schemes fluctuate much less compared to other funds. These are
ideal for corporate and individual investor as a means to park their surplus funds for
short periods.
III. By Market Capitalization:
Stock funds are often grouped by the size of companies they invest in big, small or tiny.
By size we mean a company’s value on stock market: the number of shares it has
outstanding multiplied by the share price. This is known as Market capitalization.
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Big companies tend to be less risky than small companies. But smaller companies can
often offer more growth potential. The best idea is probably to have mixed of funds
that given an exposure to large-cap, midsize and small size companies.
The fund’s market capitalization will indicate whether the fund emphasizes the stocks
of blue-chip companies with large market capitalization, emerging companies with
small capitalization or something in between.
Large Cap Funds
Large cap funds invest their assets primarily in companies, which have sizeable market
capitalization. Different fund houses define ‘sizeable’ differently. This is usually
mentioned in the fact sheets for the investor’s benefit.
For instance, in its recent IPO (Franklin Flexi cap), Templeton defined large cap as
companies with a market capitalization in excess of Rs 15 bn (Rs 1,500 crores).
Companies below this threshold were categorized as mid/small caps.
Investing in large caps is a lower risk-lower return proposition (vis-à-vis mid cap
stocks), because such companies are usually widely researched and information is
widely available.
Large-caps funds are less volatile than funds that invest in smaller companies.
Usually, that means we can expect smaller returns but stable returns.
e.g.: HDFC top 200 fund, Franklin India blue-chip fund, HSBC Equity Fund for
instance, invest predominantly in large caps
Mid Cap Funds
These funds invest in companies that have a lower market capitalization than the large
caps. For instance, Sundaram mutual fund defines mid caps as stocks with a market
capitalization of less than Rs 1800 bn but this level varies from fund hose to fund house.
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Investment in mid caps is a riskier proposition as compared to investments in large
cap funds. In fact, a mid cap stock could well graduate to large cap over the years
giving the investor a significant return on his investment.
e.g.: Franklin India prima fund, Magnum global fund, Sundaram select mid cap fund
are some examples of mid cap funds.
Small Cap Funds
Small cap funds invest in companies with a smaller market capitalization. In it’s recently
concluded IPO (Sundaram SMILE) – Sundaram mutual fund defines small caps as stocks
with a market capitalization of less than of Rs2 bn. investing in small caps funds is
fraught with considerable risk.
Small caps companies in most cases are just evolving. Again, as with mid caps,
information on small caps is not easily available so these companies are under
researched or may be not researched at all. So we are contending with a relatively
unknown entity here.
However the risk-return trade-of is much higher vis-à-vis large caps and mid caps.
The volatility of the fund often depends on the aggressiveness of the manager.
Aggressive small-caps mangers will buy hot growth and technology companies,
taking high risks in hopes of high rewards. More conservative “value” managers will
look for companies that have been beaten down temporally by the stock market.
Currently this is a niche segment as there is no fund investing purely in small cap stocks.
Sundaram SMILE is probably the first small cap fund of its kind.
Multi / Flexi Cap Funds
Just about every second mutual fund IPO these days is a multi/flexi cap fund.
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The fund manager has the mandate to shift across market capitalization depending on
the growth opportunity.
This is generally dictated by the market happenings i.e. which sector is driving
growth at a given time or which market segment (market capitalization) is witnessing
the latest vary.
But generally, there’s a ceiling on how far the fund manager can go in a particular
market segment or sector. This Helps in keeping the portfolio relatively diversified
and mitigate risks. In terms of risk-return trade-of these funds are positioned between
large caps and mid caps.
Some multi cap funds include –DSP ML opportunities, Tata Equity opportunities, and
Principal Resurgent India fund.
IV. Other Schemes:
Tax Saving Schemes
These schemes offer tax rebates to the investor under specific provisions of the Indian
Income Tax laws as the Government offers tax incentive for investment in specified
avenues.
Investment made in Equity linked saving schemes (ELSS) and Pension Schemes are
allowed as deduction u/s 88 of the income tax act 1961.
The act also provides opportunities to investors to save capital gains u/s 54EA and
54EB by investing in mutual funds. Typically returns for such schemes have been
found to be between 15-20%.
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Index Funds
Index funds replicate the portfolio of a particular Index Such as the BSE sensitive index,
S&P and NSE 50 index nifty, etc.
These schemes invest in the securities in the same weightage comprising of an index.
For e.g., an index fund which is trying to mirror the BSE-30 (Sensex) will invest only
those 30 scrip’s that constitute this particular index.
NAV of such schemes would rise or fall in accordance with the rise or fall in the
index, though not exactly by the same % due to some factors known as “tracking
error” in technical terms.
Necessary disclosures in this regard are made in offer document of the mutual fund
scheme. Fund managing an index fund is usually called passive management.
Sectoral Scheme
Sectoral funds are those, which invest, exclusively in a specified sector. This could be an
industry or a group of industries or various segments such as ‘A’ group shares or initial
public offerings. For e.g., an FMCG Sectoral fund shall invest in companies like HLL,
Cadbury’s, Nestle etc., and not in a software companies like Infosys.
Sectoral funds tend to have a very high risk-reward ratio and investors should be
careful of putting all their eggs in one basket.
Investors generally see such schemes as benefit them in the short term, usually one
year. Returns could be as high as a 50% in a good year provided investor chooses the
right sector.
Load Funds
Load fund charges a commission each time when you buy or sale unit in the funds.
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No-Load Funds
A No-load fund does not charge a commission on purchase or sale of the units in the
fund.
To put things in perspective, none of the above mentioned funds can be classified as good
or bad investment options. It depends on the risk appetite of the investor as well as how
well informed he is about a particular sector, market segment and companies within that
segment.
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Advantages of Mutual Funds
There are a lot of benefits of investing in the mutual funds. The major factors favouring
the investments in the mutual funds are as below:
Professional Management
Mutual Funds provide the services of experienced and skilled professionals, backed by a
dedicated investment research team that analyses the performance and prospects of
companies and selects suitable investments to achieve the objectives of the scheme.
Diversification
Mutual Funds invest in a number of companies across a broad cross-section of industries
and sectors. This diversification reduces the risk because seldom do all stock declines at
the same time and in the same proportion. You achieve this diversification through
Mutual Fund with far less money than you can do on your own.
Convenient Administration
Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such
as bad deliveries, delayed payments and follow up with brokers and companies. Mutual
Funds save your time and make investing easy and convenient.
Low Costs
Mutual Funds are a relatively less expensive way to invest compared to directly investing
in the capital markets because the benefits of scale in brokerage, custodial and other fees
translate into lower costs for investors.
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Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In the close-end schemes, the units can be sold on a
stock exchange at the prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the Mutual Fund.
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.
Return Potential
Over a medium to long-term, Mutual Funds have the potential to provide higher returns
as they invest in a diversified basket of selected securities.
Flexibility
Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, you can systematically invest or withdraw funds according to your
needs and convenience.
Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual
fund because of its large corpus allows even a small investor to take the benefit of its
investment strategy.
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Choice of Schemes
Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
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.
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Disadvantages of Mutual Funds
Even though the mutual fund investment has many advantages, but the investors should
be aware of the following shortcomings also:
Inefficient Management
Some funds doesn’t perform in neither the market, as their management is not dynamic
enough to explore the available opportunity in the market, thus many investors debate
over whether or not the so-called professionals are any better than mutual fund or
investor him self, for picking up stocks.
No 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 fund, albeit in return for the
professional management and research. Fees are usually payable as a percentage of the
value of investment, whether fund value is rising or declining. A mutual fund investor
also pays fund distribution cost, which he would not incur in direct investing. However,
cost is often less than the cost of direct investing.
No Tailor Made Portfolios
Investors who invest on their own can build their own portfolio of shares and bonds.
Investing through funds mean he delegates this decision to the fund manager. The high-
net-worth individuals or large corporate investors may find this to be a constraint in
achieving their objective. However, most mutual funds help investors overcome it by
offering different schemes within a same fund.
Dilution
Because funds have small holdings across different companies, high returns from a few
investments often don't make much difference on the overall return. Dilution is also the
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result of a successful fund getting too big. When money pours into funds that have had
strong success, the manager often has trouble finding a good investment for all the new
money.
Taxes
When making decisions about the investors’ money, fund managers don't consider the
investors’ personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from the sale.
It might have been more advantageous for the individual to defer the capital gains
liability.
Mutual Fund Structure
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Sponsor
Sponsor is the person who acting alone or in combination with another body corporate
establishes a mutual fund. Sponsor must contribute atleast 40% of the networth of the
Investment Manger and meet the eligibility criteria prescribed under the Securities and
Exchange Board of India (Mutual Funds) Regulations, 1996.The Sponsor is not
responsible or liable for any loss or shortfall resulting from the operation of the Schemes
beyond the initial contribution made by it towards setting up of the Mutual Fund. The
board of trustees manages the MF and the sponsor executes the trust deeds in favour of
the trustees. It is the job of the MF trustees to see that schemes floated and managed by
the AMC appointed by the trustees are in accordance with the trust deed and SEBI
guidelines. The Sponsor appoints the Trustees, Custodian and the AMC with the prior
approval of SEBI and in accordance with SEBI Regulations.
Trust
The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian
Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian
Registration Act, 1908.
Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (body of
individuals). The main responsibility of the Trustee is to safeguard the interest of the unit
holders and inter alia ensure that the AMC functions in the interest of investors and in
accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations,
1996, the provisions of the Trust Deed and the Offer Documents of the respective
Schemes. Atleast 2/3rd directors of the Trustee are independent directors who are not
associated with the Sponsor in any manner.
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Asset Management Company (AMC)
The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund.
The AMC is required to be approved by the Securities and Exchange Board of India
(SEBI) to act as an asset management company of the Mutual Fund. Atleast 50% of the
directors of the AMC are independent directors who are not associated with the Sponsor
in any manner. The AMC must have a networth of atleast 10 crore at all times. It
launches the various schemes of the fund, manages them, and then liquidates them at the
end of their term. The people in the AMC who should matter the most to you are those
who take investment decisions.
Registrar and Transfer Agent
The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent
to the Mutual Fund. The Registrar processes the application form, redemption requests
and dispatches account statements to the unit holders. The Registrar and Transfer agent
also handles communications with investors and updates investor records.
Custodians
The custodians are appointed by the sponsor to look after the transfer and storage of
securities. Only a registered custodian under the SEBI Regulation can act as a custodian
of a mutual fund. The functions of custodian a cover a wider range of services like safe
keeping of securities bid settlement, corporate action ,and transfer agent. In addition, they
may be contracted to perform administrative functions like fund accounting, cash
management and other similar functions.
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Mutual Funds Investment Plans
The term ‘investment plan’ generally refers to the services that the funds provide to
investors offering different ways to invest or reinvest. The different investment plans are
an important consideration in the investment decision, because they determine the level
of flexibility available to the investor. Alternate investment plans offered by a fund allow
the investors freedom with respect to investing one time or at regular intervals, making
transfers to different schemes within the same fund family, or receiving income at
specified intervals or accumulating distributions. Some investment plans offered by
mutual funds in India are as follows:
Automatic Reinvestment Plans (ARP)
The Automatic Reinvestment Plan allows the investor to reinvest in additional units the
amount of dividends or other distributions made by the fund, instead of receiving them in
cash. Reinvestment takes place at the ex-dividend NAV. The ARP ensures that the
investor reaps the benefit of compounding in his investments. Some funds allow
reinvestment into other schemes in the fund family.
Automatic Investment Plans (AIP)
These require the investor to invest a fixed sum periodically, thereby letting the investor
save in a disciplined and phased manner. The mode of investment could be through direct
debit to the investor’s salary or bank account. Such plans are also known as Systematic
Investment Plans. Investors looking for “rupee cost averaging” will generally opt for
funds that offer this facility.
A modified version of AIP is the Voluntary Accumulation Plan (VAP) that allows the
investor flexibility with respect to the amount and frequency of investment.
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Systematic Withdrawal Plans (SWP)
Such plans allow the investor to make systematic withdrawals from his fund investment
account on a periodic basis, thereby providing the same benefit as regular income. The
investor must withdraw a specific minimum amount with the facility to have withdrawal
amounts sent to his residence by a cheque or credited directly into his bank account. The
amount withdrawn is treated as redemption of units at the applicable NAV as specified in
the offer document.
Systematic Transfer Plans (STP)
These plans allow the investor to transfer on a periodic basis a specified amount from one
scheme to another within the same fund family, i.e. two schemes managed by the same
AMC and belonging to the same fund. A transfer will be treated as redemption of units
from the scheme from which the transfer is made. Such redemption or investment will be
at the applicable NAV for the respective schemes as specified in the offer document. The
service allows the investor to manage his investments actively to achieve his objectives.
Many funds do not even charge any transaction fees for this service – an added advantage
for the active investor.
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Hidden Costs in Mutual Funds
The costs involved in any investment determine the returns it can generate. In the case of
mutual funds, the daily volatility of NAVs hogs the news, but the costs are never
adequately addressed nor fully understood. These costs vary from fund to fund, just like
NAVs and their impact on different categories of funds is different.
The costs involved in mutual funds can be broadly classified into two categories:
1. Entry / Exit Loads
These are one-time costs incurred when you enter or exit a fund, and are charged as a
percentage of your investment/encashment amount.
2. Expense Ratio
It comprises some of the major expenses that a fund incurs:
Investment management and advisory fees
Transfer agent fee and expenses
Custodian fees
Various operating expenses
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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 players
penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fund
companies in India.
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Major Mutual Fund Companies in India
ABN AMRO Mutual Fund
ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee
(India) Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management
(India) Ltd. was incorporated on November 4, 2003. Deutsche Bank is the custodian of
ABN AMRO Mutual Fund.
ABN AMRO Asset Management is headquartered in London and Amsterdam with
important units in Atlanta, Hong Kong, Chicago and Singapore. It provides tailored
investment management services to its clients.
It has more than 1900 employees worldwide in over 20 countries, with portfolio
managers and analysts located around the world. All investment products benefit from
the valuable source of local expertise, while portfolios are often managed locally. This
local knowledge is used as input for international co-ordination of the investment policy.
ABN AMRO Asset Management manages 12,525.04 crore rupees in segregated accounts
and in over 500 mutual funds.
Birla Sun Life Mutual Fund
Birla Sun Life Mutual Fund was setup on December 24, 1994. The sponsorers of Birla
Mutual Fund are Birla Global Finance Limited and Sun Life (India) AMC Investments
Inc. Sun Life Financial Group of Companies is a financial services organization
headquartered in Toronto, Canada.
The AMC of Birla Sun Life Mutual Fund is Birla Sun Life Asset Management Company
Limited which was incorporated on September 5, 1994. Recently Birla Mutual Fund
crossed AUM of Rs. 66,305.84 crores.
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The diversified schemes are as follows:
Debt Schemes
Balanced Schemes
Offshore Schemes
Investment Plans
Readicheque
Gift Certificates
Baroda Pioneer Asset Management Company Limited
Baroda Pioneer Asset Management Company Limited was formed as a wholly owned
subsidiary of Bank of Baroda in 1995 with the key focus of managing the assets of
Baroda Pioneer Mutual Fund.
Bank of Baroda entered into an agreement on 5 October, 2007 with Pioneer Investments
(Pioneer Global Asset Management SpA), a global asset manager with 80 years of
experience and assets under management of just under € 187.86 billion (as on September
30, 2008).
HDFC Mutual Fund
HDFC Mutual Fund was setup on June 30, 2000 with two sponsorers nemely Housing
Development Finance Corporation Limited and Standard Life Investments Limited.
The Standard Life Assurance Company was established in 1825 and has considerable
experience in global financial markets. In 1998, Standard Life Investments Limited
became the dedicated investment management company of the Standard Life Group and
is owned 100% by The Standard Life Assurance Company. With global assets under
management of approximately US$126 billion as at May 15, 2003, Standard Life
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Investments Limited is one of the world's major investment companies and is responsible
for investing money on behalf of five million retail and institutional clients worldwide.
The Trustee Company of HDFC Mutual Fund is HDFC Trustee Company Limited and
AMC is HDFC Asset Management Company Limited, incorporated with the SEBI on
December 10, 1999.
The products of HDFC Mutual Fund are as follows:
Equity Funds
Balance Funds
Debt Funds
Apart from this it also provides the following value added services:
SIP (Systematic Investment Plan)
STP (Systematic Transfer Plan)
SWAP (Systematic Withdrawal Advantage Plan)
HSBC Mutual Fund
HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital
Markets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fund
acts as the Trustee Company of HSBC Mutual Fund.
The AMC is HSBC Asset Management (India) Private Ltd., incorporated on December
12, 2001.
The products of HSBC Mutual Fund are:
Equity Fund
Cash Fund
Gilt Fund
Income Fund
India Opportunities Fund
MIP
33
Floating Rate Fund
ING Vysya Mutual Fund
ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee
Company. It is a joint venture of Vysya and ING. The AMC, ING Investment
Management (India) Pvt. Ltd. was incorporated on April 6, 1998.
ING Group is known for its philosophy of 'keeping it simple' covering some 60 million
private, corporate and institutional clients in 50 countries. It is the world's fourth largest
financial services group.
ING Vysya Mutual Fund aims to provide investors with the most practical and secure
investment opportunities to invest their valuable savings. This is combined with a range
of innovative options to deliver healthy returns combined with a high degree of security.
Currently, the fund offers four equity, five debt and two hybrid schemes to its investors.
Prudential ICICI Mutual Fund
The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the
largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setup
on 13th of October, 1993 with two sponsor, Prudential Plc. and ICICI Ltd. The Trustee
Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset
Management Company Limited incorporated on 22nd of June, 1993.
Prudential ICICI Mutual Fund is the first private sector mutual fund in India to cross Rs.
80,527.02 crore mark in assets under management..
The debt funds, the PruICICI equity funds like Power and Growth Plan have well
performed in recent past. Prudential ICICI has a separate analyst who monitors the credit
ratings of quality of assets which are given by the credit rating agencies.
34
Today Prudential ICICI has an extensive network of customer service centres in 26 cities
and more than 12,000 customer contact points, comprising partner banks, financial
distribution houses and financial advisers.
The product portfolio has a diversification of debt, equity and balanced funds.
State Bank of India Mutual Fund (SBI)
SBI Mutual Fund is a fully owned subsidiary of the State Bank of India, India's premier
and highly respected bank with largest banking operation in the country.
SBI Mutual Fund follows certain philosophy in their strategy while parking investors
money in the money family to have a full control upon the risks concentrating for
heading growth at a reasonable price. It locates sustainable competitive advantage before
investing. The combination of Top down and Bottom up approaches is followed. Top
down for sector allocation and the latter for stock selection.
While determining the investment universe, SBI Mutual Fund employs a multi-stage
filtering process. The first level looks at liquidity, the second at management quality. The
third level is for the competitive position and the last for the share price valuation.
In the debt sector it always aims at the "risk adjusted returns" based on the investors risk
tolerance. The following four steps are worked upon while investing:
Manage the schemes on a "Portfolio basis".
Active management of interest rate risk.
Credit risk management by following the conservative approach.
Continuous monitoring.
Partnership firms, corporate and even trusts & societies, duly registered under the
applicable laws, can invest in SBI Mutual Funds.
35
Tata Mutual Fund
Tata Mutual Fund was setup on June 30, 1995. The Asset Management Company of Tata
Mutual Fund is Tata Asset Management Limited, incorporated on March 15, 1994. The
Trustee is Tata Trustee Company Private Limited. ABN AMRO Bank N.V. and Deutche
Bank are the custodians of Tata Mutual Fund.
Tata Asset Management Limited is one of the fastest growing fund management
companies in India. Its asset under management was Rs. 22,620.61 crores.
The AMC of Tata Mutual Fund commits to provide with consistent investment
performance and world-class service to its investors. It has a wide range of investment for
both institutional as well as individual investors.
The products diversification of Tata Mutual Fund is as follows:
Equity products
Tata Pure Equity Fund
Tata Tax Saving Fund
Tata Select Equity Fund
Tata Life Sciences & Technology Fund
Tata Equity Opportunities Fund
Tata Index Fund
Tata Growth Fund
Tata Equity P/E Fund
Tata Dividend Yield Fund
Tata Infrastructure Fund
Tata Service Industries Fund
Balanced products
Tata Balanced Fund
36
Tata Young Citizens' Fund
Debt products
Tata Liquid Fund
Tata Short Term Bond Fund
Tata Gilt Securities Fund
Tata Income Fund
Tata Income Plus Fund
Tata Fixed Horizon Fund
Tata Fixed Horizon Fund Series 1
Tata Monthly Income Fund
Tata Dynamic Bond Fund
Tata Floating Rate Fund
Tata MIP Plus Fund
Kotak Mahindra Mutual Fund
Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is
presently having more than 3, 00,000 investors in its various schemes. KMAMC started
its operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering
to investors with varying risk - return profiles. It was the first company to launch
dedicated gilt scheme investing only in government securities.
Unit Trust of India Mutual Fund
UTI Asset Management Company Private Limited, established in Jan 14, 2003, manages
the UTI Mutual Fund with the support of UTI Trustee Company Private Limited. UTI
Asset Management Company presently manages a corpus of over Rs. 79,310.27 Crore.
The sponsor of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank
(PNB), State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The
37
schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset Management
Funds, Index Funds, Equity Funds and Balance Funds.
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.
Standard Chartered Mutual Fund
Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard
Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard
Chartered Asset Management Company Pvt. Ltd. is the AMC which was incorporated
with SEBI on December 20,1999.
Franklin Templeton India Mutual Fund
The group, Franklin Templeton Investments is a California (USA) based company with a
global AUM of 33,299.49 crores. It is one of the largest financial services groups in the
world. Investors can buy or sell the Mutual Fund through their financial advisor or
through mail or through their website. They have Open end Diversified Equity schemes,
Open end Sector Equity schemes, Open end Hybrid schemes, Open end Tax Saving
schemes, Open end Income and Liquid schemes, closed end Income schemes and Open
end Fund of Funds schemes to offer.
Morgan Stanley Mutual Fund India
38
Morgan Stanley is a worldwide financial services company and it’s leading in the market
in securities, investment management and credit services. Morgan Stanley Investment
Management (MISM) was established in the year 1975. It provides customized asset
management services and products to governments, corporations, pension funds and non-
profit organizations. Its services are also extended to high net worth individuals and retail
investors. In India it is known as Morgan Stanley Investment Management Private
Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is the
first close end diversified equity scheme serving the needs of Indian retail investors
focusing on a long-term capital appreciation.
Escorts Mutual Fund
Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its
sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was
incorporated on December 1, 1995 with the name Escorts Asset Management Limited.
Alliance Capital Mutual Fund
Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital
Management Corp. of Delaware (USA) as sponsor. The Trustee is ACAM Trust
Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd.
with the corporate office in Mumbai.
Benchmark Mutual Fund
Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt.
Ltd. as the sponsor and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company.
Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset
Management Company Pvt. Ltd. is the AMC.
39
Canbank Mutual Fund
Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank acting as the
sponsor. Canbank Investment Management Services Ltd. incorporated on March 2, 1993
is the AMC. The Corporate Office of the AMC is in Mumbai.
Chola Mutual Fund
Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance
Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the
Trustee Company and AMC is Cholamandalam AMC Limited.
LIC Mutual Fund
Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It
contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was
constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. .
The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund
have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the
Investment Managers for LIC Mutual Fund.
GIC Mutual Fund
GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a
Government of India undertaking and the four Public Sector General Insurance
Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd.
(NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII)
and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act,
1882.
40
Legal and Regulatory Framework
Role of Regulators:
The primary authority for regulating mutual funds in India is the Securities and Exchange
Board of India (SEBI). It formulates policies and regulations to protect the interest of
investors in securities and to promote the development of securities market. However, the
following play a vital role in regulating the mutual funds:-
41
Securities & Exchange Board of India (SEBI)
The Government of India constituted Securities and Exchange Board of India, by an Act
of Parliament in 1992, as the apex regulator of all entities that either raise funds in the
capital markets or invest in capital market securities listed on stock exchanges. Mutual
funds have emerged as an important institutional investor; hence they come under the
purview of SEBI. SEBI requires all mutual funds to be registered with them. It issues
guidelines for all mutual fund operations including where they can invest, what
investment limits and restrictions must be compiled with, how they should account for
income and expenses to the investors and generally act in the interest of investor
protection.
Reserve Bank of India (RBI)
RBI as supervisor of bank-owned mutual funds: The operations of bank owned
mutual funds are governed by guidelines issued by Reserve Bank of India (RBI).
As regulation of all mutual funds comes under SEBI, these funds are jointly
supervised by SEBI and RBI.
RBI as supervisor of money market mutual funds: It has the sole supervisory
responsibility over all entities that operate in money markets, be it banks and
companies that issues securities etc.
Ministry of Finance (MOF)
The Ministry of Finance, which is charged with implementing the government policies,
ultimately supervises both RBI and SEBI. Besides being ultimate policy making and
supervising entity, it also plays a role of appellate authority for any major disputes.
Stock Exchange
Stock exchanges are self regulatory organizations supervised by SEBI. Many closed-end
schemes of mutual funds are listed on one or more stock exchanges. Such schemes are
42
subject to regulation by the concerned stock exchange through a listing agreement
between the fund and the stock exchange. Rules of the stock exchange and provisions of
the Companies Act would generally guide trading, clearing, transfer and settlement of the
buying and selling of mutual funds in the markets. Funds or AMCs do not get directly
involved with purchases and sales of units of such listed closed-end schemes, as their
registrars handle all such transfers as in case of shares.
Office of the Public Trustee
Mutual Funds, being public trusts are governed by the Indian Trust Act, 1882. the board
of Trustees or the Trustee Company is accountable to the Office of the Public Trustee,
which in turn reports to the Charity Commissioner. These regulators enforce provisions
of the Indian Trusts Act, to be compiled with by the fund trustees.
Association of Mutual Funds in India (AMFI)
As in USA, where the Investment Company plays a role as an industry association for the
mutual fund Industry, the Association of Mutual Funds in India (AMFI) plays a similar
role in India. AMFI is not a self regulatory organization (SRO), though it is conceivable
that it may choose to apply for the status and become one in the future.
AMFI is the umbrella body of all the Mutual Funds including Unit Trust of India. It was
incorporated in August 1995 as a non-profit organization. Its principle objectives are:
To promote the interests of mutual funds and its unit holders
To set ethical, commercial and professional standards in the industry
To increase public awareness of mutual funds in the country
Various AMFI committees are today involved with establishing standards for the mutual
fund industry on different aspects of mutual fund management or investor relations;
securities valuation norms in determining the NAV of a fund. It has devised an
Advertising Code for its member funds. The AMFI Code of Ethics is already an
accepted standard in the industry. It also takes up with the Government and competent
departments, the taxation issues or ideas on regulatory changes required for the mutual
funds and their investors in India
43
AMFI has also taken the cause of training for the mutual fund distributors (agents and
other intermediaries) as well as educating the investors about the benefits and risks of
mutual fund investing. AMFI allots the ARN Number to the successful candidates
having passed the Mutual Funds Advisors examination for canvassing the business of
Mutual Funds
44
Rules Governing Mutual Funds:
Mutual funds are subject to the rules and obligations specified by the competent
authority. They have to comply with the following important obligations:-
Schemes of Mutual Fund
The asset management company shall launch no scheme unless the trustees
approve such scheme and a copy of the offer document has been filed with the
Board.
Every mutual fund shall along with the offer document of each scheme pay filing
fees.
The offer document shall contain disclosures which are adequate in order to
enable the investors to make informed investment decision including the
disclosure on maximum investments proposed to be made by the scheme in the
listed securities of the group companies of the sponsor.
No one shall issue any form of application for units of a mutual fund unless the
form is accompanied by the memorandum containing such information as may be
specified by the Board.
Every close ended scheme shall be listed in a recognized stock exchange within
six months from the closure of the subscription
The asset management company may at its option repurchase or reissue the
repurchased units of a close ended scheme.
A close-ended scheme shall be fully redeemed at the end of the maturity period
unless a majority of the unit holders otherwise decide for its rollover by passing a
resolution.
Rules Regarding Advertisement
The advertisement for each scheme shall disclose investment objective for each
scheme.
An advertisement shall be truthful, fair and clear and shall not contain a
statement, promise or forecast which is untrue or misleading.
Advertisements shall not be so framed as to exploit the lack of experience or
knowledge of the investors.
45
All advertisements issued by a mutual fund or its sponsor or asset management
company, shall state "all investments in mutual funds and securities are subject to
market risks and the NAV of the schemes may go up or down depending upon the
factors and forces affecting the securities market".
The advertisement shall not compare one fund with another, implicitly or
explicitly, unless the comparison is fair and all information relevant to the
comparison is included in the advertisement.
The offer document and advertisement materials shall not be misleading or
contain any statement or opinion, which are incorrect or false.
Investment Objectives and Valuation Policies
The moneys collected under any scheme of a mutual fund shall be invested only
in transferable securities in the money market or in the capital market or in
privately placed debentures or securitized debts.
Provided that moneys collected under any money market scheme of a mutual fund
shall be invested only in money market instruments in accordance with directions
issued by the Reserve Bank of India;
The mutual fund shall not borrow except to meet temporary liquidity needs of the
mutual funds for the purpose of repurchase, redemption of units or payment of
interest or dividend to the unit holders.
The mutual fund shall not advance any loans for any purpose.
Every mutual fund shall compute and carry out valuation of its investments in its
portfolio and publish the same in accordance with the valuation norms specified
in Eighth Schedule
Every mutual fund shall compute the Net Asset Value of each scheme by dividing
the net assets of the scheme by the number of units outstanding on the valuation
date.
The Net Asset Value of the scheme shall be calculated and published at least in
two daily newspapers at intervals of not exceeding one week:
The price at which the units may be subscribed or sold and the price at which such
units may at any time be repurchased by the mutual fund shall be made available
to the investors.
46
General Obligations
Every asset management company for each scheme shall keep and maintain
proper books of accounts, records and documents, for each scheme so as to
explain its transactions and to disclose at any point of time the financial position
of each scheme and in particular give a true and fair view of the state of affairs of
the fund and intimate to the Board the place where such books of accounts,
records and documents are maintained.
The financial year for all the schemes shall end as of March 31 of each year.
Every mutual fund or the asset management company shall prepare in respect of
each financial year an annual report and annual statement of accounts of the
schemes and the fund as specified in Eleventh Schedule.
Every mutual fund shall have the annual statement of accounts audited by an
auditor who is not in any way associated with the auditor of the asset management
company.
Procedure for Action in case of Default
On and from the date of the suspension of the certificate or the approval, as the case may
be, the mutual fund, trustees or asset management company, shall cease to carry on any
activity as a mutual fund, trustee or asset management company, during the period of
suspension, and shall be subject to the directions of the Board with regard to any records,
documents, or securities that may be in its custody or control, relating to its activities as
mutual fund, trustees or asset management company.
Restrictions in Investments
A mutual fund scheme shall not invest more than 15% of its NAV in debt
instruments issued by a single issuer, which are rated not below investment grade
by a credit rating agency authorized to carry out such activity under the Act. Such
investment limit may be extended to 20% of the NAV of the scheme with the
prior approval of the Board of Trustees and the Board of asset management
company
A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt
instruments issued by a single issuer and the total investment in such instruments
47
shall not exceed 25% of the NAV of the scheme. All such investments shall be
made with the prior approval of the Board of Trustees and the Board of AMC.
No mutual fund under all its schemes should own more than ten per cent of any
company's paid up capital carrying voting rights.
Tax Benefits:
Tax Laws governing investments in mutual funds Under Income Tax Act, 1961:-
Unit – Holders (Resident)
Section 94(6) of the Income Tax Act, 1961
Section 94(6) of the income Tax Act 1961 now provides that any person who buys or
acquires any securities or unit within a period of three months prior to the record date and
such person sells or transfers such securities or unit received or receivable by such person
is exempt , then , the loss if any , arising to him on account of such purchase and sale of
securities or unit, to the extent such loss does not exceed the amount of dividend or
income received or receivable on such securities or unit , shall be ignored for purposes of
computing his income chargeable to tax.
Section 10(33) of the Income tax Act, 1961
The dividend received by the investors from the scheme will be exempt from income tax
all categories of investors under Section 10(33) of the Income Tax Act, 1961. The
Scheme will pay a distribution tax currently @ 10% plus surcharges if the portfolio holds
less than 50 percent debt securities on an average during the last one year period.
SECTION 88 OF THE INCOME TAX ACT, 1961
Specified units of mutual fund schemes qualify for rebate under Section 88 of the Income
Tax Act, 1961, Subscription to the Units of the Scheme by Individuals and Hindu
Undivided Families, not exceeding Rupees ten thousand would be eligible to a deduction,
from income-tax, of an amount equal to 20% of the amount so subscribed. In the case of
subscription by an individual, whose income is derived from the exercise of his
48
profession as an author, playwright, artist, musician, actor or sportsman (including an
athlete), the deduction admissible would be the rate of 25%.
Tax Deduction at Source (TDS)
There will not be any Tax Deduction at Source on Payment to resident unit-holders
towards redemption or dividends.
Capital Gains Benefit Unit Section 112 of the Income tax Act, 1961
Long –term capital gains in respect of Units held for a Period of more than 12months will
be chargeable under Section 112 of the Income Tax Act, 1961, at a confessional rate of
tax @ 20% (excluding surcharge)
From the full value of consideration, the following amounts would be deductible to arrive
at the amount of capital gains:
Cost of acquisition as adjusted by Cost Inflation Index notified by the Central
Government.
Expenditure incurred wholly and exclusively in connection with such transfer
Investors can also opt to pay tax @ 10% (excluding surcharges) on such Long Term
Capital Gains, but without the cost inflation indexation benefit.
Wealth tax Benefits
Mutual fund units are exempt from Wealth Tax.
Non – Resident / OCBS
Capital Gains under Section 112 of the Income tax Act, 1961
Long-term capital gains in respect of Units held for a period of more than 12 months will
be chargeable under Sec112 of the Income Tax Act, 1961 at a confessional rate of tax of
20%. The Capital gains would be calculated after indexation of the cost of acquisition.
Investors can also opt to pay tax @10% (excluding surcharges) on Long Term Capital
Gains, but without the cost inflation indexation benefit.
Tax Deduction at Source (TDS)
49
Redemptions/Exchanges/Switches by non-residents/OCBs/FIIs will be subjected to tax
deduction at source at the rates in force and certificates for tax deducted will be issued.
Charitable Trusts
Investment in the units of the scheme is an eligible mode of investment under Section
11(5) of the Income Tax Act read with Income Tax Rule 17 C.
The Fund
Open Ended Mutual Funds are exempt from income tax under Section 10 [23D] of the
Act.
How to Invest in Mutual Fund
Step I – Identify Your Investment Needs
Our financial goals will vary, based on your age, lifestyle, financial independence, family
commitments level of income and expenses among many other factors. Therefore, the
first step is to assess the needs. We can begin by defining your investment objectives and
needs, which could be regular income, buying a home or finance a wedding or educate
your children etc.
Step II – Choose the Right Mutual Fund
50
The important thing is to choose the right mutual fund scheme, which suits your
requirements. The offer document of the scheme tells us its objectives and provides
supplementary details like the track record of other schemes managed by the same Fund
Manager. Some factors to evaluate before choosing a particular Mutual Fund are the track
record of the performance of the fund over the last few years. Other factors could be the
portfolio allocation, the dividend yield and the degree of transparency etc.
Step III – Select the Ideal Mix of Schemes
Investing in just one Mutual Fund scheme may not meet all your investment needs. You
may consider investing in a combination of schemes to achieve your specific goals.
Step IV – Invest Regularly
The best approach is to invest a fixed amount at specific intervals, say every month. By
investing a fixed sum each month, you buy fewer units when the price is higher and more
units when the price is low, thus bringing down your average cost per unit. This is called
rupee cost averaging and is a disciplined investment strategy followed by investors all
over the world. You can also avail the systematic investment plan facility offered by
many open-end funds.
Step V – Start Early
It is desirable to start investing early and stick to a regular investment plan. If you start
now, you will make more than if you wait and invest later. The power of compounding
lets you earn income on income and your money multiplies at a compounded rate of
return.
Step VI – The Final Step
51
Finally we need to fill in application forms of various mutual fund schemes and start
investing. You may reap the rewards in the years to come. Mutual Funds are suitable for
every kind of investor- whether starting a career or retiring, conservative or risk taking,
growth oriented or income seeking.
52
SWOT Analysis of Mutual Fund Industry
The strengths, weaknesses, opportunities and threats of the Indian mutual fund industry
can be stated below in the SWOT matrix:
Strengths
Investing mutual fund is less expensive as compared to directly investing in a
capital market because operational cost is low.
Since mutual funds have different schemes like whether one wants regular income
or capital appreciation or regular income with capital appreciation, the investor
can subscribe to the units accordingly.
Investors get the benefit of the professional expertise managed by the mutual
fund.
By investing through mutual fund the risk is diversified and therefore is less risky
as compared to directly investing in the capital market.
Weaknesses
Mutual fund has not performed well in India because they are influenced by
market manipulators who have hurt the sentiments of investors.
Inadequate Customer Grievance handling services provided by the mutual fund.
With so many different types of mutual fund the investor is confused in which
mutual fund to invest, i.e. marketing of mutual fund is not adequate.
The effect of all the scams of the stock market has taken away the confidence of
the investors from the mutual fund also.
53
Opportunities
With the liberalization and globalization of Indian economy along with
privatization of Indian companies, asset management companies can provide
consultancies to companies with respect to which sectors to invest i.e. Portfolio
Management Services.
Schemes are made according to the requirements of the investors, thus attracting
huge amount of customers.
People can still take advantage of various tax saving schemes offered by various
funds.
Threats
Investors still have a soft corner for FDs, post-office deposits, Indira Vikas Patra
etc.
Investors have high-risk perception of mutual funds because of the dismal
performance of mutual fund in the past.
With the privatization of insurance sector, more and more private companies are
coming up: thus, threatening the mutual fund industry.
Lack of awareness of the mutual funds to the general public is a big drawback.
The investment that can be procured from that segment is thus completely lost.
54
RESEARCH METHODOLOGY
Research Methodology
55
Scope of the Study:
The study has been carried out in Delhi and NCR selecting a sample of 100 people. The
aim of the study was to analyze Investment considerations and perception about Mutual
Funds and the factors he takes into considerations before making an investment. An
attempt was made to understand the Investment behavior with the help of Investor’s as
well as Firm.
The project is divided into two parts. The first part of the project is comprised of the
study of Mutual Funds as a whole and the second part deals with. Investment
considerations and perception of investors about Mutual Funds and the factors he takes
into considerations before making an investment
Source of data collection:
Primary data
The study required the data to be collected first hand, directly from the investors or the
prospects. Thus the study entails collection of primary data collection. A Questionnaire
was prepared encompassing on various required details and was circulated among the
target respondents for data collection.
Secondary data
Secondary data methodology was also undertaken to collect the necessary data on Mutual
Funds. The sources for such Secondary Data Search were business magazines,
newspapers, books and various relevant websites.
Sample Size:
56
Sample size of 100 mutual fund investors was collected on the basis of convenience
sampling.
57
RESULTS AND ANALYSIS
58
Demographic Factors:
Age:
3%
35%
41%
13%
8%
Below 20 21 - 30 31 - 40 41 - 50 Above 50
The above chart shows that 41% of the respondents are in age bracket of 31 to 40 years,
35% are in age bracket of 21 to 30 years, 13% in age bracket of 41 to 50 years, 8% are in
the age group of above 50 years while only a tiny 3% are in the age group of less than 20
years.
Marital Status:
68
32
Married Unmarried
According to the survey 68% of the respondents are married, while 32% belonged to
unmarried category.
59
Occupation:
31%
43%
21%
5%
Business
Service
Student
Other
The pie chart shown above represents the distribution of the occupation. 41% of the
respondents are service holder, 31% are engaged in business, while 21% are students.
Annual Income:
18%
43%
28%
11%
< Rs.100000 Rs. 100000 - Rs.300000
Rs.300000 - Rs. 500000 > Rs.500000
According to the survey the Income level of an individual plays an important role in his
investments. The pie chart given above shows the income wise distribution of the
respondents. A majority 43% of the respondents had their annual incomes in the bracket
of Rs. 1 to 3 lacs, 28% were in bracket of Rs. 3 to 5 lacs, 18% were in bracket of less than
Rs. 1 lacs, while only 11% have their income as more than 5 lacs.
60
Preference of type of Mutual Fund:
46%
21%
33%
Open Ended Schemes Closed Ended Schemes Both
The pie chart shows that 46% of the mutual fund investors preferred to invest in open
ended schemes, 21% of the mutual fund investors preferred to invest in closed ended
schemes, while 33% of the mutual fund investors preferred to invest in both open ended
and closed ended schemes.
Preference of Mutual Fund Company:
10
21
14
8
22
18
7
0 5 10 15 20 25
Reliance Mutual Fund
ICICI Mutual Fund
SBI Mutual Fund
HDFC Mutual Fund
UTI Mutual Fund
Franklin Templeton mutual fund
Others
% of Respondents
The survey shows investors investments in the various mutual funds in the market. UTI
mutual funds rank first, having 22%. ICICI mutual funds rank second, having 21%.
Franklin Templeton mutual funds rank third, having 18% investments
61
Time Horizon of Investments:
10%
18%
27%
38%
7%
0%5%
10%15%20%25%30%35%40%
< 3Months
3 - 6Months
6 - 12Months
1 - 3Years
> 3Years
Investment Period
% o
f R
es
po
nd
en
ts
According to the survey 38% of the respondents gave their investment period as 1 to 3
years. About 27% of the respondents gave their investment period as 6 months to 1
year.18% of the respondents gave investment period as 3 months to 6 months. About
10% said they usually invested for a period of less than 3 months. While 7% had their
investment period of more than 3 years.
62
Factors / Considerations:
17
613
21
33
10
05
101520253035
% o
f R
es
po
nd
en
ts
According to the survey 33% of the respondents considered investments for tax benefits,
21% of the respondents considered investments for high level of liquidity, 17% of the
respondents considered investments for regular returns, 13% of the respondents
considered investments for risk free returns, 10% of the respondents considered
investments for ease in redemption, while 6% of the respondents voted for capital
appreciation when making an investments.
Percentage of Income Invested:
8
37
43
12
< 1%
1% - 5%
5% - 10%
> 10%
The above pie chart represents the distribution level of the portion of investments. The
chart shows that 43% of the respondents prefer to invest in the bracket of 5% to 10 % of
63
their total income, 37% of the respondents prefer to invest in the bracket of 1% to 5% of
their total income, 12% of the respondents prefer to invest more than 10% of their total
income, while 8% of the respondents prefer to invest less than 1% of their total income.
Expected Appreciation:
9
3934
18
05
1015202530354045
Upto 10% 10% - 20% 20% - 30% More than30%
Expected Appreciation Range
% o
f R
es
po
nd
en
ts
According to the survey yearly appreciation expectations play an important role in the
investment decision. 9% of the investors had expectations of up to 10% annually from
their investments in mutual fund. A majority of 39% expected 10% to 20% yearly
appreciation, while 34% wanted 20% to 30% yearly appreciation from their investment.
A modest 18% expected a yearly appreciation of more than 30%.
64
Source of Information:
23
118
19
12
18
9
0
5
10
15
20
25
Source of Information
% o
f R
es
po
nd
en
ts
According to the survey, about 23% of the respondents used internet for information
while investing. About 19% of the respondents gathered information through newspapers.
About 18% investors are depending on friends while investing in mutual funds. About
11% investors collected information through advertisement while investing in mutual
funds. Also 8% investors are taking an investment decision through different types of
magazines.
65
Distribution Channel:
15%
21%
61%
3%
Direct dealing
Investment Brokers
Banks
Others
The pie chart shows that 61% of the respondents preferred to undertake their investments
through banks. 21% of the respondents preferred to make investments through investment
brokers. 15% of the respondents prefer direct dealing with the investment firm.
Willingness to take Risk:
7%
45%39%
9%
High
Moderate
Low
Very low
According to the survey about 45% of the respondents were willing to take moderate risk
while investing in the mutual funds. About 39% of the respondents were willing to take
low risk. A 9% of the respondents wanted to take very low risk. While minorities of 7%
respondents we In the Mutual Funds, for the investors who are risk averse and want safe,
risk free returns on their investments, the bank should recommend them to go in for
Liquid Funds or the Monthly Income Plans (MIPs).
66
Preferred way of investing:
22%
78%
Automated Service Mode Personal Communication
According to the survey In spite of having access to Internet, 78 % investors prefer
“Personal Communication” mode where as only 22% prefer “Automated Service Mode”.
US-64 Performance:
17%
65%
18%
Very Much
Not Much
Not At All
According to the survey 65% of respondents are not much affected by US-64 episode.
About 17% of the respondents are very much affected. While 18% are not at all affected
67
FINDINGS
68
Findings
41% of the respondents are service holder, 31% are engaged in business, while
21% are students.
Most of the respondents are in age bracket of 31 to 40 years, where as only 3 %
are in the age group of less than 20 years.
A majority 43% of the respondents had their annual incomes in the bracket of Rs.
1 to 3 while only 11% have their income as more than 5 lacks.
According to the survey 38% of the respondents gave their investment period as 1
to 3 years. About 27% of the respondents gave their investment period as 6
months to 1 year.18% of the respondents gave investment period as 3 months to 6
months. About 10% said they usually invested for a period of less than 3 months.
While 7% had their investment period of more than 3 years.
According to the survey 65% of respondents are not much affected by US-64
episode. About 17% of the respondents are very much affected. While 18% are
not at all affected.
According to the survey 33% of the respondents considered investments for tax
benefits, 21% of the respondents considered investments for high level of
liquidity, 17% of the respondents considered investments for regular returns,
13% of the respondents considered investments for risk free returns, 10% of the
respondents considered investments for ease in redemption, while 6% of the
respondents voted for capital appreciation when making an investments.
According to the survey, most of the investors used a combination of sources for
taking investment decision. But mostly the respondents used internet and
newspapers for information while investing. 8% investors are taking an
investment decision through different types of magazines.
43% of the respondents prefer to invest in the bracket of 5% to 10 % of their total
income, 37% of the respondents prefer to invest in the bracket of 1% to 5% of
their total income, 12% of the respondents prefer to invest more than 10% of their
total income, while 8% of the respondents prefer to invest less than 1% of their
total income.
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According to the survey yearly appreciation expectations play an important role in
the investment decision. 9% of the investors had expectations of up to 10%
annually from their investments in mutual fund. A majority of 39% expected 10%
to 20% yearly appreciation, while 34% wanted 20% to 30% yearly appreciation
from their investment. A modest 18% expected a yearly appreciation of more than
30%.
46% of the mutual fund investors preferred to invest in open ended schemes, 21%
of the mutual fund investors preferred to invest in closed ended schemes, while
33% of the mutual fund investors preferred to invest in both open ended and
closed ended schemes.
According to the survey investors investments in the various mutual funds in the
market. UTI mutual funds rank first, having 22%. ICICI mutual funds rank
second, having 21%. Franklin Templeton mutual funds rank third, having 18%
investments.
61% of the respondents preferred to undertake their investments through banks.
21% of the respondents preferred to make investments through investment
brokers. 15% of the respondents prefer direct dealing with the investment firm.
According to the survey about 45% of the respondents were willing to take
moderate risk while investing in the mutual funds. About 39% of the respondents
were willing to take low risk. A 9% of the respondents wanted to take very low
risk. While minorities of 7% respondents we In the Mutual Funds, for the
investors who are risk averse and want safe, risk free returns on their investments,
the bank should recommend them to go in for Liquid Funds or the Monthly
Income Plans (MIPs).
According to the survey In spite of having access to Internet, 78 % investors
prefer “Personal Communication” mode where as only 22% prefer “Automated
Service Mode”.
70
CONCLUSION
Conclusion
71
The Mutual fund industry is growing at a tremendous pace. A large number of plans have
come up from different financial resources. With the Stock markets soaring the investors
are attracted towards these schemes. Mutual fund investors often give a lot of attention to
the funds they are investing in. It is very important to understand the An Exploratory
Study on Investment Consideration and Perception of Investors about Mutual Funds.
Investors are influenced by the infrastructural facilities of the sponsor and the reputation
enjoyed by the sponsor, in their selection of the schemes. AMCs should design products
combining insurance and investment benefits to cater to the investor needs of safety and
returns respectively. This will surely attract/retain low and moderate risk profile investors
who often resist their desire to play directly in the capital market. AMCs should design
products consciously to meet the investors’ needs and should be alert to capture the
changing market moods. In order to tap the up coming market – various other distribution
channels should be used to penetrate the untapped market. AMC should try to develop
tailor made schemes to tap the high net worth investors where the penetration level is not
so high. In order to attract investment technology should be put to a greater use. Thus In
order to excel and make mutual funds a success, Asset Management companies still need
to create awareness and understand the Psyche of the Indian customer. It is hoped that the
survey findings will have some useful managerial implication for the AMCs in their
product designing and marketing.
72
LIMITATIONS
Limitations
73
A more extended geographical sample may show greater difference in perceptions.
Limited Time for conducting the study. At times Respondents were not interested to
disclose details. The responses might be subjected to customer bias.
The criterions for analyzing investors’ considerations are not comprehensive.
The sample size is relatively small to precisely determine the actual attributes\
perceptions of an investor. The sample size may not adequately represent the national
market.
The scope of study is mainly concentrated around investments in mutual funds by
investors.
This study has not been conducted over an extended period of time having both
market ups and downs. The market state has a significant influence on the buying
patterns and preferences of investors.
74
RECOMMENDATIONS
75
Recommendations
The findings of this survey would go a long way in helping the mutual funds companies
better understand not only the existing customers, but also the potential ones. Mutual
fund investors often give a lot of attention to the funds they are investing in. It is very
important to understand the An Exploratory Study on Investment Consideration and
Perception of Investors about Mutual Funds. Following are the key recommendations:
Mutual Funds should design products combining insurance and investment
benefits to cater to the investor needs of safety and returns respectively. This will
surely attract/retain low and moderate risk profile investors who often resist their
desire to play directly in the capital market.
Investors are influenced by the infrastructural facilities of the sponsor and the
reputation enjoyed by the sponsor, in their selection of the schemes. Hence,
AMCs should take steps to develop their infrastructural facilities
In the Mutual Funds, for the investors who are risk averse and want safe, risk free
returns on their investments, the bank should recommend them to go in for Liquid
Funds or the Monthly Income Plans (MIPs)
AMCs should design products consciously to meet the investors’ needs and
should be alert to capture the changing market moods and be innovative.
Continuous product development and introduction of innovative products, is a
must to attract and retain this market segment.
Tapping the up coming market – various other distribution channels should be
used to penetrate the untapped market. If they have to increase their market size
they have to open more distribution centers at the various urban and semi-urban
markets.
AMC should try to develop tailor made schemes to tap the high net worth
investors where the penetration level is not so high.
In spite of having access to Internet, investors prefer “Personal Communication”
mode to “Automated Service Mode”. This necessitates establishment of more
76
manually operated service centers throughout the length and breadth of the
country.
AMC should try to capture investors who are in the business class segment by
offering innovative products
77
APPENDICES
78
Questionnaire
Dear Investor,
I am a final year MBA student with USMS, GGSIPU, pursuing a research project on “An
Exploratory Study on Investment Consideration and Perception of Investors about Mutual
Fundss” under the guidance of. Dr. Shilpa Jain Please spare your precious time and
furnish your views by completing this questionnaire. Your views will be extremely
valuable input for this project. The information provided by you shall be used exclusively
for academic purpose and your identity will not be revealed.
1. Name: (Mr. / Dr.)_____________________
2. Age:
[ ] Below 20
[ ] 21-30
[ ] 31-40
[ ] 41-50
[ ] Above 50
3. Marital Status:
[ ] Married
[ ] Unmarried
4. Occupation :
[ ] Business
[ ] Service
[ ] Student
[ ] Other
If any other, please specify___________________
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5. Annual Income :
[ ] Below Rs.1, 00,000
[ ] Rs.1, 00,000 to Rs.3, 00,000
[ ] Rs.3, 00,000 to Rs.5, 00,000
[ ] Above Rs.5, 00,000
6. Which type of Mutual funds do you prefer?
[ ] Open Ended Schemes
[ ] Closed Ended Schemes
[ ] Both
7. Which company’s mutual fund do you invest in?
[ ] Reliance Mutual Fund
[ ] ICICI Mutual Fund
[ ] SBI Mutual Fund
[ ] HDFC Mutual Fund
[ ] UTI Mutual Fund
[ ] Franklin Templeton mutual fund
Any other, please specify: ________________________
8. What is the usual time horizon of your investment in Mutual funds?
[ ] Less than 1 month
[ ] 1 to 3 months
[ ] 3 to 6 months
[ ] 6 months to 12 Months
[ ] 1 to 3 years
[ ] More than 3 Years
80
9. As an investor, what parameters or factors do you/would like to consider while
investing?
[ ] Regular returns
[ ] Capital appreciation
[ ] Risk free returns
[ ] High level of liquidity
[ ] Tax benefits
[ ] Ease in redemption
Any other, please specify: ________________________
10. What portions of your income do you/would like to put in mutual fund
investments?
[ ] Less than 1%
[ ] 1% to 5%
[ ] 5% to 10%
[ ] Above 10%
11. How much yearly Appreciation do you expect from your Investments in mutual
funds?
[ ] Up to 10%
[ ] 10% - 20%
[ ] 20% - 30%
[ ] More than 30%
81
12. What is your source of information while investing in mutual funds?
[ ] Internet
[ ] Advertisements
[ ] Magazine
[ ] Newspaper
[ ] Financial Advisor
[ ] Friends
[ ] Relatives
13. With whom do you/would like to deal with, in investing :
[ ] Direct dealing
[ ] Investment Brokers
[ ] Banks
[ ] Others
14. How much Risk are you willing to take?
[ ] High
[ ] Moderate
[ ] Low
[ ] Very low
15. As an investor which is the most preferred way of dealing or investing?
[ ] Automated Service Mode
[ ] Personal Communication
16. Has US-64 performance affected your opinion about Funds?
[ ] Very Much
[ ] Not Much
[ ] Not At All
Thank you for your Co-Operation!!!!!
82
Glossary
Capital Market:
It deals with transactions related to long-tern instruments (with a period of maturity of
above one year like corporate debentures, government bonds, etc) and stock (equity and
preference shares).
Money Market:
It deals with all transactions is short-term instruments 9with a period of maturity of one
year or less like treasury bills, bills of exchange etc).
Government Securities:
It encompasses all bonds and treasury bills issued by the central government, state
government, and other entities like corporations, municipal authorities and companies
wholly owned by the government for the purpose of raising funds from the public.
Ask / Offer Price:
The price at which a Mutual Funds shares can be purchased. The asked or the offering
price means the current net asset value (NAV) per share plus sales charge, if any. If a no
load fund, the asked price is the same as the NAV.
Bid / Sell Price:
The price at which a Mutual Funds shares are redeemed (bought back) by the fund. The
bid or redemption price means the current net asset value per share less any redemption
fee or back-end load.
83
Bond Price:
It is the present value of its future cash-flows.
Balance Fund:
A Mutual Fund that maintains a balanced portfolio, generally 60% bonds or preferred
stocks and 40% common stocks.
Growth Fund:
A mutual fund whose primary investment objective is long-term growth of capital. It
invests principally in common stocks with significant growth potential.
Income Fund:
A mutual fund that primarily seeks current income rather than growth of capital. It will
tend to invest in stocks and bonds that normally pay high dividends and interest.
Index Fund:
A mutual fund that seeks to mirror general stock-market performance by matching its
portfolio t a broad-based index, most often the S&P CNX Nifty index.
Money Market Mutual Fund:
A Mutual Fund that aims to pay money market interest rates. This is accomplished by
investing in sage, highly liquid securities, including bank certificates of deposit,
commercial paper, government securities and repurchase agreements. Money market
funds make these high interest securities available to the average seeking immediate and
high investment safety.
84
Invest Company:
A corporation, partnership or trust that invest the pooled monies of many investors. It
provides greater professional management and diversification of investment than most
investors can obtain independently. Mutual funds, or “open-end” investment companies,
are the most popular form of Investment Company.
Load:
A Sales charge or commission assessed by certain mutual funds (“load funds”) to cover
their selling costs. The commission is generally stated as a portion of the fund’s offering
price, usually on a sliding from one to 8.5%.
Net Asset Value:
The current market worth of a mutual fund share. Calculated daily taking the funds total
assets securities, cash and any accrued earnings deducting liabilities, and dividing the
remainder by the number of shares outstanding. It is an indicator of the capital
appreciation of the funds under the scheme as on the date of the NAV
NAV = (M+O)-L
V
M= market value of securities or investment made
O= other assets
L= total liabilities
V= number of units outstanding
Portfolio:
It refers to the group of assets that is owned by the investor.
85
Prospectus:
An official document that each investment company must publish, describing the mutual
fund and offering its shares for sale. It contains information required by the Securities
and Exchange Commission.
Record Date:
The date the fund determines who its shareholders are; “shareholders of record” who will
receive the fund’s income divided and/or net capital gain distribution. Frequently the
business immediately prior to the Ex-Dividend date.
Redemption Fee:
A mutual fund that concentrates its investments within a specific geographic area, usually
the fund’s local region. The objective is to take advantage growth potential before the
national investment community does.
Reinvestment Date:
The date on which a share’s dividend and/ or capital gains will reinvested (if requested)
in additional fund shares
Short Selling:
The sale of a security, which is not owned by the seller. The “short seller” borrows stock
delivery to the buyer, and must eventually purchase the security for return to the lender.
Spread:
It is equal to Offer Price-Bid Price.
86
Systematic Withdrawal Plan:
Many mutual funds offer withdrawal programs whereby shareholders receive payments
from their investments. These payments are usually drawn from fund’s dividend income
gain distributions, if any, and from principal only necessary.
87
Bibliography
Books:
Financial Institutions and markets- By Shashi K.Gupta
Security Analysis and portfolio management - By Shashi K.Gupta
Investment Management – By R.P. Rastogi
Fundamentals of Investment – By B.C. Shukla
Websites:
www.amfiindia.com
www.mutualfundsindia.com
www.nseindia.com
www.bseindia.com
www.moneycontrol.com
www.indiainfoline.com
www.valueresearchonline.com
www.sebi.gov.in
www.fidelity.com
www.vanguard.com
Newspapers:
Economic Times
Business Standard
Business Line
HT Business
Magazines:
Business World
Business India
88