mutual fund (word project)

8/2/2019 Mutual Fund (Word Project)

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BOARD OF STUDIES

THE INSTITUTE OF CHATERED ACCOUNTANTS

OF INDIA

DESCRIPTIVE STUDY ON CHANGING TREND OF

INVESTMENT PATTERN IN DIFFERENT ASSET

CLASSES & EMERGENCE OF MUTUAL FUND

INDUSTRY IN INDIA

PRESENTED BY:

NAME: PAWAN KUMAR SARASWA

REGISTRATION NO:WRO 0308920

BATCH NAME: VASAIBRANCHOFWIRCOF ICAIVASAI, 3 r d October, Morning 7.30 to 11.30


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INDEX

.

Sr.

no

Topic Page

No .Why to become a CA? 3

Why IT Tra in ing Is Necessary? 4-5

1.0 I n t roduct ion about chang ing t rends in inves tm entpat tern in asset c lasses

6-8

2.0 In t roduct ion to Mutual fund 8-11

3.0 Growth of Mutual fund business in Ind ia 11

4.0 Advantages of Mutual Funds 12-15

5.0Drawbacks of Mutual fund 15-16

6.0 Why invest in Mutual fund? 16-18

7.0 Types of mutual funds 18-25

7.1 Expense and income structure for mutual f und 25-29

7.2 Structure of Ind ian mutual fund industry 30-34

7.3 Structure of investment companies 34-35

7.4 Recent t rends in mutual fund industry 35-37

7.5 Performance of mutual fund industry in ind ia 37-38

7.7 Compar ison of mutual funds wi th other investments

39-40

7.8 Future of mutual fund in ind ia 40

8.0 Fact for growth of mutual fund in ind ia 40-41

9.0 Organizat ion of mutual funds in ind ia 41-42

10.0 Types of mutual fund scheme in ind ia 42-50

11.0 Conclusion 50-51

12.0 BIBLIOGRAPHY 51-52

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WHY TO BECOME A CHARTERED ACCOUNTANT?

Profession of Chartered Accountancy

Chartered Accountancy is a challenging profession that offerspractice or job opportunities in the areas of accounting, auditing,corporate finance, project evaluation, and company and other

business laws, taxation and corporate governance. The multi-facetedknowledge a chartered accountant enjoys through unique academicprogramme blended with practical training is what the business andindustry need in the advent of liberalisation, privatization andglobalisation of Indian economy. Chartered Accountants are betterequipped to discharge accounting and audit functions in acomputerized business environment.

The Career Opportunities available for Chartered Accountants

Chartered Accountancy Course offers the students a dream career inthe specialized areas of Accounting, Auditing, Corporate Finance,Corporate Laws, and Taxation.Chartered Accountants are highlydemanded professionals in industry.Chartered Accountants arestatutorily recognized audit practitioners.Chartered Accountants arehighly demanded and sought-after professionals in the practice of

Income-tax, Service-tax and other indirect tax areas.CharteredAccountants are technically equipped to act as managementconsultants.Chartered Accountants possess adequate knowledge insystems and information technology, which help to excel in the

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areas such as development of advanced IT systems for theorganisations including for the functions of finance and accounting.

It is better to lite one small candle than to curse the darkness.Ialways believe in one of the famous quote

The above vistas available for a Chartered accountant haveconvinced me to do CA

Why IT Training is necessary?

Today is Information Age. In todays expanding andgrowing environment any information is available within short

period of time. All scrollable knowledge is available in minutes. Itmay not be wrong to say that today is the time for IT propeued bythe miniaturization of machines of industrial education with siliconchips. The IT is one of the promising sectors. It is growing at anunprecedented rate.

Today IT sector has grown tremendously and anyorganization finds itself dependent on IT sector in someway or the

other. IT is any technology that is used for information to spread allacross the globe to create, to store, to exchange and utilize throughits various forms. Computer technology helps to organizeinformation and variables, thus assisting a community inconsidering various options in their planned growth.

Recent developments in IT have transformed the wayorganization conduct business, making them innovative and market

leading technology companies. A professional needs to have someknowledge of IT which helps to overcome many difficulties in thiscorporate world. Today every profession demands IT intellectualsbecause in this advanced world time is money.

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IT training not only gives technical knowledge but creates anew face in accountancy. The audits have become easier andtrustworthy. IT Training is must for a profession.

A modest attempt has been made to study andunderstand the changing trends of investment patternin different asset classes & emergence of mutual fund

industry in indiaThis project is about how the Investor's Behavior is changing andthey are now leaving behind the sacred investment options like thefixed deposits, company deposits, gold etc. Investors are now lookingtowards equity linked investment options.

Like most developed and developing countries the mutual fund cult

has been catching on in India. There are various reasons for this.Mutual Fund makes it easy and less costly for investors to satisfytheir need for capital growth, income preservation.

And in addition to this a mutual fund brings the benefit ofdiversification and money management to the individual investor,providing an opportunity for financial success that was onceavailable only to a select few.In this project I have given a brief

about economy, inflation, and equity and debt market. Then it isexplained how to cope with the inflation and how mutual fund is oneof the best investment options today. A brief about mutual fundindustry and the some information about HDFC Mutual Fund and itsvarious products are given.

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INTRODUCTION TO THE CHANGING TRENDS OF

INVESTMENTS IN ASSET CLASSES

Many individuals find investments to be fascinating because theycan participate in the decision making process and see the results of

their choices. Not all investments will be profitable, as investor willsnot always make the correct investment decisions over the period ofyears; however, you should earn a positive return on a diversifiedportfolio. In addition, there is a thrill from the major success, alongwith the agony associated with the stock that dramatically rose afteryou sold or did not buy. Both the big fish you catch and the fish thatget away can make wonderful stories.

Investing is not a game but a serious subject that can have a majorimpact on investor's future well being. Virtually everyone makesinvestments. Even if the individual does not select specific assetssuch as stock, investments are still made through participation inpension plan, and employee saving programme or through purchaseof life insurance or a home. Each of this investment has commoncharacteristics such as potential return and the risk you must bear.

The future is uncertain, and you must determine how much risk youare willing to bear since higher return is associated with acceptingmore risk.

In 1986, Microsoft Corporation first offered its stock to the public.Nine years later, the stock's value had increased over 5,000 percent-a $ 10,000 investment wasworth over $ 5,00,000 in the same year,worlds of wonder also offered its stocks to the public. Nine yearslater the company was defunct- a $ 10,000 was worth nothing. Theseare two examples of emerging firms that could do exceedingly wellor fail. Would investing in large, well establish firms generate moreconsistent returns? The answer depends, of course, on which firmswere invested in. Over the years some investments have generated

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Let's explain this with the help of an example. Suppose the IndianRupee was freely exchangeable with only one commodity- crude oil.Let's assume the conversion rate is Re 1= 1 barrel of crude (wish itwere true!). Now there is tension in the Gulf region resulting in

reduced supply. Due to the subsequent rise in price of crude oil ininternational markets, we would now have to pay more Rupees forevery barrel of oil. Suppose crude prices rise by 10%. The newexchange rate will be Rs. 1.1 = 1 barrel of declined from 1 barrel ofcrude per Rupee to only 0.91 barrel of crude per Rupee this is theerosion in the value of the currency that we are talking about. Alsonote that while the Indian Rupee may be appreciating vis--vis othercurrencies, in the ' real sense' there is erosion in value.

Another important fallout one can expect due to rising inflation ishigher interest rates. The central banks aim to reduce demand in theeconomy by rising the cost of money.

When making fresh investments or evaluating your existingholdings in potentially inflationary times you need to keep twothings in mind:

The possibility of higher interest rates

The erosion in the value of the currency

INTRODUCTION TO MUTUAL FUNDS

A Mutua l Fund i s a t rus t t ha t poo l s t he s av ings o f anumber of investors who share a common financial goalTh e mon ey thus collected is then in vested by fu ndmanager (professional money manager) in capital marketinstruments such as shares, debentures and other

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securities. The income earned through these investmentsand the capi tal appreciat ions real ized are shared by i tsunit holders in proportion to the number of units ownedby them. Thus a Mutual Fund is the most suitable

investment for the common man as it offers anoppor tuni ty to inves t in a d iversi fi ed , profess iona llymanaged por tfol io a t a r el at ively low cost . In o therwords a mutual fund is a company that pools money fr ommany investors and invests the money in s tocks, bonds,short-term money-market instruments, other securities orassets , or some combinat ion of these investments . Thecombined holdings the mutual fund owns are known as

its portfolio. Each share represents an investor'sproportionate ownership of the fund's holdings and theincome those holdings generate.

The SECURITY AND EXCHANGE BOARD OF INDIA(Mutual Funds) REGULATIONS,1996 defines a mutualfund as a " a fund establishment in the form of a trust toraise money through the sale of uni ts to the public or asec tion of the public under one or more schemes forinvesting in securities, including money marketins truments. Mutua l Funds have been a s igni ficantsource of investment in both government and corporatesecuri t ies . I t has been for the decades the monopoly of

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the s ta te with UTI being the key player with investedfunds exceeding Rs.300 bn. (US $ 10 bn. ). The s ta teowned insu rance companies a lso hold a por tfol io o fstocks. Presently, numerous mutual funds exist,

including private and foreign companies. Banks - mainlystate owned too have establ ished Mutual Funds (MFs).Foreign participation in mutual funds and assetmanagement companies permi tted on a case-by-casebasis.

Steady growth of mutual fund business in India in the four

decades from 1964, when UTI was set up is given in the table

below:

Period(Year)

AggregateInvestmentIn Crores of

Rupees

Period(Year) Aggregate

InvestmentIn Crores of

Rupees

1964-69 65 1992-93 46988.02

1969-74 172 1993-94 61301.21

1974-79 402 1994-95 75050.21

1979-84 1261 1995-96 81026.52

1986-87 4563.68 1996-97 80539.00

1987-88 6738.81 1997-98 68984.001988-89 13455.65 1998-99 63472.00

1989-90 19110.92 1999-00 107966.10

1990-91 23060.45 2000-01 90587.00

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ADVANTAGES

I t may not be obvious a t f i r s t why you would want topurchase shares in different securities through a mutualfund "middleman" instead of sim ply pur chasing thesecuri t ies on your own. There are , however, some verygood reasons why mil l ions of people opt to invest inmutual funds instead of, or in addition to, buyingsecur it ies d irec tly. Mutua l funds can offer you thefollowing benefits:

Diversification can reduce your overa ll inves tmentrisk by spreading your r isk across many d if fe rentassets . Wi th a mutua l fund you can d ivers i fy yourholdings both across companies (e.g. by buying a

mutual fund that owns stock in 100 differentcompanies) and across asset classes (e.g. by buying amutual fund that owns stocks, bonds, and othersecur it ies) . When some asset s a re fal ling in priceothers are l ikely to be rising, so diversification results

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in l ess r i sk than i f you purchased jus t one or twoinvestments.

Choice : Mutual funds come in a wide variety of typesSome mutual funds invest exclusively in a part icularsector (e.g. energy funds) , while others might targetgrowth opportunities in general . There are thousandsof funds , and each has i t s own object ives and focus .The key is for you to f ind the mutual funds that mostclosely match your own particular investmentobjectives.

Liquid ity : I t is the ease with which you can convertyour assets (with relat ively low depreciation invalue) into cash. In the case of mutual funds, i t ' s aseasy to sel l a share of a mutual fund as i t is to sel l ashare of s tock (al though some funds charge a fee forredemptions and others you can only redeem at the endof the trading day, a f ter the current value of thefund's holdings has been calculated).

Low Investment Minimums : Most mutual funds wil la l low you to buy into the fund with as l i t t le Rs.500,and some funds even a llow a "no minimum" ini ti al

investment , if you agree to make r egular month lycontributions of Rs.500 or Rs.1000. Whatever the casemay be, you do not need to be exceptionally wealthy inorderto invest in a mutual fund.

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Convenience : When you own a m utual fu nd, y oudon 't need to wo rry abou t tracking th e do zens o fdifferent securi t ies in which the fund invests ; ra ther ,all you need to do is to keep track of the fund's

performance. It 's also quite easy to make monthlycon tr ibut ions to mutua l funds and to buy and sel lshares in them.

Low Transaction Costs : Mutua l funds a re able tokeep transaction costs . i .e . , the costs associated withbuying and selling securities at a minimum because

they benefit from reduced brokerage commissions forbuying and selling large quantities of investments at asingle time. Of course, this benefit is reducedsomewhat by the fact that they are buying and selling alarge number of different stocks. Annual fees of 1.0%to 1.5% of the investment amount are typical .

Regulation : Mutual funds are regulated by thegovernment under the Inves tment Company Act of1940. This act requires that mutual funds register theirsecurit ies with the Securities and ExchangeCommission .The act also regulates the way that mutualfunds approach new inves tors and the way tha t theyconduct their internal operations. This provides some

level of safety to you, a l though you should be awarethat the investments are not guaranteed by anyone andthat they can (and often do) decline in value.

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Additional Services : Some mutual funds offer addi t ional services to the i r shareholders , such astax reports , reinvestment programs, and automaticwithdrawal and contribution plans.

Professional Management: Mutual funds are managedby a team of professionals, which usually includes onemutual fund manager and several analystsPresumably, p ro fe ss iona ls have more experience,knowledge, and information than the average investorwhen i t comes to deciding which securit ies to buy and

sel l. They a lso have the ability t o f o c u s o n j u s t asingle area of expertise. (However, i t should be notedthat this apparent benef it has not a lways t rans la tedinto superior performance, and in fact the majority ofa ll mutua l funds don 't manage to keep up with theoverall performance of the market.)

DRAWBACKS OF MUTUAL FUNDS

The different drawbacks of mutual fun ds are as follows:

No Guarantees: No investment is risk free. If theent i re s tock market decl ines in va lue , the va lue ofmutual fund shares wil l go down as well , no matterhow balanced the por tfol io . Inves tors encounter

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fewer r isks when they invest in mutual funds thanwhen they buy and sell stocks on their ownHowever, anyone who invests through a mutual fundruns the risk of losing money.

Fees and commissions: All funds chargeadministrative fees to cover their day-to-dayexpenses. Some funds also charge sales commissionsor "loads" to compensate brokers, financialconsultants, or financial planners. Even if you don' tuse a broker or other financial adviser, you will pay

a sales com mission if you bu y shares in a Lo adFund.

Taxes: During a typical year, most actively managedmutual funds sell anywhere from 20 to 70 percent ofthe securit ies in their portfolios. If your fund makesa profit on its sales, you will pay taxes on theincome you receive, even i f you reinvest the moneyyou made.

Management risk: When you invest in a mutua lfund, you depend on the fund's manager to make theright decisions regarding the fund's portfolio. If the

manager does not perform as well as you had hoped,you might not make as much money on yourinvestment as you expected. Of course, if you investin Index Funds, you forego management risk,because these funds do not employ managers.

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WHY INVEST IN A MUTUAL FUND?

The potential of mutual funds is enormous. Mutual funds

can bring the average investor great returns if he/she iswi l l ing to fol low two bas ic tenets : doing research andhaving pat ience. These two characteris t ics , as you wil llearn, define any successful investor.

Many people, adul ts included, do not have the vaguestidea of wha t mutua l funds a re . In a way, they can bedescribed as a group of people invest ing for a commoninterest . They are appealing to the average, conservativeinves tor . And they ' re easy enough so tha t the commoninvestor can do i t on his /her own. The world of mutualfunds is so vast that i t can be overwhelming. There aremany types of funds , so take i t s lowly and absorb theinformation.

We'l l t ry to give you a f lavor of what mutual funds areThe purpose of this sect ion is not to te l l you preciselywhen and in what to in vest bu t to h elp yo u becom eaware . The informed dec is ion, a fter a ll , i s far moresound than one made on impulse. Beginning to decipherthis complex mass of information and concepts will helpyou make better choices. People invest in

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Essentially, there are three basic types of mutu al funds:equity funds , f ixed-income funds and money-marke tfunds. If you are not completely sure what classificationa mutual fund belongs to, check its beta co-efficient. The

funds with the higher betas will probably be aggressivegrowth funds (equi ty or s tock funds ), and those withlower betas will be fixed-income funds.

Aggressive Growth Funds

Aggress ive growth funds a re s tock funds tha t haveprimarily one objective--maximum capital gains.

Capital gains are just the increase in the value of aninves tment. These types of mutua l funds inves t inmany d if fe rent s ecuri tie s, includ ing new indust rystocks, small-company stocks, and practice investmenttechniques such as sel l ing s tocks short, fu tures , andoptions. Aggressive growth funds tend to be the mostvolat il e of funds , a s wel l. Examples of aggress ivegr owth f und s are Fidelity Magellan , Tudor, 20thCentury , etc.

Growth Funds

Growth funds are those that invest in the stocks of well-establ ished, blu e ch ip com panies. Dividen ds, an dconsequently steady income, are not the primary goal ofthese types of funds. Instead, they focus on increasing

capital gains . Examples of growth fund a re F idel ityDest iny I, Ivy, Janus, T . Rowe P rice New Era , 20thCentury Growth, Manhattan and many more.

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Growth and Income Funds

Growth and income funds incorporate both increasedcapi tal gains and producing s teady income. They areless volat i le than aggressive growth funds. Examples

of these funds are Evergreen Total, InvestmentCompany of America, 20th Century Select , VanguardIndex Trust, Windsor II, etc.

Equity (Stock or Income) Funds

Equi ty funds a l low inves tors to own a p iece of thecompany tha t t hey have invest ed in , l ike common

stocks. Stocks have historically been the bestinvestment bar none. They have outperformed all otherinvestment veh ic le s in t he long t erm, but t he re isadded r i sk . See the sec t ion on stocks and bonds formore information about this.

Equi ty funds seek to produce a high level of currentincome by invest ing primari ly in equi ty securi t ies ofcompanies with solid reputations and a record of good-paying dividends. Decatur and Fidelity Puritan areexamples of equity funds.

Balanced Funds

Balanced funds have a portfolio mix of bonds,preferred stocks and common stocks. Balanced fundsgenerally aim to conserve investors ' initial investment,to pay an income and to aid in the long-term growth ofboth the principle and the income. Examples include

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Phoenix balanced, Wellington, Loomis-SaylesMutual, etc.

Bond Funds

These types of mutua l funds inves t in a mix ture ofcorporate and government bonds at all t imes. The mostsophis t icated inves tors often swi tch between short -term, intermediate-term and long-term bonds,depending upon the direct ion of interest ra tes . Short-term bonds are those with maturi ty of less than three

years; intermediate bonds are those that have bonds ofthree to ten years , and long- term bonds are over tenyears. For a more comprehensive description ofbonds,refer to that section.

Global Funds

Global funds are those that invest in equity securit iesof companies ar ou nd the wo rld and in the UnitedStates. These funds can change the percentage of theira l locat ion in fore ign and domest ic markets , as wel l .For example , i f there are major problems in fore ignmarke ts , g loba l funds will allow the mu tu al fu ndcompany to pull out money invested there.

International funds

In te rnat iona l funds invest in equ ity s ecur it ie s o fcompanies located outside of the United States. Two-

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th i rds of the i r por t fol ios must be inves ted in thesecompanies at any one time. Many of theseinternat ional funds invest in the emerging markets ofnations around the world. They do not offer the

f lexibi li ty of the g loba l funds because of the two-thirds minimum requirement.

Fixed-Income Funds

Fixed-income funds are safer than equity funds, but asa lways , do not y ie ld as high re turns as the la t ter do.

These types of funds are geared towards the investorwho i s approaching o ld age and doesn 't have manyearning yea rs l ef t. Many investor s hope to d raw asteady income from these types of mutual funds. Bondfunds fal l into the category of f ixed-income fundsFixed-income funds entai l lending out money to buyCertificate of Deposits (CDs) or bonds, and as a result,your principle isn' t expected to take a great hi t in the

event of the marke t heading south , bu t a t the sametime, your principle won't appreciate greatly when theloan comes due either.

Money-Market Funds

Money market funds are generally the safest and mostsecure of mutual fund investments. They invest in thelargest , mos t s table secur it ies, inc luding Treasurybills. Money-market funds have beta co-efficientvalues of zero because the chances of your principle

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being eroded are very minimal. How do these fundswork? Money-market funds are l ike fancy checkingaccounts and the best part is that they are risk-free. Ifyou invest a thousand dollars, you will get that money

back. It is simply a matter of when you get it back. Ath ousand do llar s will get you a thou san d shar es.Usually the prices of shares in money-market fu nds arekept a t a round $1. As an inves tor , you wi l l be givenchecks which you can use agains t your depos i t . Theminimum amount for these checks, however, is usuallyaround $250 or $500.

When investing in a money-market fund, you should payattention to the interest rate that is being offered, alongwith the rules regarding check-wri t ing. Money-marketshave a llowed investor s t o r eap h igh y ie lds on the irdeposi ts , and have made the ent i re investment processmore accessible to people.

The interest ra tes on money-market funds are changing

nearly day to day. In t imes of inflation, these funds havehad high yields- -like 18 % in the early 1 980s. Theinter est rate is very im portant in form ation. Manyinvestors bel ieve that even 1% is not worth the t roubleof shopping around. The graph below shows thedif fe rence 1% makes on $5000 inves ted for d if fe rentduration.

Real Estate Funds

Real estate has often rivaled common stocks asamongst the most profitable of investments. Adrawback to inves t ing in rea l es ta te i s tha t i t i s not

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very l iquid. In other words, an investor cannot pickand se l l and turn around and buy as quickly as wi thother investments. Mutual funds provide some of thisl iquidi ty. Real Estate Investment Trusts (REITs) are

sold l ike stocks on an exchange. They are not exactlymutual funds. REITs provide the most l iquidity, alongwith the lucrative benefits of investing in real estate.T. Rowe Price, Vanguard and others have many REITsthat you can invest in.

Index Funds

Ind ices (pl. index), as you know now, provide asnapshot of how the market is doing on the whole. Themos t f amous indices a re t he Dow Jones Indust ri alAverage (about 30 blue-chip s tocks) and Standard &Poor's 500 Index. Both of these give a view of how themarke t i s do ing in genera l , bu t for more a spec i f i c

view, the Wilshire 5000 and the Value Line Compositeprovide more accurate information.

Index funds t ry to emula te a market index, most of tenthe S&P 500. Because of expenses , these index fundsperform a bit worse than the index itself. An example ofa good index fund: Vanguard's 500.

Fund Families

A family of funds is a group of funds under oneorganizat ion. When you invest in a fund of famil ies ,you can switch between different types of funds with

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ease . Some of the bes t fund famil ies avai lable areStrong, T. Rowe Price, Dreyfus, Fidel i ty, Vanguard,e tc . The l argest f amily is Fide lit y, w ith ove r 100different available funds

EXPENSE AND INCOME STRUCTURE FOR

MUTUAL FUNDS

A load is the fee or sales charge that an investor has topay to buy certain mutual funds. Not all mutual fundshave loads. Those without loads are called, qu ite

logical ly, "no-load." About 60% of mutual funds carrywhat are known as "f ront -end" loads , or those tha t a reassessed when the fund is first purchased. A "back-end"load or one that is assessed when the fund is sold can befar more damaging if an investor does not pay attentionto them. The maximum load a l lowed by the Secur i t iesExchange Commiss ion (SEC) i s 8 .5% of the origina linvestment.

Most experienced investors don't buy ful l- load mutualfunds. Loads can start adding up quickly, and there is noevidence to suggest that load funds perform bet ter thanno-load funds. You, as the investor , are paying for theresearch and "due dil igence" of the broker when you paya load. Once you become more aware and gain expertise,

the need for a broker lessens.Redemption fees are charged whenever you cash al l orpart of your shares. Unlike loads, redemption fees areu su ally sm all and they do disappear af ter a wh ileNevertheless, a wise investor should be aware of whether

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or not h is /her fund charges these fees and how muchthey are.

In 1980, the SEC authorized the 12b-1 (di st ribu tion)plan. This allows mutual funds to charge 12b-1 fees,

which are used in the marketing and distributionexpenses that are entailed. This inclu des costs ofmarket ing, publ ishing annual reports and prospectuses ,and to pay brokers themselves. Any 12b-1 fee in excessof 1% is too high. In essence, funds that charge a 12b-1fee are not t ru ly a "no- load" fund. These types of feesmay seem minuscule, but when investing large amounts

of funds, they can begin to add up quickly.

The mos t se rious impedimen ts t ha t an investor mayencounte r when buying a mutua l fund i s a h igh sa lescharge (8.5%), extremely high volatil i ty, and "back-end"loads, or deferred-sales charges. These types of fees canaccumulate rapidly. There are numerous other handicapswhich wil l undoubtedly a ffec t fund per formance , but

none would be as ser ious as the aforement ioned ones .These are things that any investor must look for beforepurchasing mutual funds.

Distribu tio ns co llectiv ely refer to mo ney that y oureceive as a resul t of your investment in a mutual fund.Dividends from common and preferred s tocks, interestfrom bonds, net realized capital gains, return of capital ,undistributed capital gains--all of these are distributions.When distributions are issued, you have various optionsYou can re-invest your distributions, which is the choicethat about four-f i f ths of a l l investors take. This a l lows

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them to obtain more shares automatically. It is possibleto re- inves t jus t the income tha t you receive , and notyour capi tal gains . The other possible opt ion is to haveyour distributions check mailed to you. Only funds with

loads of less than 7.25% can charge commission to re-invest distributions.

As a general rule, it is not a good idea to buy shares of afund r ight before d is tr ibut ions a re i ssued. You wil lreceive back a part of your investment immediately, butno w it is taxable. Mo st distr ibu tion s are issu ed inDecember and some in July. Each fund varies , so i t is a

good idea to check with the particular fund that you areinterested in

Remember that in addit ion to mutual funds being groupsof funds that investors can buy, they may refer tocompanies that sell funds to people. In this case, mutualfunds are l ike any other bus iness . They have cos ts formaintenance and other expenses. An eff ic ient fund is

going to have lower expenses. The general rule of thumbis that the larger the fund, the lower i ts per-share cost isgoing to be . This i s due to the fac t tha t these mutua lfu nds are d oin g bu siness in gr eat volu me. Th ere isdefini tely the economy of scale which such funds takeadvantage of.

Expense ratios are yet another factor that is veryimportant to look at when buying a mu tual fund. You cancalculate a fu nd s expense ratio by d iv idin g an nu alexpenses by aver age net assets. A fu nd' s expen sestypical ly inc lude adviser' s fees , legal and accountingfees, 12b-1 fees, but not commissions, interest on loans

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or income taxes. An expense ratio of over 2% isconsidered exorbitant.

Funds tha t per form poorly year a fter year have h ighexpense ratios. That makes sense. Obviously, these funds

are not managing their expenses to the highest level ofe ff ic iency, and thi s resul ts in poor per formance . Butthese numbers can be mis lead ing. Cons ider t his : Amutual fund al lows investors in with a very low ini t ia lminimum inves tment . As a resu l t , i t wi l l have a h ighexpense ratio because it is more expensive to deal with alarge group of small inves tors than a small g roup of

large investors.

The Wiesenberger Investment Companies Serviceprovides this type of information about funds. Here aresome of the expense rat ios of different types of mutualfunds , not a l l of which are discussed in th is page , forsimplicity's sake:

Expense Ratios for Various Mutual Funds

Type of Mutual Fund Expense Ratio (in %)

Aggressive growth 1.15

Growth/income 1.03

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Balanced 0.96

Stock income 1.20

Income (flexible) 1.05

International 1.35

Metals 1.32Sector 1.35

Government 1.02

Technology 1.27

Other 1.51

ALL MUTUAL FUNDS 1.15

INDIAN SCENARIO

Structure of the Indian mutual fund industry

The origin of mutual fund industry in India is with theintroduction of the concept of mutual fund by UTI in theyear 1963. Though the growth was slow, but it

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accelerated from the year 1987 when non-UTI playersentered the industry.

The Indian mutua l fund indus try i s dominated by theUnit Trust of India, which has a total corpus of Rs700bn

collected from more than 20 mill ion investors. The UTIhas many funds/schemes in a ll categor ies i .e . equitybalanced, income etc with some being open-ended andsome being closed-ended. The Unit Scheme 1964commonly re fe r red to as US 64 , which i s a ba lancedfu nd, is the b igge st sch em e with a corpu s of abo utRs200bn. Most of i t s inves tors bel ieve tha t the UTI i s

government owned and controlled, which, while legallyincorrect, is true for all practical purposes.

The second largest category of mutual funds is the onesfloated by nationalized banks. Can bank AssetManagement f loat ed by Cana ra Bank and SBI FundsManagement f loated by the State Bank of India are thelargest of these. GIC AMC floated by General Insurance

Corporat ion and Jeevan Bima Sahayog AMC floated bythe LIC are some of the other prominent on es.

In the past decade, Indian mutual fund industry had seena dramatic improvements , both qual i ty wise as well asquanti ty wise. Before, the monopoly of the market hadseen an ending phase ; the Asset s Under Management(AUM) was Rs . 67 bn. The pr iva te sec tor ent ry to thefund family rose the AUM to Rs. 470 bn in March 1993and t i l l Apri l 2004; i t reached the height of 1 ,540 bn.

Put t ing the AUM of the Indian Mutual Funds Indus t ryinto comparison, the total of i t is less than the deposits

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of SBI a lone , const it ut e l ess than 11% of t he tota ldeposits held by the Indian banking industry.

The main reason of i t s poor growth is tha t the mutual

fund indust ry in India is new in the country. Largesections of Indian investors are yet to be intel lectuatedwith the concept. Hence, i t is the prime responsibil i ty ofall mutual fund companies, to market the productcorrectly abreast of selling.The mutual fund indus t ry can be broadly put in to fourphases according to the development of the sector. Eachphase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 byan Act of Parliament. It was set up by the ReserveBankof India and functioned under the Regulatory andadministrative control of the Reserve Bank of India. In1978 UTI was de-linked from the RBI and theIndustrial Development Bank of India (IDBI) took over

the regulatory and administrative control in p lace ofRBI. The first scheme launched by UTI was UnitScheme 1964. At the end of 1988 UTI had Rs.6,700crores of assets under management.

Second Phase - 1987-1993 (Entry of Publ ic Sector

Funds)

Entry of non-UTI mutual funds. SBI Mutual Fund was

the f i rs t fol lowed by Canbank Mutual Fund (Dec 87),Punjab National Bank Mutual Fund (Aug 89), IndianBank Mutual Fund (Nov 89), Bank of India (Jun 90),Bank of Baroda Mutual Fund (Oct 92) . LIC in 1989

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and GIC in 1990. The end of 1993 marked Rs.47,004as assets under management.

Third Phase - 1993-2003 (Entry of Private Sector

Funds )

With the entry of private sector funds in 1993, a newera s tar ted in the Indian mutual fund industry, givingthe Indian investors a wider choice of fund famil ies .Also, 1993 was the year in which the first Mutual FundRegulat ions came into being, under which al l mutualfunds, except UTI were to be registered and governed.The e rs twhil e Kotha ri P ioneer (now merged with

Fr anklin Tem pleto n) was the f irst p riv ate secto rmutual fund registered in July 1993.

The 199 3 SEBI (Mu tu al Fu nd) Regu lation s weresubs ti tu ted by a more comprehensive and r ev isedMutual Fund Regula t ions in 1996. The indus t ry nowfunct ions under the SEBI (Mutual Fund) Regulat ions1996.

The number of mutual fund houses went on increasingwith many fore ign mutual funds se t t ing up funds inIndia and a lso the indust ry has w itnessed s everalmergers and acquisi tions. As a t the end of January2003, there were 33 mutual funds with total assets ofRs . 1 ,21,805 c ro re s. The Uni t Trust o f India w ith

Rs.44,541 crores of assets under management was wayahead of other mutual funds.

Fourth Phase - since February 2003

Th is ph ase had bitter e xperienc e for UTI. It wasbifurcated into two separate entit ies. One is the

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Specified Undertaking of the Unit Trust of India withAUM of Rs.29, 835 crores (as on January 2003). TheSpecified Undertaking of Unit Trust of India,functioning under an administrator and under the rules

f ramed by Government of Ind ia and does not comeunder the purview of the Mutual Fund Regulations.

The graph indicates the growth of assets over the years.

GROWTH INASSESTS UNDER

MANAGEMENT

The Indian mutua l fund indus try i s dominated by theUnit Trust of India, which has a total corpus of Rs700bncollected from more than 20 mill ion investors. The UTIhas many funds/schemes in a ll categor ies i .e . equitybalanced, income etc with some being open-ended andsome being closed-ended. The Unit Scheme 1964commonly re fe r red to as US 64 , which i s a ba lancedfu nd, is the b igge st sch em e with a corpu s of abo ut

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Rs200bn. Most of i ts investors bel ieve that the UTI isgovernment owned and controlled, which, while legallyincorrect, is true for all practical purposes.

The second largest category of mutual funds is the ones

floated by nationalized banks. Can bank AssetManagement f loat ed by Cana ra Bank and SBI FundsManagement f loated by the State Bank of India are thelargest of these. GIC AMC floated by General InsuranceCorporat ion and Jeevan Bima Sahayog AMC floated bythe LIC are some of the other prominent on es.

Structure of Investment Companies (Mutual Funds)

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A typical MF in India has the following constituents:

RECENT TRENDS IN MUTUAL FUND INDUSTRY

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The most important trend in the mutual fund industry isthe aggress ive expans ion of the fore ign owned mutualfund companies and the decline of the companies floatedby nationalized banks and smaller private sector players.

Many nation alized banks got into th e m utual fundbusiness in the early nineties and got off to a good startdue to the s tock marke t boom preva il ing then. Thesebanks did not really understand the mutual fund businessand they ju st viewed it as an other kind of ban kin gactivity. Few hired specialized staff and generally choseto t ransfer s ta ff f rom the paren t o rgan izat ions. The

performance of most of the schemes floated by thesefunds was not good. Some schemes had offeredguaranteed returns and their parent organizations had tobail out these AMCs by paying large amounts of moneyas the d if fe rence between the guaranteed and actua lreturns . The service levels were also very bad. Most ofthese AMCs have not been able to retain staff, f loat newschemes e tc . and i t i s doubtful whether , barr ing a fewexcept ions, they have ser ious plans of continuing theactivity in a major way.

The experience of some of the AMCs floated by privatesec tor Ind ian companies was a lso very s imilar . Theyquickly rea l ized tha t the AMC business i s a bus iness ,which makes money in the long term and requires deep-

pocketed support in the intermediate years. Some havesold out to foreign owned companies, some have mergedwith others and there is general restructuring going on.

They can be credited with introducing many newpractices such as new product innovation, sharp

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improvement in service standards and disclosure, usageof technology, broker education and support etc. In fact ,t hey have forced the indust ry to upgrade i tse lf andservice levels of organizat ions l ike UTI have improved

dramatica lly in the l as t few years in response to thecompetition provided by these.

PERFORMANCE OF MUTUAL FUNDS IN INDIA

Let us start the discussion of the performance of mutualfunds in India from the day the concept of mutual fundtook b i r th in India . The year was 1963. Uni t Trus t o fIndia invited investors or rather to those who believed in

savings , to park the i r money in UTI Mutual Fund. Theperformance of mutual funds in India in the initial phasewas not even closer to sat isfactory level . People rarelyunderstood, and of course investing was out of questionBut yes, some 24 mill ion shareholders were accustomedwith guaranteed high returns by the beginning ofl iberal izat ion of the industry in 1992. This good recordof UTI became marke ting too l for new ent rant s. Theexpectations of investors touched the sky in profitabil i tyfactor. Ho wever, peop le were m iles away fro m thepreparedness of risks factor after the liberalization.

The Assets under Management of UTI was Rs. 67bn. bythe end of 1987. Let me concentrate about theperformance of mutual funds in India through figures.

From Rs. 67bn. the Assets Under Management rose toRs . 470 bn . in March 1993 and the f igure had a th reetimes higher performance by April 2004. It rose as highas Rs . 1 ,540bn. The ne t asse t va lue (NAV) of mutua lfunds in India declined when stock prices started fall ingin the year 1992. Those days, the market regulations did

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not allow portfolio shifts into alternative investments.There was rather no choice apart from holding the cashor to fur ther continue inves ting in shares. One morething to be noted , s ince only c losed-end funds were

f loat ed in t he marke t, the investor s d is invest ed byselling at a loss in the secondary market.

The per fo rmance o f mutua l funds in Ind ia su fferedquali tat ively. The 1992 stock market scandal, the lossesby disinvestments and of course the lack of transparentrules in the whereabouts rocked confidence among theinvestors. Partly owing to a relatively weak stock market

performance, mutual funds have not yet recovered, withfunds t rading at an average discount of 1020 percent ofthei r ne t asse t va lue . The measure was taken to makemutual funds the key instrument for long-term saving.The more the var ie ty offered, the quant i ta t ive wi l l beinves tors . At l as t to ment ion , as long as mutua l fundcompanies are performing wi th lower r i sks and higher

profitability within a short span of time, more and morepeople will be inclined to invest until and unless theyare fu l ly educa ted wi th the dos and don ' t s o f mutua lfunds.

MARKET TRENDS

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COMPARISION OF MUTUAL FUNDS WITH OTHER

INSTRUMENTS

A lone UTI with just one scheme in 1964 now competeswith as many as 400 odd products and 34 players in themarke t. In spi te o f t he s ti ff compe tit ion and los ingmarket share, Last six years have been the mostturbulent as well as exi t ing ones for the industry. Newplayers have come in, while others have decided to closesh op by either sellin g o ff or mergin g with o th ers.Product innovat ion is now pass with the game shif t ing

to performance del ivery in fund management as well asservice. Those directly associated with the fundmanagement indust ry l ike dis tr ibutors, regist rars andtransfer agents, and even the regula tors have becomemore mature and responsible.

The indu stry is also having a profound impact onfinancial markets. While UTI has always been a

do minant player on th e bou rses as well as the d ebtmarkets , the new genera tions of pr ivate funds, whichhave gained subs tant ia l mass , a re now f lexing the irmuscles . Fund managers , by their select ion cri ter ia forstocks have forced corporate governance on the industry.Rewarding hones t and t ransparent management withhigher valuat ions has created a sys tem of r isk-reward

created where the corporate sector is more t ransparentthen before.

Funds have sh if ted the ir focus to t he r eces sion f reesec tors l ike pharmaceutica ls , FMCG and technologyse cto r. Fu nds perfo rm ances ar e im prov in g. Fu nd s

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col lect ion, which averaged a t less than Rs100bn per annum over f ive-year period spanning 1993-98 doubledto Rs210bn in 1998-99. In the current year mobilizationtill now have exceeded Rs300bn. Total collection for the

current financial year ending March 2000 is expected toreach Rs450bn.

What i s par ti cu la rly notewor thy is t ha t bulk o f t hemobilization has been by the private sector mutual fundsra ther than publ ic sec tor mutual funds . Indeed pr iva teMFs saw a net inf low of Rs . 7819.34 Crore dur ing thefirs t nine months of the year as against a net inf low of

Rs.604.40 Crore in the case of public sector fund s.

FUTURE OF MUTUAL FUNDS IN INDIA

By December 2004, Indian mutual fund industry reachedRs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banksshould be Rs 40,90,000 crore.

The annual composite rate of growth is expected 13.4%during the rest of the decade. In the last 5 y ears we haveseen annual growth rate of 9%. According to the currentgrowth rate, by year 2010, mutual fund assets will bedouble.

FACTS FOR THE GROWTH OF MUTUAL FUNDS IN

INDIA

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100% growth in the last 6 years.

Number of foreign AMC's are in the que to enter theIndian markets l ike Fidelity Investments, US based ,with o ver US$1 tr ill ion assets und er m an agem en t

worldwide.

Our sav ing rate i s over 23%, h ighest in the wor ldOnly channelizing these savings in mutual funds sectoris required.

We have approximately 29 mutual funds which is muchle s s t han US hav ing more than 800 . The re i s a b ig

scope for expansion.

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

Mutual fund can penet ra te rura l a rea l ike the Indianinsurance industry with simple and limited produ cts.

SEBI al lowing the MF's to launch commodity mutualfunds.

Emphasis on better corporate governance.

Trying to curb the la te trading practices. Introductionof Financial Planners who can p rovide need based

advice.ORGANIZATION OF MUTUAL FUNDS IN INDIA

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There are many enti t ies involved and the diagram aboveillustrates the organizational set up of a mutual fund.

TYPES OF MUTUAL FUNDS SCHEME IN INDIA

Wide variety of Mutual Fund Schemes exists to cater tothe needs such as f inancial posi t ion, r isk tolerance andreturn expectations etc. The table below gives anov erview into th e existin g ty pes o f schemes in theIndustry.

By Structure

Open - Ended Schemes

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Close - Ended Schemes

Interval Schemes

By Investment Objective Growth Schemes

Income Schemes

Balanced Schemes Money Market Schemes

Other Schemes

Tax Saving Schemes

Special Schemes

Index Schemes

Sector Specific Schemes

A deta iled explanat ion per ta ining to these schemes i s

g iven ear li er whi le expla in ing d if fe rent Mutua l fundSchemes

REGULATORY ASPECTS

Schemes of a Mutual Fund

The asset management company shall launch no

scheme unless the trustees approve such scheme and acopy of the offer document ha s filed with the Board.

Every mutual fund shall along with the offer documentof each scheme pay filing fees.

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The offer document shall contain disclosures, whichare adequate in order to enable the investors to makeinformed investment decision including the disclosureon maximum inves tments proposed to make by the

scheme in the l isted securit ies of the group companiesof the sponsor a close-ended scheme shall fullyredeemed at the end of the maturi ty period. "Unless amajor i ty of the uni t holders otherwise decide for i t srollover by passing a resolution".

The mutual fund and asset management company shallbe liable to refund the application money to the

applicants,-

( i ) I f the mutua l fund fa i l s to rece ive the minimumsubscript ion amount referred to in clause (a) of sub-regulation (1);

( ii ) I f the moneys received f rom the applicants foruni ts a re in excess of subscr ipt ion as referred to in

clause (b) of sub-regulation (1).

Rules Regarding Advertisement:

The offer document and advertisement materials shallnot be misleading or contain any statement or opinion,which are incorrect or false.

General Obligations:

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The financial year for all the schemes shall end as ofMarch 31 of each year. Every mutual fund or the assetmanagement company shall prepare in respect of eachfinancial year an annual report and annual statement of

accounts of the schemes and the fund as specif ied inEleventh Schedule.

Every mutual fund shal l have the annual s ta tement ofaccounts audi ted by an audi tor who is not in any wayassocia ted wi th the audi tor of the asse t managementcompany.

Restrictions on Investments:

A mutual fund scheme shall not invest more than 15%of it s NAV in debt inst rument s i ssued by a sing leissuer, which are rated not below investment grade bya c redi t rat ing agency authorized to car ry out suchact ivi ty under the Act . Such investment l imit may beextended to 20% of the NAV of the scheme wi th the

prior approval of the Board of Trustees and the Boardof asset Management Company.

ASSOCIATION OF MUTUAL FUNDS IN INDIA

(AMFI )

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With the increase in mutual fund players in India , aneed for mutual fund association in India was generatedto funct ion as a non-profi t organization. Associat ion ofMutual Funds in India (AMFI) was incorporated on 22nd

August, 1995.AMFI is an apex body of all Asset ManagementCompanies (AMC) which has been registered with SEBITi l l da te a l l the AMCs are tha t have launched mutualfund schemes a re i ts members . I t funct ions under thesupervis ion and guidel ines of i ts Board of Directors.

Association of Mutual Funds India has brought down theIn dian Mutu al Fun d In du stry to a pr ofession al andhealthy market with ethical lines enhancing andmaintaining s tandards. I t fol lows the principle of bothprotecting and promoting the interests of mutual funds aswell as their unit holders.

Objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with30 r eg is te red AMCs o f the count ry . I t has ce rt aindefined objectives which juxtaposes the guidelines ofits Board of Directors. The objectives are as follows:

This mutual fund association of India maintains a

high professional and ethical standards in all areasof operation of the industry .

I t a lso recommends and promotes the top c lassbusiness practices and code of conduct which isfol lowed by members and related people engaged

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in the activities of mutual fund and assetmanagement . The agencies who are by any meanscon nected or invo lv ed in the field of capitalmarkets and financial services a lso involved in

this code of conduct of the association. AMFI interacts with SEBI and works according to

SEBIs guidelines in the mutual fund industry.

Association of Mutual Fund of India doesrepresent the Government of India , the ReserveBank of India and other related bodies on mattersrelating to the Mutual Fund Industry.

I t develops a team of wel l qual i f ied and t ra inedAgent distributors. I t implements a programme oftraining and certification for all intermediaries andother engaged in the mutual fund industry.

AMFI undertakes al l India awareness programmefor investors in order to promote proper

u nderstand ing of th e co ncept and wo rkin g ofmutual funds.

At last but not the least association of mutual fundof India a lso disseminate informat ion on MutualFund Industry and undertakes studies and researcheither directly or in association with other bodies.

PERFORMANCE INDICATORS OF A MUTUAL

FUND AND ITS RISK

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The Beta Co-efficient: Gauge Your Fund's Volatility

Th e beta co- efficient is an ind icator used by m anyinvestors and analysts to determine just how volat i le a

mutual fund is as compared to a s tandard. The s tandardof comparison is provided by the Standard and Poor ' s500 index. The S&P index is given a beta of 1. I ts usualt ime frame is three years back. In other words, a s tockfund tha t i s 20% more vola t i le than the s tocks of tha tconstitute the S&P would have a beta value of 1.2. Thosestock funds tha t a re 15% les s volat il e t han the S&Pindex would have a beta of 0.85.

The beta is not a total ly indicat ive depict ion of a s tockfund's s ituation. If a fund is " thinly t raded," or in otherwords there are not too many shares outs tanding, largeprice swings are possible whenever shares are sold. Ingeneral, however, beta values are a f airly reliable way ofdetermining how a s tock fund has done, and in a way,how well i t may do in the future. Beta values for manymutual funds can be found in many financial magazinesor special inv estin g period icals su ch as Investor'sBusiness Daily.

Risk vs. Reward and the Alpha

How much of a risk-taker you are is directly proportionalto h ow m uch you stand to ga in- -and lose. Risk v s.

Reward is a concept tha t near ly a l l inves tors s t rugglewith and are constantly aware of. A good example of therelat ionship between r isk and reward are high-yie ld(junk) bonds. They are amongst the most volatileinvestments that an investor can make, but on the upside,they a lso have t remendously high yie lds. F inding the

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"happy medium" often times is the difference between agood investor and a great one.

Like the beta co-eff ic ient , the s tandard devia t ion of afund is important in determining volati l i ty, and thus the

risk involved in investing. The standard deviation takesinto account both the upward and downward swing of afu nd. In this way, th e stan dard deviation o f a fu ndmeasures it s pure volat il it y, not in compari son to as tandard. But , you may wonder , why should a fund bepenalized for fluctuating upwards, or rewarded forf luctuat ing downwards? That i s why nei ther s tandard

deviation nor beta co-efficient values are totallyaccepted by al l investors . They provide a rough guide,but are by no means flawless. Since the S&P is used toarr ive at the beta co-eff icient , i t is obviously favoringblue-chip stocks (of which the S&P is largelycomposed).

The relat ionship between a fund' s beta value and i ts

actual performance is called alpha. The higher that thisvalue i s , the bet ter . Anything over 0 i s des i rable . I f afund's a lpha value equals 0, then the fund did preciselywhat was expected of it , giving its volatility.

RETURNS BY SOME OF THE MUTUAL FUNDS

SINCE THE GLOBAL MELTDOWN

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CONCLUSION:

The unique investment strategy of letting the maturity of the debtinvestment run down with time and targeting equity investments tocapture dividends is targeted to deliver positive returns over mediumtime frame. The investment strategy of the fixed income portfolio isdesigned to remove the impact of interest rate movements over the

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medium term. The strategy of targeting dividends in equities overa period is expected to improve the yield of the fund. The aboveinvestment strategy expects to minimize capital loss in adversemarket condition and deliver moderate returns in stable/positive

market conditions.So, if you are looking for an investment product that offers you lowrisk of capital loss and the potential to earn reasonable returns in theuncertain environment of today, HDFC Multiple Yield Fund mightbe the right fund for you.

Recommendations:

Chhattisgarh has huge untapped market as far as MF isconcerned.

Create Awareness about Mutual Fund.

Remove the differences in perception of audience about PrivateCompany & PSU.

Literate audience about MF as better investment option.

Run some program to bring MF in final decision set while

prospects decide about distributorship.Brand Equity of Reliance is very high just, go & hit the market.

BIBLIOGRAPHY:

www.reliancemutual.com www.amfiindia.com www.moneycontrol.com www.valueresearch.com www.geocities.com/kstability/index.html

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mutual fund (word project)

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