A project report on a mutual fund concept at birla sun life insurence

A MUTUAL FUND CONCEPT BIRLA SUN LIFE DISTRIBUTION COMPANY

Objectives and Research Methodology

Objective

1. To understand the behavior pattern of business class with respect to
investments.
2. To test the awareness of various investment products among the business
class.
3. Build relations with the newly interested business class

Research Methodology:
Conclusive research
The research undertaken was conclusive research as the data needs
were clear. The research was conducted to study about the investment pattern of business
people.

Sampling process
Population:-
Element: The research was restricted to business people.
Extent: Bhosari Industrial Area, Pune
Sample size:
The total sample size consists of 100 business people.
Sampling method:-

Non probability:-
The business people were selected on the basis of convenience.

Babasabpatilfreepptmba.com


Data Collection:-

For the research purpose the data is collected in the form of Primary data and Secondary
data.
 Primary data is collected in the form of Structured Questionnaire.
 Secondary data is collected from various Boucher’s, Books, Magazines and Web
sites.

Primary Data:-
Primary data is collected through direct interviews and telephonic
interviews. The data is collected from the business person through questionnaires
which was prepared depending upon the need of study. A structured
questionnaire was prepared to collect the data

Secondary Data:-
The source of secondary data were published Journals, magazines, like
investime and web sites,
www.amfi.com
www.indiainfolin.com
www.birlasunlife.com
www.mutualfundindia.com
www.valuereserchonline.com



Limitations:-

 Sample size is very small as compared to the total population.

 Most of the business people don’t five out the exact invest figures their assets and

their finical planning

 The method which is applied for the data collection may not be right

 Lack of knowledge in the survey sample about the mutual funds.

 The result obtained from the sample may not be the result of the whole

population.



Introduction to Mutual Funds

A mutual fund is the ideal investment vehicle for today’s complex & modern
financial scenario. Markets for enquiry shares bonds and other fixed income instruments,
real estate, derivatives and other assets have become mature and information driven.
Price changes in these assets are driven by global events occurring in faraway places. A
typical individual is unlikely to have the knowledge, skills, inclination and time to keep
track of events, understand their implications and act speedily. An individual also finds it
difficult to keep track of ownership of this assets, investments, brokerage dues & bank
transactions etc.

A mutual fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full time bases.
The large pool of money collected in the fund allows it to hire such staff at a very; low
cost to each investor. In effect the mutual fund vehicle exploits economies of scale in all
three areas – research, investments, transaction processing. While the concept of
individual coming together to invest the money collectively is not new, the mutual fund
in its present form is a 20 th century phenomenon. In fact mutual funds gained popularity
only after the Second World War. Globally there are thousands of firms offering tens of
thousands of mutual funds with different investment objectives. Today mutual funds
collectively manage almost as much as or more money as compared to banks.

To get a better understanding of mutual funds it is necessary to know the industry in
detail. In the following sections a detailed descriptions of the mutual funds industry will
be discussed.



Concept of a mutual fund

A mutual fund is a common pool of money into which investors place their
contributions that are to be invested with a stated objective. The ownership of the fund is
thus joint or mutual and the fund belongs to all investors. A single investors ownership of
the fund is in the same ratio as the amount of contribution made by him or bears to the
total amount of the fund.

Meaning of Mutual Fund

Mutual Funds are investment products that operate on the principles of ‘Strength
in Numbers’. They collect money from a large group of investors, pool it together, and
invest it in various securities in line with their objective. They are an alternative to
investing directly. A more convenient alternative yet no less rewarding. Take stocks,
trading into the market by yourself would mean knowing at the very least, how to analyze
and track companies, the way of the market and the intermediaries who will help you buy
and sell shares. A mutual fund that invests in stocks relieves you of all such hassles,
while giving you the same investment option for individual’s handicapped by a lack of
investing acumen or time, or generally disciplined to take charge of their personal
finances.

Mutual funds are not magic investment vehicles that do it all you’ll have to come to terms
with the fact that they assure neither returns nor the value of yours original investment.
You’ll have to accept the reality that even they, who are supposedly experts in
investments matter, can go wrong. These are inherent risks, but these can be managed.
Mutual funds offer several advantages that make them a powerful and convenient wealth
creation vehicle worthy of yours consideration



Characteristics of a Mutual Fund

 A Mutual fund actually belongs to the investors who have pooled their funds.
The ownership of the mutual funds is in the hands of the investors.
 In case of mutual fund the contributors and the beneficiaries of the funds are the
same class of people namely the investors.
 Investment professionals manage a mutual fund and other service providers,
who earn a fee for their services provided, from the fund.
 The pool of funds is invested in a portfolio of marketable investments. The value
of the portfolio is updated every day.

The investor’s share in the fund is denominated by “UNITS”. The value of the units
changes with the change in the portfolio’s value, everyday. The value of one unit of
investment is called as the net asset value or NAV

HOW ARE THE MUTUAL FUNDS STRUCTURED?

Mutual funds can be structured in the following ways:

• Company form, in which investors hold shares of the mutual fund. In this
structure, management of the fund is in the hands of an elected board, which in
turn appoints investment managers to manage the fund.
• Trust form, in which the funds of the investors are held by a trust, on behalf of the
investors. The trust appoints investment managers and monitors their functioning
in the interest of investors.



The company form of organization is very popular in the United States. In India,
mutual funds are organized as trusts. The trust is created by sponsor, who is the
actually the entity interested in creating the mutual fund business. The trust is either
managed by a Board of trustees, or by a trustee company, formed for this purpose.
The investor’s funds are held by the trust.

Types of Mutual Funds

Open-End Funds

An open-ended fund is one that has unit’s available foe sale and repurchase at all
times. An investor can buy or redeem units from the fund itself at a price based on the
Net Asset Value (NAV) per unit. NAV per unit is obtained by dividing the amount of the
market value of the fund’s assets by the number of units outstanding. The number of
outstanding goes up or down every time the fund issues new units or repurchase existing
units.

Closed-End Funds

Unlike an open-end fund, the ‘unit capital ‘of a closed-ended fund is fixed, as it
makes a one-time sale of a fixed number of units. Closed-ended funds do not allow
investors but or redeem units directly from the funds. However, to provide the much-
needed liquidity to investors, any closed-end funds get themselves listed on stock
exchanges. Trading through a stock exchange enables investors to buy or sell units of a
closed-end mutual fund from each other.

Load and No-Load Funds



Marketing of a new mutual fund scheme involves initial expenses. These expenses
may be recovered from the investors in different ways at different times. Three usual
ways in which a fund's sales expenses may recover from the investors are:
1. At the time of investor's entry into the fund/scheme, by deducting a specific
amount from his Initial contribution, or
2. By charging the fund/scheme with a fixed amount each year, during the stated
number of years, or

3. At the time of the investor's exit from the fund/scheme, by deducting a specified
amount from the redemption proceeds payable to the investor.

These charges made by the fund managers to the investors to cover
distribution/sales/marketing expenses often called "loads". The load charged to the
investor at the time of his entry into a scheme is called “front-end or entry load". The
load amount charged to the scheme over period of time is called a deferred load. The load
that the investor pays at the time his exit is called a "back-end or exit load".

Some funds may also charge different amounts of loads to the investors, depending upon
how many years the investor is stayed with the fund; the longer the investor stays with
the fund, less the amount of” exit load" he charged. This is called “contingent deferred
sales charge".

Funds that charge front-end, back-end or deferred loads are called load funds. Funds that
make no such charges or loads for sales expenses are called no-load funds.

A load fund's declared NAV does not include the loads. Hence, a new investor must add
any front-end load amount per unit the NAV per unit to calculate his purchase price. An
outgoing investor needs to deduct the amount of any back-end load per unit from his sale
price per unit to get to know the net sale proceeds he would receive.



Tax Exempt and Non-Tax Exempt Funds

Generally, when a fund invests in tax-exempt securities, it is called a tax-exempt fund. In
the U.S.A, For example, municipal bonds pay interest that is tax-free, while interest on
corporate and other bonds is taxable. In India, after the 1999 Union Government Budget,
all of the dividend income received from many of the Mutual funds is tax-free in the
hands of the investor.

However, funds other than Equity Funds have to pay a distribution tax, before
distributing income to investors. In other words, equity mutual fund schemes are tax-
exempt investment avenues, while other funds are taxable for distributable income.

While Indian Mutual funds currently offer tax-free income, any capital gains arising out
of sale of fund nits are taxable. All these tax considerations are important in the decision
on where to invest as the tax exemptions or concessions alter returns obtained from these
investments. Hence, classification Of Mutual funds from the taxability perspective has
great significance for investors.

Broad Fund types by Nature of Investments

Mutual funds may invest in equities, bonds or other fixed income securities, or
short-term money market securities. So we have Equity, Bond and Money Market Funds.
All of them invest in financial assets. But there are funds that invest in physical assets.
For example, we may have Gold or other Precious Metals Funds, or Real Estate Funds.

Broad Fund Types by Investment Objective

Investors and hence the mutual funds pursue different objectives while investing.
Thus, Growth Funds invest for medium to long-term capital appreciation. Income Funds
invest to generate regular income, and less for capital appreciation. Value Funds invest



in equities that are considered under-valued today, whose value will be unlocked in the
future.

Broad Fund Types by Risk Profile

The nature of a fund's portfolio and its investment objective imply different levels
of risk undertaken. Funds are therefore often grouped in order of risk. Thus, Equity funds
have a greater risk of capital loss than a Debt Fund that seeks to protect the capital while
looking for income. Money Market Funds are exposed to less risk than even the Bond
Funds,' since they invest in short-term fixed income securities, as compared to longer-
term portfolios of Bond Funds.

Money Market Funds

Often considered the lowest rung order of risk level, Money Market Funds
invest in securities of a short-term nature, which generally means securities of less than
one-year maturity. The typical, short-term interest-bearing instruments these funds
invest in include Treasury Bills issued by governments. Certificates of Deposit issued
by banks and Commercial Paper issued by companies. In India Money market Mutual
funds also invest in the inter-bank call money market. The major strengths of money
market funds are the liquidity and safety or principal that investors can normally expect
from short-term investments.



Gilt Funds

Gilts are government securities with medium to long-term maturities, typically of
over one year (under one-year instruments being money market securities). In India we
have now seen the emergence of Government Securities or Gilt Funds that invest in
government paper called dated securities (unlike Treasury Bills that mature less These
funds have little risk of default and hence offer better protection of principal.
However, investors have to recognize the potential changes in values of debt securities
held by the funds that are caused 'by changes in the market price of debt securities
quoted on the stock exchanges (Just like the equities).Debt securities' prices fall when
interest rate levels increase (and vice versa).

Debt Funds (or Income Funds)

Next in the order of risk level, we have the general category Debt Funds. Debt
funds invest in debt instruments issued not only by governments, but also by private
companies, banks and financial institutions and other entities such as infrastructure
companies/utilities.

By investing in debt, these funds target low risk and stable income for the investor as
their key objectives. However, as compared to the money market funds, they do have a
higher price fluctuation risk, since they invest longer-term securities. Similarly
compared to Gilt Funds, general debt funds do have a higher risk of default by their
borrowers.

Debt Funds are largely considered as Income Funds as they do not target capital



appreciation, look for high current income, and therefore distribute a substantial part of
their surplus to investors. Income funds that target returns substantially above market
levels can face more risks. The Income Funds fall largely in the category of Debt Funds
as they invest primarily in fixed income generating debt instruments. Again, different
investment objectives set by the fund managers would result in different risk profiles.

Diversified Debt Funds

A debt fund that invests in all available types of debt securities, issued by entities
across all industries and sectors is a properly diversified debt fund.
While debt funds offer high income and less risk than equity funds, investors need to
recognize that debt securities are subject to risk of default by the issuer on payment of
interest or principal.

A diversified debt fund has the benefit of risk reduction through diversification and
sharing of any default-related losses by a large number of investors. Hence a diversified
debt fund is less risky than a narrow-focus fund that invests in debt securities of a
particular sector or industry.

Focused Debt Funds

Some debt funds have a narrower focus, with less diversification in its investments.
Examples include sector, specialized and offshore debt funds.

These funds are similar to the funds described later in the equity category except that
debt funds have a substantial part of their portfolio invested in debt instruments and are
therefore more income oriented and inherently less risky than equity funds. However
'the Indian financial markets have demonstrated that debt funds should not be
automatically considered to be less risky than equity funds, as there have been
relatively large default by issuers of debt and many funds have non-performing assets
in their debt portfolios. It should also be recognized that market values of debt
securities will also fluctuate more as Indian debt markets witness more trading and



interest rate volatility in the future.

High Yield Debt Funds

Usually, Debt Funds control the borrower default risk by investing in securities issued by
borrowers who are rated by credit rating agencies and are considered to be of
"investment grade". There are High Yield Debt Fund that seek to obtain higher returns by
investing in debt instruments that are considered "below investment grade”.’ Clearly,
these funds are exposed to higher risk.

In U.S.A., funds that invest in debt instruments that are not backed by tangible assets and
rated below investment grade (popularly known as junk bonds) are called Junk Bond
Funds. These funds tend to be more volatile than other debt funds, although they may
earn higher returns as a result of the higher risks taken.

Assured Return Funds

Fundamentally, mutual funds hold assets in trust for investors. All returns and risks are
for account of the investor. The role of the fund Manager is to provide the professional
management service and to ensure the highest possible return consistent with the
investment objective of the fund. Assured return debt fund certainly reduce the risk level.



Fixed Term Plans

Fixed Term Plans are closed-end, but usually for shorter term-less than a year. Being of
short duration, they are not listed on a stock exchange.
As investors move from Debt Fund category to Equity Funds they face increased risk
level.

However, there is a large variety of Equity Funds and all of them are not equally risk-
prone. Investors and their advisors need to sort out and select the right equity fund that
suits their risk appetite

Equity funds invest a major portion of their corpus in equity shares issued by companies,
acquired directly in initial public offerings or through the secondary market. Equity funds
would be exposed to the equity price fluctuation risk at the market level at the industry or
sector level and at the company-specific level. Equity Funds Net Asset Values fluctuate
with all these price movements. These prices are caused by all kinds of external factors,
political and social as well as economic. Hence, Equity Funds are generally considered at
the higher end of the risk spectrum among all funds available in the market. Equity funds
adopt different investment strategic resulting in different levels of risk. Hence, they are
generally separated into different types in terms of their investment styles. Some of the
major types of equity funds, arranged in order of higher to lower risk level.

Aggressive Growth Funds

There are many types of stocks/shares available in the market; Blue Chips that are
recognized market leaders, less researched stocks that are considered to have future
growth potential, and even some speculative stocks of somewhat unknown or unproven
issuers. Fund managers seek out and invest in different types of stocks in line with their
own perception of potential returns and appetite for risk.



Aggressive growth funds target maximum capital appreciation, invest in less researched
or speculative shares and may adopt speculative investment strategies to attain their
objective of high returns for the investor. Consequently, they tend to be more volatile and
riskier than other funds.

Growth Funds

These funds invest in companies whose earnings are expected to rise at an above average
rate. These companies may be operating in sectors like technology considered having a
growth potential, but not entirely unproven and speculative. The primary objective of
Growth Funds is capital appreciation over a three to five year span. Growth funds are
therefore less volatile than funds that target aggressive growth.

Specialty Funds

These funds have a narrow portfolio orientation and invest in only companies that meet
pre-defined criteria. For example, at the height of the South African apartheid regime,
many funds in the U.S. offered plans that promised not to invest in South African
companies. Some funds may build portfolios that will exclude Tobacco companies.
Funds that invest in particular regions such as the Middle East or the ASEAN countries
are also an example of specialty funds. Within the Specialty Funds category, some funds
may be broad-based in terms of the types of investments in the portfolio. However, most
specialty funds tend to be concentrated funds, since diversification is limited to one type
of investment. Clearly, concentrated specialty funds tend to be more volatile than
diversified funds.



Sector Funds

Sector funds' portfolios consist of investments in only one industry or sector of the
market such as Information on Technology, Pharmaceuticals or Fast Moving Consumer
Goods that have recently been launched in India. Since sector funds do not diversify into
multiple se Offshore Funds.

Offshore Funds

These funds invest in equities in one or more foreign countries thereby achieving
diversification across the country's borders. However they also have additional risks -
such as the foreign exchange rate risk - and their performance depends on the economic
conditions of the countries they invest in. Offshore Equity Funds may invest in a single
country (hence riskier) or many countries (hence more diversified).

Small Cap Equity Funds

These funds invest in shares of companies with relatively lower market capitalization
than that of big, blue chip companies. They may thus be more volatile than other funds,
as smaller companies' shares are not very liquid in the markets. In terms of risk
characteristics, small company funds may be aggressive-growth or just growth type.



Option Income Funds

Option Income Funds write options on a significant part of their portfolio. While options
are viewed as risky instruments, they may actually help to control volatility, if properly
used. Conservative option funds invest in large, dividend paying companies, and then sell
options against their stock positions. This ensures a stable Income stream in the form of
premium income through selling options and dividends.

Diversified Equity Funds

A fund that seeks to invest only in equities except for a very small portion in liquid
money market securities, but is not focused on any one or few sectors or shares, may be
termed a diversified equity funds seek to reduce the sector or stock specific risks through
diversification. They have mainly market risk exposure. Diversified funds arc clearly at
the lower risk level than growth funds

Equity Linked Saving Schemes: An Indian Variant

In India, the investors have been given tax concessions to encourage them to invest in
equity markets through these special schemes. Investment in these schemes entitles the
investor to claim an income tax rebate, but usually has a lock-in period before the end of
which funds cannot be withdrawn. These funds are subject to the general SEBI
investment guidelines for all equity funds, and would be in the Diversified Equity Fund
category. However, as there are no specific restrictions on which sectors these funds
ought to invest in, investors should clearly look for where the Fund Management
Company proposes to invest and accordingly judge the level of risk involved.



Equity Index Funds

An index fund tracks the performance of a specific stock market index. The objective is
to match the performance of the stock market by tracking an index that represents the
overall market. The fund invests in shares that constitute the index and in the same
proportion as the index. Since they generally invest in a diversified market index
portfolio, these funds take only the overall market risk, while reducing the sector and
stock specific risks through diversification.

Value Funds

Value Funds try to seek out fundamentally sound companies whose shares arc currently
under-priced in the market. Value Funds will add only those shares to their portfolios that
are selling at low price-earnings ratios, low market to book value ratios and are
undervalued by other yardsticks.

Value funds have the equity market price fluctuation risks, but stand often at a lower end
of the risk spectrum in comparison with the Growth Funds. Value Stocks may be from a
large number of sectors and therefore diversified.

Equity Income funds

Usually income funds are in the Debt Funds category, as they target fixed income
investments. However, there are equity funds that can be designed to give the investor a
high level of current income along with some steady capital appreciation, investing
mainly in shares of companies' with high dividend yields.



Hybrid Funds – Quasi Equity/Quasi Debt

Money market holdings will constitute a lower proportion in the overall portfolios of debt
or equity funds. There are funds that, however, seek to hold a relatively balanced holding
of debt and equity securities in their portfolio. Such funds are termed "hybrid funds" as
they have a dual equity/bond focus.

Balanced Fund

A balanced fund is one that has a portfolio comprising debt instruments, convertible
securities, and Preference equity shares. Their assets are generally held in more or less
equal proportions between debt/money market securities and equities. By investing in a
mix of this nature, balanced funds seek to attain the objectives of income, moderate
capital appreciation and preservation of capital, and are ideal for investors with a
conservative and long-term orientation.

Growth-and-Income Funds

Unlike income-focused or growth-focused funds, these funds seek to strike a balance
between capital appreciation and income for the investor. Their portfolios are a mix
between companies with good dividend paying records and those with potential for
capital appreciation. These funds would be less risky than pure growth funds, though
more risky than income fund.



Commodity Funds

Commodity funds specialize in investing in different commodities directly or through
shares of commodity companies or through commodity future contracts. Specialized
funds may invest in a single commodity or a commodity group such as edible oils or
grains, while diversified commodity funds will spread their assets over many
commodities.

Real Estate Funds

Specialized Real Estate Funds would invest in Real Estate directly, or may fund real
estate developers, or lend to them, or buy shares of housing finance companies or may
even buy their securities assets.

The funds may have a growth orientation or seek to give investors regular income. There
has recently been an initiative to offer such an income fund by the HDFC.

TYPES OF MUTUAL FUND:-

MUTUALFUND WHO Objective Investment Risk Ideal
TYPE SHOULD portfolio investment
INVEST

Diversified equity Moderate and High growth Equity shares High 1-3years
funds aggressive
investors

Sector fund Aggressive High growth Equity shares Very high 1-3years
investors
Index fund Moderate To generate Portfolio like Returns of 1-3years
investors returns which BSE. Sensex, NAV, very
are similar to Nifty,etc with index
the returns of performance
the respective
index



Equity linked Moderate and Long-term Equity shares High 1-3years
saving aggressive growth with
scheme(ELSS) investors tax saving

Balance fund Moderate and Growth and Balance ratio of Capital Over 2
aggressive regular equity and debt market risk years
investors income fund to ensure and interest
higher returns at rate risk
lower risk

Bond funds Salaried and Regular Predominantly Credit risk Over
conservative income debenture and interest 9-12months
investors government rate risk
securities,
corporate bonds

Gilt fund Salaried and Security and Government Interest rate Over 12
conservative income securities risk months
investors
Short-term funds Investors with Liquidity and Call money Linked 3weeks
surplus short- moderate commercial interest rate 3months
term fund income papers, treasury risk
bill short-term
G-secs

Liquidity funds Investors who Liquidity Treasury bills, Negligible 2days
park their +moderate certificate of Risk 3weeks
fund in income deposits ,
current preservation commercial
account or of capital papers,
short term securities call
bank fixed money
deposits



Benefits of Mutual Fund

 Portfolio Diversification

Return on investment from just one industry or sector are subject to how well or poorly
the industry fares. But with mutual fund one’s money is invested across different sector.
This reduces the risk of low returns on investments, because rarely do different sectors
decline at the same time.

 Professional Management

A mutual fund draws on the professional expertise of a team of research analysts and
fund managers in investing one’s saving in a number of securities.

 Reduction of Transaction Costs

The purchase or sale of financial assets through the exchanges entails a certain proportion
of changes known as transaction made. Investments through mutual fund reduce these
costs considerably as they enjoy the benefits of economies of scale.

 Liquidity

If one invests in an open-ended mutual fund, one can claim the money at net asset value
related prices from the mutual fund itself.



 Convenience and Flexibility

One has access to up-to-date information on the value of the investment in addition to the
investments that have been made by the scheme, the proportion allocated to different
assets and the fund manager’s investment strategy.

 Return Potential

Investing in a Mutual Fund reduces paperwork and helps to avoid many problems such as
bad deliveries, delayed payments and follow up with brokers and companies. Mutual
Funds save time and make investing easy and convenient.

 Transparency

Through features such as regular investment plans, regular withdrawal plans and dividend
reinvestment plans, one can systematically invest or withdraw funds according to once
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.



 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.

Mutual Fund Industry-A Profile

Origin of Mutual Funds

The Mutual Fund industry traces its roots to England in the mid – 1800’s. The
enactment of two British laws, the joint stock companies Acts of 1862 and 1867,
permitted investors, for the first time to share in the profits of an investments enterprise,
and limited investor liability to the amount of investment capital devoted to the
enterprise. Shortly thereafter, in 1868, the Foreign and Colonial Government Trust
formed in London. This trust resembled a mutual fund in basic structure, providing “the
investor of moderate means the same advantage as the large capitalists… by spreading
the investment over a number of different stocks.”

This concept of offering the investment potential of financial markets to all individuals
spawned additional “investment companies” in Britain and Scotland and among other
things helped finance the development of the post-civil was US economy. Most of the
early British investment companies or trusts resembled today’s closed-end funds by
issuing a fixed number of shares to groups of investors whose “pooled” assets were
invested in various companies. The Scottish American Investment Trust, formed on



February 1, 1873 by fund pioneer Robert Fleming, was significant because it invested in
the economic potential of the United States Chiefly through American railroad bonds.
Many other trusts followed that not only target investment in America, but more
importantly led to the introduction of investment fund concept on U. S shares in the late
1800’s and early 1900’s.

History of the Indian Mutual Fund Industry

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. 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 Can bank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund
(Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda
Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set
up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under management of Rs.47,004
crores.

Third Phase – 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund
industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the
year in which the first Mutual Fund Regulations came into being, under which all mutual
funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer
(now merged with Franklin Templeton) was the first private sector mutual fund registered
in July 1993.

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

The number of mutual fund houses went on increasing, with many foreign mutual funds
setting up funds in India and also the industry has witnessed several mergers and
acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets
of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under
management was way ahead of other mutual funds.

Fourth Phase – since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was
bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust
of India with assets under management of Rs.29,835 crores as at the end of January 2003,
representing broadly, the assets of US 64 scheme, assured return and certain other
schemes. The Specified Undertaking of Unit Trust of India, functioning under an



administrator and under the rules framed by Government of India and does not come
under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is
registered with SEBI and functions under the Mutual Fund Regulations. With the
bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of
assets under management and with the setting up of a UTI Mutual Fund, conforming to
the SEBI Mutual Fund Regulations, and with recent mergers taking place among
different private sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421 schemes.

The graph indicates the growth of assets over the years

GROWTH IN ASSETS UNDER MANAGEMENT



Growth of MF

250000
200000
150000
Rs. in Crores
100000
Rs. In Crore
50000
0
Mar- Mar- Mar- Mar- Mar- Mar- Mar-
65 87 93 03 04 05 06
Year

LIST OF MUTUAL FUNDS IN INDIA

Mutual Fund Sponsors Year of
Entry

Bank sponsored
BOB Asset Management Co. Ltd Bank of Baroda 1992
Can Bank Investment Management Canara Bank 1987
Services Ltd.,
S.B.I. Funds Management Ltd., State Bank of India 1987
UTI Asset Management Co., Pvt. SBI, PNB, BOB, LIC 1963
Ltd.,
Institutions
G.I.C. Asset Management Co. Ltd., General Insurance 1990
Corporation & other 4
PSU GIC
Jeevan Bhima Sahyoga Asset LIC 1989
Management Co. Ltd.,
Private Sectors



Benchmark Asset Management Co. NICHE Financial 2001
Pvt. Ltd., Services
Chola Mandalam Asset Chola Mandalam 1997
Management Co. Ltd., Investments
Escorts Asset Management Ltd., Escorts Finance 1996
J. M. Capital Management Pvt. J.M. Shares and Stock 1994
Ltd., Brokers
Kotak Mahindra Asset Management Kotak Mahindra Bank 1998
Co. Ltd.,
Reliance Capital Asset Reliance Capital 1995
Management Co. Ltd.,
Sahara Asset Management Co. Pvt. Sahara India Finance 1996
Ltd.,
Sundaram Asset Management Co. Sunadaram Finance 1996
Ltd.,
Tata Asset Management Pvt. Ltd., Tata Sons 1995
Joint Ventures Predominantly Indian
Birla Sun Life Asset Management Birla Global Finance 1994
Pvt. Ltd.,
D.S.P. Merrill Lynch Fund D.S.P. Merrill Lynch 1996
Manager Ltd.,
HDFC Asset Management Co. Ltd., HDFC & Std Life 2000
Investment
Joint Ventures Predominantly Foreign
Alliance Capital Asset Management Alliance Capital 1994
Pvt. Ltd., Management
Deutsche Asset Management Pvt. Deutsche Asset 2002
Ltd., Management
Franklin Templeton Asset Franklin Templeton 1996
Management Pvt. Ltd., Investments
HSBC Asset Manageent Pvt. Ltd., HSBC Security 2002
ING Inveatment Management Pvt. ING Group 1999
Ltd.,
Morgan Stanley Investment Morgan Stanley 1993
Management Pvt. Ltd.,
Prudential ICICI Asset Prudential ICICI 1993
Management Pvt. Ltd.,
Principal Asset Management Co. Principal Financial 1994
Pvt. Ltd., Service
Standard Charted Asset Standard Charted Bank 2000
Management Ltd.,
( Source: Outlook Money : Laymen’s guide to MUTUAL FUND )



Sales Practices in the Indian Mutual Fund Market

Agent commissions

Agents are compensated by the funds through commissions, commission rates.
In India there are no rules prescribed for governing the minimum r maximum
commissions payable by a fund to its agents. Each fund has discretion to decide the
commission structure for its agents. Thus sundaram pays commission to its agents as a
basic rates plus an incentive that depends on the volume of business. In recent times
funds have been paying commissions in the range of 1.5-2 % on equity oriented funds
and 0.4-0.8 % on debt based funds. Higher commissions are generally paid in case of
investments that are made with the purpose of taking tax benefits, since investors are
required to lock in their funds for a longer period.

SEBI Regulations

Although SEBI does not prescribe the minimum or maximum amount of commission
payable by a fund to agents under SEBI (MF) Regulations, 1996, all initial expenses
including Brokerage paid to agents are limited to 6 % of resources raised under the
schemes. In additions, SEBI regulated open-end funds are authorized to charge the



investors are “entry & exit” loads to cover the fund distribution expenses. These loads
should not exceed the percentage specified in the scheme’s offer document. In case the
agents commissions paid by the fund result in over all distribution expenses are to be
borne by AMC i.e. the excess cannot be passed on to the unit holders.
A no – load, charging no entry or exit loads is authorized to charge the schemes with the
commissions paid to agents as part of the regular management & marketing expenses
allowed by SEBI. SEBI puts a cap on the total expenses (including commissions) that can
be charged to a scheme each year. Any excess over allowable expenses is required to be
borne by the AMC.

Marker Practice

Some funds pay the entire commission up- fronts to the agents (i.e. at the time of sale of
units), while others pay apart of it up-front and the balance in phases. The latter practice
is known as trail commission. Some funds follow the practice of non-paying the balance
to the agent if the investor exits the scheme before a specified period or stop paying the
commission after the investor exits whenever he does.
On the issue of commissions, is that of rebating by the agent to the investor of a part of
the commission received from the fund on the sale to that investor. Although agent
commissions in the in the mutual industry are not at the same levels as in insurance,
investors have come to expect such rebates from agents of all financial products. It is
possible in future such rebates might reduce in future & may even disappear. He
distributors themselves will tend to realize that they provide useful processing and
advisory services to investors, & have to incur costs in the process that need to be
covered from their well deserve commissions received from the funds

Agents Obligation

Commission/other arrangements are between the fund and agent/broker. Sub-brokers
serve as agents of the principle agent and the fund is not answerable for their activities.



Clearly, given the need for and widespread existence of a sub-broker network in India
their role cannot be washed away. But the distributors need to make the investors aware
of whom they are dealing with, whom the commission rebate is received from, & whom
should they contact in case of any problems. Agents are well advised to practice honesty
& transparency in explaining the commission structure & the timing of any rebate
payment to the investors, whose trust will build a long-term relationship.

The AMFI Code of Ethics

One of the objects of the Association of Mutual Funds in India (AMFI) is to promote the
investors’ interest by defining and maintaining high ethical and professional standards in
the mutual fund industry. In pursuance of this objective, AMFI had constituted a
Committee under the Chairmanship of Shri A. P. Pradhan with Shri S. V. Joshi, Shri C.
G. Parekh and Shri M. Laxman Kumar as members. This Committee, working in close
co-operation with Price Waterhouse–LLP under the FIRE Project of USAID, has drafted
the Code, which has been approved and recommended by the Board of AMFI for
implementation by its members. I take opportunity to thank all of them for their efforts.

The AMFI Code of Ethics, “The ACE” for short, sets out the standards of good practices
to be followed by the Asset Management Companies in their operations and in their
dealings with investors, intermediaries and the public. SEBI (Mutual Funds) Regulation
1996 requires all Asset Management Companies and Trustees to abide by the Code of
conduct as specified in the Fifth Schedule to the Regulation. The AMFI Code has been
drawn up to supplement that schedule, to encourage standards higher than those
prescribed by the Regulations for the benefit of investors in the mutual fund industry.



This is the first edition of the Code and it may be supplemented further as may be
necessary. I hope members of AMFI would implement the code and ensure that their
employees are made fully aware of the Code.

1.0 INTEGRITY

1.1 Members and their key personnel, in the conduct of their business shall observe
high standards of integrity and fairness in all dealings with investors, issuers,
market intermediaries, other members and regulatory and other government
authorities.

1.2 Mutual Fund Schemes shall be organized, operated, managed and their portfolios
of securities selected, in the interest of all classes of unit holders and not in the
interest of
 Sponsors
 Directors of Members
 Members of Board of Trustees or directors of the Trustee company
 Brokers and other market intermediaries
 Associates of the Members
 A special class selected from out of unit holders

2.0 Due Diligence

2.1 Members in the conduct of there Asset Management business shall at all time.
 Render high standards of service.
 Exercise due diligence.
 Exercise independent professional judgement.



2.2 Members shall have and employ effectively adequate resources and procedures,
which are needed for the conduct of Asset Management activities.

3.0 Disclosures

3.1 Members shall ensure timely dissemination to all unit holders of adequate,
accurate, and explicit information presented in a simple language about the
investment objectives, investment policies, financial position and general affairs
of the scheme.

3.2 Members shall disclose to unit holders investment pattern, portfolio details, ratios
of expenses to net assets and total income and portfolio turnover wherever
applicable in respect of schemes on annual basis.
3.3 Members shall in respect of transactions of purchase and sale of securities entered
into with any of their associates or any significant unit holder.
 Submit to the Board of Trustees details of such transactions, justifying its fairness
to the scheme.
 Disclose to the unit holders details of the transaction in brief through annual and
half yearly reports.
3.4 All transactions of purchase and sale of securities by key personnel who are
directly involved in investment operations shall be disclosed to the compliance
officer of the member at least on half yearly basis and subsequently reported to
the Board of Trustees if found having conflict of interest with the transactions of
the fund.

4.0 Professional Selling Practices



4.1 Members shall not use any unethical means to sell, market or induce any investor
to buy their products and schemes
4.2 Members shall not make any exaggerated statement regarding performance of any
product or scheme.
4.3 Members shall endeavor to ensure that at all times

 Investors are provided with true and adequate information without any misleading
or exaggerated claims to investors about their capability to render certain services
or their achievements in regard to services rendered to other clients,

 Investors are made aware of attendant risks in members’ schemes before the
investors make any investment decision,
 Copies of prospectus, memoranda and related literature is made available to
investors on request,
 Adequate steps are taken for fair allotment of mutual fund units and refund of
application moneys without delay and within the prescribed time limits and,
 Complaints from investors are fairly and expeditiously dealt with.

4.4 Members in all their communications to investors and selling agents shall
 Not present a mutual fund scheme as if it were a new share issue
 Not create unrealistic expectations
 Not guarantee returns except as stated in the Offer Document of the scheme
approved by SEBI, and in such case, the Members shall ensure that adequate
resources will be made available and maintained to meet the guaranteed returns.
 Convey in clear terms the market risk and the investment risks of any scheme
being offered by the Members.
 Not induce investors by offering benefits, which are extraneous to the scheme.



 Not misrepresent either by stating information in a manner calculated to mislead
or by omitting to state information which is material to making an informed
investment decision.

5.0 Investment Practice
5.1 Members shall manage all the schemes in accordance with the
fundamental investment objectives and investment policies stated in the offer
documents and take investment decisions solely in the interest of the unit holders.

5.2 Members shall not knowingly buy or sell securities for any of their schemes from
or to
 Any director, officer, or employee of the member
 Any trustee or any director, officer, or employee of the Trustee Company

6.0 Operations

6.1 Members shall avoid conflicts of interest in managing the affairs of the schemes
and shall keep the interest of all unit holders paramount in all matters relating to
the scheme.
6.2 Members or any of their directors, officers or employees shall not indulge in front
running (buying or selling of any securities ahead of transaction of the fund, with
access to information regarding the transaction which is not public and which is
material to making an investment decision, so as to derive unfair advantage).
6.3 Members or any of their directors, officers or employees shall not indulge in self-
dealing (using their position to engage in transactions with the fund by which they
benefit unfairly at the expense of the fund and the unit holders).
6.4 Members shall not engage in any act, practice or course of business in connection
with the purchase or sale, directly or indirectly, of any security held or to be
acquired by any scheme managed by the members, and in purchase, sale and



redemption of units of schemes managed by the members, which is fraudulent,
deceptive or manipulative.

6.5 Members shall not, in respect of any securities, be party to-
 Creating a false market,
 Price rigging or manipulation

 Passing of price sensitive information to brokers, Members of stock exchanges
and other players in the capital markets or take action, which is unethical or unfair
to investors.
6.6 Employees, officers and directors of the Members shall not work as agents/
brokers for selling of the schemes of the Members, except in their capacity as
employees of the Member or the Trustee Company.
6.7 Members shall not make any change in the fundamental attributes of a scheme,
without the prior approval of unit holders except when such change is consequent
on changes in the regulations.
6.8 Members shall avoid excessive concentration of business with any broking firm,
and excessive holding of units in a scheme by few persons or entities.

7.0 Reporting Practices

7.1 Members shall follow comparable and standardized valuation policies in with the
SEBI Mutual Fund Regulations.
7.2 Accordance Members shall follow uniform performance reporting on the basis of
total return.
7.3 Members shall ensure scheme wise segregation of cash and securities
accounts.

8.0 Unfair Competition



Members shall not make any statement or become privy to any act, practice or
competition, which is likely to be harmful to the interests of

other Members or is likely to place other. Members in a disadvantageous position
in relation to a market player or investors, while competing for investible funds.

9. O Observance of Statutes, Rules and Regulations

Members shall abide by the letter and spirit of the provisions of the Statutes, rules
and regulations, which may be applicable, and relevant to the activities carried on
by the members.

10.0 Enforcement

Members shall
 Widely disseminate the AMFI Code to all persons and entities covered by it
 Make observance of the Code a condition of employment
 Make violation of the provisions of the code, a ground for revocation of
contractual arrangement without redress and a cause for disciplinary action
 Require that each officer and employee of the Member sign a statement that
he/she has received and read a copy of the Code
 Establish internal controls and compliance mechanisms, including assigning
supervisory responsibility
 Designate one person with primary responsibility for exercising compliance with
power to fully investigate all possible violations and report to competent authority
 File regular reports to the Trustees on a half yearly and annual basis regarding
observance of the Code and special reports as circumstances require



 Maintain records of all activities and transactions for at least three years, which
records shall be subject to review by the Trustees
 Dedicate adequate resources to carrying out the provisions of the Code

Procedure for registering a mutual fund with SEBI.

An applicant proposing to sponsor a mutual fund in India must submit an
Application in Form A along with a fee of Rs.25, 000. The application is
examined and once the sponsor satisfies certain conditions such as being in the
financial services business and possessing positive net worth for the last five
years, having net profit in three out of the last five years and possessing the
general reputation of fairness and integrity in all business transactions, it is
required to complete the remaining formalities for setting up a mutual fund. These
include inter alias, executing the trust deed and investment management
agreement, setting up a trustee company/board of trustees comprising two- thirds
independent trustees, incorporating the asset management company (AMC),



contributing to at least 40% of the net worth of the AMC and appointing a
custodian. Upon satisfying these conditions, the registration certificate is issued
subject to the payment of registration fees of Rs.25.00 lacs for details; see the
SEBI (Mutual Funds) Regulations, 1996.



SECURITIES AND EXCHANGE BOARD OF INDIA

INVESTMENT MANAGEMENT DEPARTMENT

Trends in Transactions on Stock Exchanges by Mutual Funds (since January 2000)

Equity (Rs in Crores) Debt (Rs in Crores)
Net Net
Gross Gross Purchase/ Gross Gross Purchase/
Purchase Sales Sales Purchase Sales Sales
Jan 2000-March 2000. 11070.54 11492.19 -421.65 2764.72 1864.29 900.43
April 2000 -March 2001. 17375.78 20142.76 -2766.98 13512.17 8488.68 5023.49
April 2001-March 2002. 12098.11 15893.99 -3795.88 33583.64 22624.42 10959.22
April 2002-March 2003 14520.89 16587.59 -2066.70 46663.83 34059.41 12604.42
April 2003-March 2004 36663.58 35355.67 1307.91 63169.93 40469.18 22700.75
April 2004-March 2005 45045.25 44597.23 448.02 62186.46 45199.17 16987.29
April 2005-March 2006 100389.30 86083.64 14305.66 109622.51 73003.67 36618.84
April 2006. 12752.47 9631.91 3120.56 11227.96 6800.08 4427.88
May 2006 (upto 19th) 11837.29 7406.65 4430.64 9746.45 4110.53 5635.92
Total (April - May '06) 24589.76 17038.56 7551.20 20974.41 10910.61 10063.80

Trends in Transactions on Stock Exchanges by Mutual Funds

(Provisional and subject to revision) May 2006

Equity (Rs in crores) Debt (Rs in crores)

Gross Net Purchases Gross Net Purchases/
Transaction Date Purchases Gross Sales / Sales Purchases Gross Sales Sales
02.05.06 543.63 494.80 48.83 389.58 324.42 65.16
03.05.06 722.59 580.21 142.38 555.27 229.88 325.39
04.05.06 855.53 580.62 274.91 285.41 119.01 166.40
05.05.06 761.83 527.42 234.41 409.98 152.30 257.68
08.05.06 401.00 571.78 -170.78 537.41 204.32 333.09
09.05.06 726.92 575.41 151.51 564.28 234.27 330.01
10.05.06 981.53 453.30 528.23 813.02 397.06 415.96
11.05.06 456.65 524.58 -67.93 1475.45 246.91 1228.54
12.05.06 778.21 422.04 356.17 619.55 365.87 253.68
15.05.06 1274.82 489.46 785.36 748.34 344.06 404.28
16.05.06 1103.60 760.39 343.21 925.49 271.92 653.57
17.05.06 707.24 513.94 193.30 1325.27 636.61 688.66
18.05.06 1244.54 481.85 762.69 738.64 360.11 378.53
19.05.06 1279.20 430.85 848.35 358.76 223.79 134.97
Total 11837.29 7406.65 4430.64 9746.45 4110.53 5635.92

Market meltdown shows Mutual Funds run with the bulls, get mauled by the bears



Underperformance is worrying: MFs have lagged the Sensex by 3.5 percentage points
over a month to 8.7 percentage points over a year
Take all diversified equity mutual fund schemes. Find out how they fared over various
time periods. Crunch the numbers. Put them against the market benchmark, the BSE
Sensex. What do you get? A rather uninspiring look at fund managers, experts who we
pay about 2.5 per cent of our investment to outperform markets.

Take a look:
• During the past month, when the Sensex crashed by 25.4 per cent, the average fall in
158 diversified equity funds was 28.9 per cent-an underperformance of 3.4 percentage
points. Only one out of 10 funds managed to beat the Sensex in this period.
• In the past two weeks, when the Sensex fell by 12.8 per cent, the funds on an average
fell by 16.6 per cent, an underperformance of 3.8 percentage points, with just 16 of 161
funds being able to beat the Sensex. In other words, just 9.9 per cent of funds were able
to deliver returns better than the Sensex.
• A study of 161 diversified mutual funds over the past week, two weeks, one month,
three months, six months, 12 months and 36 months shows that on an average the funds
have been lagging the Sensex in all but the 36-month period.

But it is not merely the level but the extent of underperformance that's disturbing. Barring
36-month comparisons, in all other time frames, the percentage of funds that has lagged
the Sensex has ranged from 74.6 per cent for 12-month performance to 96.3 per cent over
one week-which means more than nine out of 10 funds delivered below benchmark
returns.

Now, the industry is likely to say that when you invest in an equity mutual fund, it is not
for weeks or months but years. Which is right? Over a three year period, between June
2003 and June 2006, when the Sensex rose by 40.7 per cent per annum, 52 out of 61
funds (or 85.2 per cent) outperformed. On an average, the funds outperformed the Sensex
by 9.6 percentage points, rising 50.3 per cent per annum during the period (SBI Magnum
Global and SBI Magnum Umbrella dished out returns of 82 and 79 per cent, per annum).



The former is an arbitrage fund, buying companies as well as futures with a minimum 25
per cent debt exposure, and because of which its volatility, and hence the
underperformance, is low. The latter invests in international equities, with exposures to
companies like 3M, Atlas Cop co AB, BASF AG and so on.
On the other end of the spectrum, the one fund that consistently figures among the three
worst performers is Taurus Discovery Stock, whose objective is to "identify and select
low priced stocks through price discovery mechanism" to bring long term capital
appreciation. Its top holdings include J P Associates, NDTV, SRF and Reliance Capital.
The problem with many underperforming funds is really their exposure to mid-cap and
small-cap stocks. These stocks are neither liquid enough to sell in quantities, nor do they
have futures to hedge with (only 142 actively traded shares do). As a result, when a fall
comes, funds are unable to exit on time or in quantities as the stocks hit lower circuits.
Much of which points to the direction of investments in the last leg of the Bull run that
began in April 2003. Fund managers have not been seeking value or growth but riding
momentum, that is, following the latest fast-growing fad and moving to the next.
Something likes stocks staccato.
A strategy that has worked well for them on the rise. But today, when the bulls are taking
a much needed breather before stampeding on the 8-10 per cent GDP growth highway,
the short-term weak links are showing that while funds can match the Indian bull march,
they're in a Canadian forest when it comes to dealing with the Grizzly.
Mutual fund (MF) houses disappointed investors during the May 10 to June 9 periods
with equity schemes across-the-board showing sharp fall in returns.
Equity funds of LIC Mutual Fund lead the pack, registering a fall of 29.91% on return
during the period under review. The average NAV (net asset value) of two equity fund
schemes decreased from Rs 18.08 to Rs 12.67.
Among the two equity fund schemes, the highest decline in NAV was registered in the
case of LIC MF Equity Fund-D. The fund's NAV declined from Rs 14.67 to Rs 10.28.

R Swami Nathan, Associate VP, IDBI Capital, said, "Over heated market was waiting for
an opportunity to cool down. The correction started in a broad-based manner irrespective



of large cap, mid cap or small cap scrip’s. The effect of the market downfall has been
experienced in the erosion of the net asset value of mutual fund equity schemes."
"At this juncture when the market is volatile, an investor should take stock of his
portfolio for a review. He can add some equity funds, provided his asset allocation plan
permits. This is the time one can look at the equity funds again for investment with a
medium to long-term perspective," Mr. Swami Nathan pointed out.
The top 5 MF houses according to the average NAV of equity fund schemes as on June 9,
2006 are Reliance Capital MF (Rs 81.79), Franklin Templeton MF (Rs 57.88), Birla Sun
Life MF (Rs 52.50), HDFC MF (Rs 40.78) and Prudential ICICI MF (Rs 34.09). Among
these, highest decline in average NAV of equity funds was seen in the case of Reliance
Capital MF (26.82%).

Abstract

International mutual funds are key contributors to the globalization of financial
markets and one of the main sources of capital flows to emerging economies. Despite
their importance in emerging markets, little is known about their investment allocation
and strategies. This article provides an overview of mutual fund activity in emerging
markets. It describes their size, asset allocation, and country allocation and then focuses
on their behavior during crises in emerging markets in the 1990s. It analyzes data at both
the fund-manager and fund-investor levels. Due to large redemptions and injections,
funds' flows are not stable. Withdrawals from emerging markets during recent crises were
large, which is consistent with the evidence on financial contagion.



Structure of Mutual Funds in India

Like other countries, India has a legal framework within which mutual funds be
constituted. Unlike in the UK, where two distinct ‘trust’ and ‘corporate’ structures are
followed with separate regulations, in India open-end and closed end funds operate under
the same regulatory structure and are constituted along one unique structure – as unit
trusts. A mutual fund in India is allowed to issue open-end and closed-end schemes under
a common legal structure. Therefore, a mutual fund may have several different schemes
(open-end and closed-end) under it. That is under one unit trust, at any point of time.

The structure is required to be followed by mutual funds in India is laid down under SEBI
(mutual fund) regulations, 1996. In the following paragraphs, we look at the structure of
each of the fund constituent



SEBI

TRUSTEE SPONSOR

OPERATIONS AMC

FUND MANAGER MARKET / SALES

MUTUAL FUND

SCHEMES

INVESTOR



Sponsor

What a promoter is to a company, a sponsor is to a mutual fund. The sponsor initiates the
idea to set up a mutual fund. It could be a financial services company, a bank or a
financial institution. It could be Indian of foreign. It could do it alone or through a joint
venture. In order to run a mutual fund in India, the sponsor has to obtain a license from
SEBI. For this, it has to satisfy certain conditions, such as a capital and profits, back
records (at least five years in financial services), default free dealings and a general
reputation for fairness.

Asset Management Company (AMC)

An AMC is the legal entity formed by the sponsor to run a mutual fund. It’s the AMC
that employs fund managers and analyst, and other personnel. It’s the AMC that handles
all operational matters of a mutual fund – from launching schemes to managing them to
interacting with investors.

The people in the AMC who should matter the most to you are those who take investment
decisions. There is the head of the fund house, generally referred to as the chief executive
officer (CEO). Under him comes the chief investment officer (CIO), who shapes the
funds investment philosophy and fund managers who manage its schemes. A team of
analysts, who track markets, sectors and companies, assists them.

Trustees



Trustees are like internal regulations in a mutual fund, and their job is to protect the
interests of unit holders. Trustees are appointed or corporate bodies. In order to ensure
they are impartial and fair, SEBI rules mandate that at least two thirds of the trustees be
independent that is, not have any association with the sponsor.

Trustees appoint the AMC, subsequently seeks their approval for the work it does and
reports periodically to them on how the business is being run. Trustees float and market
schemes and secure necessary approvals. They check if the AMC investments are within
defined limits and whether the funds accountable for financial irregularities in the mutual
fund.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibilities
include receipt and delivery of securities, collection of income, and distribution of
dividends and segregation of assets between schemes. The sponsor of a mutual fund
cannot act as a custodian to the fund. This condition, formulated in the interest of
investors, ensures that the assets of a mutual fund are not in the hands of its sponsor. For
example Deutsche Bank is a custodian but it cannot service Deutsche Mutual Fund, its
mutual fund arm.

Registrar

Registrars also known as transfer agents, handles all investor related services. This
includes issuing and red reaming units. Sending fact sheet and annual reports. Some fund



houses handle such functions in house. Others outsource it to registrars; Karvy and
CAMS are the more popular ones. It doesn’t really matter which model your mutual fund
opts for, as long as it is prompt and efficient in servicing you. Most mutual funds in
addition to registrars also have investor service centers of their own in some cities.

Recent Trends in Mutual Fund Industry

The most important trend in the mutual fund industry is the aggressive expansion of the
Foreign owned mutual fund companies and the decline of the companies floated by
Nationalized Banks and smaller Private Sector players.

Many Nationalized banks got into the mutual fund business in the early nineties and got
off to a good start due to the stock market boom prevailing then. These banks did not
really understand the mutual fund business and they just viewed it as another kind of
banking activity. Few hired specialized staff and generally chose to transfer staff from the
parent organization. The performance of the schemes floated by these funds was not
good.

Some schemes offered guaranteed returns and their parent organization had to bail out
these AMCs by paying large amounts of money as the difference between the guaranteed
and actual returns. The service levels were also very bad. Most of these AMCs have not
been able to retain staff, float new schemes etc. and it is doubtful whether, barring a few
exceptions they have serious plans of continuing the activity in a major way.

The experience of some of the AMCs floated by private sector Indian companies was also
very similar. They quickly realized that the AMC business, which makes money in the
long term and requires deep-pocketed support in the intermediate years. Some have sold
out to Foreign owned companies, some have merged with others and there is general
restructuring going on.

The Foreign owned companies have deep pockets and come in here with the expectation
of a long haul. They can be credited with introducing many new practices such as new



product innovation, sharp improvement in service standards and disclosure, usage of
technology, broker education and support etc. In fact they have forced the industry to
upgrade itself and service levels of organizations like UTI have improved dramatically in
the last few years in response to the competition provided by these companies.

Future Scenario

The asset base will continue to grow at an annual rate of about 30 to 35% over the next
few years as investors shift their assets from banks and other traditional avenues. Some of
the older and private sector players will either close shop or be taken over.

In the coming years the market will witness a flurry of new players entering the arena.
There will be a large number of offers from various AMCs in the time to come. Some big
names like Fidelity, Principal, Old Mutual etc. are looking at Indian market seriously.
One important reason for it is that most major players already have presence here and
hence these big names would hardly like to get left behind. The mutual fund industry is
awaiting the introduction of

Derivatives in India as this would enable it to hedge its risk and this in turn would be
reflected in its NAV.

SEBI is working out the norms for enabling the existing mutual fund schemes to trade in
derivatives. Importantly, many market players have called on the regulator to initiate the
process immediately, so that the mutual funds can implement the changes that are
required to trade derivatives.



Global Scenario

Some basic facts

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

 Out of the top 10 mutual funds worldwide, eight are bank- sponsored. Only
Fidelity and Capital are non-bank mutual funds in this group.

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

 Internationally, mutual funds are allowed to go short. In India fund managers do
not have such leeway.

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

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

 85% of the core customer bases of mutual funds in the top 50-broking firms in the
U.S. are expected to trade on-line by 2003.

Internationally, on- line investing continues its meteoric rise. Many have debated
about the success of e- commerce and its breakthroughs, but it is true that this aspect
of technology could and will change the way financial sectors function. However,



mutual funds cannot be left far behind. They have realized the potential of the
Internet and are equipping themselves to perform better.

In fact in advanced countries like the U.S.A, mutual funds buy- sell transactions have
already begun on the Net, while in India the Net is used as a source of Information.

Such changes could facilitate easy access, lower intermediation costs and better services
for all. A research agency that specializes in Internet technology estimates that over the
next four years Mutual Fund Assets traded on- line will grow ten folds from $ 128 billion
to $ 1,227 billion; whereas equity assets traded on-line will increase during the period
from $ 246 billion to $ 1,561 billion. This will increase the share of mutual funds from
34% to 40% during the period. Such increases in volumes are expected to bring about
large changes in the way Mutual Funds conduct their business.

Here are some of the basic changes that have taken place since the advent of the Net.

Lower Costs

Distribution of funds will fall in the online trading regime by 2003. Mutual funds could
bring down their administrative costs to 0.75% if trading is done on- line. As per SEBI
regulations, bond funds can charge a maximum of 2.25% and equity funds can charge
2.5% as administrative fees. Therefore if the administrative costs are low, the benefits are
passed down and hence Mutual Funds are able to attract mire investors and increase their
asset base.

Better advice



Mutual funds could provide better advice to their investors through the Net rather than through
the traditional investment routes where there is an additional channel to deal with the Brokers.
Direct dealing with the fund could help the investor with their financial planning. In India,
brokers could get more Net savvy than investors and could help the investors with the
knowledge through get from the Net.

New investors would prefer online

Mutual funds can target investors who are young individuals and who are Net savvy,
since servicing them would be easier on the Net.
India has around 1.6 million net users who are prime target for these funds and this could
just be the beginning. The Internet users are going to increase dramatically and mutual
funds are going to be the best beneficiary. With smaller administrative costs more funds
would be mobilized .A fund manager must be ready to tackle the volatility and will have
to maintain sufficient amount of investments which are high liquidity and low yielding
investments to honor redemption.

Net-based advertisements

There will be more sites involved in ads and promotion of mutual funds. In the U.S. sites
like AOL offer detailed research and financial details about the functioning of different
funds and their performance statistics. a is witnessing a genesis in this area . There are
many sites such as indiainfoline.com and indiafn.com that are doing something similar
and providing advice to investors regarding their investments.



In the U.S. most mutual funds concentrate only on financial funds like equity and debt.
Some like real estate funds and commodity funds also take an exposure to physical
assets. The latter type of funds are preferred by corporate who want to hedge their
exposure to the commodities they deal with.

For instance, a cable manufacturer who needs 100 tons of Copper in the month of January
could buy an equivalent amount of copper by investing in a copper fund. For Example,
Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed percentage of
it’s corpus in Gold, Silver, Swiss francs, specific stocks on various bourses around the
world, short –term and long-term U.S. treasuries etc.

In U.S.A. apart from bullion funds there are copper funds, precious metal funds and real
estate funds (investing in real estate and other related assets as well.). In India, the
Canada based Dundee mutual fund is planning to launch a gold and a real estate fund
before the year-end.

In developed countries like the U.S.A there are funds to satisfy everybody’s requirement,
but in India only the tip of the iceberg has been explored. In the near future India too will
concentrate on financial as well as physical funds.

Corpus:-

Investing in a scheme is a simple process. Juts walk into any office of the
mutual fund or that of its representatives. Fill up a short and simple form, and
hand over a cheque. Yours money gets added to the pool already with the scheme,
given to it by numerous other investors like you. The total money available with a
scheme at any point in time is referred to as the “Corpus” or Asset under
management ’the mutual fund, on your and other investors behalf invests this
corpus in various securities in line with its sated objectives



Units:

Mutual fund issues you ‘units’ against your investment. A unit is the currency
of a fund. What a share is to company, a unit is to a fund.

Net asset value (NAV):

NAV: (Net asset of the scheme /number of unit’s o/s)
(Number of units outstanding as at the NAV)

You are allotted units on the basis of a scientific mechanism. This price, measured
per unit, is called the Net Asset Value (NAN) of the unit. Just as share or land is
bought and sold at its NAV. if for example, you were to invest Rs 10000 in
scheme when it’s NAV
Is Rs 10. You will be allotted 1000 units (10000/10) roughly – the fund charges a
nominal processing fee.

The NAV of any scheme tells how much each units of its is worth at any
point in time, and is therefore the simplest measure of how it is performing.
Schemes NAV is its net assets (Market value of the securities its own minus it
owes) divided by the number of units it has issued.

A scheme NAV is dynamic figure. The market value of a schemes portfolio,
changes from day to day, as prices of shares and bonds move up or down. The number of
units outstanding also changes as new investors come into the scheme and told ones



leave. If the NAV of your scheme rises from Rs 10 to Rs, 11 over a period of time, your
scheme is said to have generated a return of 10%. Similarly, if its NAV falls from Rs 10
to Rs 9, it is said to have lost 10%

Fund house have to calculate and disclose the NAV’s of their schemes daily fund
NAV’s can be easily looked up. While dailies give a random listing of schemes the
financial papers are more exhaustive in their coverage. NAV information is also available
on website, of the mutual fund concerned and of independent data providers. When
invested in a scheme, its NAV is the figure to track as it qualifies your returns and your
purchase price and sale price will be based on it.
Load:-

Although the NAV represents scheme current market value it is not the exact price at
which an investor enters or exits the scheme. Fund houses levy a nominal charge, on
most of their schemes, to meet their processing costs and to discourage investors from
lacking. This charge is referred to as ‘load’ and it is price you pay over and above the
fund NAV when you buy or cell units.

You pay an ‘entry load’ at the time buying units and an ‘exit load’ while selling.
Loads are always expressed as percentage of the NAV, and have the effect of reducing
your returns. An entry load increases your NAV, which places fewer units in your hands.
An exit load decrease you’re NAV of Rs 10 and it levies an entry and exit load of 1%
(10 paisa) each. So when you buy units you’ll pay Rs 10.1 (10+0.10)per unit, not Rs 10.
Similarly if you sell you’ll get Rs 9.90(10-0.10) per unit, not Rs 10. Under SEBI rules,
the sum of entry and exit loads charged by a scheme cannot exceed 7%

Cost of investment in mutual fund:-



Another entry that eats into your return is ‘expenses’ this is what your fund
charges you for managing your only. Fund managers have to be paid a fee, as do the
other constraints involved in managing your money. All this entails costs, which your
scheme recovers from you, within limits. Every year, a fund charges same amount to
your schemes NAV reducing your returns by that amount. SEBI rules allow equity
schemes to charge a maximum of 2.5%of corpus as expenses every year, the
corresponding figure for debt schemes is 2.25%

SEBI also decides what kind of expenses a fund can charge its unit holders and what it
cannot. For e.g.: the cost of running a campaign about a fund having won an award
cannot be charged to investors.

Disclosures:-

From time to time, your fund house will share with you information
relating to your scheme. It does this in various ways, in various degrees. Under
SEBI rules, fund houses have to send to all unit holder’s annual reports disclosing
the complete portfolio of all units holders’ annul reports disclosing the complete
portfolio of all units holders’ annul reports disclosing the compete portfolio of all
their schemes and publish half-yearly results in newspapers. These document
shade light on your schemes performing over various time periods, and how it
stands up, given market conditions.

Some fund house goes beyond such mandatory information sharing. Whatever
information is relevant to your investment they send it to you on a quarterly basis,



through fax and newsletters. Most fund houses update their scheme portfolio on
their website even quicker, the norm being on a monthly basis. This information
you can use to make an investment in the schemes

Redemption:-

Whenever you want, you can sell your units, partly or fully back to your fund.
Although it’s sale from your point of view in mutual fund parlance it is called ‘
repurchase ‘or redemption’ you’ll have to fill up another short and simple from
your Mutual fund will pay you the schemes NAV prevailing on that date minus
the exit load,
Mail you a cheque within three to five days.

DISTRIBUTION COMPANIES.

A distribution company has several agents and distributors working
for it, and is the transitional interface with the mutual fund. It is institutional
agent for a mutual fund, and earns commissions on funds mobilized.
Distribution companies are a very popular channel with mutual fund today.



Company Profile
Introduction:-

VISION:

”To be the most trusted name in investment and wealth management, to be
the preferred employer in the industry and to be a catalyst for growth and
excellence of the asset management business in India”.

MISSION:

To consistently pursue investor's wealth optimization by:

• Achieving superior and consistent investment results
• Creating a conducive environment to hone and retain talent
• Providing customer delight
• Institutionalizing system-approach in all aspects of functioning
• Upholding highest standards of ethical values at all times

.

Biral Sun Life Financial Services offers a range of financial services for resident
Indians and Non Residents Indians.Birla Sun Life Distribution Co. Ltd. a part of the Joint



Venture between The Aditya Biral Group and Sun Life Financial of Canada. The synergy
of these two accomplished conglomerates brings the global financial know-how and local
market insight. It is the aim of the company to offer diverse and top quality financial
services to customers. The Mutual Fund and Insurance companies provide wealth
management and protection products to customers while the Distribution and Securities
companies provide brokerage and trading services for investment in equities, debt
securities, fixed deposits, etc.

It is said that: "To acquire wealth is difficult, to preserve it more difficult, but to
nourish it wisely, the most difficult of all."

The company’s commitment to excellence along with a roots up approach to
research and analysis, coupled with technology driven processes has enabled them to
excel at this challenging task and in a span of four years emerge as one of the leading
distribution houses of the country.

"Knowledge is a treasure but practice is the key to it"

The company believes that the desire for knowledge increases with the acquisition
of it. At Birla Sun Life Distribution they make the best use of intellect and expertise
putting knowledge to good practice. As and when and where investors need it.

For company the concept of perfect service is contently expanding. This along
with transparent business ethics, inspired and innovative solutions is what their investors
have come to expect from them.

A fact, which has been reaffirmed by recognition and awards, conferred on them
by the leading names of the India Financial Services Industry.



Birla Sun Life Financial Services

Birla Sun Life Birla Sun Life Birla Sun Life
Mutual Fund Insurance Distribution

Birla Sun Life Asset Management Company

Limited:

Biral Sun Life Mutual Fund follows a conservative long-term approach to
investment, which is based on identifying companies that have good credit-worthiness
and are fundamentally strong. It places a lot of emphasis on quality of management and
risk control. This is done through extensive analysis that includes factory visits and field
research. It has one of the largest team of research analysts in the industry. The company
is one of India's leading, private mutual funds with a large customer base. It has been
recognized nationally with coveted awards.



Biral Sun Life Insurance Company Limited:

Insurance is not about something going wrong. It's often about things going right.
One of the wonders of human nature is that we never believe anything can actually go
wrong. Surely, life has its share of ifs. At Biral Sun Life however, company believe it has
its equally pleasant share of buts as well. Biral Sun Life stand committed to helping
people realize those happy moments which make a life. Be it living the same lifestyle in
their post retirement days or providing a secure future for their loved ones, in case
something happens to them.

Birla Sun Life Distribution Company Limited:

VISION:
“To be the first performance of our customers as a integrated provider
of complete financial services through superior value creation and
technology”.
At Birla Sun Life Distribution, they put knowledge, expertise and experience to
good use to preserve, nurture and nourish your wealth. For customers today and
tomorrow.

They are a part of the Joint Venture between The Aditya Birla Group and

Sun Life Financial of Canada. The synergy of these two accomplished

conglomerates brings investors global financial know-how and local market

insight.


A project report on a mutual fund concept at birla sun life insurence

A project report on a mutual fund concept at birla sun life insurence

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