Evaluation of mutual fundportfolio @ sbi project report mba finance

“ MUTUAL FUNDPORTFOLIO PERFORMANCE EVALUATION

ABBREVIATIONS USED IN THE STUDY

 NAV—Net Asset Value

 AMC- Asset Management Company

 SEBI- Security Exchange Board of India

 AMFI- Association of Mutual Funds in India

 UTI- Unit Trust of India

 MF- Mutual Fund

 ELSS- Equity Linked Saving Scheme

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EXECUTIVE SUMMERY

Mutual Funds over the years have gained immensely in their popularity. Apart from the
many advantages that investing in mutual funds provide like diversification,
professional management, the ease of investment process has proved to be a major
enabling factor. However, with the introduction of innovative products, the world of
mutual funds nowadays has a lot to offer to its investors. With the introduction of
diverse options, investors needs to choose a mutual fund that meets his risk acceptance
and his risk capacity levels and has similar investment objectives as the investor.

With the plethora of schemes available in the Indian markets, an investors needs to
evaluate and consider various factors before making an investment decision. Hence an
investor must infer the fact sheets of the various scheme to asses the portfolio
management style of the fund manager. Mutual funds provide risk diversification:
diversification of a portfolio is amongst the primary tenets of portfolio structuring, and a
necessary one to reduce the level of risk assumed by the portfolio holder. Mutual funds
represent one such option. So it is always safe for investor to invest their hard earned
money in those schemes which have invested in stock of divers sectors with potential to
earn higher returns.

So this project is carried to understand the science of portfolio management that mutual
fund apply to trade off with risk and maximize return. It becomes very difficult for
investor to make decision as where to invest his hard earned money and in which stream
of investment will reap optimal appreciation of money invested for the period. By
analyzing the fact sheets of the Asset Management Company we can auspicate the best
fund scheme to invest. There are many research institutes, which provide updated
information of all the schemes that are available and the trend in the Mutual Fund
industry. All that we need is to read between the lines and make sense of befuddling
information, and acquire knowledge related to investment and comprehend finance
terminology.

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Though still at a nascent stage, Indian MF industry offers a plethora of schemes and
serves broadly all type of investors. The range of products includes equity funds, debt,
liquid, gilt and balanced funds. India offers biggest opportunity for asset management
companies
The next five years will see the Indian asset management business grow at least 33
percent annually. The main drivers of this will be the retail segment, expected to grow
at 36 percent annually, and the institutional investor segment, expected to grow at 29
percent annually. This will take the total assets under management (AUM) to $440
billion, as per study by McKinsey, a consultancy firm.
In India, asset management business is in emerging phase. One reason why it also has
the fastest growth rate though still behind Russia and China. The business has grown 47
percent annually since 2003, taking the total AUM in India today to $92 billion. It grew
97 percent and 67 percent in Russia and China, respectively.

Investment in mutual funds is still low in India, by both the retail and institutional
categories. AUM as a percentage of GDP works out to only 8 percent here, compared
with 79 percent in the US, and 39 percent in Brazil. AUM as a percentage of bank
deposits is also abysmally low in India, at 25 percent, while it is 140 percent in the US
and 96 percent in Brazil.
The business is very profitable in India, with operating profits at 32 bps as a percentage
of average AUM. In developed markets, this ratio is very low: it is 18 bps in the US and
12 bps in the UK

Moreover, the setup of a legal structure, which has enough teeth to safeguard investors’
interest, ensures that the investors are not cheated out of their hard-earned money. All in
all, benefits provided by them cut across the boundaries of investor category and thus
create for them, a universal appeal.

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The project has been under taken at SBI- MUTUAL FUND HUBLI. The focus of study
is to evaluate the portfolio performance of the funds. In this report an attempt is made
to evaluate the performance of three growth-oriented mutual funds on the basis of
monthly returns compared to benchmark returns for the period of 3 years. For this
purpose, risk adjusted performance measures suggested by Jenson, Treynor and Sharpe
are employed.
I have chosen three Growth schemes having highest asset under management as fund
with huge asset basis can diversify risk by deploying assets in various investment
vehicle.
The schemes I have chosen for study are

MAGNUM CONTRA FUND

MAGNUM GLOBAL FUND

MAGNUM TAX GAIN SCHEME

The rationale behind choosing these three different schemes (one is equity scheme,
other one is diversified scheme and one more is tax scheme) is that these three are the
top performing schemes of SBI MF. And has highest Asset Under Management So to
know as to weather the risk and return associated with these schemes are high as they
are one of the best schemes or it is vice versa.

The schemes are compared with the Benchmark BSE 100 index. Three years
values have been taken into consideration for calculation. The past performance is not
an indicative for the future growth .No AMC can guarantee for any return.

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DESIGN OF THE STUDY

TITLE OF THE PROJECT

“ MUTUAL FUNDPORTFOLIO PERFORMANCE
EVALUATION

OBJECTIVES

Objective

• To Evaluate portfolio performance of mutual fund scheme with its

respective benchmark

Sub objectives

• Elaborate rationalism of investment

• Comprehensive study of mutual fund industry

• Inquisition of SBI Mutual Fund and its schemes

SCOPE OF THE STUDY

 The study was conducted on only SBI Mutual fund schemes.

 The study was conducted on three schemes of SBI

 The study focuses on portfolio management strategy applied with respect to 3
schemes of SBI Mutual Fund.

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 The study covers the period from January 2005 to Dec 2007.

METHODOLOGY OF DATA COLLECTION

SOURCES OF DATA

PRIMARY DATA

 Discussion with the company managers regarding the schemes nature,
their performance, and risk associated with these schemes and the return
that these schemes are generating.

SECONDARY DATA

 Internet sources

 Materials provided by the company

 Business magazines

CONCEPTUAL DESIGN

Sample unit: schemes of SBI mutual fund

Sample size: 5 years NAV and market index values

Conclusion

The schemes taken for study proved to be a good investment avenue for all the
investors as the risk associated with these schemes are low and they are yielding a
very good return. it should be considered for Long-term investment plan.

The volatility in the market might have affected the returns of the schemes
for short period like 6 months or one year, but the performance of the schemes
for 3 years and above proves to be consistent. The schemes have been the one of
the best schemes of SBI MF and hence have bagged many awards.

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COMPANY PROFILE

STATE BANK OF INDIA - MUTUAL FUND A partner for life.

SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBI
Mutual Fund has been constituted as a trust, sponsored by State Bank India.
Today the Fund has an investor base of over 2.8 million spread over 23 schemes.
With a large network of collecting branches and investor service centers, SBI
Mutual Fund constantly endeavors to get closer to its growing family of investors.
SBI is the largest public sector Bank in India with 8,836 branches all over India.
SBI is the leader in providing loans to trade & industry. It also provides related
services, which generate significant fee-based income. It has also identified
project finance and consumer banking as key areas.

Currently the SBI Mutual Fund offers 64 schemes in with different investment
objective and needs, as follows.

No. of schemes 64
No. of schemes including options 177
Equity Schemes 36
Debt Schemes 115
Short term debt Schemes 11
Equity & Debt 3
Money Market 0
Gilt Fund 12

Corpus under management

Rs.29492.9685 Crs. as on Feb 29, 2008

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SBI Mutual fund is India’s largest bank sponsored mutual fund and has an
enviable track record in judicious investments and consistent wealth creation.
The fund traces its lineage to SBI- India’s largest banking enterprise. The
institution has grown immensely since its inception and today it is India’s largest
bank patronized by over 80% of the top corporate houses of the country.

SBI Funds Management Pvt. Ltd – Investment Managers for SBI Mutual
Fund, one of the largest mutual funds in the country . SBI- Mutual fund is a joint
venture between Societe-Generale Asset Management, one of the world’s leading
fund management companies that manage over 330 U.S.$ billion worldwide.

Started in July 1987, the fund has launched 67 schemes and successfully
redeemed 15 schemes. In the process, it has rewarded its investors handsomely
with consistently high returns. A total of over 3.5 million investors have reposed
their faith in the wealth generation expertise of the mutual fund. Schemes of the
mutual fund have consistently outperformed benchmarks indices and have
emerged as the preferred investment for the millions of investors and HNI’s

Today the fund manages Rs.29492.9685 Crs. as on Feb 29, 2008 of assets and
has diversified profile of investors actively parking their investments across 37
active schemes. The fund serves this vast family of investors by reaching out to
them through network of 100 collection branches, 26 investor service centers, 28
investor service desks, and 52 district organizers.

SBI- Mutual fund is the first bank sponsored fund to launch an off-shore fund
called Resurgent India Opportunity Fund Growth through innovation and stable
investment policies is the SBI-mutual fund credo

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FUND-HOUSE EXPERTISE

The investment environment is becoming increasingly complex. Innumerable
parameter need to be factored in to generate a clear understanding of market
movement and performance in the near and long term future.

At SBI- mutual fund the team donates considerable resources to gain,
maintain and sustain the profitable insights in to market movements. The team
consistently pushes the envelope to ensure our investors get the maximum
benefits year after year.

RESEARCH- THE BACKBONE OF SBI MF SUCESSFUL PERFORMANCE

Our expert and experienced and market savvy researchers prepare
comprehensive analytical and informative reports on diverse sectors and identify
stocks that promise high performance in the future.

This team works in tandem with a compliance and risk-monitoring
department, which insures minimization of operational while protecting the
interest of investors.

The fund house has an experienced team of fund managers and analyst who
continuously monitor market movements to identify stocks that promise high
performance in the future. This team works in tandem with a compliance and risk-
monitoring department, which ensures minimization of operational risks while
protecting the interests of the investors. The outcome of this is that the schemes
continue to deliver consistent returns to investors and outperform benchmark
indices.

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KEY PERSONNEL OF SBI MUTUAL FUND

Mr. Syed Shahabuddin Managing Director

Mr. C A Santosh Chief Manager - Customer Service.

Mr. Didier Turpin Dy. Chief Executive Officer

Ms.Aparna Nirgude Chief Risk Officer

Mr. Achal K. Gupta Chief Operating Officer

Mr. Ashutosh P Vaidya Company Secretary & Compliance Officer

Mr. Sanjay Sinha Chief Investment Officer

Mr. Parijat Agrawal Head – Fixed Income

Mr. R. S. Srinivas Jain Chief Marketing Officer

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THE FUND MANAGERS

Quote by Managing Director

Mr. Syed Shahabuddin, Managing Director and CEO, SBI Mutual Fund said: “We
at SBI Mutual Fund endeavor to provide efficient and prompt service to our
investors and cater to their investment and servicing needs.

Chief Investment Officer:

Sanjay Sinha

Mr. Sanjay Sinha has taken over as Chief Investment Officer with effect from
June 1, 2007. Mr. Sinha joined SBI Mutual Fund as the Head of Equities in
November 2005 and has managed the largest number of funds in SBI MF covering
the entire spectrum of equity funds – from index funds, diversified equity funds to
sector funds.

He has over 18 years of experience in the Mutual Fund Industry. Prior to joining
SBI MF, Mr. Sinha worked as Senior Fund Manager with UTI Mutual Fund and
was managing a corpus of over Rs 28 billion (over US$600 million). A Post
Graduate from IIM Kolkatta, Mr. Sanjay Sinha has a rich experience in managing
funds.

Head Portfolio Management Services / Fund Manager :

Nipa Ladiwala

After obtaining a post graduate degree in Business Management and Law, Nipa
worked as an equity analyst, and dealer for the offshore Funds of UTI.
Subsequently she was appointed as Fund Manager for India Growth Fund, which
was listed on NYSE. She was head of Research at UTI Securities before joining
SBIMF as Head of PMS. Nipa has 6 years experience as Fund Manager. She has a

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total of 15 years experience and has been with SBI Funds Management Pvt Ltd
since October 2005.

Debt / Fixed Income :

Parijat Agrawal (Head – Fixed Income)

Parijat has done his B.E (ECE) and PGDM (IIM Bangalore). He has got 12 years
experience in capital markets in areas like research, dealing and fund
management. Parijat is associated with SBI Funds Management Pvt. Ltd. since
July 2006.

Prior to joining SBI Funds Management Pvt. Ltd., he was with State Bank of
Mauritius Limited, Mumbai as Head – Treasury.

Ganti N Murthy (Asst. Vice President & Fund Manager)

Mr. Murthy did his B.Sc (Hons) from Osmania University and his Masters in
Financial Management from Jamnalal Bajaj Institute of Management Studies,
Mumbai. He has over 12 years experience in the Mutual Fund Industry, 9 years in
Unit Trust of India and 3 years in Cholamandalam AMC Ltd. Prior to joining SBI
Funds Management Pvt. Ltd., he was with Cholamandalam Mutual Fund as Fund
Manager – Debt.

Offshore Funds - Fund Manager :

Anand Gupta

Anand holds charter from CFA Institute, USA and Institute of Chartered
Accountants of India. Before joining SBI Funds Management in October 2005,
Anand has worked with HSBC securities and domestic brokerage house as equity

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research analyst for 3 years. Anand has 5 years of experience in capital markets
and 3 years of experience in Audit & Business consulting.

Investment Team (Equity) :

Aashish Wakankar (Vice President & Fund Manager)

Aashish Wakankar is a Bachelor of Science from University of Mumbai and holds
Post Graduate Diploma in Management Studies from Jamnalal Bajaj Institute of
Management Studies, University of Mumbai. He has more than 12 years of
experience in capital markets ranging from institutional equities, equity research
and fund management. He is associated with SBI Funds Management from
December 2005.

Prior to joining SBI Funds Management, he has worked with Kotak Mahindra
Asset Management, Deutsche Asset Management - part of Deutsche Bank Group,
and TATA TD Waterhouse Securities - a joint venture between the TATA Group,
India and TD Bank Financial Group, Canada. At Deutsche Asset Management, he
was responsible for advising the offshore fund Deutsche India Equity Fund, Japan
and MetLife Insurance.

Pankaj Gupta – Fund Manager

Pankaj has done his B.Com (Hons), PGDBM, C.S and PGDBM IIM – Lucknow.
He has experience of over 4 years in Mutual Fund, Equity Research and Corporate
Banking. His last assignment was ICICI Bank Ltd. and has been with SBI Funds
Management Pvt. Ltd. since December 2005.

Jayesh Shroff – Fund Manager

Jayesh has done his B.Com and PGD (MBFS) – ICFAI. He has experience of over
5 years as Fund Manager. He also has wide experience in investment banking
activities including M&A activities, venture capital funding, preparation of

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business plans, project reports etc. His last assignment was with BOB Mutual
Fund and has been with SBI Funds Management Pvt. Ltd. since March 2006.

Vivek Pandey – Fund Manager

Vivek is a Science graduate and has done his CFA from ICFAI. He has about 7
years of experience in the industry. He is currently placed in Investment
Department as a Junior Fund Manager since June 2007.

Investment Team (Debt) :

Killol Pandya - Fund Manager

Killol has done his B.Com, DPCM and MMS (Finance). He has over 7 years of
experience in debt trading. His last assignment was with IL&FS Investmart India
and has been with SBI Funds Management Pvt. Ltd. since June

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PRODUCTS OF SBI MUTUAL FUNDS

Equity Schemes

The investments of these schemes will predominantly be in the stock markets and
endeavor will be to provide investors the opportunity to benefit from the higher
returns which stock markets can provide. However they are also exposed to the
volatility and attendant risks of stock markets and hence should be chosen only by
such investors who have high risk taking capacities and are willing to think long
term. Equity Funds include diversified Equity Funds, Sectoral Funds and Index
Funds. Diversified Equity Funds invest in various stocks across different sectors
while sectoral funds which are specialized Equity Funds restrict their investments
only to shares of a particular sector and hence, are riskier than Diversified Equity
Funds. Index Funds invest passively only in the stocks of a particular index and
the performance of such funds move with the movements of the index.

• Magnum COMMA Fund
• Magnum Equity Fund
• Magnum Global Fund
• Magnum Index Fund
• Magnum MidCap Fund
• Magnum Multicap Fund
• Magnum Multiplier Plus 1993
• Magnum Sector Funds Umbrella
• MSFU - FMCG Fund
• MSFU - Emerging Businesses Fund
• MSFU - IT Fund
• MSFU - Pharma Fund
• MSFU - Contra Fund
• SBI Arbitrage Opportunities Fund
• SBI Blue chip Fund
• SBI Infrastructure Fund - Series I
• SBI Magnum Taxgain Scheme 1993
• SBI ONE India Fund
• SBI TAX ADVANTAGE FUND - SERIES

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Debt Fund Schemes

Debt Funds invest only in debt instruments such as Corporate Bonds, Government
Securities and Money Market instruments either completely avoiding any
investments in the stock markets as in Income Funds or Gilt Funds or having a
small exposure to equities as in Monthly Income Plans or Children's Plan. Hence
they are safer than equity funds. At the same time the expected returns from debt
funds would be lower. Such investments are advisable for the risk-averse investor
and as a part of the investment portfolio for other investors.

• Magnum Children’s Benefit Plan
• Magnum Gilt Fund
• Magnum Gilt Fund (Long Term)
• Magnum Gilt Fund (Short Term)
• Magnum Income Fund
• Magnum Income Plus Fund
• Magnum Income Plus Fund (Saving Plan)
• Magnum Income Plus Fund (Investment Plan)
• Magnum Insta Cash Fund
• Magnum Insta Cash Fund -Liquid Floater Plan
• Magnum Institutional Income Fund
• Magnum Monthly Income Plan
• Magnum Monthly Income Plan Floater
• Magnum NRI Investment Fund
• SBI Capital Protection Oriented Fund - Series I
• SBI Debt Fund Series
• SDFS 15 Months Fund
• SDFS 90 Days Fund

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• SDFS 30 DAYS
• SDFS 30 DAYS
• SDFS 30 DAYS
• SBI Premier Liquid Fund
• SBI Short Horizon Fund
• SBI Short Horizon Fund - Liquid Plus Fund
• SBI Short Horizon Fund - Short Term Fund

Balanced Schemes..

Magnum Balanced Fund invest in a mix of equity and debt investments. Hence
they are less risky than equity funds, but at the same time provide
commensurately lower returns. They provide a good investment opportunity to
investors who do not wish to be completely exposed to equity markets, but is
looking for higher returns than those provided by debt funds.

• Magnum Balanced Fund
• Magnum NRI Investment Fund - FlexiAsset Plan

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AWARDS AND ACHIEVEMENTS

SBI- MUTUAL FUND has been performing excellently since its inception. The
fund house expertise and excellent performance is frequently recognized by the
mutual fund industry. SBI Mutual Fund (SBIMF) has been the proud recipient of the
ICRA Online Award - 8 times, CNBC TV - 18 Crisil Award 2006 - 4 Awards, The
Lipper Award (Year 2005-2006) and most recently with the CNBC TV - 18 Crisil
Mutual Fund of the Year Award 2007 and 5 Awards for our schemes.

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HISTORY OF MUTUAL FUNDS :

When three Boston securities executives pooled their money together in 1924 to create

the first mutual fund, they had no idea how popular mutual funds would become.

The idea of pooling money together for investing purposes started in Europe

in the mid-1800s. The first pooled fund in the U.S. was created in 1893 for the

faculty and staff of Harvard University. On March 21st, 1924 the first official

mutual fund was born. It was called the Massachusetts Investors Trust.

After one year, the Massachusetts Investors Trust grew from $50,000 in

assets in 1924 to $392,000 in assets (with around 200 shareholders). In

contrast, there are over 10,000 mutual funds in the U.S. today totaling around

$7 trillion (with approximately 83 million individual investors) according to

the Investment Company Institute.

The stock market crash of 1929 slowed the growth of mutual funds. In

response to the stock market crash, Congress passed the Securities Act of

1933 and the Securities Exchange Act of 1934. These laws require that a fund

be registered with the SEC and provide prospective investors with a

prospectus. The SEC (U.S. Securities and Exchange Commission) helped

create the Investment Company Act of 1940, which provides the guidelines

that all funds must comply with today.

With renewed confidence in the stock market, mutual funds began to blossom.

By the end of the 1960s there were around 270 funds with $48 billion in

assets.

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INCEPTION OF MUTUAL FUND IN INDIA:

Mutual funds made an opening in India in 1963 under the enactment f Unit Trust of
India (UTI), which came out with is debut scheme named US-64, an open ended
scheme n, which is operating till date. Up to 1986-87 it had launched 20 schemes,
mobilizing net resources amounting to Rs. 4564 crores. for these 23 long years up to
1987 UTI enjoyed complete monopoly of the unit trust business in India. It remained
one and the only mutual fund in India.

It was in 1986 that the government of India amended banking regulation act
and allowed commercial banks in public sector to set up mutual funds. This lead to
promotion of ‘SBI-MUTUAL FUND’ by State Bank Of India (SBI) in July 1987
followed by

• Canara Bank

• Indian bank

• Bank of India

• Bank of Baroda

• Punjab National bank

The government of India further granted permission to Insurance Corporation to public
sector to float mutual funds. The following were the corporations,

 Life Insurance Corporation

 General Insurance of Corporation

This was the picture till 1991, but when in 1991 the government of India followed a
policy of liberalization, privatization, and globalization it opened the gates to private
sector to launch mutual funds.

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The History of Indian mutual fund industry can be broadly classified in to
The four phases:

• Phase 1— July 1964 to November 1987

• Phase 1— November 1987- October 1993

• Phase 3--- October 1993- February 2003

• Phase 4-- since February 2003

First Phase – 1964-87 monopoly of UTI

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.

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

With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund families. 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.

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.

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Introduction to Mutual Funds

Mutual Funds - The Concept

A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciations realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The
flow chart below describes broadly the working of a mutual fund

The following simple diagram clearly shows the working of a mutual fund:

Mutual fund as an investment company combines or collects money of its shareholders
and invests those funds in variety of stocks, bonds, and money market instruments. The
latter include securities, commercial papers, certificates of deposits, etc. Mutual funds
provide the investor with professional management of funds and diversification of
investment.

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Investors who invest in mutual funds are provided with units to participate in stock
markets. These units are investment vehicle that provide a means of participation in the
stock market for people who have neither the time, nor the money, nor perhaps the
expertise to undertake the direct investment in equities. On the other hand they also
provide a route into specialist markets where direct investment often demands both
more time and more knowledge than an investor may possess.

The price of units in any mutual fund is governed by the value of underlying
securities. The value of an investor’s holding in a unit can therefore, like an investment
in share, can go down as well as up. Hence it is said that mutual funds are subjected to
market risk. Mutual fund cannot guarantee a fixed rate of return. It depends on the
market condition. If the particular scheme is performing well than more return can be
expected. It also depends on the fund manager expertise knowledge. It is also seen that
people invest in particular funds depending on who the fund manager is

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WHY TO INVEST IN MUTUAL FUNDS:

A proven principle of sound investment is –do not put all eggs in one
basket. Investment in mutual funds is beneficial due to following reasons.

• They help in pooling of funds and investing in large basket of shares of
different companies. Thus by investing in diverse companies, mutual funds
can protect against unexpected fall in value of investment.

• An average investor does not have enough time and resources to develop
professional attitude towards their investment. Here professional fund
managers engaged by mutual funds take desirable investment decision on
behalf of investors so as to make better utilization of resources.

• Investment in mutual funds is comparatively more liquid because investor
can sell the units in open market or can approach mutual fund to repurchase
the units at net asset value depending upon the type of scheme.

• Investors can avail tax rebates by investing in different tax saving schemes
floated by these funds, approved by the government.

• Operating cost is minimized per head because of large size of investiable
funds, there by realizing more net income of investors.

Instruments where Mutual funds deploy funds
1. Equity
Equity represents the shares of a company. Mutual funds are entitled to
dividends, rights and bonuses declared by the companies apart from the benefit of
capital appreciation resulting from appreciation resulting from appreciation in the
market value of the held shares. This is definitely reflected in the appreciation of the net
asset value of the mutual fund units. The disadvantage of investing in equity is the

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highly volatile nature of the Indian capital markets leading to sudden changes in the
prices of the shares.

2 Convertible Debentures
These are bonds issued by companies that automatically get converted into equity
shares on a pre-determined date. From that date onwards the so converted shares have
the same benefits and risks that normal equity shares have.

3. Fixed Income Securities.
Mutual funds invest a part of their funds in fixed income securities like debentures
or Bonds or Gilts. The underlying idea is to have some fixed return to safeguard and
meet the recurring expenses and to pay at least some dividend to the investors. Bonds or
debentures are instruments issued by public or private limited companies, having a
fixed rate of interest payable on a fixed date every year. Gilts are also similar
instruments but the only difference is that they are issued by the Government and are
hence considered as the safest investment.

4. Money Market Instruments
Money market instruments are instruments that are issued /invested in for a short
term ranging from a few days to a few months. In spite of the fact the yield from such
instruments is very low, mutual funds (especially open-ended) invest a part of their
funds in money market instruments to maintain adequate liquidity to meet short term /
sudden requirements like repurchase. Some of the money market instruments are
commercial paper, Treasury Bills, Bills of exchange and Call Money.

In nutshell, mutual funds act as financial intermediaries by building a liaison between
financial market and small investors. Mutual funds are financial intermediaries as they
pool down small savings of scattered investors and invest in to securities in capital
market and earn income over it. The earning is distributed in the shape of return on
investment to investors who again save a part of it and reinvest through mutual funds.

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

Overview of existing schemes existed in mutual fund category:

BY STRUCTURE

1. Open - Ended Schemes:

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

2. Close - Ended Schemes:

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

3. Interval Schemes:

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

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Overview of existing schemes existed in mutual fund category:
BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The
structure of the fund may vary different for different schemes and the fund
manager’s outlook on different stocks. The Equity Funds are sub-classified
depending upon their investment objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high
on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities,
private companies, banks and financial institutions are some of the major issuers
of debt papers. By investing in debt instruments, these funds ensure low risk and
provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly
known as Government of India debt papers. These Funds carry zero Default risk
but are associated with Interest Rate risk. These schemes are safer as they invest
in papers backed by Government.
Income Funds:
Invest a major portion into various debt instruments such as bonds, corporate
debentures and Government securities.
MIPs:
Invests maximum of their total corpus in debt instruments while they take minimum
exposure in equities. It gets benefit of both equity and debt market. These
scheme ranks slightly high on the risk-return matrix when compared with other
debt schemes.

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

Liquid Funds:
Also known as Money Market Schemes, These funds provide easy liquidity and
preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs and CDs. These funds are
meant for short-term cash management of corporate houses and are meant for an
investment horizon of 1day to 3 months. These schemes rank low on risk-return
matrix and are considered to be the safest amongst all categories of mutual
funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest
in both equities and fixed income securities, which are in line with pre-
defined investment objective of the scheme. These schemes aim to provide
investors with the best of both the worlds. Equity part provides growth and
the debt part provides stability in returns.

Further the mutual funds can be broadly classified on the basis of
investment parameter viz Each category of funds is backed by an
investment philosophy, which is pre-defined in the objectives of the fund.
The investor can align his own investment needs with the funds objective
and invest accordingly.

By investment objective:
Growth Schemes:

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Growth Schemes are also known as equity schemes. The aim of these
schemes is to provide capital appreciation over medium to long term. These
schemes normally invest a major part of their fund in equities and are willing to
bear short-term decline in value for possible future appreciation.
Income Schemes: Income Schemes are also known as debt schemes. The aim of
these schemes is to provide regular and steady income to investors. These
schemes generally invest in fixed income securities such as bonds and corporate
debentures. Capital appreciation in such schemes may be limited.

Balanced Schemes:
Balanced Schemes aim to provide both growth and income by periodically
distributing a part of the income and capital gains they earn. These schemes
invest in both shares and fixed income securities, in the proportion indicated in
their offer documents (normally 50:50).
Money Market Schemes:
Money Market Schemes aim to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer, short-
term instruments, such as treasury bills, certificates of deposit, commercial
paper and inter-bank call money
Others

Dividend Re-investment plan

Here the dividend accrued on the mutual funds is automatically re-invested in the
purchasing additionally units in the open ended funds. In most cases mutual funds offer
the investor an option of collecting dividends or re-investing the same.

Systematic investment Plan

In this type of plan the investor is given the option of preparing a predetermined
number of post-dated cheques in favour of the fund. He will get the units on the date of
cheques at the existing NAV.

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For instances , if on the 5th March ,he has given a post dated cheques for June 5 th
2006, he will get units on 5th June 2006 at the existing NAV.

Systematic Withdrawal Plan:

As opposed to SIP, the systematic withdrawal plan allows the investor the facility to
withdraw predetermined amount/units from his fund at a pre-determined interval. The
investor’s units will be redeemed at the existing NAV as on that day. The unit holder
may set-up a systematic Withdrawal plan on a monthly, quarterly or semi annually or
on an annual basis to redeem a fixed number of units or redeem enough units to provide
a fixed amount of money.
Retirement Pension Plan

Some schemes are linked with retirement pension. Individuals participate in these plans
for themselves, and corporate for their employees.

Insurance Plan:
Some schemes launched by UTI and LIC offer insurance cover to investor.
Like ULIP plans

Tax Saving Scheme

These schemes offer tax rebates to the investors under specific provisions of the income
tax act, 1961 as the government offers tax incentives for investment in specified
avenues, eg: Equity Linked Saving Scheme (ELSS). Pension schemes launched by the
mutual fund also offer tax benefits. These schemes are growth-oriented and invest pre-
dominantly in equities. Their growth opportunities and risk associated are like any
equity-oriented scheme.

Load and No-Load Funds

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A load fund is one that charges a percentage of NAV for entry or exit. That is, each
time one buys or sells the units in the fund, a charge will be payable. This charge is used
by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit
is Rs.10 .if the entry as well as exit load charge is 2% , then the investors who buy
would be required to pay Rs.10.20 and those would want to repurchase must pay
Rs.9.80 per unit. A no-load fund is the one that does not charge for entry or exit. It m

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Pros & cons of investing in mutual funds:
For investments in mutual fund, one must keep in mind about the Pros and cons of
investments in mutual fund.
Advantages of Investing Mutual Funds:
1. Professional Management - The basic advantage of funds is that, they are
professional managed, by well-qualified professional. Investors purchase funds
because they do not have the time or the expertise to manage their own
portfolio. A mutual fund is considered to be relatively less expensive way to
make and monitor their investments.
2. Diversification - Purchasing units in a mutual fund instead of buying individual
stocks or bonds, the investors risk is spread out and minimized up to certain
extent. The idea behind diversification is to invest in a large number of assets so
that a loss in any particular investment is minimized by gains in others.
3. Economies of Scale - Mutual fund buy and sell large amounts of securities at a
time, thus help to reducing transaction costs, and help to bring down the average
cost of the unit for their investors.
4. Liquidity - Just like an individual stock, mutual fund also allows investors to
liquidate their holdings as and when they want.
5. Simplicity - Investments in mutual fund is considered to be easy, compare to
other available instruments in the market, and the minimum investment is small.
Most AMC also have automatic purchase plans whereby as little as Rs. 2000,
where SIP start with just Rs.50 per month basis.
Disadvantages of Investing Mutual Funds:
1. Professional Management- Some funds doesn’t perform in neither the market, as
their management is not dynamic enough to explore the available opportunity in
the market, thus many investors debate over whether or not the so-called
professionals are any better than mutual fund or investor him self, for picking up
stocks.

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2. Costs – The biggest source of AMC income, is generally from the entry & exit
load which they charge from an investors, at the time of purchase. The mutual
fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have smallholdings across different companies, high
returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When
money pours into funds that have had strong success, the manager often has
trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider
your personal tax situation. For example, when a fund manager sells a security, a
capital-gain tax is triggered, which affects how profitable the individual is from
the sale. It might have been more advantageous for the individual to defer the
capital gains liability. Mutual Funds – Organization

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Structure of mutual Fund in India

The formation and operations of mutual funds in India is solely guided by the Securities
and Exchange Board of India (SEBI) regulations, in 1993, which came in to force on 20
Jan 1993.

The above figure shows the structure of Indian mutual funds. A mutual fund comprises
four separate entities namely,

 Sponsors

 Mutual fund trust

 AMC

 Custodian

These are associated by other independent administrative entities like banks, registrar,
and transfer agents.

The sponsor for a mutual fund can be any person who, acting alone or in
combination with another body corporate establishes the mutual fund and gets it
registered with SEBI. The sponsor is required to contribute at least 40% of the
minimum net worth (Rs 10 crores) of the asset management company. The sponsor
must have a sound track record and general reputation of fairness and integrity in all his
business transactions.

As per SEBI regulations, 1996, a mutual fund must be formed by the sponsor and
registered with SEBI. ‘ A mutual fund shall be constituted in the form of trust and the
instrument of trust shall be in the form of the deed, duly registered under
the provision of the Indian registration act 1908, executed by the sponsor in favor of
trustees named in such an instrument.

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Mutual fund is managed by the Board of trustees and the sponsor executes the trust
deeds in favor of the trustees. The mutual fund raises money through sale of units under
one or more schemes for investing in securities in accordance with SEBI guidelines. It
is the job of mutual fund trustees to see that the schemes floated and managed by the
AMC appointed by the trustees, are accordance with the trust deeds and SEBI
guidelines. It is also the responsibility of the trustee to control the capital property of
mutual fund schemes.

The trustees have the right to obtain relevant information from the AMC, as well
as a quarterly report on its activities. They can also dismiss the AMC under specific
condition as per SEBI regulations.

At least half the trustees should be independent persons. The AMC or its employees
cannot act as a trustee. No person who is appointed as a trustee of a mutual fund can be
appointed as a trustee of any other mutual fund unless he is independent trustee and
prior permission is obtained from the mutual fund in which he is a trustee. The trustees
are required to submit half yearly reports to SEBI on the activities of the mutual fund.
The trustees appoint the custodian and supervise their activities. The trustees can be
removed only with prior approval of SEBI.

As per the SEBI guidelines, an asset management company is appointed by trustees to
float the schemes for mutual fund and manage the funds raised by selling units a
scheme. The AMC must act as per SEBI guidelines, the trust deeds and the management
agreement between the trustees and the AMC.

The AMC should be registered with SEBI. As per revised guidelines the net worth of an
AMC should be in the form of cash all assets should held in the name of the AMC. In

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case the AMC wants to carry out the other fund management business, it should satisfy
the capital adequacy requirement for each such business independently.

The AMC cannot give or guarantee loans and is prohibited from acquiring any assets
(out of the scheme property) which would involve the assumption of unlimited liability.
The AMC is required to disclose the scheme particulars and base of calculation of
NAV. It must submit quarterly reports to the mutual fund.

The director of the AMC should be a person of repute and high standing, with at least 5
years experience in the relevant field. The appointment of the AMC can be terminated
by a decision of 75% of unit holders or a majority of the trustees.

The SEBI 1996 defines the mutual fund as a fund established in the form of trust to
raise moneys through the sale of units to the public or section of public under one or
more schemes for investing in securities, including money marketable instruments.
Since the definition is restricting the scope of operations of mutual funds to diversify
their activities in the following years

 Portfolio management services

 Management of off-shore funds

 Providing advice to off-shore funds

 Management of pension or provident funds

 Management of venture capital funds

 Management of money market funds

 Management of real estate funds

The regulations deal with the various issues relating to the launching, advertising, and
listing of mutual fund schemes. All the schemes to be launched by an AMC need to be
approved by the trustees and copies of offer documents of such schemes are to be filed
with the SEBI. The offer document shall contain adequate disclosures to enable

BABASAB PATIL 40


investors to make informed decisions. Advertisements in respect of schemes should be
in conformity with the prescribed advertisement code of SEBI.

The listing of closed ended scheme is mandatory and every closed ended scheme
should be listed in a recognized stock exchange within six months from the closure of
subscription. However, listing is not mandatory:

Units of a closed ended scheme can be repurchased or reissued by an AMC. Units of a
closed –ended scheme can also be converted in to an open-ended scheme. Units of a
closed ended scheme may be rolled over by passing a resolution by majority
shareholders.

Guaranteed returns can be provided in a scheme if such return is fully guaranteed by the
AMC or the sponsor. In such cases, there should be a statement indicating name of the
person and the manner in which the guarantee to be made must be made in the offer
document.

The regulations provide procedures for winding up of a closed ended scheme. A closed
ended scheme will be wound up on redemption date, unless it is rolled over, or if 75%
of unit holders of a scheme pass a resolution for winding up of the scheme, or if the
trustees, on the happening of any event, require the scheme to be wound up, or SEBI so
directs in the interest of the investors.

Some other operational aspects as prescribed by SEBI are

1) Appointment of custodian.

2) Disclosure

3) Advertisement

4) Investment restriction

5) Sale and distribution of units

6) Code of conduct.

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SEBI REGULATIONS ON MUTUAL FUND

SEBI’s regulatory reach has been extended to more areas and there is a considerable
change in the capital market. SEBI’s annual report for 97-98 has stated that throughout
its six years existence as a statutory body, it has sought to balance the twin objectives of
investor protection and market development. it has formulated new rules and crafted
regulations to foster development. Monitoring and surveillance was put in the stock
exchanges in 96-97 and strengthened 97-98.

OBJECTIVES OF SEBI
The promulgation of the SEBI ordinance in the parliament gave statutory status to
SEBI in 92. According to the preamble of the SEBI, the three main objectives are:

 To protect the interest of the investors in securities.

 To promote the development of securities market

 To regulate the securities market.

FUNCTIONS OF SEBI

a) Regulating the business in stock exchanges and any other securities
Market.

b) Registering and regulating the working of stock brokers , sub brokers,
Share transfer agents, bankers to the issue, trustees of the trust deed
Underwriters, portfolio managers, investment advisors, and other such
intermediaries who may be associated with securities market in any manner.

c) Registering and regulating the working of collective investment schemes mutual
funds.
d) Promoting and regulating self-regulatory organization

e) Prohibiting fraudulent and unfair trade practices in the securities market

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MUTUAL FUNDS AND SEBI

For the smooth conduct and regulation of the mutual fund several guidelines have been
issued by the SEBI regarding the investment, disclosure, accountability distribution, of
its profits to its members and the asset management companies. SEBI has issued
regulation and code of conduct in 93 that provided a basic legal framework for the
functioning of the mutual fund. The mutual fund regulation act 1996 has provided a
sound footing and considerable leeway to fund management. The new elements
incorporated in the year 98, have placed the investors in a better position with regard to
proper asset management and disclosure.

DISCLOSURE NORMS
With the number of mutual funds schemes on the increase (in 97 alone 67
new of schemes of wide varieties were introduced in the market) the investor should be
kept well informed about the nature and functioning of the mutual funds. It should start
right from the offer document. The offer document should provide essential information
to assist the investors to informed and correct decision. According to SEBI regulations
the standard offer document should give the following information

 Standard and scheme specific risk factors. The latter may be related to
investment objective, investment strategy, asset allocation, risks from non
diversification if any, and from investing in closed ended schemes (range of
discount, liquidity)

 Due diligence by the asset management company (AMC)

 Fundamental attributes such as type of schemes, investment objective (including
the tentative equity /debt/money market portfolio) and terms of issue (provision
such as listing, repurchase /redemption, fees, expenses, guarantee/safety net)

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Details of the offer, such as sale, purchase, minimum corpus and pricing of units in
relation to NAV

 Likely initial issue expenses, actual issue expenses for schemes launched
during the last year, expenses borne by the AMC and annual recurring
expenses (as a percentage of average weekly net assets).

 Identification of AMC and background of fund managers.

 Asset allocation pattern (as a percentage of the assets) with indicative range
of investment or the maximum investment in a certain assets class.

 The policy of diversification or concentration to be pursued.

 The portfolio turnover policy and effects of investment techniques on total
portfolio turnover.

 The policy with respect to dividend and distributions, including any options
for unit holders.

 The policy of the fund regarding their scheme transfers.

 Associate transaction

 The borrowing policy including the intent and purpose of borrowing and
stock lending by the fund.

 Valuation of assets, accounting policies and NAV.

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 The manner of determination of redemption and repurchase price of the
units.

 Tax treatment of investments in mutual funds, investor rights, and services
and redressal of investor grievances.

The amendment in 1998 made a significant change in information disclosure pertaining
to litigation/penalties. SEBI has now mandated the disclosure of information contained
in reports of investigation and inspection conducted by it. So far such information was
neither disclosed in the offer document nor in the annual reports. Now, all mutual funds
have to disclose in the offer documents the information pertaining to the following
areas.

 All cases of penalty awarded by the SEBI or any other regulatory body against
the sponsor of the mutual fund, the Trustee Company/ board of trustee, or any of
the directors or key personnel of the AMC and trustee company. The nature of
the penalty must be disclosed.

 Pending material litigation proceedings including pending criminal and
economic cases against any of the afore mentioned parties. The name of the
court or agencies in which the proceedings are pending, the date instituted , the
principal parties thereto, a brief description of the factual basis alleged to
underline the proceedings and relief sought, if any shall be indicated.

 Any deficiency in the system and operations of the sponsor of the mutual fund
or any company associated with the sponsor in any capacity such as the AMC or
the trustee company. This must pertain to matters that SEBI has specifically
directed disclosures. The full disclosure in the annual reports is mandatory.

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INVESTMENT

The investment made issued by the mutual funds decides the return for the investor.
Improper management would land the investor in peril. To prevent this, SEBI has
tightened its control regarding the investment criteria. They are as given below:-

Mutual funds cannot deal in option trade, short sale carry forward transaction in
securities. They can only invest in transferable securities in the money market capital
market, any privately placed debenture or debt securities.

Mutual funds required to form trust and managed separately by the asset management
companies. The minimum net worth of asset management should be Rs 5 crores and
40% should be the sponsor’s contribution.

Investment under individual schemes should not cross the 5% of the corpus of any
company’s share and the investment under all schemes should not exceed 10% of the
funds in the shares, debentures or securities of a single company.

Mutual fund shall not make investment in any privately placed securities issued by the
associates/group companies of the sponsors.
The aggregate investment of mutual funds in the listed or to be listed securities of group
companies of the sponsor shall not exceed 25% of the net assets of all schemes of the
fund.

The assets management companies (AMC) would be required to disclose in the offer
document maximum investment proposed to be made by the schemes in the securities
of the group companies of the sponsors and also aggregate investment made by all
schemes in the group companies.

The AMCs shall have to submit quarterly report to the trustees giving details about the
transactions in the securities of the group companies during the quarter and the trustees

BABASAB PATIL 46


have to make specific comments in their half yearly reports to the SEBI on those
investment.

The ‘group’ for this purpose would have the meaning as provided in the Monopolies
and Trade Practices Act in 1969.

An AMC cannot purchase or sell securities through a broker who is an associate of the
sponsor beyond 5% of the gross business of the mutual fund, which will be monitored
on a quarterly average than on a daily basis.

An AMC shall not in quarter purchase or sell securities for any of the schemes through
any broker beyond 5% of the aggregate business of the securities in a quarter , unless
the AMC records the justification for exceeding the limit and reports such cases to the
trustees on a quarterly basis.

ACCOUNTABILITY

Every mutual fund for each scheme should keep and maintain proper books of accounts,
records and documents to explain its transaction. The records should disclose at any
point of time financial position of the mutual fund in a true and fair view of the state of
affairs of the fund. The accounts should provide information regarding the distribution
or accumulation of income accruing to the unit holder in a fair and true manner.

Short-term capital gains and long-term capital gains should be segregated in the
accounts. All the expenses should be clearly identified and appropriated to the
individual scheme. The AMC may charge the mutual fund with investment
management and advising fees that are fully disclosed in the prospectus subject to the
following viz,

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• One and quarter of one per cent of the weekly average net assets outstanding in
each accounting year for scheme concerned as long as the net assets do not
exceed Rs. 100 crores and one percent of the excess amount over Rs.100 crores.

• The AMC can charge a) initial issue costs of sponsoring the fund and its
schemes b) recurring expenses related to marketing and selling expenses
including agents commission, brokerage and transaction costs and registrar
services for transfer of shares sold or redeemed, provided , the initial expenses
in respect of any one scheme shall not exceed 6% of the fund raised under the
scheme.

The above mentioned expenses and fees payable to Asset management Company
shall be charged to the mutual fund.
DIVIDEND
Mutual funds after closing the accounts, distribute by way of dividend
the holders in accordance with the regulations, an amount not less than 90% of the
profits earned during the year by that scheme. This does not apply to a cumulative
investment schemes or a growth oriented scheme where the nature of the scheme
has been made known to the investors at the time of offer.

MANAGEMENT
The sponsor should have a sound track record, experience in the relevant field
of financial services for a minimum period of five years, professional competence,
financial soundness and general reputation of integrity in all his business
transaction.
AMC shall be authorized for business by SEBI on the basis of certain criteria. The
memorandum and articles of association of the AMC would have to be approved by
the SEBI. The trustee board should be constituted with two thirds of independent
trustees to stand for the interest of the investors.

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ASSOCIATION OF MUTUAL FUNDS IN INDIA

With increase in Mutual Fund players in India, a need for mutual fund association in
India was generated to function as a non-profit organization.
Association of mutual funds in India (AMFI) was incorporated on 22nd August, 1995.

AMFI is an apex body of all Assets Management Companies (AMC) which has been
registered with Security Exchange Board of India (SEBI) .till date all the AMCs are that
have mutual fund schemes are its members. It functions under the supervision and
guidelines of its board of Directors.
Association of Mutual Funds India has brought down the Indian Mutual Fund Industry
to a professional and a healthy market with the ethical lines enhancing and maintaining
standards. It follows the principle of both protecting and promoting the interests of
mutual funds as well as their unit holders.

THE OBJECTIVES OF ASSOCIATION OF MUTUAL FUNDS IN INDIA
The Association of Mutual Funds of India works with 30 registered AMCS of
the country. It has certain defined objectives which juxtaposes the guidelines of its
Board of Directors. The objectives are as follows.

 This Mutual Fund Association of India maintains high professional and ethical
standards in all areas of operation of the industry.

It also recommends and promotes the top class business practices and code of conduct
which is followed by members and related people engaged in activities of Mutual
Fund and Assets Management. The agencies that are by any means connected or
involved in this code of conduct of the association.

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 AMFI interacts with SEBI and works according to SEBI’s guidelines in the
mutual fund industry.

 Association of Mutual Fund of India do represent the government of India , the
Reserve bank of India and other related bodies on matters relating to the Mutual
Fund Industry.

 It develops a team of well qualified and trained agent distributors. It implements a
programme of training and certification for all intermediaries and other engaged in
the Mutual Fund Industry.
.

 AMFI undertakes all India awareness programme for investors in order to promote
proper understanding of the concept and working of mutual funds.

 At last Association of mutual fund of India also disseminate information on
mutual fund industry and undertakes studies and research either directly or in
association with other bodies.

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The sponsors of Association of Mutual Funds in India.

Bank sponsored

• SBI Mutual management Ltd.

• BOB asset management CO. Ltd.

• Canbank Investment Management Services. Ltd

• UTI Asset management Company Pvt, Ltd.

Institution

• GIC Asset management Co.Ltd

• Jeevan Bima sahayog asset management Company.

PRIVATE SECTOR

INDIAN

• Benchmark asset management company

• Cholamandalam Asset Management Co.Ltd

• Credit Capital Asset Management Co.Ltd

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• Escorts Asset Management Ltd

• JM Financial Mutual fund

• Kotak Mahindra asset management company

• Reliance capital Asset management Ltd

• Sahara Asset management Co.Ltd

• Sundaram Asset management Co.Ltd

• Tata Asset Management Private Ltd

Indian joint ventures

• Birla Sun life Asset management company

• DSP Merill Lynch Fund Managers company

• HDFC Asset management company

Foreign joint ventures

• ABN AMRO Asset Management (I) Ltd.

• Alliance capital Asset management (India) Pvt.Ltd

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INVESTMENT PERSPECTIVE
Investment is the employment of funds on assets with the aim of earning income or
capital appreciation. Investment has two attributes namely time and risk. Present
sacrificed to get a return in the future. The sacrifice that has to be borne is certain but
the return in the future may be uncertain. This attribute of investment indicates the risk
factor. The risk is undertaken with a view to reap some return from the investment. For
laymen. Investment means some monetary commitment.

Financial investment is the allocation of money to assets that are expected to yield some
gain over a period of time. It is an exchange of financial claims such as stocks and
bonds for money .they are expected to yield returns and experience capital growth over
the years

Investment objectives:-
The main investment objectives are increasing the rate of return and reducing the risk.
Other objectives like safety, liquidity, and hedge against inflation can be considered as
subsidiary objectives.
Return
Investor always expects a good rate of return from their investments. Rate of return
could be defined as the total income the investor receives during the holding period
stated as a percentage of the purchasing price at the beginning of the holding period.

Capital appreciation & dividend
Return =
Purchase price
Risk
Risk of holding securities is related with the probability of actual return become less
than the expected return. An investment whose rate of return varies widely from period

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to period is risky than whose return that does not change much. Every likes to reduce
the risk of his investment by proper combination of different securities.

Liquidity
Marketability of the investment provides liquidity to the investment. The liquidity
depends upon the marketing and trading facility. If a portion of the investment could be
converted into the cash without much loss of time, if would help the investor meet the
emergencies. Stocks are liquid only if they command good market by providing
adequate return through dividends and capital appreciation.
Hedge against inflation;
Since there is inflation in almost all the economy, the rate of return should ensure a
cover against the inflation. The return rate should be higher than the rate of inflation,
otherwise the investor will have loss in real terms. Growth stocks would appreciate in
their values overtime and provide a protection against inflation. the return thus earned
should assure the safety of the principal amount, regular flow of income and be a hedge
against inflation.

Safety
The selected investment avenue should be under the legal and regulatory framework. If
it is not under the legal framework, it is difficult to represent the grievances, if any.
Approval of the law itself adds a flavor of safety. Even though approved by law, the
safety of the principal differs from one mode of investment to another. Investments
done with the government assure more safety than with the private party.

The investment process
The investment process involves a series of activities leading to the purchase of
securities or other investment alternatives
The investment process can be divided in to
1. Framing of investment policy
2. Investment analysis
3. Valuation

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4. Portfolio construction
5. Portfolio evaluation

Investment Process

Investment Policy Analysis Valuation Portfolio Construction Portfolio Evaluation

Investable fund Market Intrinsic value Diversification Appraisal
Knowledge Industry Future value Selection & Revision
Allocation
Objectives Company

Financial Planning

Whenever we talk of planning, the first question which comes to our mind is what is the
objective?
The first step of planning is setting up of objectives. the same applies with financial
planning.
Every investor has needs at various stages in his life. For example we need money for
our education, for buying car, buying house etc. we have to ensure that we should have
money when we need it.
As we all need money to meet our needs, these needs can be the best objectives or goals
for us to plan finances. So, “financial planning is a process aimed at achieving
investor’s goal in life.”

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Life cycle stage of financial planning

Life cycle stage Features Priority Choice of investment
products.
Childhood stage This is a period Long term investment No immediate needs.
dependency which lasts of money received in Long-term investments.
till the full time the form of gifts at
education finishes. various occasions.
Most of the fulfillments
and requirements are
filled by parents.
Young Might still depend to They might not have Liquid plans and short
Unmarried some extent on parents. any dependents and term investments.
Relatively lower income hence might not need Investments for long
and would not be able to insurance. Main need term plans when
afford large amount to is to protect their adequate short term
financial planning. earnings against any savings have been
More risk taking ability. disability or long achieved.
sickness.
More immediate and
short term needs.

Young married Two incomes to To secure Medium to
stage both meet cost and income loss of long-term
partners earn save. any partner investments.
Sufficient income against any Ability to take
and surplus to disability or risks. Fixed
meet financial sickness. income,
planning needs. Life insurance insurance and
Short and so that equity products.
intermediate term unfortunate
Housing and events of any
insurance needs. partner’s
Consumer finance death that part
needs of income
may be
replaced Need
for emergency
fund.
Young married Two or more Life insurance of Medium to long-term
stage one partne dependent on just earning member is investments. lesser
with childern rs one earner. Less must. ability to take risks and

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earn potential to save Need to start for save.
pension provision at
an early stage is
immense.

Young married Arrival of kids changes Life assurance of Medium to long-term
with childern the scenario. The earning member is investments. Ability to
expenditure starts raising must. Consumer take risks. Portfolio of
at a faster rate than finance needs are products, for growth
income children’s high. Financial needs and long term
education holidays and are highest as this
consumer finance stage is ideal for
housing. disciplining spending
and saving regularly
Married with Individuals are in mid- Higher saving ratio Medium term
elder children career and family has recommended. investments with higher
become bigger with more Priority would shift liquidity needs.
children. Improved from protection needs Portfolio of products
finance and better life to investment needs including equity, debts
style Medium term needs because of pension and pension plans.
for children’s education needs. Because of Major contribution to
and marriage. Need for loan repayment needs pension products
pension, insurance and requirement cash contribution to health
medical cover higher. flows is higher. insurance.
Post family /pre- Children’s have become Adequate income and Maximum investment
retirement stage. independent. Last chance savings in pension funds
to ensure adequate
income to maintain the
standards of living after
retirement.
Retirement stage As a thumb rule, after After retirement the The need would
retirement individual savings rate declines correspond to
need 2/3rd of their final substantially categories 1),2),3) of
years incomes . the previous column:
In general people would 1)continue to work and/
fall in one of the or produce fixed
following three income with no risk at
categories: all.
1)Low pension income 2)invest capital to
and low capital to produce additional
supplement it. income and can take
2)Relatively low pension any risk
income plus some 3)wise people. need to
accumulated capital. preserve the value of
3)sufficient pension savings against
income plus substantial inflation

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assets and capital.

PYRAMID OF INVESTMENT AVENUES :

The above pyramid speaks about the different types of risk and the respective growth
associated with the risk.

It can be seen that, at the lower level risk is very less and their more safety. This kind of
portfolio is usually preferred by the in the third level of their life cycle i.e. mainly
people who are pension holders.

As we move on to the pyramid we see that there is average risk and reasonable growth
and income. These are people in second level of their life cycle who are well settled in
life who are ready to take the calculated risk.

The last level depicts a picture of people who can assume the highest risk. these are
people who have just started their career who can take high risk.

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PORTFOLIO MANAGEMENT

Portfolio:
It is combination of all the securities, group of assets - such as stocks, bonds and debt
instrument - held by an investor. It is constructed in such a manner to meet the
investor’s goals & objectives . The balanced portfolio is the one which gives maximum
return with minimum risk.
The process of blending together the broad assets classes so as to obtain optimum return
with minimum risk is called portfolio construction.
To reduce their risk, investors tend to hold more than just a single stock or other asset.
Each piece of the portfolio is divided up into specific assets such as bonds, equities,
stock , commodity etc.
A passive form of portfolio management involves the matching of future cash flows
with future liabilities.
Diversification is a familiar term to most investors. In the most general sense, it can be
summed up with phrase: "Don’t put all of your eggs in one basket." The main
objective is reduction of risk in loss of capital & income.

Portfolio Management

The art and science of making decisions about investment mix and policy, matching
investments to objectives, asset allocation for individuals and institutions, and balancing
risk vs. performance.
Portfolio management is all about strengths, weaknesses, opportunities and threats in
the choice of debt vs. equity, domestic vs. international, growth vs. safety, and
numerous other trade offs encountered in the attempt to maximize return at a given
appetite for risk.

A Guide To Portfolio Construction
In today's financial market place, a well-maintained portfolio is vital to any investor's
success. As an individual investor, we need to know how to determine an asset
allocation which best conforms to our personal investment goals and strategies. In other
words, a portfolio should meet future needs for capital . Investors can construct

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portfolios aligned to their goals and investment strategies by following a systematic
approach. Some essential steps for taking such approaches are as under :

Step1:Determining the appropriate Assets Allocation
Ascertaining our individual financial situation and investment goals is the first task in
constructing a portfolio. Important items to consider are age, how much time we have to
grow our investments, as well as amount of capital to invest and future capital needs. A
single college graduate just beginning his or her career and a 55-year-old married
person expecting to help pay for a child's college education and plans to retire soon will
have disparate investment strategies.
A second factor to take into account is personality and risk tolerance. Generally, the
more risk we can bear, the more aggressive our portfolio will be, devoting a larger
portion to equities and less to bonds and other fixed-income securities. Conversely, the
less risk that's appropriate, the more conservative our portfolio will be. Here are two
examples: one suitable for a conservative investor and another for the moderately
aggressive investor.

The main goal of a conservative portfolio is to protect its value. The allocation shown
above would yield current income from the bonds, and would also provide some long-
term capital growth potential from the investment in high-quality equities.

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A moderately aggressive portfolio satisfies an average risk tolerance, attracting those
willing to accept more risk in their portfolio in order to achieve a balance of capital
growth and income.

Step 2: Achieving the Portfolio Designed in Step 1
Once we determined the right asset allocation, we simply need to divide our capital
between the appropriate asset classes. On a basic level, this is not difficult: equities are
equities, and bonds are bonds.
For example, an investor might divide the equity portion between different sectors and
market caps, and between domestic and foreign stock. The bond portion might be
allocated between those that are short term and long term, government versus corporate
debt and so forth.
Stock picking - Choose stocks that satisfy the level of risk we want to carry in the
equity portion of your portfolio - sector, market cap and stock type are factors to
consider. Analyze the companies using stock screeners to shortlist potential picks, than
carry out more in-depth analysis on each potential purchase to determine its
opportunities and risks going forward. This is the most work-intensive means of adding
securities to our portfolio, and requires to regularly monitor price changes in our
holdings and stay current on company and industry news.
Bond picking - When choosing bonds, there are several factors to consider including the
coupon, maturity, the bond type and rating, as well as the general interest rate

Step 3: Re-assessing Portfolio Weightings
Once we have an established portfolio, we need to analyze and rebalance it periodically
because market movements may cause our initial weightings to change. To assess our
portfolio's actual asset allocation, quantitatively categorize the investments and
determining their values' proportion to the whole. To rebalance, we need to determine
which of our positions are over-weighted and those that are under-weighted.

Step 4: Rebalancing Strategically
Once we have determined which securities we need to reduce and by how much, decide
which under-weighted securities we will buy with the proceeds from selling the over-
weighted securities.
When selling assets to rebalance our portfolio, take a moment to consider the tax
implications of readjusting our portfolio. Perhaps our investment in growth stocks has
appreciated strongly over the past year, but if we were to sell all of our equity positions
to rebalance our portfolio, we may incur significant capital gains taxes. In this case it
might be more beneficial to simply not contribute any new funds to that asset class in
the future while continuing to contribute to other asset classes. This will reduce our
growth stocks' weighting in our portfolio over time without incurring capital gains
taxes.

Importance of Diversification.

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Throughout the entire portfolio construction process, it is vital that we remember to
maintain our diversification. It is not enough simply to own securities from each asset
class; we must also diversify within each class. Ensure that our holdings within a given
asset class are spread across an array of subclasses and industry sectors.

Portfolio Evaluation:

Portfolio Manager evaluates portfolio performance and identifies the sources of strength
and weakness. The evaluation provides a feedback about the performance to evolve
better management strategy.

Portfolio management style

Basically the fund managers who manage the portfolio of the scheme follow
normally two kinds of strategy they can be classified into aggressive defensive
strategy.

Aggressive Portfolio Management Strategy

Aggressive investment management and capital growth strategies are portfolio
management strategies which aim at maximizing the return over investment. An
aggressive portfolio management strategy often includes high-return high-risk
investments such as equities. Aggressive portfolio management requires highest grade
of money management and is not at all suitable for those with low-risk tolerance and
those with less experience.

In an aggressive portfolio management strategy, usually more than 60% of investments
are done in equities. Aggressive investors allocate lesser percentage of their money in
low-risk low-return or fixed- income products like bonds, treasury notes, money market
funds, etc. They often choose to invest in aggressive stocks from high growth
companies, small and mid caps, etc. Although these strategies may include methods for
limiting downside risks, they will not be as strict as defensive investment strategies.

The advantages of aggressive investment strategy include long-term capital growth and
higher return over investment. The disadvantages include higher risk, high volatility in
asset value, difficulty in estimating the return and the need of active money
management. Aggressive investment strategy is suitable for long-term returns and not at
all for monthly earnings or living costs. With aggressive strategies, it is better to
diversify investments and to include some low-risk investments.

Defensive Investment Strategy :

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As the name suggests, defensive investment strategy is the portfolio management
strategy which aims at investing in low-risk products. Defensive investors choose
bonds, treasury notes, money market funds, and defensive stocks. Defensive stocks
include stocks which are undervalued, less volatile, steadily growing, and/or offering
reasonable dividends. Defensive investors must be very strict with their money
management and investment product selection.

The main advantage of a good defensive investment strategy is the minimized risk of
losing the capital. Other advantages include better planning of investments, almost
steady and predictable income, and better use of risk-minimizing practices like close
stop-losses. Defensive investment strategy suits beginners, investors with less risk-
tolerance and investors having less time to monitor their portfolio.

Defensive investment strategy is a low profit strategy, and often requires much more
capital investment to get a targeted profit. When investing in stocks or similar products,
defensive investors are limited with their options and often limited with their profit
maximizing techniques such as leverage or margin trading. This type of investment

Some manager uses mix of both strategies to balance the needs of investors and
investment objective of fund house as whole.

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Evaluation

The facts sheets of Magnum Global, Magnum Contra, and Magnum taxgain Funds are
given below. By analyzing the data we can observe the type of management the fund
manager follows to beat risk and earn extra return, how often the mix in portfolio is
changed which is most favored sector is the invest decision of fund manager right and
can he break even or out performance the bench mark indices

SBI Mutual Fund is India’s largest bank sponsored mutual fund and has an enviable
track record in judicious investments and consistent wealth creation.

SBI Mutual Fund is a joint venture between the State Bank of India and Société
Générale Asset Management, one of the world’s leading fund management companies
that manage over US$ 500 Billion worldwide.

Exploiting expertise, compounding growth

In twenty years of operation, the fund has launched 38 schemes and successfully
redeemed fifteen of them. In the process it has rewarded it’s investors handsomely with
consistently high returns.

A total of over 4.6 million investors have reposed their faith in the wealth generation
expertise of the Mutual Fund.

Schemes of the Mutual fund have consistently outperformed benchmark indices and
have emerged as the preferred investment for millions of investors and HNI’s.

Today, the fund manages over Rs. 28500 crores of assets and has a diverse profile of
investors actively parking their investments across 36 active schemes.

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The fund serves this vast family of investors by reaching out to them through network
of over 130 points of acceptance, 28 investor service centers, 46 investor service desks
and 56 district organisers.

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Portfolio as on 31-9-07 of Magnum Global Fund
NAV :45.82
AUM 1138.22 Cr.

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Evaluation of mutual fundportfolio @ sbi project report mba finance

Evaluation of mutual fundportfolio @ sbi project report mba finance

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