A study on investors’ awareness level on mutual fund & promotion of sip plan

1. “A STUDY ON INVESTORS’ AWARENESS LEVEL ON MUTUAL
FUND & PROMOTION OF SIP PLAN”
DONE FOR
Project report submitted in partial fulfillment of the requirement of
Pondicherry University for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted By
BRIJESH PULAIYA
(Reg.No. 1095514)
Under the Guidance of
Dr. B.CHARUMATHI Mr. ALOK KUMAR SINGH
Reader, Relationship Manager,
Department of Management Studies, Reliance Mutual Fund,
Pondicherry University. Gwalior (M.P.)
DEPARTMENT OF MANAGEMENT STUDIES
SCHOOLS OF MANAGEMENT
PONDICHERRY UNIVERSITY
PUDUCHERRY 605014
MAY-JUNE 2010

2. DEPARTMENT OF MANAGEMENT STUDIES
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
PUDUCHERRY-605014
CERTIFICATE
This is to certify that this project entitled “A STUDY ON INVESTORS’
AWARENESS LEVEL ON MUTUAL FUND & PROMOTION OF SIP PLAN”
done for Reliance Mutual Fund is submitted by Brijesh Pulaiya, MBA II year (Reg. No.
1095514) to the Department of Management Studies, School of Management,
Pondicherry University in partial fulfillment of the degree requirement for the award of
the degree Master of Business Administration and is certified to be an original and
bonafide work.
Dr. R.P.RAYA Dr. B.CHARUMATHI
Professor & Head of the Department, Reader,
Department of Management Studies, Department of Management Studies,
Pondicherry University. Pondicherry University.
Place: Puducherry
Date:

3. DECLERATION
I, Brijesh Pulaiya, hereby declare that this Project Report entitled “ A STUDY ON
INVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTION
OF SIP PLAN” in Reliance Mutual Fund, Gwalior (M.P.) submitted in the
partial fulfillment of the requirement of Master of Business Administration (MBA)
of Department of Management Studies-School of Management, Pondicherry
University, Puducherry-605014 is based on primary & secondary data found by
me in various departments, books, magazines and websites & Collected by me in
under guidance of Mr. Alok Kumar Singh , Customer Relationship Manager,
Reliance Mutual Fund, Gwalior (M.P.).
Date: BRIJESH PULAIYA
MBA (Second Year)
Reg. No. 1095514
DMS, PU.

5. ACKNOWLEDGEMENT
I am indebted to the all powerful Almighty God for all the blessings he showered on me
and for being with me throughout the study.
I place on record my sincere gratitude and appreciation to my project guide
Dr.B.CHARUMATHI, Reader, Department of Management Studies, for her kind co-
operation and guidance which enabled me to complete this project.
I express my sincere thanks to Dr.R.P.RAYA, HOD, Department of Management
Studies, School of Management, Pondicherry University, who provided me an
opportunity to do this project.
I am deeply obliged to Mr. ALOK KUMAR SINGH, Customer Relationship Manager,
Reliance Mutual Fund, Gwalior (M.P.) for taking the role as my external guide and
guiding and supporting continuously in shaping my project, correcting errors, clearing
doubts throughout the project.
I would also like to extend my thanks to other members for their support especially
Mr. VAIBHAV DESHPANDEY, Branch Manager, Reliance Mutual Fund, Gwalior
(M.P.) and entire Reliance Mutual Fund Sales Team and Other Private Banks’ Sales
Team for their constant guidance and support.
Lastly, I would like to express my gratefulness to the parent’s for seeing me through it
all.
BRIJESH PULAIYA
(Signature of the Candidate)
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6. EXECUTIVE SUMMARY
In few years Mutual Fund has emerged as a tool for ensuring one’s financial well-
being. Mutual Funds have not only contributed to the India’s growth story but have
also helped families tap into the success of Indian Industry. As information and
awareness is rising more and more people are enjoying the benefits of investing in
mutual funds. The main reason the number of retail mutual fund investors remains
small is that nine in ten people with income in India do not know the benefits of
mutual funds. But once, people are aware of mutual fund investment opportunities
and benefits, the number of people who decide to invest in mutual funds increase to
as many as one in five people. The trick for converting a person with no knowledge
of mutual funds to a new mutual fund customer is to understand which of the
potential investors are more likely to buy mutual funds and to use the right
arguments in the sales process that customers will accept as important and relevant
to their decision.
This Project gave me a great learning experience and at the same time it gave me
enough scope to implement my analytical ability. The analysis and advice
presented in this Project Report is based on market research on the saving and
investment practices of the investors and preferences of the investors for investment
in Mutual Funds. This Report will help to know about the investors’ Preferences in
Mutual Fund means Are they prefer any particular Asset Management Company
(AMC), Which type of Product they prefer, Which Option (Growth or Dividend)
they prefer or Which Investment Strategy they follow (Systematic Investment Plan
or One time Plan). This Project as a whole can be divided into two parts.
The first part gives an insight about Mutual Fund and its various aspects, the
Company Profile, Objectives of the study, Research Methodology. One can have a
brief knowledge about Mutual Fund and its basics through the Project.
The second part of the Project consists of data and its analysis collected through
survey done on 100 people. For the collection of Primary data I made a
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7. questionnaire and surveyed of 100 people. I also taken interview of many People
those who were coming at the Reliance Mutual Fund Gwalior (M.P.) Branch where
I done my Project. I visited other AMCs and several Private and Government
Banks in Gwalior (M.P.) to get some knowledge related to my topic. I studied about
the products and strategies of other AMCs in Gwalior (M.P.) to know why people
prefer to invest in those AMCs. This Project covers the topic “A STUDY ON
INVESTORS’ AWARENESS LEVEL ON MUTUAL FUND & PROMOTION
OF SIP PLAN”. The data collected has been well organized and presented. I hope
the research findings and conclusion will be of use.
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8. TABLE OF CONTENTS
Chapter DESCRIPTION Page
No.
ACKNOWLEDGEMENT 1
EXECUTIVE SUMMARY 2
LIST OF TABLES 5
LIST OF CHARTS 7
1 INTRODUCTION 8
1.1 Introduction to the topic 9
1.2 Need for the study 9
1.3 Statement of the problem 11
1.4 Objectives of the study 11
1.5 Research methodology 12
1.6 Limitations of the study 12
1.7 Chapterization 13
2 PROFILE OF THE MUTUAL FUND INDUSTRY AND THE 14
COMPANY
2.1 Profile of the mutual fund industry 15
2.2 Profile of the Reliance Mutual Fund 28
3 FUNCTIONING OF MUTUAL FUND 36
4 ANALYSIS & INTERPRETATION 82
5 SUMMARY OF FINDINGS, SUGGESTIONS & 108
RECOMMENDATIONS
BIBLIOGRAPHY 112
QUESTIONNAIRE 114
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9. LIST OF TABLES
Table Title Page
No. No.
2.1 Total net asset in U.S. Dollars 17
2.2 Phase II. Entry of Public Sector Funds 21
2.3 Phase IV. Growth and SEBI Regulation 23
2.4 Latest AUM & Ranking for mutual funds 24
2.5 Reliance Capital Ltd financials 29
2.6 Reliance Capital Asset Management Ltd. Schemes summary 30
3.1 Snapshot of mutual fund schemes 53
3.2 Tax rules for mutual fund investors 60
3.3 R-squared 68
3.4 SIP returns 76
3.5 Investor type 1 77
3.6 Investor type 2 78
3.7 Investor type 3 79
3.8 Compare percentage change in returns of Reliance Growth Fund & 80
BSE-Sensex
4.1 Profile of the respondents 83
4.2 Primary objective for investment 84
4.3 Knowledge about mutual fund 85
4.4 Relationship between mutual fund & Share market 86
4.5 Have you ever invested in mutual funds 87
4.6 Reason not to invest in mutual funds 88
4.7 Which mutual fund company 89
4.8 Reason for selecting Reliance mutual fund 91
4.9 Reason for investments in mutual fund 92
4.10 Rank primary sources of your knowledge about Mutual Funds 93
4.11 Prioritize reason for investment 94
4.12 Rank the various investments that you would invest 95
4.13 Rank factors affect your decision for investment in Mutual Fund 96
4.14 What kind of investment schemes you prefer in Mutual Fund 97
4.15 What is your Primary objective? *Age Cross-tab 98
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10. 4.16 What is your primary objective for your investment? * Occupation 98
Cross-tab
4.17 What is your primary objective for your investment? * Income level 99
Cross-tab
4.18 What is your primary objective for your investment? * Marital Status 100
Cross-tab
4.19 Do you know about the Mutual Funds? * Age Cross-tab 100
4.20 Do you know about the Mutual Funds? * Occupation Cross-tab 101
4.21 Do you know about the Mutual Funds? * Income level Cross-tab 101
4.22 Have you ever invested in mutual fund? * Age Cross-tab 102
4.23 Have you ever invested in mutual fund? * Occupation Cross-tab 102
4.24 Have you ever invested in mutual fund? * Income level Cross-tab 103
4.25 If no: What is/are the reason? * Age Cross-tab 103
4.26 If no: What is/are the reason? * Occupation Cross-tab 104
4.27 If no: What is/are the reason? * Income level Cross-tab 104
4.28 If invested in Reliance Mutual Fund; what are the reasons? 105
4.29 If Reliance Mutual Fund; what are the reasons?* Income level Cross 105
tab
4.30 Why do you prefer investment in mutual fund to other investment 106
avenue? * Occupation Cross-tab
4.31 What kind of investment schemes you prefer in Mutual Fund? * 107
Occupation Cross-tab
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11. LIST OF CHARTS
Chart Title Page
No. No.
2.1 Asset under Management till 30 April, 2010 20
3.1 Mutual fund operation flow chart 38
3.2 Mutual fund structure 40
3.3 Classification of mutual fund 42
3.4 Risk V/s Returns 64
3.5 Pass through certificate 73
3.6 SIP benefits chart 81
4.1 Primary objective for investment 84
4.2 Knowledge about mutual fund 85
4.3 Relationship between mutual fund & Share market 86
4.4 Have you ever invested in mutual funds? 87
4.5 Reason not to invest in mutual funds 88
4.6 Which mutual fund company 89
4.7 Reason for selecting Reliance mutual fund 91
4.8 Reason for investments in mutual fund 92
4.9 What kind of investment schemes you prefer in Mutual Fund 97
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12. CHAPTER 1
INTRODUCTION
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13. INTRODUCTION TO THE TOPIC
In the last decade we have seen enormous growth in the size of mutual fund industry in
India. Especially the private sector has shown tremendous growth. With unmatched
advances on the information technology, increased role of the institutional investors in
the stock market and the SEBI still in its infancy, the mutual fund industry players gained
unparalleled and unchecked power. To ensure the safety of investment of small investors
against whims and fancies of professional fund managers have become the need of the
hour.
WHAT IS INVESTMENT?
Trade off between risk and reward while aiming for incremental gain and preservation of
the invested amount (principal). In contrast, speculation aims at 'high gain or heavy loss,'
and gambling at 'out of proportion gain or total loss.' Two main classes of investment are
 Fixed income investment such as bonds, fixed deposits, preference shares
 Variable income investment such as business ownership (equities), property
ownership.
In economics, investment means creation of capital or goods capable of producing other
goods or services. Expenditure on education and health is recognized as an investment
inhuman capital, and research and development in intellectual capital. Return on
investment (ROI) is a key measure of firm’s performance.
1.2 NEED FOR THE STUDY
 100% growth in the last 6 years.
 Numbers of foreign AMC’s are in the queue to enter the Indian markets like Fidelity
Investments, US based, with over US$1trillion assets under management worldwide.
 Our saving rate is over 23%, highest in the world. Only channelizing these savings in
mutual funds sector is required.
 We have approximately 37 mutual funds which are much less than US having more than
800. There is a big scope for expansion.
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14.  'B' and 'C' class cities are growing rapidly. Today most of the mutual funds are
concentrating on the 'A' class cities. Soon they will find scope in the growing cities.
 Mutual fund can penetrate rural like the Indian insurance industry with simple and
limited products.
 SEBI allowing the MF's to launch commodity mutual funds.
 Emphasis on better corporate governance.
 Trying to curb the late trading practices.
 Introduction of Financial Planners who can provide need based advice.
The Indian mutual funds business is expected to grow significantly in the coming years
due to a high degree of transparency and disclosure standards comparable to anywhere in
the world, though there are many challenges that need to be addressed to increase net
mobilization of funds in this sector, as said by Mr. A.P. Kurian, Chairman of the
Association of Mutual Funds of India (AMFI).
Indian Mutual fund industry exhibited 200% growth in the last 10 yrs from Rs.470 billion
to Rs1400 billion in terms of assets under management (AUM). The Mutual Funds
industry is expected to jump sharply from its present share of 6% of GDP to 40% in the
next 10yrs provided the country’s growth rate is consistently above 6%. The growing
investor preference for mutual funds has resulted in the assets under management of
mutual funds growing 8-folds in last 5 yrs. Number of foreign AMC's are in the queue to
enter the Indian markets like US based Fidelity Investments, with over US$1trillion
assets under management worldwide. Our saving rate is over 23%, highest in the world.
Only channeling these savings in mutual funds sector is required. There is a big scope for
expansion as we have 37 mutual funds which are much less than US having more than
800.
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15. 1.3 STATEMENT OF THE PROBLEM
One of the lucrative investment avenues available for investors is mutual fund nowadays.
The problem at hand was to study and measure the awareness level of people regarding
mutual funds in the city. To find out Investors’ awareness about Mutual funds and
Promotion of SIP plan. The study includes analysis of the investors on the basis of their
investment objectives, age etc. It also examined the position of MF among investment
avenues available for the investors and the past performances of various schemes from
the active AMCs in Indian market on the basis of NAV & time. So that it can help the
advisors as well as investors to choose the correct portfolio.
1.4 OBJECTIVES OF THE STUDY
The major objective of the study was to determine the awareness about benefits of
Mutual funds and to impart information, knowledge and the functioning of mutual funds
among financial advisors.
Following are the specific objectives:
 To know the awareness of mutual funds among Indian investors.
 To evaluate the position of Mutual Fund among investment avenues available for
the investors in Indian market.
 To promote the SIP Scheme (Systematic Investment Plan).
 To come up with recommendations for investors and mutual fund companies in
India based on the above study.
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16. 1.5 RESEARCH METHODOLOGY
This is a descriptive study. Two types of data were taken into consideration i.e.
Secondary data & primary data. My major emphasis was on gathering the primary data.
The secondary data has been used to make things more clear.
(i) Primary Data: Direct collection of data from the source of information,
technology including personal interviewing, survey etc.
(ii) Secondary Data: Indirect collection of data from sources containing past or
recent past information like Bank’s Brochures, Annual publications, Books, Fact sheets
of mutual funds, Newspaper & Magazines etc. The secondary data was collected to
know the theoretical aspect of the mutual funds and also for the performance evaluation
of various mutual fund schemes.
A questionnaire was constructed for survey. Questionnaire consisting of a set of
questions made to be filled by various respondents. My area of the study was Gwalior
(M.P.). The sample consisted of 100 respondents. The sample was drawn from walk in
customers of Reliance Mutual Fund, Some private & government banks and offices,
College students. The selection of the respondents was done on the basis of convenient
sampling. The responses were taken through personal interviews, telephonic interview.
The next step is to extract the pertinent findings from the collected data. I have tabulated
the collected data & developed frequency distributions. Thus the whole data was grouped
aspect wise and was presented in tabular form. Thus, cross-tabulations, frequencies &
percentages were prepared to render impact of the study.
1.6 LIMITATIONS OF THE STUDY
Every research is incomplete without its own limitations. In this research too there were
some limitations. They are:
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17.  Results are just an indication of the present scenario and may not be applicable in the
future.
 As the study was conducted only in Gwalior (M.P.) only, so it can be said that the study
was regionally biased.
 Since sampling was done under the simple random sampling method, where easily
approachable respondents were picked up. So this may not represent the whole universe.
 Lack of time on the part of respondents for filling up the questionnaire.
 Respondents may fill the partially correct information in questionnaire.
1.7 CHAPTERIZATION
 Chapter 1 deals with the crisp introduction of topic. Along with this it deals with the
need for the study, statement of the study, objective of the study, period of the study,
research methodology used and limitations of the study.
 Chapter 2 portrays the profiles of the mutual fund industry with history and Reliance
Mutual Fund.
 Chapter 3 contains a detailed study of functioning of Mutual Fund and regulatory
authorities, tax planning for investors, SIP promotion and benefits of its.
 Chapter 4 gives the analysis and interpretation of the data.
 Chapter 5 suggests some suggestions and recommendation based on the study done.
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18. CHAPTER 2
Profile of
Mutual fund
industry
&
company
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19. PROFILE OF THE MUTUAL FUND INDUSTRY
2.1.1. BEGINNING OF THE MUTUAL FUND INDUSTRY
Historians are uncertain of the origins of investment funds; some cite the closed-end
investment companies launched in the Netherlands in 1822 by King William I as the first
mutual funds, while others point to a Dutch merchant named Adrian van Ketwich whose
investment trust created in 1774 may have given the king the idea. Van Ketwich probably
theorized that diversification would increase the appeal of investments to smaller
investors with minimal capital. The name of van Ketwich's fund, EENDRAGT MAAKT
MAGT, translates to "unity creates strength". The next wave of near-mutual funds
included an investment trust launched in Switzerland in 1849, followed by similar
vehicles which is followed by many kind of companies created in Scotland in the 1880s.
The idea of pooling resources and spreading risk using closed-end investments soon took
root in Great Britain and France, making its way to the United States in the 1890s. The
Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S.
The creation of the Alexander Fund in Philadelphia, Pennsylvania, in 1907 was an
important step in the evolution toward what we know as the modern mutual fund. The
Alexander Fund featured semi-annual issues and allowed investors to make withdrawals
on demand.
2.1.2. THE ARRIVAL OF THE MODERN FUND
The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the
arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually
spawning the mutual fund firm known today as MFS Investment Management. State
Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later,
State Street Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall
and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and
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20. Clark, an outfit that would launch the first no-load fund in 1928. A momentous year in
the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which
was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank
style of investments in business and trade.
2.1.3. REGULATIONS AND EXPANSION
By 1929, there were 19 open-end mutual funds competing with nearly 700 closed-end
funds. With the stock market crash of 1929, the dynamic began to change as highly-
leveraged closed-end funds were wiped out and small open-end funds managed to
survive.
Government regulators also began to take notice of the fledgling mutual fund
industry. The creation of the Securities and Exchange Commission (SEC), the passage of
the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 put
in place safeguards to protect investors: mutual funds were required to register with the
SEC and to provide disclosure in the form of a prospectus. The Investment Company Act
of 1940 put in place additional regulations that required more disclosures and sought to
minimize grievance of investor of different categories conflicts of interest.
The mutual fund industry continued to expand. At the beginning of the 1950s, the
number of open-end funds topped 100. In 1954, the financial markets overcame their
1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 new
funds over the course of the decade. The 1960s saw the rise of aggressive growth funds,
with more than 100 new funds established and billions of dollars in new asset inflows.
Hundreds of new funds were launched throughout the 1960s until the bear market
of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds
as quickly as investors could redeem their shares, but the industry's growth later resumed.
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21. Massachusetts Investors Trust (now MFS Investment Management) was founded
on March 21, 1924, and, after one year, had 200 shareholders and $392,000 in assets. The
entire industry, which included a few closed-end funds, represented less than $10 million
in 1924.
The stock market crash of 1929 slowed the growth of mutual funds. In response to
the stock market crash, Congress passed the Security Act of 1933 and the Securities
Exchange Act of 1934. These laws require that a fund be registered with the SEC.
2.1.4. Introduction of Mutual Fund Industry – Global Perspective
The U.S. mutual fund market, with $9.6 trillion in assets under management as of year-
end 2008, remained the largest in the world, accounting for 55 percent of the $19.0
trillion in mutual fund assets worldwide.
Table 2.1 TOTAL NET ASSETS IN U.S. DOLLARS
(Millions, end of period)
COUNTRY 2005 2006 2007 2008 2009
WORLD 17,771,027 21,823,455 26,150,936 18,917,499 22,882,716
AMERICA 9 ,763,921 11,485,012 1 3,442,521 1 0,579,430 1 2,515,691
EUROPE 6,002,261 7,803,906 8,934,864 6,231,116 7,545,531
ASIA & 1,939,251 2,456,511 3,678,330 2,037,536 2,715,233
PACIFIC
Australia 700,068 864,254 1,192,992 841,133 1,198,838
China 434,063 276,303 381,207
Hong Kong 460,517 631,055 818,421
India 40,546 58,219 108,582 62,805 130,284
Japan 470,044 578,883 713,998 575,327 660,666
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22. Korea 198,994 251,930 329,979 221,992 264,573
New 10,332 12,892 14,924 10,612 17,657
Zealand
Pakistan 2,164 4,956 1,985 2,224
Philippines 1,449 1,544 2,090 1,263 1,488
Taiwan 57,301 55,571 58,323 46,116 58,297
AFRICA 65,594 78,026 95,221 69,417 106,261
(South
Africa)
Note: Components may not sum to total because of rounding.
Source: National mutual fund associations; European Fund and Asset Management Association (EFAMA)
provide data for all European countries except Russia.
1 Funds of funds are not included, except for France, Germany, Italy, and Luxembourg. Home-domiciled
funds, except for Hong Kong, New Zealand and Trinidad & Tobago, which include home and foreign-
domiciled funds.
Mutual fund assets worldwide increased 2.3 percent to $22.88 trillion at the end of 2009.
Net cash flow to all funds was $77 billion in the fourth quarter, marking the fifth
consecutive quarter with positive net flows. Net inflows to long-term funds slowed to
$283 billion in the fourth quarter of 2009, from $351 billion in the third quarter. Net
outflows from money market funds also decelerated, with $206 billion of net outflows,
from $283 billion in outflows in the previous quarter. For the year as a whole, net cash
flows into all mutual funds worldwide were $275 billion, on par with the $280 billion of
net inflows experienced in 2008. However, the composition of flows was considerably
different. Long-term funds had net inflows of $912 billion in 2009, compared to net
outflows of $610 billion in 2008. Money market funds had net outflows of $638 billion
in 2009, compared to net inflows of $891 billion in 2008.
The Investment Company Institute compiles worldwide statistics on behalf of the
International Investment Funds Association, an organization of national mutual fund
associations. The collection for the fourth quarter of 2009 contains statistics from 44
countries.
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23. 2.1.5 INDIAN MUTUAL FUND INDUSTRY- AN INSIGHT
The concept of mutual funds in India dates back to the year 1963. The era between 1963
and 1987 marked the existence of only one mutual fund company in India with Rs. 67bn
assets under management (AUM), by the end of its monopoly era, the Unit Trust of India
(UTI). By the end of the 80s decade, few other mutual fund companies in India took their
position in mutual fund market.
The new entries of mutual fund companies in India were SBI Mutual Fund,
Canbank Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund,
Bank of India Mutual Fund.
The succeeding decade showed a new horizon in Indian mutual fund industry. By
the end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector
funds started penetrating the fund families. In the same year the first Mutual Fund
Regulations came into existence with re-registering all mutual funds except UTI. The
regulations were further given a revised shape in 1996.
Kothari Pioneer was the first private sector mutual fund company in India which
has now merged with Franklin Templeton. Just after ten years with private sector players’
penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 37 mutual fund
companies in India.
2.1.6 AT THE BEGINNING
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 of India.
Though the growth was slow, but it accelerated from the year 1987 when Non-UTI
players entered into the Industry.
In the past decade, Indian mutual fund industry had seen a dramatic
improvement, both qualities wise as well as quantity wise. In March 1987, the
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24. Asset under Management (AUM) was Rs.4564 crores. The private sector entry to
the fund family raised the AUM to Rs. 47000 crores in March 1993 and till April
30, 2010; it has reached the height of Rs. 7, 19,133 crores.
Asset Under Management (In Rs. Crores)
800000
719133
700000
600000
505152
417300
500000
400000
326388
300000
200000 79464
100000 47000
25 4564
0
1965 Phase I 1987 Phase 1993 Phase 2003 Phase 2007 2008 2009 30-Apr
II III IV
Asset Under Management (In Rs. Crores)
Source: www.amfiindia.com
The Mutual Fund Industry is obviously growing at a tremendous space with the
mutual fund industry can be broadly put into four phases according to the
development of the sector. Each phase is briefly described as under.
Phase I. Establishment and Growth of Unit Trust of India - 1964-87
Unit Trust of India enjoyed complete monopoly when it was established in the year 1963
by an act of Parliament. UTI was set up by the Reserve Bank of India and it continued to
operate under the regulatory control of the RBI until the two were de-linked in 1978 and
the entire control was transferred in the hands of Industrial Development Bank of India
(IDBI). UTI launched its first scheme in 1964, named as Unit Scheme 1964 (US-64),
which attracted the largest number of investors in any single investment scheme over the
years. UTI launched more innovative schemes in 1970s and 80s to suit the needs of
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25. different investors. It launched ULIP in 1971, six more schemes between 1981 and 1984,
Children's Gift Growth Fund and India Fund (India's first offshore fund) in 1986, Master
share (India’s first equity diversified scheme) in 1987 and Monthly Income Schemes
(offering assured returns) during 1990s. By the end of 1987, UTI's assets under
management grew ten times to Rs. 6700 crores.
Phase II. Entry of Public Sector Funds - 1987-1993
The Indian mutual fund industry witnessed a number of public sector players entering the
market in the year 1987. In November 1987, SBI Mutual Fund from the State Bank of
India became the first non-UTI mutual fund in India. SBI Mutual Fund was later
followed by Canbank Mutual Fund, LIC Mutual Fund, Indian Bank Mutual Fund, Bank
of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. By 1993, the assets
under management of the industry increased seven times to Rs. 47,004 crores. However,
UTI remained to be the leader with about 80% market share.
Table 2.2
Mobilization
Amount
Assets Under as % of
Mobilized
1992-93 Management Gross
(In Rs.
(In Rs. crores) Domestic
crores)
Savings
UTI 11,057 38,247 5.2%
Public
1,964 8,757 0.9%
Sector
Total 13,021 47,004 6.1%
Phase III. Emergence of Private Sector Funds - 1993-96
The permission given to private sector funds including foreign fund management
companies (most of them entering through joint ventures with Indian promoters) to enter
the mutual fund industry in 1993, provided a wide range of choice to investors and more
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26. competition in the industry. Private funds introduced innovative products, investment
techniques and investor-servicing technology. By 1994-95, about 11 private sector funds
had launched their schemes.
Phase IV. Growth and SEBI Regulation - 1996-2004
The mutual fund industry witnessed robust growth and stricter regulation from the SEBI
after the year 1996. The mobilization of funds and the number of players operating in the
industry reached new heights as investors started showing more interest in mutual funds.
Investors' interests were safeguarded by SEBI and the Government offered tax benefits to
the investors in order to encourage them. SEBI (Mutual Funds) Regulations, 1996 was
introduced by SEBI that set uniform standards for all mutual funds in India. The Union
Budget in 1999 exempted all dividend incomes in the hands of investors from income
tax. Various Investor Awareness Programs were launched during this phase, both by
SEBI and AMFI, with an objective to educate investors and make them informed about
the mutual fund industry. In February 2003, the UTI Act was repealed and UTI was
stripped of its Special legal status as a trust formed by an Act of Parliament. The primary
objective behind this was to bring all mutual fund players on the same level.
UTI was re-organized into two parts:
1. The Specified Undertaking
2. The UTI Mutual Fund
Presently Unit Trust of India operates under the name of UTI Mutual Fund and its past
schemes (like US-64, Assured Return Schemes) are being gradually wound up.
However, UTI Mutual Fund is still the largest player in the industry. In 1999, there was a
significant growth in mobilizations of funds from investors and assets under management
which is supported by the following data:
Page | 22

27. Table 2.3
ASSETS UNDER MANAGEMENT (Rs. CRORES)
PUBLIC PRIVATE
AS ON UTI TOTAL
SECTOR SECTOR
31-
March- 53,320 8,292 6,860 68,472
99
Phase V. Growth and Consolidation - 2004 Onwards
The industry has also witnessed several mergers and acquisitions recently, examples of
which are acquisition of schemes of Alliance Mutual Fund by Birla Sun Life, Sun F&C
Mutual Fund and PNB Mutual Fund by Principal Mutual Fund. Simultaneously, more
international mutual fund players have entered India like Fidelity, Franklin Templeton
Mutual Fund etc. There were 38 funds as at the end of April 2010. This is a continuing
phase of growth of the industry through consolidation and entry of new international and
private sector players.
2.1.7 INDIAN MUTUAL FUND INDUSTRY- TODAY
Thirteen out of 37 fund houses witnesses a growth in average AUM in January, 2010,
with Reliance Mutual Fund continuing the largest fund house by asset at Rs. 1.17 trillion.
HDFC was at the second spot at Rs. 948 billion, followed by ICICI Prudential Mutual
Fund at Rs. 784 billion. UTI Mutual Fund and Birla Sun Life Mutual Fund followed with
an average AUM of Rs. 745 billion and Rs. 626 billion, respectively. The share of top 5
MF’s in the industry’s asset was at 56% while that of top 10 funds’ asset was close to
80% in January 2010.
As per AMFI data, UTI Mutual Fund had the highest number of investor folios at
10 million as of December 2009. The total number of investor folios for the mutual fund
industry stood at 48 million as of December 2009.
Page | 23

28. The average AUM data analyzed for equity oriented schemes showed that Reliance
Growth Fund held the highest corpus of around Rs. 70 billion, followed by HDFC top
200 fund, Reliance diversified Power Sector fund, HDFC equity fund and SBI magnum
Tax Gain Scheme1993 with an average AUM Rs. 61billion, Rs.58 billion, Rs. 55 billion,
Rs. 54 billion, respectively.
Table 2.4
Latest Average Asset Under Management for all Mutual Fund houses & Ranking
according to the AAUM
MUTUAL FUND NO. OF ASSET UNDER MANAGEMENT (AMOUNT IN RS. CRORE)
NAME SCHEMES*
AS ON CORPUS AS ON CORPUS NET INC/DEC
IN CORPUS
AIG GLOBAL 44 MAY 31, 1,030.86 APR 30, 1,093.24 -62.378
INVESTMENT 2010 2010
GROUP MUTUAL
FUND
AXIS MUTUAL 58 MAY 31, 4,715.89 APR 30, 3,477.98 1237.912
FUND 2010 2010
BARODA PIONEER 31 MAY 31, 4,759.53 APR 30, 4,362.69 396.845
MUTUAL FUND 2010 2010
BENCHMARK 14 MAY 31, 2,263.15 APR 30, 1,930.53 332.628
MUTUAL FUND 2010 2010
BHARTI AXA 45 MAY 31, 724.17 APR 30, 595.35 128.819
MUTUAL FUND 2010 2010
BIRLA SUN LIFE 219 MAY 31, 73,828.03 APR 30, 69,508.69 4319.346
MUTUAL FUND 2010 2010
(RANK 4)
CANARA ROBECO 87 MAY 31, 10,661.95 APR 30, 10,050.84 611.109
MUTUAL FUND 2010 2010
Page | 24

29. DEUTSCHE 116 MAY 31, 10,102.46 APR 30, 10,111.61 -9.149
MUTUAL FUND 2010 2010
DSP BLACKROCK 96 MAY 31, 21,884.95 APR 30, 21,948.76 -63.814
MUTUAL FUND 2010 2010
EDELWEISS 40 MAY 31, 261.09 APR 30, 216.16 44.932
MUTUAL FUND 2010 2010
ESCORTS MUTUAL 30 MAY 31, 198.23 APR 30, 205.46 -7.237
FUND 2010 2010
FIDELITY MUTUAL 61 MAY 31, 7,457.84 APR 30, 7,684.70 -226.865
FUND 2010 2010
FORTIS MUTUAL 472 MAY 31, 7,537.44 APR 30, 6,902.15 635.297
FUND 2010 2010
FRANKLIN 173 MAY 31, 35,774.79 APR 30, 34,107.00 1667.789
TEMPLETON 2010 2010
MUTUAL FUND
HDFC MUTUAL 162 MAY 31, 101,863.31 APR 30, 94,702.79 7160.526
FUND 2010 2010
(RANK 2)
HSBC MUTUAL 88 MAY 31, 5,851.11 APR 30, 6,005.03 -153.926
FUND 2010 2010
ICICI PRUDENTIAL 317 MAY 31, 87,709.81 APR 30, 83,035.51 4674.3
MUTUAL FUND 2010 2010
(RANK 3)
IDFC MUTUAL 170 MAY 31, 26,614.77 APR 30, 25,177.28 1437.488
FUND 2010 2010
ING MUTUAL 92 MAY 31, 1,645.42 APR 30, 1,652.84 -7.423
FUND 2010 2010
JM FINANCIAL 90 MAY 31, 8,950.43 APR 30, 8,568.80 381.625
MUTUAL FUND 2010 2010
Page | 25

30. JPMORGAN 31 MAY 31, 3,784.98 APR 30, 4,114.75 -329.768
MUTUAL FUND 2010 2010
KOTAK 119 MAY 31, 40,657.52 APR 30, 33,743.49 6914.032
MAHINDRA 2010 2010
MUTUAL FUND
L&T MUTUAL 61 MAY 31, 5,170.69 APR 30, 4,125.69 1045.009
FUND 2010 2010
LIC MUTUAL FUND 62 MAY 31, 38,962.82 APR 30, 40,507.21 -1544.388
2010 2010
MIRAE ASSET 37 MAY 31, 236.50 APR 30, 245.06 -8.562
MUTUAL FUND 2010 2010
MORGAN 11 MAY 31, 2,253.67 APR 30, 2,305.89 -52.226
STANLEY MUTUAL 2010 2010
FUND
PEERLESS 22 MAY 31, 823.38 APR 30, 496.26 327.119
MUTUAL FUND 2010 2010
PRINCIPAL 85 MAY 31, 7,647.76 APR 30, 7,470.15 177.605
MUTUAL FUND 2010 2010
QUANTUM 11 MAY 31, 101.72 APR 30, 101.34 0.381
MUTUAL FUND 2010 2010
RELIANCE 185 MAY 31, 118,973.14 APR 30, 111,819.33 7153.812
MUTUAL FUND 2010 2010
(RANK 1)
RELIGARE 87 MAY 31, 15,464.10 APR 30, 13,829.25 1634.85
MUTUAL FUND 2010 2010
SAHARA MUTUAL 44 MAY 31, 765.23 APR 30, 804.57 -39.335
FUND 2010 2010
SBI MUTUAL FUND 116 MAY 31, 36,235.76 APR 30, 39,826.35 -3590.585
2010 2010
Page | 26

31. SHINSEI MUTUAL 11 MAY 31, 323.71 APR 30, 222.28 101.433
FUND 2010 2010
SUNDARAM BNP 143 MAY 31, 13,976.11 APR 30, 14,361.18 -385.076
PARIBAS MUTUAL 2010 2010
FUND
TATA MUTUAL 168 MAY 31, 22,673.43 APR 30, 22,051.27 622.154
FUND 2010 2010
TAURUS MUTUAL 47 MAY 31, 3,056.16 APR 30, 2,347.23 708.928
FUND 2010 2010
UTI MUTUAL FUND 203 MAY 31, 78,617.15 APR 30, 79,456.70 -839.544
2010 2010
(RANK 5)
* indicates currently in operation
Page | 27

32. 2.2 PROFILE OF THE RELIANCE MUTUAL FUND
2.2.1 INTRODUCTION:
The Reliance group - one of India's largest business houses with revenues of Rs. 990
billion ($22.6 billion) that is equal to 3.5 percent of the country's gross domestic product
was split into two.
The group - which claims to contribute nearly 10 per cent of the country's indirect
tax revenues and over six percent of India's exports - was divided between Mukesh
Ambani and his younger brother Anil on June 18, 2005.
Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, with
Average Assets under Management (AAUM) of Rs. 1, 18,973 Crores and an
investor count of over 74 Lakh folios. (AAUM and investor count as of May 2010).
Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is
one of the fastest growing mutual funds in the country. RMF offers investors a well-
rounded portfolio of products to meet varying investor requirements and has presence in
159 cities across the country. Reliance Mutual Fund constantly endeavors to launch
innovative products and customer service initiatives to increase value to investors.
"Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management
Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up
capital of RCAM, the balance paid up capital being held by minority shareholders."
2.2.2 Sponsor
Reliance Capital Limited
Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management
Limited., a subsidiary of Reliance Capital Limited, which holds 93.37% of the paid-up
capital of RCAM, the balance paid up capital being held by minority shareholders.
Reliance Mutual Fund (RMF) has been sponsored by Reliance Capital Ltd (RCL). The
promoter of RCL is AAA Enterprises Private Limited. Reliance Capital Limited is a Non
Banking Finance Company. Reliance Capital Limited is one of the India’s leading and
Page | 28

33. fastest growing financial services companies, and ranks among the top three private
sector financial services and banking companies, in terms of net worth.
Reliance Capital has interests in asset management and mutual funds, life and
non-life insurance, private equity and proprietary investments, stock broking and other
activities in the financial services sector. The net worth of RCL is Rs. 6086 crores as on
March 31, 2008. Given below is a summary of RCL’s financials:
Table 2.5
Particulars 2007-08 2006-07 2005-06
(Rs. in crores)
Total Income 2079.79 883.86 652.02
Profit Before Tax 1171.45 733.18 550.61
Profit After Tax 1025.45 646.18 537.61
Reserves & Surplus 5779.06 4915.07 3849.58
Net Worth 5927.50 5161.23 4122.46
Earnings per 41.75 28.39 29.74
Share (Rs.) (Basic + (Basic + (Basic +
Diluted) Diluted) Diluted)
Dividend (%) 55% 35% 30%
Paid up Equity 246.16 246.16 223.40
Capital
Reliance Capital Ltd. has contributed Rupees One Lac as the initial contribution to the
corpus for the setting up of the Mutual Fund. Reliance Capital Ltd. is responsible for
discharging its functions and responsibilities towards the Fund in accordance with the
Securities and Exchange Board of India (SEBI) Regulations.
2.2.3 The Asset Management Company
Reliance Capital Asset Management Ltd.
Reliance Capital Asset Management Ltd. (RCAM) is an unlisted Public Limited
Company incorporated under the Companies Act, 1956 on February 24, 1995.
Page | 29

34. Vision Statement:
“To be a globally respected wealth creator, with an emphasis on customer care and a
culture of good corporate governance”.
Mission Statement:
“To create and nurture a world-class, high performance environment aimed at delighting
their customers”.
Pursuant to this IMA, RCAM is authorized to act as Investment Manager of the Mutual
Fund. The net worth of the Asset Management Company based on audited accounts as on
March 31, 2009 is Rs. 841.32 Crore. Table 2.6
No. of schemes 57
No. of schemes including 185
options
Equity Schemes 60
Debt Schemes 100
Short term debt Schemes 15
Equity & Debt 2
Money Market 0
Gilt Fund 6
Corpus under management Rs. 109485.69 crores as on May 31, 2010
Page | 30

35. 2.2.4 MANAGEMENT TEAM
1. Sundeep Sikka (CEO),
2. Madhusudan Kela (Hd-Equity),
3. Rajesh Derhgawen (Hd-HRD),
4. Himanshu Vyapak (Sales & Dist),
5. Milind Nesarikar (IRO),
6. Suresh T Viswanathan (Compliance),
7. Muneesh Sud (Legal)
2.2.5 FUND MANAGERS
1. Amit Tripathy,
2. Hiren Chandaria ,
3. Krishan Daga ,
4. Omprakash Kuckien ,
5. Sailesh Raj Bhan ,
6. Sunil Singhania
2.2.6 INVESTMENT OBJECTIVES OF THE SCHEMES
 Reliance Monthly Income Plan aims to generate regular income in order to make
regular dividend payments to unit holders and the secondary objective is growth of
capital.
 Reliance Income Fund aims to generate optimal returns consistent with moderate levels
of risk. This income may be complemented by capital appreciation of the portfolio.
Accordingly, investments shall predominantly be made in Debt and Money Market
Instruments.
 Reliance Medium Term Fund aims to generate regular income in order to make regular
dividend payments to unit holders and the secondary objective is growth of capital.
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36.  Reliance Liquid Fund aims to generate optimal returns consistent with moderate levels
of risk and high liquidity. Accordingly, investments shall predominantly be made in Debt
and Money Market Instruments.
 Reliance Liquidity Fund aims to generate optimal returns consistent with moderate
levels of risk and high liquidity. Accordingly, investments shall predominantly be made
in Debt and Money Market Instruments
 Reliance Short Term Fund aims to generate stable returns for investors with a short
term investment horizon by investing in fixed income securities of a short term maturity.
 Reliance Gilt Securities Fund aims to generate optimal credit risk free returns by
investing in a portfolio of securities issued and guaranteed by the Central Government
and State Governments
 Reliance Floating Rate Fund aims to generate regular income through investment in a
portfolio comprising substantially of Floating Rate Debt Securities (including floating
rate securitized debt and Money Market Instruments and Fixed Rate Debt Instruments
swapped for floating rate returns).
 Reliance Regular Savings Fund Debt Option: The primary investment objective of this
plan is to generate optimal returns consistent with moderate level of risk. This income
may be complemented by capital appreciation of the portfolio. Accordingly investments
shall predominantly be made in Debt & Money Market Instruments.
 Reliance Regular Savings Fund Equity Option: The primary investment objective is to
seek capital appreciation and or consistent returns by actively investing in equity / equity
related securities.
 Reliance Regular Savings Fund Hybrid Option: The primary investment objective is
to generate consistent return by investing a major portion in debt & money market
securities and a small portion in equity & equity related instruments.
 Reliance Growth Fund aims to achieve long term growth of capital by investment in
equity and equity related securities through a research based investment approach.
 Reliance Vision Fund aims to achieve long term growth of capital by investment in
equity and equity related securities through a research based investment approach.
Page | 32

37.  Reliance Equity Opportunities Fund aims to generate capital appreciation & provide
long term growth opportunities by investing in a portfolio constituted of equity securities
& equity related securities
 Reliance Banking Fund aims to generate continuous returns by actively investing in
equity / equity related or fixed income securities of banks.
 Reliance Diversified Power Sector Fund seek to generate consistent returns by
investing in equity / equity related or fixed income securities of Power and other
associated companies
 Reliance Pharma Fund aims generate consistent returns by investing in equity / equity
related or fixed income securities of Pharma and other associated companies.
 Reliance Media & Entertainment Fund to generate consistent returns by investing in
equity / equity related or fixed income securities of media & entertainment and other
associated companies.
 Reliance Index Fund-Sensex Plan aims to replicate the composition of the Sensex, with
a view to endeavor to generate returns, which could approximately be the same as that of
Sensex.
 Reliance Index Fund-Nifty Plan aims to replicate the composition of the Nifty, with a
view to endeavor to generate returns, which could approximately be the same as that of
Nifty.
 Reliance NRI Equity Fund aims to generate optimal returns by investing in equity and
equity related instruments primarily drawn from the Companies in the BSE 200 Index.
 Reliance Equity Fund: The primary investment objective of the scheme is to seek to
generate capital appreciation & provide long-term growth opportunities by investing in a
portfolio constituted of equity & equity related securities of top 100 companies by market
capitalization & of companies which are available in the derivatives segment from time
to time and the secondary objective is to generate consistent returns by investing in debt
and money market securities.
Page | 33

38. 2.2.7 CUSTODIAN
Deutsche Bank, AG
Deutsche Bank AG, the Custodian shall, inter alia:
 Provide post-trading and custodial services to the Mutual Fund.
 Keep Securities and other instruments belonging to the Scheme in safe custody.
 Ensure smooth inflow/outflow of securities and such other instruments as and when
necessary, in the best interests of the unit holders.
 Ensure that the benefits due to the holdings of the Mutual Fund are recovered and
 Be responsible for loss of or damage to the securities due to negligence on its part on the
part of its approved agents.
2.2.8 REGISTRAR
M/s. Karvy Computershare Pvt. Limited
The Registrar is responsible for carrying out diligently the functions of a Registrar and
Transfer Agent and will be paid fees as set out in the agreement entered into with it and
as per any modification made thereof from time to time.
2.2.9 TRUSTEE
Reliance Capital Trustee Co. Limited
Reliance Capital Trustee Co. Limited (RCTC), a company incorporated under the
Companies Act, 1956, has been appointed as the Trustee to the Fund vide the Trust Deed
dated April 25, 1995 executed between the Sponsor and the Trustee.
Page | 34

39. 2.2.10 BANKERS TO THE SCHEMES OF RELIANCE CAPITAL ASSET
MANAGEMENT
 ABN AMRO Bank
 Axis Bank
 Citibank N. A.
 Deutsche Bank AG
 Development Bank of Singapore - only for online investors
 HDFC Bank Limited
 HSBC Bank
 ICICI Bank Limited
 IDBI Bank
 ING Vysya Bank
 Kotak Mahindra Bank
 State Bank of India
 Standard Chartered Bank
 Yes Bank
Page | 35

40. CHAPTER 3
FUNCTIONING
OF
MUTUAL FUND
Page | 36

41. 3.1 WHAT IS MUTUAL FUND?
Mutual fund is a trust that pools the savings of a number of investors who share a
common financial goal. This pool of money is invested in accordance with a stated
objective. The joint ownership of the fund is thus “Mutual”, i.e. the fund belongs to all
investors. 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 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. A Mutual Fund is an investment tool that
allows small investors access to a well-diversified portfolio of equities, bonds and other
securities. Each shareholder participates in the gain or loss of the fund. Units are issued
and can be redeemed as needed. The fund’s Net Asset value (NAV) is determined each
day.
Investments in securities are spread across a wide cross-section of industries and
sectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. Mutual fund
issues units to the investors in accordance with quantum of money invested by them.
Investors of mutual funds are known as unit holders.
Page | 37

42. Source: www.jmfinancial.com
When an investor subscribes for the units of a mutual fund, he becomes part owner of the
assets of the fund in the same proportion as his contribution amount put up with the
Corpus (the total amount of the fund). Mutual Fund investor is also known as a mutual
fund shareholder or a unit holder.
Any change in the value of the investments made into capital market
instruments (such as shares, debentures etc) is reflected in the Net Asset Value
(NAV) of the scheme. NAV is defined as the market value of the Mutual Fund
scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the
market value of scheme's assets by the total number of units issued to the investors.
Page | 38

43. NAV = Market Value of the scheme / Number of unit-holders
Where, Numerator= Market value of investment+receivables+other Accrued Income
+Other Assets- Accrued Expenses-Other Payables-Other Liabilities.
3.1.1. SET-UP OF MUTUAL FUNDS:
A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset
Management Company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unit holders.
Asset management company (AMC) approved by SEBI managers the fund by
making investments in various schemes of the in its custody. The trustees are vested with
the general power of superintendence and direction over AMC. They monitor the
performance and compliance of SEBI regulations by the mutual fund.
SEBI regulations require that at least two thirds of the directors of trustee
company or board of trustees must be independent i.e., they should not be associated with
the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds
are required to be registered with SEBI before they launch any scheme. The performance
of a particular scheme of a mutual fund is denoted by Net Asset Value (NAV).
3.1.2. MUTUAL FUND STRUCTURE
In India, the following are involved in mutual fund operations: the sponsor, the
mutual fund, the trustees, the asset management company, the custodian, and the
registrars and transfer agents.
Page | 39

44. 1. Fund Sponsor:
The sponsor of a mutual fund is like the promoter of a company. The sponsor may be a
bank, a financial institution, or a financial service company. It may be Indian or foreign.
The sponsor is responsible for setting up and establishing the mutual fund. The sponsor is
the
the settler of the mutual fund trust. The sponsor delegates the trustee functions to the
trustees.
2. Mutual fund :
The mutual funds constituted as a trust under the Indian trust act, 1881, and registered
with SEBI.
Page | 40

45. 3. Trustees:
A trust is a notional entity that cannot contract in its own name. so, the trust enters into
contracts in the name of the trustees. Appointment by the sponsor, the trustees can be
either individuals or a corporate body. Typically it is the latter. The trustees appoint the
asset management company (AMC), secure necessary approval, periodically monitor
how the AMC functions, and hold the properties of the various schemes in trust for the
benefits of investors.
4. Asset Management Company:
It also referred to as the investment manager, is a separate company appointed by the
trustees to run the mutual fund. The AMC should have a certificate from SEBI to act as
portfolio manager under SEBI rules and regulations, 1993.
5. Custodian:
The custodian handles the investment back office operations of a mutual fund. It looks
after the receipt and delivery of securities, collection of income, distribution of dividends,
and segregation of assets between schemes. The sponsor of a mutual fund cannot act as
its custodian.
6. Registrars and Transfer Agents:
The registrars and transfer agents handle investor related services such as issuing units,
redeeming units, sending fact sheets and annual reports, and so on. Some funds handle
such functions in house, while others outsource it to be SEBI approved registrars and
transfer agents like Karvy and CAMS. The legal structure and organization of mutual
funds as laid down by SEBI guidelines is as follows.
Page | 41

46. 3.2 CLASSIFICATION OF MUTUAL FUNDS
Mutual Funds
Investment
Return based Sector based Others
based
Commodity
Income funds Equity funds Debt funds Balanced funds IT industry
funds
Market cap Long & short Pharmaceutical Exchange traded
Growth funds
funds term Debt funds industry funds
Conservative Opportunities
Liquid funds Power sector Real estate funds
funds funds
Theme based Long & short TAX saving
funds term Gilt funds schemes
Index funds Dynamic funds
Long & short
Fund of Funds term floating
rate funds
Conventional Fixed maturity
diversified funds funds
MIPs
Page | 42

47. CLASSIFICATION- I
1. Return based classification:
The investors of the mutual fund schemes are made to enjoy a good return in form of
regular dividends or capital appreciation or a combination of these both.
a) Income Funds
Income funds are floated for the interest of investors who want to maximize current
income. These funds distribute periodically the income earned by them, in the form of
either a constant income at relatively low risk or in the form of maximum income
possible with higher risk by the use of leverage.
b) Growth Funds
These Schemes have the objective to achieve an increase in the value of the underlying
investments through capital appreciation, and they invest in growth oriented securities.
c) Conservative Funds
These funds offer a blend of good average returns and reasonable capital appreciation.
These funds are very popular and are ideal for the investors who want both growth and
income from their investment.
2. Investment Based Classification:
Mutual funds may also be classified on the basis of the kind of securities that they invest
in.
Equity Funds:
Equities are a high risk-high return asset class; the same risk profile spills over to equity
funds as well. However investors must take note of the fact that a large number of
variations exist within the 'high risk' equity funds segment. For example a sector fund
would be on the relatively higher scale in the risk-return paradigm when compared to an
index fund, which simply tracks the movements in a chosen benchmark index. These
funds invest most of their investible shares in equity shares of companies and undertake
Page | 43

48. the risk associated with the investment in equity shares. In a developed market, Equity
funds can be of different categories. For example, ‘Blue Chip’, FMCG, PSUs, etc.
The equity funds category can be further differentiated as follows:
i. Market capitalization-based funds
Market capitalization is defined as the number of shares issued by a company multiplied
by the price of each share. Companies are generally divided into the large cap, mid cap
and small cap segments respectively on the basis of their market capitalization. Some
diversified equity funds are launched with the mandate to invest in stocks from one or
more of the stated segments i.e. the company's market capitalization becomes the
governing force.
ii. Opportunities funds
Fund managers handling opportunities funds have perhaps the most flexible investment
mandates. Opportunities funds can invest in stocks across market segments, sectors and
some are even permitted to invest a significant portion of their corpus in debt. As the
name suggests, the idea is to seek opportunities for clocking gains from any sector/market
segment.
iii. Theme-based funds
Theme based funds are fairly similar to sector funds, however the differentiating factor is
the level of diversification they offer. Instead of concentrating on stocks from a single
sector/industry, their focus lies on a specific theme like globally competitive Indian
companies or multinational corporations operating in India. In terms of diversification
and risk profiles, these companies tread the path between a sector fund and a
conventional diversified equity fund.
iv. Index funds
Index funds are launched with the mandate of tracking benchmark indices like the BSE
Sensex or S&P CNX Nifty. These funds invest in stocks from the index in the same
Page | 44

49. proportion as the benchmark, thereby offering investors the opportunity to capture the
growth in the chosen index. Index funds are generally more popular in developed markets
where actively managed funds find it difficult to outperform the benchmark indices as
markets are relatively better researched; also their expenses (fees, charges) tend to be
lower vis-à-vis actively managed funds.
v. Fund of Funds
A regular mutual fund invests in equities, bonds and fixed income securities depending
on its objective. Fund of Funds (FoF) extend this concept by investing in units of other
mutual fund schemes. By investing in more than one mutual fund they take
diversification to a new level For example an FoF could invest in five top performing
equity funds and offer a highly diversified portfolio to the investor. Similarly others could
invest in equity and debt funds simultaneously, thereby offering a portfolio that is
diversified across asset classes. On the flipside, FoF investors must be wary of higher
expenses on account of overlapping of costs. FT India Life Stage Fund is the example of
a FoF.
vi. Conventional diversified equity funds
We have used the term "conventional" diversified equity funds at various places during
the course of this discussion. This is not a variant; instead these are equity funds in their
purest form and might seem rather lackluster in the present scenario. Typically, a
diversified equity fund invests in a number of equity/ equity related instruments from
various sectors thereby enabling investors to benefit from diversification. HDFC Equity
Fund and Sundaram Growth Fund can be classified as conventional diversified equity
funds.
Debt Funds:
These Funds have their portfolio comprising of bonds and debentures (Debt Instruments).
These funds are considered to be very secure with a steady income.
Page | 45

50. i. Long-term debt funds
Long-term debt funds are conventional debt/bond funds that have been in existence for as
long as equity funds. Investors prefer to invest in debt funds for the same reasons they
choose to invest in equity funds viz. they get benefits of diversification across debt
instruments and the services of a professional fund manager. In fact, for retail investors,
debt funds are one of the most important avenues for investing in debt securities like
corporate bonds and government securities, chiefly because individual transactions in
debt are of a very high value (running in millions of rupees) and beyond most retail
investors. This is unlike equities for instance, where retail investors can invest on their
own in smaller lots.
Debt funds invest across a range of debt/fixed income securities. The corpus of
long-term debt funds comprises mainly of corporate bonds and government securities
(gilts/G-secs).
When these securities have a residual maturity of at least 12 months, they are
classified as long-term debt or longer-dated paper. Debt funds also invest in shorter-dated
paper like treasury bills, certificate of deposit (CDs) and commercial paper to name a
few.
ii. Short-term debt funds
There is a category of investors who have two critical needs that short-term debt funds
help achieve. One – they want to be invested for the short-term - less than 6 months. Two
- over this time frame, they are looking at preserving capital with a return that is superior
to that of a fixed deposit of a comparable tenure. The reason why short-term debt funds
can preserve capital better than long term debt funds is because they are invested in debt
instruments of a shorter tenure.
a) Liquid funds
Liquid funds invest in very short-term debt instruments maturing in 30-45 days.
Typically this includes Treasury bills and call money. Liquid funds serve needs quite
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51. similar to that of short-term debt funds, only difference is that liquid fund investors have
an even shorter investment time frame, at times as short as one day. If investors are
looking at being invested for more than a month, they can consider short-term debt funds
for a marginally higher return.
b) Gilt Funds
Long-term gilt funds:
A long-term government securities and invests primarily in government paper (gilt/G-
Sec) with a residual maturity of over 12 months. Gilt funds have a higher risk profile than
conventional debt funds because their investments are limited to a particular segment of
the debt market and they cannot diversify across other segments like corporate bonds.
Short-term gilt funds:
A short-term gilt fund invests primarily gilts of a shorter tenure (less than 12 months).
The rationale for investing in short-term gilt funds is similar o that of short-term debt
funds. The reason investors choose short-term gilt funds over short-term debt funds is
because gilts can provide a higher capital appreciation vis-à-vis bonds.
Dynamic debt funds
Dynamic debt funds attempt to combine the benefits of debt funds and gilt funds. They
can invest across corporate bonds and gilts without any restrictions. They are distinct
from conventional debt funds that invest in gilts and corporate bonds because these funds
usually maintain a cap on their gilt investments. Dynamic debt funds tend to increase
their gilt investments in times of economic stability as gilt prices tend to have a more
lucrative spread (i.e. difference between the buy and sell prices). Investments in dynamic
debt funds should be made with a time frame of at least 12 months.
c) Long-term floating rate funds
Floating rate funds invest in debt instruments that have their coupon rates adjusted at
periodic intervals. These instruments are called 'floating rate instruments'. The floating
rate paper is benchmarked against a reference point like the MIBOR (Mumbai Inter-bank
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52. Offered Rate) for instance. Changes in the MIBOR are a cue for the coupon rate on the
floating rate paper to be reset accordingly.
Short-term floating rate funds
Short-term floating rate funds work on the same lines as long-term floating rate funds
except that they invest in floating rate paper of shorter tenure (less than 12 months). If
investors are looking to be invested across a shorter time frame of 1-6 months, short-term
floating rate funds should be preferred over their long-term counterparts. Templeton
Floating Rate Fund (Short Term) is an example of a short-term floating rate fund.
d) Fixed Maturity Plans (FMP)
Fixed maturity plans (FMPs) are another 'invention' that became a 'necessity' to counter
interest rate instability, a problem that has become acute over the last two years.
Typically, FMPs are close-ended funds. They invest across debt instruments to arrive at a
pre-determined yield, Pre-determined because the yield is announced beforehand to
investors. So FMPs have defined investment tenure. The benefit of investing in FMP is
that the investor knows in advance the return that he will generate on his investment.
FMPs have investment tenures ranging from less than a year to more than 10 years.
e) Monthly Income Plan (MIP)
As a mutual fund category, monthly income plans (MIPs) are a relatively recent
phenomenon. MIPs are hybrid funds that invest predominantly in debt instruments with a
small portion of assets invested in equities. The equity component is expected to act as a
'kicker' that will make the MIP outperform a conventional debt fund. The rationale for a
hybrid product like an MIP came to the fore because debt funds weren't adding a lot of
value to the risk-averse investor's portfolio. So we had MIPs being launched that gave the
fund manager a mandate to invest 5-30% of assets in equities. Conventional MIPs invest
about 5- 15% of assets in equities with their aggressive counterparts investing as high as
20-30% in equities. Several fund houses have two distinct MIPs catering to different
investor groups
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53. Balanced Fund:
These funds have their portfolio consisting of a balanced mix of equity and bonds. The
composition of these funds may vary depending upon the outlook of the market.
Balanced funds invest their corpus in both equity and debt instruments in a pre-
determined ratio, say 60:40. An aggressive balanced fund would typically hold a higher
portion of its assets in equities maybe as high as 70% of the total assets. On the other
hand, a 'disciplined' balanced fund would maintain a conservative equity allocation
during most times.
a) Sector Based Funds
There are funds that invest in a specified sector of economy and they specialize in the
said sector. However, they run the risk of not being able to diversify. Sector based
funds are aggressive growth funds which make investments on the basis of assessed
bright future for a particular sector. The specialty of sector funds rather oddly lies in
the fact that they go against the very grain of mutual fund investing i.e. holding a
diversified portfolio. That is why you will find some Asset Management Companies
that swear against sector funds. Sector funds are launched with the intention of
capitalizing on opportunities in a single sector.
b) Commodity Funds
It will invest directly in commodities or through shares of the commodity companies or
through commodity futures contract .Most common example of such fund is precious-
metal fund, Gold funds invest in Gold, Gold futures or shares of gold mines
c) Exchange Traded Funds
It combines the best features of open end and closed structure. It tracks a market index
and trades like a stock on the stock market. ETFs are not the index funds.
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54. d) Real Estate Funds
It can invest in real estate, Fund real estate developers, Buy shares of housing finance
companies, Buy securitized assets.
Classification II
A. Based on their investment objective:
1. Growth Schemes –
Aim to provide capital appreciation over the medium to long term. These schemes
normally invest a majority of their funds in equities and are willing to bear short term
decline in value for possible future appreciation. These schemes are not for investors
seeking regular income or needing their money back in the short term.
Ideal for:
 Investors in their prime earning years.
 Investors seeking growth over the long term.
2. Income Schemes -
Aim 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.
Ideal for:
 Retired people and others with a need for capital stability and regular income.
 Investors who need some income to supplement their earnings.
3. Balanced Schemes -
Aim to provide both growth and income by periodically distributing a part of the
income and capital gains they earn. They invest in both shares and fixed income
securities in the
proportion indicated in their offer documents. In a rising stock market, the NAV of these
schemes may not normally keep pace or fall equally when the market falls.
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55. Ideal for:
 Investors looking for a combination of income and moderate growth.
4. Money Market / Liquid 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 interbank call money. Returns on these
schemes may fluctuate, depending upon the interest rates prevailing in the market.
Ideal for:
 Corporate and individual investors as a means to park their surplus funds for short
period or awaiting a more favorable investment alternative.
B. Other Schemes:
 Capital Protection Oriented Schemes –
Capital Protection Oriented Schemes are the schemes that endeavour to
protect the capital as the primary objective by investing in high quality fixed
income securities and generate capital appreciation by investing in equity/equity
related instruments as a secondary objective. The first Capital Protection Oriented
Fund in India, Franklin Templeton Capital Protection Oriented Fund opened for
subscription on October 31, 2006.
 Gold Exchange Traded Fund (GETF) –
Gold Exchange Traded Fund offers investors an innovative, cost efficient
and secure way to access the gold market. Gold Exchange Traded Fund are
intended to offer investors a means of participating in the gold bullion market by
buying and selling units on the Stock Exchanges, without taking physical delivery
of gold. The first Gold ETF in India, Benchmark GETF, opened for subscription on
February 15, 2007 and listed on the NSE on April 17, 2007.
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56.  Quantitative Funds –
A quantitative fund is an investment fund that selects securities based on
quantitative analysis. The managers of such funds build computer based models to
determine whether or not an investment is attractive. In a pure "quant shop" the final
decision to buy or sell is made by the model. However, there is a middle ground where
the fund manager will use human judgment in addition to a quantitative model. The first
Quant based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on
October 25, 2007.
 Funds Investing Abroad –
With the opening up of the Indian economy, Mutual Funds have been permitted to
invest in foreign securities/ American Depository Receipts (ADRs) / Global Depository
Receipts (GDRs). Some of such schemes are dedicated funds for investment abroad while
others invest partly in foreign securities and partly in domestic securities. While most
such schemes invest in securities across the world there are also schemes which are
country-specific in their investment approach.
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57. SNAPSHOT OF MUTUAL FUND SCHEMES (Table 3.1)
Mutual Fund Objective Risk Investment Who should Investment
Type Portfolio invest horizon
Money Liquidity + Negligible Treasury Bills, Those who 2 days - 3
Market Moderate Certificate of park their weeks
Income + Deposits, funds in
Reservation of Commercial current
Capital Papers, Call accounts or
Money short-term
bank deposits
Short-term Liquidity + Little Call Money, Those with 3 weeks -
Funds Moderate Interest Rate Commercial surplus 3 months
(Floating - Income Papers, short-term
short-term) Treasury Bills, funds
CDs, Short-
term
Government
securities.
Bond Funds Regular Credit Risk Predominantly Salaried & More than 9
Income & Interest Debentures, conservative - 12 months
(Floating - Rate Risk Government investors
Long-term) securities,
Corporate
Bonds
Gilt Funds Security & Interest Rate Government Salaried & 12 months
Income Risk securities conservative & more
investors
Equity Long-term High Risk Stocks Aggressive 3 years plus
Funds Capital investors with
Appreciation long term
outlook.
Index Funds To generate NAV varies Portfolio Aggressive 3 years plus
returns that are with index indices like investors.
commensurate performance BSE, NIFTY
with returns of etc
respective
indices
Balanced Growth & Capital Balanced ratio Moderate & 2 years plus
Funds Regular Market Risk of equity and Aggressive
Income and Interest debt funds to
Rate Risk ensure higher
returns at lower
risk
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58. ADVANTAGES OF MUTUAL FUND
 Portfolio Diversification
 Professional management
 Reduction / Diversification of Risk
 Liquidity
 Flexibility & Convenience
 Reduction in Transaction cost
 Safety of regulated environment
 Choice of schemes
 Transparency
DISADVANTAGE OF MUTUAL FUND
 No control over Cost in the Hands of an Investor
 No tailor-made Portfolios
 Managing a Portfolio Funds
 Difficulty in selecting a Suitable Fund Scheme
3.3 COST INVOLVED IN MUTUAL FUNDS
As with any business, running a mutual fund involves costs — including
shareholder transaction costs, investment advisory fees, and marketing and distribution
expenses. Funds pass along these costs to investors by imposing fees and expenses. It is
important that you understand these charges because they lower your returns. Some funds
impose "shareholder fees" directly on investors whenever they buy or sell shares. In
addition, every fund has regular, recurring, fund-wide "operating expenses." Funds
typically pay their operating expenses out of fund assets — which mean that investors
indirectly pay these costs.
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59. An investor must know that there are certain costs involved while investing in mutual
funds.
1. OPERATING EXPENSES/EXPENSE RATIO
These refer to cost incurred to operate a mutual fund. Advisory fee is paid to investment
managers, audit fees to charted accountant, custodial fees, register and transfer agent fees,
trustee fees, agent commission. Operating expenses also known as expenses ratio which
is annual expenses expressed as a percentage of these expenses is required to be reported
in the schemes offer document or prospectus.
Operating expenses
Expenses ratio =
Average net assets
For instant, if funds Rs. 100 crores and expenses Rs. 20 Lakh. Then expenses ratio is 2%
expenses ratio is available in the offer document and fro historical per unit statistics
included in the financial results of the fund which are published by annually, un audited
for the half year ending September 30th and audited for the physically year end 1st March
30th .
Depending upon scheme and net asset, operating expenses are determined by limits
mandated by SEBI mutual funds regulation act. Any excess over specified limits as to
borne by Management Company, the trustees or sponsors.
2. SALES CHARGES:
These are known commonly sale loads; these are charged directly to investor. Sales
loads are used by mutual fund for the payment of agent’s commission, distribution and
marketing expenses. These charges have no effect on the performance of the scheme.
Sales loads are usually expression percentage and or of two types-
1. Front-end load
2. Back-end load
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60.  FRONT-END LOAD:
It is a onetime fixed fee paid by an investor when buying a Mutual funds scheme.
It determines public offer price which intern decides how much of your initial investment
actually get invested the standard practice of arriving a public offer price is as follows.
Net asset value
Public offer price =
(1-front end load)
Let us assume, an investor invests Rs. 10,000 in a scheme that charges it 2% front end
load at a NAV per unit Rs. 10 using the formula public offer price = 10/(1-0.02) is Rs.
10,20. So only 980 units are allowed to the investor.
Amount invested
Number of units allotted =
Public offer price
10,000/10.20= 980 units at a NAV of Rs. 10.
This means units worth 9800 are allotted to him an initial investment Rs.10,000 front end
loads tend to decrease as initial investment amount increase.
 BACK END LOAD:
May be fixed fee redemption or a contingent differed sales charged a redemption
so load continues so long as the redeeming or selling of the units of a fund does not take
place in the event of a back end load is applied. The redemption price is arrive or using
following formula.
Net asset value
Redemption price =
(1+back end load)
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61. Let us assume an investor redeems units valued at Rs. 10,000 in a scheme that charges a
2% back, end load at a NAV per units of Rs. 10 using the formula Redemption price
10/(1+0.02)= Rs. 9.8 s, what the investor gets in hand is 9800(9.8*1000).
3. CONTINGENT DEFERRED SALES CHARGES (CDSC):
Contingent differed sales charges of a structured back end load. It is paid when
the units are reading during the initial years of ownership. It is for a predetermined
period only and reduced over the time you invested for a fund, the longer remains in a
fund the lower the CDSC.
The SEBI stipulate the a CDSC may be charge only for first four years after
purchase of units and also stipulate the maximum CDSC that can we charge every year.
This is the SEBI mutual funds regulations 1996 do not allow either the front end load or
back end load to any combination is higher than 7%.
4. TRANSACTION COST:
Some funds may also impose a switch over fee which is charge on transfer of
investment from one scheme to another within a same mutual funds family and also to
switch from one plan to another within same scheme. The real estate mutual funds sector
is now being considered as the engine of economic growth.
The AMC reports to the trustees who safeguard the interests of investors in the
mutual fund and also ensure compliance of the operations of the und with SEBI
guidelines. They not only monitor performance of the AMC but also oversee operations
of the custodian and transfer agent. The AMC receives a fee for its services. Currently,
SEBI permits a maximum fee of 1.25%p.a. of the asset value of the fund size less than
Rs.1bn. As the asset size of the fund increases, this falls progressively to 0.75%p.a. of the
incremental asset value. In addition, SEBI also permits AMCs to charge expense related
to the management of the fund up to certain limits. These are of two kinds of as follows:
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62.  Up front expenses related to fund marketing and initial account opening – up to
maximum of 6%of the investment amount (termed as “load”).
 Recurring expenses, which together with the management fees should not exceed certain
limits. The maximum is 2.5% per year for equity funds and 2.25% per year for debt
funds. As the asset size increases, the maximum limit falls progressively to 1.75% of the
incremental assets
First 1bn. Next 3 bn. Next 3 bn. Over 7 bn.
2.5% 2.25% 2.00% 1.75%
Both the management fee and the expenses are charged directly to the mutual fund
scheme.
3.4 TAX SAVING ON MUTUAL FUND
There are two types of Tax-saving funds,
1. Equity-linked savings schemes (ELSS)
2. Pension funds
Equity-linked savings schemes (ELSS)
ELSS schemes are basically diversified equity schemes, which have a three-year
lock-in. Investments here—subject to a maximum of Rs 10,000—receive a tax rebate of 0
to 20 per cent depending on the income slab. As these are equity instruments they have
the maximum risk-return potential among all asset classes. What this means is that return
has a propensity to vary with great intensity. Although an average tax-saving mutual fund
delivered 16.36 per cent in 2002, the range of returns was extreme. Thus, in that year, the
best tax-saving fund delivered 42.61 per cent and the worst was down 3.16 per cent. The
best way to overcome the vagaries of stock markets is to diversify. Diversification can be
across funds and, more importantly, across time periods. By investing regularly every
year in these funds one can set up a long-term systematic investment plan.
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