3S of IDFC Mutual Fund

8/8/2019 3S of IDFC Mutual Fund

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A PROJECT REPORT ON

3s Of Mutual Fund s

AT

IDFC AMC Ltd

Submitted By:

Hitesh .M. Karamchandani

Ankita .S. Sonawane

Mihir .S. Mehta

Kruti .D. Sanghragka

Nishant .M. Jain

Sakina .T. Mandsaurwala

K.C. COLLEGE OF MANAGEMENT STUDIES

MAY JUNE

(2010 - 2011)


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DECLARATION

We, the students of K.C. College of Management Studies of PGCHM herebydeclare that we have completed this project on Sales and Distribution of Mutual Fundsfor the academic year 2010 2011. The information revealed in the project submitted istrue and original to the best of our knowledge.

Date: 8 th July, 2010.

Names

1. Hitesh .M. Karamchandani ______________

2. Ankita .S. Sonawane ______________

3. Mihir .S. Mehta ______________

4. Kruti .D. Sanghrajka ______________

5. Nishant .M. Jain _________

6. Sakina .T. Mandsaurwala ______________


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ACKNOWLEDGEMENT

We wish to express our sincere gratitude to Prof. Manju Nichani - Director, KC Collegeof Management Studies, Colaba and Prof. Flo ss y Jo s eph Coordinator of KCCMS, andMr. Rajan Gurnani - Placement Coordinator of KCCMS, for providing us an opportunityto do our project work on Sales and Distribution of Mutual Funds in IDFC AMC Ltd.This project bears on imprint of many peoples.

We sincerely thank to our trainer Mr. Kulbhu s han Singh VP Sales Manager at IDFC,for guidance and encouragement in carrying out this project work. We also wish toexpress our gratitude to the officials and other staff members of IDFC AMC whorendered their help during the period of our project work. My special thanks to therelationship managers of the company for their kind co-operation to the completion of our project work.

Last but not least we wish to avail ourselves of this opportunity, express a sense of gratitude and love to our friends and our beloved parents for their manual support,strength, and help and for everything

Place: Mumbai

Date: 8 th July, 2010.


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RESEARCH METHODOLOGY

The information for compiling our final project report was collected from both primary aswell as secondary sources. Primary sources include the personal methods of datacollection and whereas secondary sources includes books, internet, company brochure,

product brochure, company website, competitors website, newspaper articles as well ashandbooks, etc.


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EXECUTIVE SUMMARY

Infrastructure Development Finance Company Ltd. is India's leading financial institutionfocused on infrastructure. IDFC was incorporated as a public limited company on 30

January 1997 with its registered office at Chennai. IDFC operates as a professionallymanaged commercial entity with the objective of maximizing shareholder value. Thecompany has been formed by a consortium of public and private investors with the GoIholding 20% share and 45% being held by Foreign Institutional Investors/ Foreign DirectInvestment.

Mutual fund industry which is growing over a period time has gone sea changes whichhave included four different phases. Indian securities markets have undergone manychanges during the last decade. Exponential growth in trading volumes is pushing

existing trading systems and processes to capacity and increasing settlement risk. Indeedit has been SEBI that has made the Indian markets, one of the most competitive andefficient markets of the world.

Competitors analysis of five companies is done which help us to better understand the position of the company. The Competitors research consisted of analyzing the funds of 5different Fund Houses who were in the top 10 list of Indian Mutual fund industry, theAMCs given were Reliance Growth Fund, DSP Blackrock Macro Cap Fund, DSPBlackrock Small and Midcap Fund, Sundaram BNP Paribas and HDFC Mutual Fund.

Mutual funds tower over other investment choices. If past collection figures are atestimony, investors seem to have realized this. Most public offerings of mutual fundshave collected in excess of Rs 500 crore (Rs 5 billion) from thousands of investors. Inconclusion, it can be said that despite few problems, the recent changes in the mutualfunds industry in India has really favored its amazing growth and in times to comemutual funds will continue to be a significant resource mobilize in the Indian financialmarket.


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INDEX

1. Introduction to IDFC AMC.1-11

1.1 IDFC Ltd...2

1.2 Standard Chartered Asset Management Company Ltd.9

1.3 Rise of IDFC AMC..10

1.3.1 Awards11

2. Market Re s earch...12- 33

2.1 Know Your Distributors..14

2.2 Asset Allocation Fund.16

2.3 Capital Protection Oriented Fund Series II..22

2.4 Small and Midcap Equity Fund...29

2.5 Tips on buying Mutual Funds..32

3 . Competitor s Analy s is .. 34 -4 0

3.1 Introduction...35

3.2 Project 1....36

3.3 Project 237

3.4 Project 338

3.5 Project 439

3.6 Project 540


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4 . Training at IDFC AMC. 4 1-89

4.1 Fund Basics....42

4.1.1 Introduction...42

4.1.2 What is Mutual Fund43

4.1.3 History of Mutual Fund Industry..43

4.1.4 Why we need Mutual Fund..47

4.1.5 Fund Pluses..49

4.1.6 Fund Minuses..50

4.1.7 Some facts for the growth of Mutual Fund in India...50

4.2 Kinds of Funds.524.2.1 Introduction.52

4.3 Types of Funds.59

4.3.1 Open-Ended and Closed-End..61

4.3.1.1 Open-Ended...61

4.3.1.2 Closed-End....61

4.3.2 Active and Passive...62

4.3.2.1 Active Fund...63


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4.3.2.2 Passive Fund..64

4.3.3 Thematic Fund..65

4.3.4 Sector Fund..65

4.3.5 Gilt Fund..65

4.3.6 Funds of Fund..65

4.4 How Funds Work..66

4.5 How to Choose a Fund..72

4.5.1 Why do we need a Fund..72

4.5.2 How old are you73

4.5.3 For how long you want to invest...74

4.5.4 Are you ok with risk..74

4.5.5

How to buy a Mutual fund75

4.6 Mechanism of Mutual Fund...77

4.7 Investment Strategies..79

4.8 Organizational Hierarchy....81

4.8.1 Structure of Mutual fund in India...81

4.8.2 The Fund Sponsor..82


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4.8.3 Mutual Fund as Trustee..82

4.8.4 Trustees...83

4.8.5 Asset Management Company.83

4.8.6 Transfer Agents..83

4.8.7 Distributors.84

4.9 Merits of Mutual Fund.85

4.10 Demerits of MutualFund87

4.11 Basic terms used in MutualFund....87

5 . Recent Change s ..90-92

Conclu s ion....9 3 -95

Webliography and Bibliography96-98


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Li s t of Figure s

1.1 Shareholding pattern of IDFC AMC7

2.1 Relationship process.13

2.2 Holdings of SME Fund.....30

2.3 Sectors of SME Fund....31

4.1 Mutual Fund..42

4.2 Growth of Assets47

4.3 Kinds of Funds..52

4.4 Types of Funds..60

4.5 Cycle of Mutual Funds..77

4.6 Chart of Mutual Funds..78

4.7 Risk V/s Returns.79

4.8 risk Return Matrix...80

4.9 Organizational Hierarchy814.10 Flow of Distributors..84


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Li s t of Table s

1.1 Total Schemes in IDFC AMC.11

2.1 Sectors and Stocks of Reliance Mutual Fund......36

2.2 Sectors and Stocks of Sundaram Mutual Fund....37

2.3 Sectors and Stocks of DSP Blackrock Microcap Fund...38

2.4 Sectors and Stocks of HDFC Mutual Fund.39

2.5 Sectors and Stocks of DSP Blackrock Small and Midcap Fund.40

4.1 Details of Phase II45


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Chapter 1

INTRODUCTION TO IDFC AMC


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1.1 Infra s tructure Development Finance Company Ltd

IDFC is India's leading financial institution focused on infrastructure.

In 1994, the Department of Economic Affairs, MoF in recognition of the need todevelop the country's infrastructure, established an Expert Group on

Commercialization of Infra s tructure Project s under the Chairmanship of Dr.

Rake s h Mohan . The group recommended the need for a specialized financial

intermediary for funding infrastructure projects. Thereafter, the announcement for the

setting up of IDFC was made in the Union Finance Minister's budget speech in July

1996.

IDFC was incorporated as a public limited company on 30 January 1997 with its

registered office at Chennai.

Professionally managed entity

IDFC operates as a professionally managed commercial entity with the objective of

maximizing shareholder value. The company has been formed by a consortium of

public and private investors with the GoI holding 22% share and 46.6% being held

by Foreign Institutional Investors/ Foreign Direct Investment.

Policy advisory role

IDFC plays a significant role in shaping the direction of infrastructure policy and

has worked on various strategic advisory assignments including conducting a

National Strategy Study for evolving a clean development mechanism in India. The

company actively assists Government and Government agencies, at both Central and

State levels, in developing contractual framework/structure for Public-Private

Partnership (PPP) projects.


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Vision

To build a diversified portfolio of viable infrastructure projects of national

importance and to imbue the projects with best practices in development,

management, design, construction and operation while maintaining the highest

regard for service, safety and environment.

Goals

y Investment: Develop projects with an aggregate investment potential of

USD 1 bn in 5 years.

y Building Capacities: Create high order capacities and credentials for

implementation of infrastructure assets.

y Forging Partnerships: Build successful partnerships with national and

international developers, contractors and operators.

Values

y Fairness

Fairness lies at the heart of good corporate governance. Our dealings with

governments, partners, suppliers, customers and investors are fair and

recognize the legitimate interests of stakeholders.

y Integrity

We have inherited a strong legacy of operating at the highest level of

integrity from our parent. We are committed to pursing the path of honesty,

truthfulness and uprightness, even if it means sacrificing potential

economic gains.


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y Trust

Our stakeholders can depend on us to achieve a common purpose. We

believe in making promises we can keep. We will always act in a manner that justifies the trust put in by our stakeholders regardless of their ability

to monitor or control our actions.

y Professionalism

We strive to be professional in our dealings. To us, this means being

responsive, enthusiastic and committed to the needs of our stakeholders

through application of knowledge to practical situations, constant

innovation, and an ethical and transparent approach to business.

Sectors

y Power

Over the last decade IDFC has financed power projects aggregating to

about 10000 MW. IDFC has also financed transmission projects like the

Tala project of Powerlinks.

y Transport

IDFC has successfully financed several pioneering

road projects such as the Jaipur - Kishangarh

Expressway and has a total exposure of Rs. 7,922

crore in the sector.

IDFC has been actively involved as a financier for almost all the ports on

the west coast and for Container Forwarding Stations (CFS) in India.


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y Urban

IDFC has a rich financing experience in commercial and industrial

infrastructure, primarily in IT parks, SEZs,commercial property and hotels, which now account

for over 9.8% of IDFC's exposure.

IDFC has been actively involved in several roles in the water sector. The

roles range from being a co-developer to providing long term project

financing.

Mutual Fund IDFC Mutual Fund

Setup Date Mar-13-2000

Incorporation Date Dec-20-1999

Sponsor Infrastructure Development Finance Company

Limited (IDFC)

Tru s tee IDFC AMC Trustee Company Private Limited

Chairman Dr. Rajiv Lall

CEO / MD Mr. Naval Bir Kumar President

CIO Mr. Kenneth Andrade

Compliance Officer Ms. Jyothi Krishnan

Inve s tor Service Mr. Praveen Bhatt


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Officer

Ass et s Managed Rs. 21482.75 crore (June-30-2010)

Auditor s B. S. R. & Co. Chartered Accountants

Cu s todian s Deutsche Bank Limited AG.

Regi s trar s Computer Age Management Services Pvt. Ltd.

Addre ss One India Bulls Centre, 841, Jupiter Mills

Compound, S. B. Marg, Elphinstone Road (W),

Mum. 400013

Telephone No s . 022-2266289999

Fax No s . 022-24215052

E-mail [email protected]

Shareholding Pattern of IDFC

The Government of India, international foreign institutions and private retail and

corporate entities comprise our shareholders. This exceptional shareholding pattern,

with the GOI holding over 20%, demonstrates our unique location on the firmamentof financial institutions in the country. The large FDI/ FII shareholding is further

proof of our strict adherence to best practices of corporate governance and financial

accountability.


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Shareholding Pattern

Fig.1.1 Shareholding pattern of IDFC AMC

Unique Positioning

The company's expertise in the infrastructure sector and strong relationships

with government and infrastructure sponsors provide it with a platform for

facilitating private investment and public-private partnership in sectors where

market structures, government policy and regulation are evolving.

y One of a kind platform combining benefits of Government sponsorship,

internationally diversified shareholder base and professional management to

pursue business opportunities in the infrastructure space

Mutual Funds/UTI6%

Institutions/Banks5% Central

Gove rnm e nt/Stat eGove rnm e nt

20%

Insuranc eCompani e s

12%

FII's44%

FDI1%

Corporat e3%

Individuals9%

Oth e rs0%

Shareholding As On 31st March 2010


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y Well poised to capitalize on the strong momentum in infrastructure

investments

y High profile Board and experienced management team with over 550

professionals dedicated to infrastructure financing and advisory

y Largest and the most comprehensive multi-faceted infrastructure financier with

wide repertoire of products and services

y Deep domain knowledge in the core sectors of energy, transportation, telecom,

& industrial and commercial infrastructure

y Focus on high ROE businesses including Asset Management, Investment

Banking and Principal Investments.


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1.2 Standard Chartered A ss et Management Company Ltd

Standard Chartered Asset Management Company Ltd primarily focused on debt

schemes and mutual funds. The instigation of the company was found in ANZ

Grindlays that was later renamed Standard Chartered Mutual Fund following the

take over Grindlays Bank by Standard Chartered Bank. The mutual funds offered

include equity and debt funds like Grind lays cash funds, dynamic bond funds,

government securities fund, super saver income funds, short term institutional

plans, standard chartered arbitrage funds, classical equity funds, imperial equity

funds, premier equity funds, enterprise equity funds, tax saver ELSS funds andmany more. The sponsor of standard chartered mutual fund was the bank and its

AMC is SCB Asset Management or Standard Chartered Asset Management

Company Ltd.

The SCB Asset Management Company made two-thirds of its profits from Asia.

The India branch was third to Hong Kong and South Korea and was a part of the $

3 billion Standard Chartered Asset Management Company Ltd. There were plans

on either a sellout of Standard Chartered Asset Management Company Ltd India or

as much as 90 % divesting of the unit and retaining a strategic stake.


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1.3 Ri s e of IDFC AMC

Infrastructure Development Finance Company (IDFC) bagged Standard

Chartereds asset management business (AMC) in India for a total consideration

of $205 million (around Rs 820 crore) in an all-cash deal. This amounts to 5.67

per cent of the total assets under management of Rs 14,141 crore of StanCharts

AMC. The deal comes after the Reserve Bank of India, in December, rejected

Swiss major UBS AGs last years bid to buy StanCharts MF business for Rs

516 crore, which was 4 per cent of the total AUM of Rs 12,628 crore.

JASPAL BINDRA, Chief Executive Officer, A s ia, Standard Chartered:

IDFC is a well respected financial services company and we are delighted to

have reached an agreement with them for the sale of this business. Standard

Chartered will remain a distributor of asset management products in India. India

is a key market and delivered record results in 2007.

RAJIV LALL, Managing Director and Chief Executive Officer Of IDFC:

This is in line with our wider strategy of broadening our footprint in the asset

management business and diversifying our fee-based revenue streams. We have

also bought out Atul Chokseys stake in Standard Chartered mutual fund.

Valuations arent cheap. Nevertheless we went ahead with the deal as we want to

create an impact in the asset management business in the next 3-4 years. Naval

Bir Kumar will continue to head the mutual fund business.


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N o. of schemes 84N o. of schemes including options 269Equity Schemes 24Debt Schemes 209Short term debt Schemes 19Equity & Debt 0Money Market 0Gilt Fund 13

Tab. 1.1 Total schemes in IDFC AMC

1.3 .1 Award s

IDFC MF RECEIVED SEVEN STARS RATING FOR ITS

PREMIER EQUITY FUND FROM ICRA IN 2006, 2007

IDFC MF RECEIVED FIVE STAR RATING FOR ITS

IMPERIAL EQUITY FUND FROM ICRA IN 2007


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Chapter 2

MARKET RESEARCH


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2.2 A ss et Allocation Fund

Aim

To promote Asset Allocation Fund.

Introduction

y TYPE OF THE SCHEME

An Open Ended Fund of Funds Scheme

y INVESTMENT OBJECTIVE OF THE SCHEME

The primary objective of Scheme is to generate capital appreciation

through investment in different mutual fund schemes primarily local funds

based on a defined asset allocation model.

However, there can be no assurance that the investment objective of

the scheme will be realized.

y ASSET ALLOCATION

The asset allocation under the scheme will be as follows:

Con s ervative AA Plan:

% to net a ss et s Ri s k profile

Equity Funds 10 15 Low to Medium

Debt Funds 45 50 Low to Medium

Liquid Fund 45 50 Low to Medium

Alternate 0 -

Money market securities 0 15 Low


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Moderate AA Plan:


Equity Funds 25 30 Medium

Debt Funds 60 70 Medium to High

Liquid Fund 5 - 10 Low to Medium

Alternate 5 10 Low to Medium


Aggre ss ive AA Plan:


Equity Funds 45 50 High

Debt Funds 35 45 Medium

Liquid Fund 0 - 5 Low to Medium

Alternate 10 15 Low to Medium


y WHERE WILL THE SCHEME INVEST?

Depending on the market conditions the assets of the Scheme will be

allocated in a diverse capitalization range of equity funds, debt funds, liquidfunds, money market funds and money market securities.


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y OPTIONS OFFERED

Under the scheme, investors may choose either the Growth Option or

the Dividend Option (Dividend payout & Dividend re-investment). In case

of valid applications received, without indicating any choice of Option, it

will be Option and processed accordingly.

o Growth Option

The scheme will generally not declare any dividend under this option.

The income attributable to units under this option will continue to remain

invested in the scheme and will reflected in the Net Asset Value of unitsunder this option. This option is suitable for investors who are not

looking for current income, but who have invested only with the intention

of capital appreciation. If the units under this option are held as capital

asset for a period of at least one year, from the date of acquisition,

Unitholders should get the benefit of long term capital gain tax.

o Dividend Option

Under this option, the Fund will endeavour to declare dividends at

such other frequency as deem fit.

The distribution of dividend will be made out of the net surplus under

this Option subject to availability of distributable profits, as computed in

accordance with SEBI Regulations. The remaining net surplus after

considering the dividend and tax, if any, payable thereon will remain

invested in the Scheme and be reflected in the NAV. Dividends, if

declared, will be paid out of the net surplus of the Scheme to those unit

holders whose name appear in the Register of Unit holders on the record


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o Trustee(s) of Religious and Charitable and Private Trusts under the

provision of Section 11(5) (xii) of the Income Tax Act, 1961 read with

Rule 17C of Income Tax Rules, 1962 (subject to receipt of necessary

approvals as Public Securities where required)o The Trustee of Private Trusts authorised to invest in mutual fund

Schemes under their trust deed.

o Partner(s) of Partnership Firms.o Karta of Hindu Undivided Family (HUF).

o Banks (including Co-operative Banks and Regional Rural Banks),

Financial Institutions and Investment Institutions.o Non-resident Indians/Persons of Indian origin residing abroad (NRIs)

on full repatriation basis or on non-repatriation basis.

o Foreign Institutional Investors (FIIs) registered with SEBI on full

repatriation basis.

o Army, Air Force, Navy and other para-military funds.o Scientific and Industrial Research Organizations.

o Others who are permitted to invest in the Scheme as per their

respective constitutions Subscriptions from residents in the United

States of America and Canada shall not be accepted by the Scheme.

The Fund reserves the right to include / exclude new / existing

categories of investors to invest in this Scheme from time to time,

subject to regulatory requirements, if any. This is an indicative list and

investors are requested to consult their financial advisor to ascertainwhether the scheme is suitable to their risk profile.


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2.3 Capital Protection Oriented Fund Serie s II

Aim

To promote Capital Protection Oriented Fund Series II.

Introduction

y TYPE OF THE SCHEME

A 3 year close ended scheme

y INVESTMENT OBJECTIVE OF THE SCHEME

The scheme endeavors to protect the capital by investing in high

quality fixed income securities as the primary objective and generate capital

appreciation by investing in equity and equity related instruments as a

secondary objective. However, there can be no assurance that the

investment objective of the scheme will be realized.

New Fund offers (NFO) of this Scheme Information Document willcommence at any time within months from the date SEBI gives a clearance

to the Scheme Information Document.

y ASSET ALLOCATION

The asset allocation under the scheme will be as follows:


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Ass et Cla ss Range of allocation (% of Net A ss et s ) Ri s k Profile

Equities & Equity 0 16 HighRelated securities

Debt securities & Money 84 100 Low to Medium

Market instruments (0 30 % in securitized instruments)

y WHERE WILL THE SCHEME INVEST?

The corpus of the plans(s) under the scheme will be invested in debt

and money market instruments and in equity and equity related products.Subject to the Regulations, the corpus of the Scheme can be invested in

any (but not exclusively) of the following securities / instruments:

o Equity and Equity related instruments include equity warrants and

convertible instruments.

o Stock futures / index futures and such other permitted derivative

instrumentso Securities created and issued by the Central and State Governments

and/or repos/reverse repos in such Government Securities as may be

permitted by RBI (including but not limited to coupon bearing

bonds, zero coupon bonds and treasury bills).

o Securities guaranteed by the Central and State Governments

(including but not limited to coupon bearing bonds, zero coupon

bonds and treasury bills).

o Debt instruments issued by domestic Government agencies and

statutory bodies, which may or may not carry a Central/State

Government guarantee.


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o Corporate debt and securities (of both public and private sector

undertakings) including Bonds, Debentures, Notes, Strips, etc.

o Debt instruments (both public and private sector) issued by banks /

development financial institutions.o Money market instruments permitted by SEBI including call money

market or in alternative investments for the call money market as

may be provided by RBI to meet the liquidity requirements.

o Certificate of Deposits (CDs).

o Commercial Paper (CPs).

o Securitised Debt instruments.

o The non-convertible part of convertible securities.

o Any other domestic fixed income securities including Structured

Debt Instruments

o Pass through, Pay through or other Participation Certificates

representing interest in a pool of assets including receivables.

o Any other securities / instruments as may be permitted by SEBI

from time to time

o The scheme will invest in a portfolio predominantly of fixed income

securities that are generally maturing in line with the duration of the

scheme (3 years).

y INVESTMENT STRATEGY

The initial investment mix between the debt and equity shall be such

that the maturity value of the debt portfolio, at the time of schemes

redemption, net of all expenses is more than or equal to the face value of

the units issued. The debt portfolio will be allocated to high quality papers


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in line with the AMCs policy of maintaining high credit quality across its

debt schemes.

The scheme will invest in well-managed growth companies that are

available at reasonable value. Companies would be identified through a

systematic process of reviewing the companys financial performance and

valuations.

y HOW WILL THE SCHEME BENCHMARK ITS PERFORMANCE?

Currently no AMFI - recognized benchmark is available for strict

comparison for the Scheme. However, CRISIL MIP Blended Index being awidely used benchmark (for products with similar tenor / average maturity

etc.) in the market, the same has been selected as a standard benchmark for

the purpose of this Scheme.

y WHO MANAGES THE SCHEME?

The Fund Manager of the Scheme is Mr. Ashwin Patni. His

particulars are given below:

Mr. Ashwin

Patni

Fund

Manager

B.E, PGDMIIM

CALCUTTA

Over six years of

experience in Wealth

Management,

Structured Finance,

Credits and Market

Groups and Business

Consulting.


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y NEW FUND OFFER (NFO)

New Fund Offer Period (This is the period during which a new

scheme sells its units to the investors)

NFO opens on: June 01, 2010

NFO closes on: June 30, 2010

y OPTIONS OFFERED

Under the Scheme investors may choose either the Growth Option or

the Dividend Option.

o Growth Option

The Scheme will generally not declare any dividend under this

option. The income attributable to Units under this Option will

continue to remain invested in the Scheme and will be reflected in the

Net Asset Value of Units under this option.

o Dividend Option

Under this option, the Fund will endeavor to declare dividends

as and when deemed fit by the Fund and/or on &/or before the

closure of the scheme. In case no dividend is declared during the

tenure of the scheme or at closure, the net surplus, if any, will remain

invested and be reflected in the NAV. Dividends, if declared, will be paid out of the net surplus of the Scheme to those Unitholders whose

names appear in the Register of Unitholders on the record date. The

actual date for declaration of dividend will be notified suitably to the

Registrar. Unitholders are entitled to receive dividend within 30 days


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of the date of declaration of the dividend. However, the Mutual Fund

will endeavor to make dividend payments sooner to Unitholders.

There is no assurance or guarantee to Unitholders as to the rate of

neither dividend distribution nor will that dividends are paid, thoughit is the intention of the Mutual Fund to make dividend distributions.

y WHO CAN INVEST?

The following persons may apply for subscription to the Units of the

Scheme (subject, wherever relevant, to purchase of units of Mutual Funds

being permitted under respective constitutions, relevant statutory

regulations and with all applicable approvals):

o Resident adult individuals either singly or jointly

o Minor through parent/lawful guardian

o Companies, Bodies Corporate, Public Sector Undertakings,

association of persons or bodies of individuals whether

incorporated or not and societies registered under the SocietiesRegistration Act, 1860 (so long as the purchase of units is permitted

under the respective constitutions).

o Trustee(s) of Religious and Charitable and Private Trusts under the

provision of Section 11(5) (xii) of the Income Tax Act, 1961 read

with Rule 17C of Income Tax Rules, 1962 (subject to receipt of

necessary approvals as Public Securities where required)

o The Trustee of Private Trusts authorised to invest in mutual fund

Schemes under their trust deed.

o Partner(s) of Partnership Firms.

o Karta of Hindu Undivided Family (HUF).


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o Banks (including Co-operative Banks and Regional Rural Banks),

Financial Institutions and Investment Institution.

o Non-resident Indians/Persons of Indian origin residing abroad

(NRIs) on full repatriation basis or on non-repatriation basis.o Foreign Institutional Investors (FIIs) registered with SEBI on full

repatriation basis.

o Army, Air Force, Navy and other para-military funds.o Scientific and Industrial Research Organizations.

o Mutual fund Schemes.

o Provident/Pension/Gratuity and such other Funds as and when

permitted to invest.

o International Multilateral Agencies approved by the Government of

India.

o Others who are permitted to invest in the Scheme as per their

respective constitutions

o Other Schemes of IDFC Mutual Fund subject to the conditions and

limits prescribed in SEBI Regulations and/or by the Trustee, AMC

or sponsor may subscribe to the units under this Scheme.

Subscriptions from residents in the United States of America and

Canada shall not be accepted by the Scheme.


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2.4 Small and Midcap Equity Fund

Aim

To promote SME Fund and its comparison with CNX Nifty in the market.

Introduction

y WHAT IS THIS FUND?

The IDFC Small and Midcap Fund is a fund that invests in

companies that are in a high growth phase and have proven themselves intheir markets. The fund therefore provides the investor with the portfolio

of companies that show high growth rates but have low business risk.

y HOW DOES THE FUND INVEST?

The fund identifies small and mid cap companies that have proven

themselves over the years and looks to buy them at cheap valuations.

This helps investors grow their wealth when the market values these

companies for their worth.

y FUND PERFORMANCE under the IDFC SMEF- Growth a s on 3 1May 2010


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Fig. 2.2 Holdings of SME Fund

Ne stle India24%

De wan Housing Fin. Co.

21%Strid e s Arcolab21%

Spiceje t

17%

Mundra Port & SEZ17%

Top 5 Holdings as on 31st May 2010


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Fig. 2.3 Sectors of SME Fund

Se rvice s29%

Financial24%

FMCG23%

Automobil e12%

He alth Car e12%

Top 5 Sectors as on 31st May 2010


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2.5 Tip s on buying mutual fund s :-

1. Determine your financial objectives and how much money you have to invest.

Make sure the funds objectives coincide with your own. Dont change your

objectives or exceed the amount set aside for investment unless you have good

reason.

2. Always obtain all available information before you invest. Request the

prospectus, the Statement of Additional Information and the latest shareholder

report from each fund you are considering.

3. Never invest in periodic payment plans unless you are virtually certain that you

will not have to redeem early. If you redeem early or do not complete the plan, you

may have to pay sales charges of up to 51% of your investment.

4. Be on the alert for incorporation by reference. You will have "no excuse" for not

knowing this information, if a problem arises. You may be legally presumed to

know materials incorporated by reference in a prospectus or other documents.

5. Always determine all sales charges, fees and expenses before you invest. Fees

such as 12b-1 fees can cost you dearly and charges for reinvestment of dividends

and capital gains distributions can substantially add to your costs. Shop around

among the many funds offered and compare the various fees and costs connected

with funds that appeal to you.

6. Learn the costs of redemption. Sometimes investors are surprised to learn that

they have to pay to get out of funds through back-end loads or redemption fees.

Find out the redemption costs before you invest so you wont be unpleasantly

surprised when you redeem your shares.


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7. Never treat the risks of investment in a fund lightly. Weigh the risks of the funds

you want to buy against your ability to tolerate the ups and downs of the market

and your investment goals. Be extra cautious when considering investing in fundswith high yield/high risk portfolios. Junk bond problems, for example, invariably

affect the funds performance.

8. Dont be misled by the name of a fund. Some funds have been given names

denoting safety, stability and low risk, despite the fact that the underlying

investments in the portfolio are volatile and highly risky.


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Chapter 3

COMPETITOR ANALYSIS


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3 .1 Introduction The Competitors research report on different AMC was a part of 2 months

summer training project where the trainees were given the task of analyzing the

funds of 5 different Fund Houses who were in the top 10 list of Indian Mutual

fund industry, the AMCs given were Reliance Growth Fund, DSP Blackrock

Macro Cap Fund, DSP Blackrock Small and Midcap Fund, Sundaram BNP

Paribas and HDFC Mutual Fund.

The basic reason for this study was to find out that much Fund houses are

bullish on various sectors and on which companies are they more bullish.


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3 .1.1 PROJECT 1

Aimy The primary investment objective of the scheme is to achieve long-

term growth of capital by investing in equity and equity related

securities through a research based investment approach.

Analysis:

y CEO: Mr. Sundeep Sikka

y FUNDS: Reliance Growth Fund

y EQUITY FUND MANAGERS: Mr. Sunil B. Singhania

y Website: www.reliancemutualfund.com

TOP 5 SECTORS

As on May 2010

TOP 5 STOCKS

As on May 2010

Banks Lupin Ltd.

Pharmaceuticals State Bank Of India

Software Bank Of Baroda

Ferrous Metals Jindal Saw Ltd.Consumer Non Durables Jindal Steel & Power Ltd.

Tab.2.1 Sectors and Stocks of Reliance Mutual fund


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3 .1.3 PROJECT 3

Aimy To Study The Factsheet Of DSP Blackrock

Analysis:

y CEO: Mr.Lawerance.D.Fink

y FUNDS: Equity Fund DSP Blackrock Micro Cap Fund

y EQUITY FUND MANAGERS: Apoorva Shah and Aniruddha

Naha since March 2008

y Website: www.dspblackrock.com

TOP 5 SECTORS

As on May 2010

TOP 5 STOCKS

As on May 2010

Industrial capital goods Whirlpool of India

Pharmaceuticals Jubilant Organosys

Construction Hindustan Dorr-Oliver

Consumer non durables The Federal Bank

Software Zuari Industries

Tab. 2.3 Sectors and SStocks of DSP Blackrock Microcap Fund


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3 .1.4 PROJECT 4

Aimy To generate long-term capital appreciation from a portfolio that is

substantially constituted of equity and equity related securities of

Small and Mid-Cap companies. Analysis:

y CEO: Mr. Milind Barve

y FUND: HDFC Mid-cap Opportunities Fund

y EQUITY FUND MANAGERS:

Mr. Chirag Setalvad (since Apr 2, 07)

Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities

y Website: www.hdfcfund.com

TOP 5 SECTORS

As on May 2010

TOP 5 STOCKS

As on May 2010

Banking/Finance Ipca Labs

Pharmaceuticals Patni Computer

Engineering Crompton Greave

Automotive VIP Industries

Manufacturing Exide Industrie

Tab. 2.4 Sectors and Stocks of HDFC Mutual Fund


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3 .1.5 PROJECT 5

Aim

y It is an open Ended equity growth scheme, primarily seeking to

generate long term capital appreciation from a portfolio substantially

constituted of equity and equity related securities, which are not part of

top 100 stocks by market capitalization.

Analysis:

y CEO: Laurence D Fink

y FUND: DSP BlackRock Small and Midcap Fund

y EQUITY FUND MANAGERS: : Apoorva Shah, Anup Maheshwari

y Website: For service related requests : [email protected]

For general queries : [email protected]

TOP 5 SECTORS

As on May 2010

TOP 5 STOCKS

As on May 2010

Consumer non durables Cadila Healthcare

Pharmaceuticals EID Party India

Power Gujarat State Petronet

Software Trent

Industrial Capital Goods Bayer Cropscience

Tab. 2.5 Sectors and Stocks of DSP Blackrock Small and Midcap Fund


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Chapter 4

TRAINING


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maintaining a routine and correct postures, but also in having an expert

monitor your progress- a mutual fund is a vehicle that allows you to hand over

the specialized work of managing your money to an expert.

4 .1.2 What i s Mutual Fund?

It is a pool of money collected from a large number of investors by a

professional entity with an aim to invest in different avenues for a variety of

purposes. These avenues could be equity, debt gold, commodities, real estate

and so on. At present, in India, mutual funds are not allowed to invest in real

estate directly, though they can invest in equity shares or bonds of real estatecompanies. Equity, debt and gold are the most popular asset classes that

Indian mutual funds invest in. the purpose of investment varies according to

the asset class chosen. Equity is usually a vehicle for long-term wealth

creation. Debt is used for capital protection. Gold is used as hedge against

inflation and for liquidity. Investors can look at where the fund manager aims

to invest and then match personal financial needs to choose a fund.

4 .1.3 Hi s tory of Mutual Fund Indu s try

The Evolution

The formation of Unit Trust of India marked the evolution of the Indian

mutual fund industry in the year 1963. The primary objective at that time was

to attract the small investors and it was made possible through the collective

efforts of the Government of India and the Reserve Bank of India. The history

of mutual fund industry in India can be better understood divided into

following phases:


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Pha s e 1. E s tabli s hment and Growth of Unit Tru s t of India - 196 4 -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 untilthe 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 different investors. It launched ULIP in 1971, six more schemes between

1981-84, Children's Gift Growth Fund and India Fund (India's first offshore

fund) in 1986, Master share (Indias 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.

Pha s e II. Entry of Public Sector Fund s - 1987-199 3

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.


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1992-9 3 Amount

Mobilised

Ass et s Under

Management

Mobili s ation a s

% of gro ss

Dome s tic Saving s

UTI 11,057 38,247 5.2%

Public

Sector 1,964 8,757 0.9%

Total 13,021 47,004 6.1%

Tab. 4.1 Details of Phase II

Pha s e III. Emergence of Private Sector Fund s - 199 3 -96

The permission given to private sector funds including foreign fund

management companies (most of them entering through joint ventures withIndian promoters) to enter the mutal fund industry in 1993, provided a wide

range of choice to investors and more 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.

Pha s e IV. Growth and SEBI Regulation - 1996-200 4

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


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showing more interest in mutual funds.

Inventors 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 Programmes 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

Pha s e V. Growth and Con s olidation - 200 4 Onward s

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

29 funds as at the end of March 2006. This is a continuing phase of growth of

the industry through consolidation and entry of new international and private

sector players.


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The graph indicates the growth of assets over the years.

Fig. 4.2 Growth of assets

4 .1.4 Why we need Mutual Fund s ?

Managing money is a specialized task and a mutual fund can be

viewed as public transport to take people, who do not want to drive their own

cars (that is, take their own investment calls), to their investment destinations.

People who drive their own cars ( invest on their own) can end up going faster


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if they are good at choosing their investments, or can end up badly hurt with a

crashed car, losing money, due to poor investment choices. While mutual

funds give an option to invest in several asset classes such as equity, debt and

gold, retail investors find equity investing one of its biggest attractions asdiversification makes it safer. Of course, investors can diversify using stocks,

but will have to actively manage their stock portfolio and that requires

knowledge and time. Mutual funds are for those who dont have the time to

make money decisions everyday but will do so, say, twice a year to examine

their mutual fund choices and changed personal financial needs.

Equity mutual funds are useful for lay investors since stock selection is not

easy for an average investor and can be fairly risky. Reading balance sheet is a

specialized task and knowing when to buy and sell needs active monitoring of

markets and events.

Most people are busy with their jobs and families and have no time to spend

on managing an active portfolio. Additionally, small investors run the risk of

over concentrating their portfolios in a few stock and seeing their money

erode due to the risk of a tight portfolio. Funds hire professional money

managers to make investment calls and monitor the portfolio on a daily basis.

The mutual funds route reduces volatility by diversifying the portfolio. The

risk of having all your money in just one or two stocks is much higher than

buying a basket of stocks that is diversified across the markets and sectors.


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4 .1.5 Fund Plu s es

y Small amounts can be invested. You can begin with Rs 5000 to buy a

mutual fund scheme that invests across 50 companies. Investing in just onecompany can be very costly. For instance, armed with Rs 5,000, you could buy

just about, say, two equity shares of State Bank of India, Indias largest public

sector bank, but with a mutual fund, you can own tiny bits of many large

companies.

y All, or some, money can be taken back quickly. Mutual funds are easy

to redeem. Funds will buyback any quantity of units at the given price as

denoted in the net asset value (NAV), or the price of each unit of a mutual fund.

You can redeem your liquid fund within 24 hours and equity and debt funds in

less than three days. There are some mutual funds that come with a lock-in,

such as equity linked savings schemes, but they impose a lock-in for a

purposethey give tax deduction benefits at the time of investing. Few others

come with a lock-in, but they give redemption windows at regular intervals.


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6. Mutual fund can penetrate rural like the Indian insurance industry with

simple and limited products.

7. SEBI allowing the MF's to launch commodity mutual funds.

8. Emphasis on better corporate governance.9. Trying to curb the late trading practices.

10. Introduction of Financial Planners who can provide need based advice.


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4 .2 Kind s of Fund s

Fig. 4.3 Kinds of Funds

4 .2.1 Introduction

Before we buy anything, usually a market survey is done and seen what is

available and then product is matched with need. It is a good idea to do the

same while investing in a mutual fund. There are several ways in which mutual

fund can be viewed. The most important distinction one must make is to choose

what final product you are comfortable with. Mutual funds invest in differentasset classes including equity, debt and gold. Real estate is also an asset class

that is available overseas as an investment choice, but these are yet to come to

India though the process is on. High return-seeking investors, who do not mind

taking risk, look at equity as an investment vehicle. Short-term investors, who

may want to keep money liquid, need some sort of regular income or keep their

capital protected and look at mutual funds that invest in debt products. Investorsseeking to diversify their portfolios and guard against inflation buy some gold

through a fund. And then, there are those who want to take care of multiple

needs and look at hybrid products. These combine assets in various proportions

to give an investor a ready-to-use-asset-allocated fund. There are further sub-

EQUITY DEBT

GOLD


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divisions within each asset class. Within equity, for example, there are clumps

of stocks that carry lower risk than others large cap companies carry lower

risk and return profile than mid-cap companies or those belonging to certain

sectors. Mid-cap companies carry high risk but can also give a huge returnkicker to the portfolio. Then there are other classifications that are important.

The distinction between open-ended and closed-ended funds is important, as is

between active and passive funds.

The three broad categories or distinctions as follow:

Equity

Equity funds are those that invest in shares of companies that are listed on

the stock exchanges. The bonus and dividends paid out by the companies also

get added to the total return of an investor. Within equity, there are various

categories of products that come with their own risk and return attributes.

y Large cap

These funds invest in large and well-established companies in the

market such as State Bank of India, Infosys Technologies Ltd., Reliance

Industries Ltd. and Hindustan Unilever Ltd. These companies are heavy

weights in the stock markets and are well researched by many experts,

fund managers and analysts. Large-cap funds are, typically, the leastrisky funds. These companies are among the least volatile companies as

they are mostly in mature businesses and have left the volatile growth

period behind. They are also widely held companies with shareholders

running in millions in certain cases. Most diversified funds prefer to be


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investigated significantly in large-cap scrips to limit their volatility, but

that is not always a certainty.

y Small and Mid cap

These funds are riskier than large-cap funds. They invest in smaller

companies that are in their growing stages. The large companies of

today were once upon a time small and mid-sized companies. Since mid

and small sized companies are in their growing stages, they can get

volatile in choppy and uncertain markets. These are high-risk companies they typically rise more than large-cap funds in rising

markets, but fall more than large-cap companies in falling markets.

When these companies graduate to being large-cap companies, their

share prices show a sharp increase over a period of time. If fund

managers correctly spot these companies high returns are made. Wrong

calls can also prove to be very costly and are punished by a severe fall

in value.

y Sector / Thematic

These invest in select sectors and companies. While sector funds

invest in one or two sectors, thematic funds invest in a bunch of sectors

that are woven by a common theme, such as infrastructure, consumer

spending and fast-moving consumer goods. These are the most risky of

all types of funds as their portfolios are, typically, very concentrated.

For instance, in May, the portfolio of one of the services sector fund


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had just 13 stocks as it invests in just banking and financial sector

stocks, limiting the universe of stocks it can pick. On the contrary, a

diversified fund has 30-100 stocks. On account of their lack of

diversification, fortunes of sector and thematic funds depend on ahandful of sectors and stocks. Hence, it is generally advisable for

investors to have a proper understanding of the theme or sector they

wish to invest through a sectoral or thematic fund. Debt

These are funds that invest in fixed-income yielding instrument. Debt fundsare used for some kind of regular return or protection. There are many types

of debt funds, but broadly they fall into three types:

y Bond

Bond funds invest in corporate bonds and partly in government

securities. These funds are long-term and short term in nature. Long-

term funds carry an average maturity of two or more years to about five

or even up to 10 years. This means that they invest in scrip that mature

around that period on an average. The longer a debt funds average

maturity, the riskier it gets because scrip with long maturities take a

long time to wound up and therefore get exposed to market vagaries

and volatilities for a long time. Short-term bond funds carry a maturity

of one or two years.


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y Government Securities

The second type of debt fund is government securities fund. Like

bond funds, these too come in long-term and short-term variety. These

are mostly seasonal funds as they invest only in government securities-

scrips issued by the Reserve Bank of India. Though government

securities are the safest debt instruments because they are issued by the

government of India and, hence, come guaranteed, they are also the

most volatile because they are the most liquid instruments in the debt

market. Other instruments such as corporate bonds can get very illiquidand, hence, dont see much price volatility comparatively. Like bond

funds, government securities fund come with an average maturity of

two or more years to five or maybe even 10 years. Short-term

government securities funds, come with a maturity of one or two years.

y Liquid

The third type of debt fund is a liquid fund. These are funds meant to

park surplus cash from a time period of overnight to about three

months. In the mutual fund space, these are considered to be the safest

because they invest in scrips that mature in a very short time. Hence

they arent as volatile, though there are no guarantees. The 2008 market

crash brought about a lot of pain to liquid funds. Subsequently, the

capital market regulator, Sebi, introduced a lot of changes in liquid

funds and made them much safer.


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A variation of liquid funds is called ultra short-term (ST) funds. They

were earlier called liquid-plus funds. Ultra ST Funds work just like

liquid funds, but can invest in scrips that mature in up to 90 days. As

they have a higher leeway, they have the potential to earn a bit morethan what liquid funds can earn. In steady markets if liquid funds fetch

around 3.75%returns per annum, ultra ST can return about 4.5%

returns. Compared with them, savings bank accounts earn only 3.5%.

Gold

These are mutual funds that invest in gold bars or gold backed securities.

Gold funds are of two types- those that mimic gold prices in the form of an

index fund and those that buy shares of gold mining companies. Gold

exchange-traded funds (ETFs, an index fund that is listed on stock exchange)

have become very popular during the run up in gold prices over the last few

years. Some funds also actively invest in gold mining. These are MF schemes

that solicit money and then invest entire corpuses in international funds of

their own parentage. The international fund will then invest in equity shares of

gold mining companies in India, the money in these funds are sent abroad and

invested there. For instance, DSP BlackRock World Gold Fund is an Indian

fund and is available to Indian investors in India. This fund invests its entire

corpus in BlackRock Global Funds-World Gold Fund, which is listed abroad.


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Hybrid

Hybrid funds invest across equity, debt and gold. They are either balanced

funds (invest 65% in equities and rest in debt) or monthly income plans/

regular income plans (invest upto 25% in equities and the rest in debt). They

are less risky than equity funds, but carry more risk than debt funds.


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4 .3 Type s of Fund s

The distinctions in funds are useful to know to get the best out of your

investment. There are different fund types for different needs of a person, so

choosing among the available options become as crucial as choosing a fund.

ACTIVE PASSIVE

OPEN-ENDED

CLOSED-ENDED

THEMATIC


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Fig. 4.4 Types of Funds


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4 .3 .1 Open-Ended and Clo s ed-End

Another distinction in funds is based on the length of time for which

the fun is collecting money.

There are two kinds of funds under this classification: Open- ended and

close ended funds.

4 .3 .1.1 Open-Ended

These are funds where you can get in and out anytime you want as

they have perpetual life. As inflows are unlimited and, typically,

unrestricted, there is no limit to which the corpus can grow to. According

to mutual fund tracker Morningstar India, the largest equity scheme in

India as of may-end had a corpus of Rs 7490 crore. And the oldest

scheme has been at work for the last 38 years. At present, most fund

houses prefer to launch open-ended funds as it helps the fund house

garner money consistently and manage it on a continuous basis.

4 .3 .1.2 Clo s ed-End

These are funds that restrict their inflows. Once they are launched,

they are open for subscription for a few days. Once the subscription

period ends, they stop accepting money from the public.

Close-end funds, therefore, also come with a fixed tenor such as 3, 5

or typically 10 years. Once the period gets over, close-end finds either

redeem their money to their investors or convert them to open-ended

funds.


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choose once and then just use over their investment lifetimes, without

worrying about whether their fund manager is going to stay with the fund

or whether he will sustain the performance, choose passive funds.

Investors who want returns that are ahead of the market, and do not mindtaking the higher risk that comes due to the fund managers risk, choose

active funds.

4 .3 .2.1 Active Fund

The reason for the existence of an active fund is to beat the

benchmark it has chosen to measure its performance against. The fundmanagers of active funds believe they have the ability to select stocks and

time the market in a manner that makes the returns on their portfolio

higher than what the market (in the form of the benchmark) gives over a

specific period of time. Active funds have fund managers who have the

freedom to pick and choose stocks they want to buy or sell. Of course,

the freedom comes in an institutional structure with internal rules. Since

fund managers are actively involved, there are costs on research &

transaction.

4 .3 .2.2 Pa ss ive Fund

Also called index funds since their only aim is to mimic an index, they

dont have fund managers. In fact they dont need fund managers. They

simply mimic their benchmark indices. They invest in scripsand inexactly the same proportionas lie in their benchmark indices. They

move up & down as much as their benchmarks move. For example, a

passive fund on the Nifty index will buy all 50 stocks on the Nifty in the


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same proportion as held by the Nifty. Each time a stock is taken out or

added to the Nifty index, the fund will do the same. On a day to day

basis, this makes lesser work than what managing active funds would

entail. Changes in the composition of the index are usually not more thanonce a year. However, the individual weights of scrips in an index change

every day and since index funds are mandated to simultaneously change

their scrip weights in the last half hour before the equity market closes,

by rebalancing their existing their existing portfolios, index funds do end

up incurring some cost. Investors can expect almost the same return as

the index their fund tracks, though there will be a small difference between an index funds performance and that of its benchmark. Called

tracking error, this is caused because of the small cash component that

every index find keeps (to face redemption pressure) and also the various

costs that it incurs (that eventually reduces your funds NAV) such as

brokerage, advertising & marketing. Costs are lower in a passive fund as

compared with an active fund. Passive funds are of two kindsindex

mutual funds & exchange traded funds (ETFs).

An ETF is an index fund with just one difference from the investors

point of view. Investors can buy and sell ETFs on the stock markets as

they need to be listed on a stock exchange. ETFs come with several

advantages over an index fund. First, they have lower fee that index

funds and lower tracking error. They also allow you the facility of real

time buying & selling, unlike index funds that will give you the price

once a day on which you will invest.


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4 .3 .3 Thematic Fund s

Thematic Funds asset allocation and investment universe are structured

on a theme. Not as restrictive as sector funds, the theme could run wellacross the sectors. The classic example of a theme fund is the

INFRASTRUCTURE FUND of any AMC.

4 .3 .4 Sector Fund s

Sector funds restrict their investments to a particular segment or a sector

and hence quite restrictive. Concentrations in terms of stocks/sector may be part of this fund.

4 .3 .5 Gilt fund s

Gilt Funds invest their corpus in securities issued by Government,

popularly known as G-Sec (Government Securities). These Funds carry

zero Default risk but carry Interest Rate risk, which generally determinesthe rate of return on these funds. These funds are safer investment option

as they invest in securities backed by Government.

4 .3 .6 Fund of Fund s

Mutual funds that do not invest in financial or physical assets, but do

invest in other mutual fund schemes offered by different AMCs, areknown as Fund of Funds. Fund of Funds maintain a portfolio comprising

of units of other mutual fund schemes, just like conventional mutual funds

maintain a portfolio comprising of equity/debt/money market instruments

or non financial assets. Fund of Funds provide investors with an added


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advantage of diversifying into different mutual fund schemes with even a

small amount of investment, which further helps in diversification of

risks. However, if the fund of funds carries an operating expense,

investors are essentially paying double for an expense that is alreadyincluded in the expense figures of the underlying funds.

4 .4 How Fund s Work

A mutual fund in India has a three-part structure a sponsor, trust and asset

management company (AMC). The sponsor is the promoter with a business view

who initiates the business to earn a profit. The AMC is the entity that managesthe business of the mutual fund. The trust is the entity that holds the investors

money so that neither the sponsor nor the AMC can use it for purposes other than

the investment mandate of the mutual fund. A trust is also the internal

governance body that ensures protection of investor interest. India has not seen as

single instance of a mutual fund running away with the investors money, as was

seen in the case of plantation companies and many other get-rich-quick schemes

over the years. The market value may have been due to market value may have

been halved, but that has been due to market valuations and not because the

sponsor or your AMC has run away with your money. If the sponsor loses

business interest, he can sell his stake to another sponsor who takes over the fund.

Investors face market risk, but not the risk of systemic fraud when they invest in

a mutual fund.


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There are some basic rules of understanding a mutual fund and evaluating its

performance. Investors need to study these before they make investment

decisions.

There are four things investors need to know before they invest:

1. What is the investment mandate of the fund they are choosing?

2. What is the benchmark the fund tracks its performance against?

3. What is the return history of this fund?

4. What are the costs that they will face?

Investment

Mandate

BenchmarkReturn

History


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1. Investment Mandate:

You need to ask the question- what the fund aims to do with my

money. As the investment mandate defines what your fund is and where it

aims to invest your money, it tells you whether or not the fund is suited for you. Every mutual fund scheme is supposed to have an investment mandate.

This mandate tells you what the fund is about and what it does. It lays down

the boundary within which the fund is supposed to play. The details of this

mandate are present in the offer document. An offer document tells you

everything that you need to know about a particular scheme and also the

fund house. This is a legal document that says that your fund cannot invest beyond its mandate. If you find that your fund has crossed its investment

mandate, you have the right to take action.

2. Benchmark:

If your fund returns 10% over a year, how do you know whether it is

good or bad performance? Enter benchmark indices. Every fund is mandated

to have a benchmark index and is also mandated to compare its own

performance with that of the benchmark index. This gives you an idea of

how your fund is performing. If you find that your fund is consistently

underperforming the benchmark index, its time to exit and switch to a better

performing fund. For example, your fund may have returned 50% over a

particular year, but if the index it tracked, say, the Sensex, went up by 70%,

your fund has lost your money. You would have been better off investing ina passive broad market index fund or a better performing active fund with a

similar investment mandate.


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3. Return History:

Although past performances dont guarantee future returns, it gives

you comfort if your fund has performed well in the past. It gives you an

indication of how the fund has done. Take a look at past performances of funds in their fact sheets that they disclose once a month or every quarter.

You can also check out a funds website to know more about their

performances.

4. Costs Of A Fund:

As managing peoples money incurs costs, mutual funds are allowedto charge these to investors. Your funds NAV comes down to the extent of

this cost that MFs are allowed to charge you. Over the years, the costs of

funds have come down due to regulatory action and growth in the fund size.

Earlier, funds were allowed to charge up to 6% of the assets it collected

every time it launched a scheme. If the new fund offer (NFO) collected Rs.1,

000 crore, Rs.60 crore could be taken away from your money towards

marketing charges and commissions to the agents. Sebi banned open-ended

funds to charge this cost from April 2006 and closed-end funds from January

2008. There are four kinds of costs investors need to understand.

a. Loads:

These are embedded costs in the price of a mutual fund that are

collected by the fund house and given to the agent or bank who sellsyou the fund. It is a price you pay for the services received in helping

you buy the product. Effective 1 August 2009, it has become a lot

cheaper to invest in mutual funds as Sebi abolished entry loads that


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were earlier at 2.25% of your investment. You need to pay fees

directly to your agent, commensurate to his services, though entities

such as banks do deduct a sales charge from your investment money.

You can also invest in MFs through online portals that are free of costat present. They offer the convenience of investing in funds through

an online platform as well as other tools to track your portfolio. Most

brokerages and banks also offer facilities to buy funds through them.

They press nominal charges though. For instance, some large

brokerages charge Rs.100 for all lump sum investments, irrespective

of the amount (for portfolio values of less than Rs.8 lakh). Few otherscharge Rs.100 every quarter.

b. Fund Management Charge:

Equity funds can charge a maximum of 2.5% of the net assets.

Debt funds can charge a maximum of 2.25% of the net assets. Usually

as the size of the mutual fund grows, economies of scale kick in and

costs per head tend to go down. Large equity funds with assets under

management (AUM) of over Rs.500 crore now charge a little under

2% as their annual costs, while the smaller ones cost the full 2.5%.

The total cost also includes fund management charges of a maximum

of 1.25%. This is the income of your AMC that pays salaries to your

fund managers. Any costs incurred over and above the limit are

absorbed by the fund house.


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c. Exit Cost:

Many funds charge exit loads or a charge on your money when

you want to sell your investment. This is mostly up to 1% of your

investment amount. However, exit loads are charged usually for earlywithdrawals such as six months to a year for equity funds. They act as

a deterrent to quick withdrawals that could put pressure on fund

managers to generate cash to meet redemption. After a year, most

equity funds become zero exit load.

d.

Tax:Tax is imposed when you withdraw your money from MFs. If

you withdraw from an equity fund before one year, you pay 15% tax

on your capital gains (selling price less cost price). Capital gains are

exempt from tax if you withdraw from an equity fund after one year

of investing. Withdrawals from debt funds are taxed at income-tax

rates if you withdraw your debt funds before one year. If you

withdraw from debt funds after a year, you pay 10% tax without

indexation or 20% with indexation. Dividends are tax free in your

hands. However, debt funds pay a dividend distribution tax (DDT) of

13.840% of the dividend amount that they distribute. Though

dividends are tax-free in your hands, DDT comes out of the dividend

to be distributed. So, in effect, its you who end up paying the tax.

Dividends from equity-oriented funds are completely tax-free. Theseare going to change if the revised Direct Taxes Code, tabled in mid-

June, comes into force. Most of the tax shelters for funds will go

away.


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4 .5 How to Choo s e a Fund

Knowing about the fund is only one part of the journey. You need to match your

investment needs-stage in life and your own appetite for risk to match your profile

with that of mutual fund you buy. Investor tend to get swayed either by recent top

performance of a fund or by a sharp sales practices. Mature investing would mean

matching own needs to product in the market and if you cannot do this by yourself,

paying an advisor or financial planner to do this for you.

4 .5 .1 Why do you need a fund?

Ask yourself why you need a mutual fund. Since there are over

thousand schemes in the market today, you need to match what you need

with what you buy. Here are some reasons why you need a mutual fund and

some fund type that go with it.


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1. If you just want to park your cash, you need a liquid fund, preferably an

ultra short term fund.

2. It you want to invest about 2 years, but you may just need the money any

time after, say six months; you need to buy a short term bond fund.

3. If you dont need the money immediately and can take some risk, you can

invest in low-risk equity-diversified fund, such as a passive fund like an

index or an exchange rated fund.

4. If you dont need the money immediately but are comfortable with

taking high risk, you can invest in actively managed equity fund.

5. If you are retired with a good pension and have a surplus that you need to

invest you need a equity fund if you are willing to take risk or a balanced

fund with an equity exposure to keep your money ahead of inflation.

4 .5 .2 How old are you?Age is an important factor in understanding what product you should

buy. Ideally the younger you are the more you should you invest in equity.

A rough rule of thumb subtracts age from 100 to arrive at how much of

your portfolio should go into equity product. However, the exceptions to

this rule are many. There are many senior citizen who earn good pension

and has surplus cash that they can like to invest in equity even through their

age may not indicate such a high risk appetite. You need to keep your ownfinances in your mind before you apply this rule.


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kicker in returns, you need to take some risk to be able to earn more then

inflations the letter can easily eat into your return over a period of time.

4 .5 .5 How to buy a mutual fund?You can buy directly from the mutual fund house or from an agent or

a distributor. If you wish to go directly, you have 2 choices. Visit the funds

website and download your chosen schemes invest application forms. You

can also get the form from its registrar and transfer agent office. Fill the

form, attach the cheque, and submit it either at your funds office or its

registrars office. If you have an agent, have him deliver the form to you. Fillthe form, attach the cheque and submit it to your agent. Alternatively, you

can also ask your bank to help you invest in mutual fund .They will charge

you though. Now, online brokerages also allow you to buy mutual funds. If

this online brokerages belongs to banks, they would mandate you to open a

bank account with them, else, independent online portals that specialize in

mutual funds invest in typically have tie-ups with several banks.A new trend that became visible in 2009 was the use of online

comparison, transecting and maintaining portal that do not charge anything

yet offer a slave of services.

Transacting funds over the internet is not new and can be done in

several ways. One, most fund houses have been offering there own schemes

online. But this is a just half the solution for an investor who has a portfolio

of several holdings. Getting a consolidated look at his net worth is a

transaction nightmare along this road. Two, all brokerages, including online,

also offer MFs in addition to equity shares. There, banks, too, allow

transaction in mutual funds on their own website.


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Investors run the risk of getting a filtered choice of schemes of still

paying transaction cost that may charge as much as 1.75% of their

investment for just moving money from their saving accounts to the funds.

The new kids on the blog are independent online MF portals such asFundsIndia.com, Fundsupermart.co.in and powermf.com. This work like

online market places for funds .These are do-it-yourself channels meant for

those who are confident of taking their own decision. Some charges you

nothing for a choice of most funds and facility to consolidate your MF

investments at one place.

Online market such as fundsIndia.com and fundsupermart.co.in arefree and earn trail commissions, but other are not most brokerage and banks

press nominal charges.

Next to cost is the choice parameter. Typically, banks offer a white choice,

though some are choosy. Online broker and market places have most funds.

But it is best to check. For example, fundsIndia.com does not have MF

schemes of some key fund houses.

The next in line is convenience. While brokerage gives you a consolidated

holding statement across your equity and MF investment, online market

place give you a consolidated statement just for funds. What these sides do

allow, however, is portfolio analysis in many interesting ways. For example,

it could give your total investment in Infosys technologies limited or, say,

the pharmaceuticals sector, across all your mutual funds holdings.


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Fig. 4.6 Chart of Mutual Fund

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.


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4 .7 Inve s tment Strategie s

1. Sy s tematic Inve s tment Plan: Under this a fixed sum is invested each month

on a fixed date of a month. Payment is made through post dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and

more units when the NAV is low. This is called as the benefit of Rupee Cost

Averaging (RCA)

2. Sy s tematic Tran s fer Plan : Under this an investor invest in debt oriented fund

and give instructions to transfer a fixed sum, at a fixed interval, to an equity

scheme of the same mutual fund.

3 . Sy s tematic Withdrawal Plan : If someone wishes to withdraw from a mutual

fund then he can withdraw a fixed amount each month.

Fig. 4.7 RISK V/S RETURNS


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Fig. 4.8 Risk Return Matrix


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4 .8 Organizational Hierarchy

Fig 4.9 Organizational Hierarchy

4 .8.1 Structure of Mutual Fund s in India

Like other countries, India has a legal framework within which mutual funds

must be constituted. In India, open and closed-end funds operate under the

same regulatory structure, i.e. in India; all mutual funds are constituted alongone unique structure-as unit trust. A mutual fund in India is allowed to issue

open-end and close end schemes under a common legal structure. Therefore, a

mutual fund may have different schemes (open and closed-end) under it i.e.

under one unit trust, at any point of time. The structure, which is required to be


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followed by mutual funds in India, laid down under SEBI (Mutual Fund)

Regulations, 1996.

4 .8.2 The Fund Spon s or

'Sponsor" is defined under SEBI regulations as any person who, acting Alone or

in combination with another body corporate, establishes a, mutual fund. The

sponsor of a fund is akin to the promoter of companies he gets the fund registered

with SEBI. The sponsor will form a Trust and appoint a board of Trustees. The

sponsor will also generally appoint an Asset management Company (AMC) as

fund managers. The sponsor ill also appoint a Custodian to hold the fund assets.

All these appointment are made in accordance with the SEBI regulations. Per the

existing SEBI regulations, for a person to qualify as a sponsor, must contribute at

least 40% of the net worth of the AMC and issues a sound financial track over

five years prior to registration.

4 .8.3 Mutual Fund s a s Tru s ts

Mutual fund in India is constituted in the form of a Public Trust under the Indian

Trusts Act 1882.The fund invites investors. Contribute their money in the

common pool by subscribing to units Issued by various schemes established by

the trust as evidence of their beneficial interest in the fund.

The trust or fund has no legal capacity itself rather it is the Trustee(s) who havelegal capacity and therefore the trustees take all acts in relation to the trust on its

behalf.


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4 .8.7 Di s tributor s

AMCs usually appoint Distributors or Brokers, who sell units on behalf bf the

fund. Some funds require that all transactions to be routed through such brokers.

In India, besides brokers, independent individuals are appointed as agents for the

purpose of selling the fund scheme to the invest

3S of IDFC Mutual Fund

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