Synopsis of Paras

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A

PROJECT REPORTOn

Comparative Study of Mutual Fund in India of two

companies

To be submitted in partial fulfillment for the requirement

of the degree of

Master of Business Administration (MBA) Indira Gandhi

National Open Universsity

Session

2010-2011

Under the Guidance of : Submitted by:

Mr. Suboor Khan Paras SinghalAsstt. Professor Roll. No. 0900570050

(M.B.A Deptt.)

F.M.C.A. Rajabalwant Singh College,

Khandari Farm Campus, Agra


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This Research report is made by me during the 4th

semester in

partially fulfillment of the for Master of Business

Administration (M.B.A.) Students are essentially required to

conduct a research project work on the topic provided by the related

department of the institute. The idea behind it to test acquired

knowledge through practical experience and to apply the rhetorical

aspect of management in the practical field. This research report on

the study Studyof Mutual Fund and Comparison between

two companies

Paras Singhal

MBA 4th

Sem

Roll. No. 0900570050


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I am thankful to Mr. Suboor Khan Asstt. Professor FMCA , RBS College, Agra

who provided me with the opportunity and guided me in successful completion of my

project. I would also like to acknowledge my sincere thanks to various faculty members

under their valuable guidance, constant interest and encouragement, who have devoted

their ever-precious time from their busy schedule and helped me in completing the project.

Special, continual assistance while collecting the data was provided by the

respondents. I wish to acknowledge my special thanks to them for their help and

cooperation in order to complete this project.

Paras SinghalMBA 4

thSem

Roll. No. 0900570050


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DECLARATION


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DECLARATION

I Paras Singhal do hereby declare that the project report titled Study of

Mutual Fund and Comparison between two companies

is genuine research work under taken by me and it has not been published any

where earlier.

Paras Singhal

MBA 4th

Sem

Roll. No. 0900570050

Date :-

Place:- Agra


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Table of Contents

Page No.


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Chapter-1

INTRODUCTION TO THE TOPIC


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INTRODUCTION TO THE TOPIC

As the people like to invest their savings in such a manner

that they could get a good return on it and these investments are also

safe. This project will be helpful in identifying the best available Mutual

Funds in the market.

Mutual Funds have over the time become one of the most popular

investment avenues worldwide for both Institutional and Retail

Investors. The increasing importance of mutual fund as a vehicle for

investment has led to higher focus on its performance evaluation.

Under this Project a comparative study of top 5 Mutual Funds

Companies in the market is done. These companies have been selected

for comparison because of their good past performances, good responses

of public and are considered as top 5 Mutual Fund Companies according

to the rating company CRISIL.


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INTRODUCTION

It is said, Necessity is the mother of invention. Innovation

has been always the spirit of human nature. In the financial sector

also, several new instruments had been innovated in tune with the

market needs. The constraints of banks to provide growth with

market yields for the investors section of society has already given

birth to one more new institution the Mutual Fund.

Therefore, emergence of mutual funds in the Indian scene is a

product of necessity. The constraints on the banking sector to tap

the fruits of the capital market and the reluctance of the investors

to take a direct plunge in complex and erratic capital market

operation required an intermediary. Mutual fund fills this gap

admirably.

The word mutual denotes something to be done collectively by

a group of people with the common objective having mutual faith

and understanding among them. The other part of the word, i.e.

fund is used in monetary terms, to collect some money from the

members of the mutual fund for a common objective of all the

members of the group. Here the common objective of the members


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of mutual fund can be well guessed as earning the profits from a

huge collective fund with a joint effort.

Mutual fund has been defined as it is a non-depository or

non-banking financial intermediary which acts as important vehicle

for bringing wealth holders and deficit units together indirectly.

According to Dr. Vinayakam, N. a Mutual Fund is an indirect

investment made by the public by pooling in sources. The fund per

se comprises equal units/ shares/ certificates and the public

invests its savings in them depending on the quantum of resources

available with the individuals. The fund uses these savings for

investment in equity shares and debentures of various companies.

The resulting earnings are distributed among the fund owners.

Mutual funds perform as per their portfolio, and better the portfolio

management, it will give better returns.

A mutual fund is a single; large professionally managed

investment organization that combines the funds of many

individual investors having similar investment objectives. In rapidly

changing stock markets, it is essential to respond positively and

quickly to events, which tend to move share prices. The search for

maximum returns has to be balanced against the need to control

risk. A mutual fund is able to reduce such risk associated with


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investments by investment in a large number of companies across

different industries. An individual investor with limited financial

resources may be unable to do so. The guiding factor behind

investment decisions of a mutual fund is the fundamental strength

of a share determined by the overall economic situation. The

research dept. is the backbone of a mutual fund, which devises

investment strategies based upon market knowledge, experience

and the expertise.

A mutual fund is a pool of co-mingled funds invested by

different investors. Most mutual fund investors do not know each

other and never have contact with each other. The investment

management of such a pool of funds is usually performed by a

professional money management firm for a fee of say 1% of the

market value of all the assets managed each year. Such managers

invest the funds in a diversified portfolio of securities they research

and analyze and expect to perform well. The owners of shares in

mutual funds may either invest more money or withdraw their

money at time from the mutual fund scheme.


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HISTORY OF MUTUAL FUNDS IN INDIA

(1964 - 2003)

The end of millennium marks 36 years of existence of mutual

funds in this country. The ride through these 36 years is not been

smooth. Investor opinion is still divided. While some are for mutual

funds others are against it.

UTI commenced its operations from July 1964 .The impetus

for establishing a formal institution came from the desire to

increase the propensity of the middle and lower groups to save and

to invest. UTI came into existence during a period marked by great

political and economic uncertainty in India. With war on the

borders and economic turmoil that depressed the financial market,

entrepreneurs were hesitant to enter capital market.

The already existing companies found it difficult to raise fresh

capital, as investors did not respond adequately to new issues.Earnest efforts were required to canalize savings of the community

into productive uses in order to speed up the process of industrial

growth.

The then Finance Minister, T.T. Krishnamachari set up the

idea of a unit trust that would be "open to any person or institution

to purchase the units offered by the trust. However, this institution

as we see it, is intended to cater to the needs of individual

investors, and even among them as far as possible, to those whose

means are small."

His ideas took the form of the Unit Trust of India, an

intermediary that would help fulfill the twin objectives of mobilizing


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retail savings and investing those savings in the capital market and

passing on the benefits so accrued to the small investors.

UTI commenced its operations from July 1964 " with a view to

encouraging savings and investment and participation in the

income, profits and gains accruing to the Corporation from the

acquisition, holding, management and disposal of securities."

Different provisions of the UTI Act laid down the structure of

management, scope of business, powers and functions of the Trust

as well as accounting, disclosures and regulatory requirements for

the Trust.One thing is certain the fund industry is here to stay. The

industry was one-entity show till 1986 when the UTI monopoly was

broken when SBI and Can bank mutual fund entered the arena.

This was followed by the entry of others like BOI, LIC, GIC, etc.

sponsored by public sector banks. Starting with an asset base of

Rs. 25 crore in 1964 the industry has grown at a compounded

average growth rate of 27% to its current size of Rs.90000 crore.

The period 1986-1993 can be termed as the period of public

sector mutual funds (PMFs). From one player in 1985 the number

increased to 8 in 1993. The party did not last long. When the

private sector made its debut in 1993-94, the stock market was

booming.

The opening up of the asset management business to private

sector in 1993 saw international players like Morgan Stanley,

Jardine Fleming, JP Morgan, George Soros and Capital

International along with the host of domestic players join the party.

But for the equity funds, the period of 1994-96 was one of the worst

in the history of Indian Mutual Funds.


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First Phase 1964-87

An Act of Parliament established Unit Trust of India (UTI) on

1963. It was set up by the Reserve Bank of India and functioned

under the Regulatory and administrative control of the ReserveBank of India. In 1978 UTI was de-linked from the RBI and the

Industrial Development Bank of India (IDBI) took over the

regulatory and administrative control in place of RBI. The first

scheme launched by UTI was Unit Scheme 1964. At the end of 1988

UTI had Rs.6,700 crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual

funds set up by public sector banks and Life Insurance Corporation

of India (LIC) and General Insurance Corporation of India (GIC). SBI

Mutual Fund was the first non- UTI Mutual Fund established in

June 1987 followed by Can bank Mutual Fund (Dec 87), Punjab

National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund

(Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct

92). LIC established its mutual fund in June 1989 while GIC had

set up its mutual fund in December 1990.

At the end of 1993, the mutual fund industry had assets under

management of Rs.47,004 crores.

Mutual funds have been around for a long period of time to be

precise for 36 yrs but the year 1999 saw immense future potential

and developments in this sector. This year signaled the year of

resurgence of mutual funds and the regaining of investor confidence

in these MFs. This time around all the participants are involved in

the revival of the funds ----- the AMCs, the unit holders, the other


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related parties. However the sole factor that gave lifer to the revival

of the funds was the Union Budget. The budget brought about a

large number of changes in one stroke. An insight of the Union

Budget on mutual funds taxation benefits is provided later.

It provided center stage to the mutual funds, made them more

attractive and provides acceptability among the investors. The

Union Budget exempted mutual fund dividend given out by equity-

oriented schemes from tax, both at the hands of the investor as well

as the mutual fund. No longer were the mutual funds interested in

selling the concept of mutual funds they wanted to talk business,which would mean to increase asset base, and to get asset base,

and investor base they had to be fully armed with a whole lot of

schemes for every investor. So new schemes for new IPOs were

inevitable. The quest to attract investors extended beyond just new

schemes. The funds started to regulate themselves and were all out

on winning the trust and confidence of the investors under the

aegis of the Association of Mutual Funds of India (AMFI). One can

say that the industry is moving from infancy to adolescence, the

industry is maturing and the investors and funds are frankly and

openly discussing difficulties opportunities and compulsions.

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

With the entry of private sector funds in 1993, a new era

started in the Indian mutual fund industry, giving the Indian

investors a wider choice of fund families. Also, 1993 was the year in

which the first Mutual Fund Regulations came into being, under

which all mutual funds, except UTI were to be registered and


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governed. The erstwhile Kothari Pioneer (now merged with Franklin

Templeton) was the first private sector mutual fund registered in

July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by

a more comprehensive and revised Mutual Fund Regulations in

1996. The industry now functions under the SEBI (Mutual Fund)

Regulations 1996.

The number of mutual fund houses went on increasing, with

many foreign mutual funds setting up funds in India and also the

industry has witnessed several mergers and acquisitions. As at theend of January 2003, there were 33 mutual funds with total assets

of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541

crores of assets under management was way ahead of other mutual

funds.

Fourth Phase

since February 2003In February 2003, following the repeal of the Unit Trust of

India Act 1963 UTI was bifurcated into two separate entities. One is

the Specified Undertaking of the Unit Trust of India with assets

under management of Rs.29,835 crores as at the end of January

2003, representing broadly, the assets of US 64 scheme, assured

return and certain other schemes. The Specified Undertaking of

Unit Trust of India, functioning under an administrator and under

the rules framed by Government of India and does not come under

the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI,

PNB, BOB and LIC. It is registered with SEBI and functions under

the Mutual Fund Regulations. With the bifurcation of the erstwhile


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UTI which had in March 2000 more than Rs.76,000 crores of assets

under management and with the setting up of a UTI Mutual Fund,

conforming to the SEBI Mutual Fund Regulations, and with recent

mergers taking place among different private sector funds, the

mutual fund industry has entered its current phase of consolidation

and growth. As at the end of October 31, 2003, there were 31

funds, which manage assets of Rs.126726 crores under 386

schemes.


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ORGANIZATION OF A MUTUAL FUND

Essentially there are four parties to any mutual fund

organization. These are:

The Sponsor

The Asset Management Company (AMC)

The Trustees

The Custodians

THE SPONSOR

A mutual fund is set up b a company, which is called the

sponsor. Sponsor must be has a sound track record, general

reputation and fairness among the players in its business

transactions {SEBI (Mutual Funds) regulations, 1993}. Now in India

a sponsor can be financial institution like ICICI, a bank either in the

public sector or in the private sector like state bank of India (SBI),

life insurance corporation of India (LIC), General insurance

corporation of India (GIC), Unit trust of India and a body corporate

registered under the Indian companies Act, 1956 like HB portfolio

leasing Ltd.

THE ASSET MANAGEMENT COMPANYMutual funds are to be operated by a separate Asset

Management Company (AMC). The asset management Company

operates and manages the fund of the mutual fund schemes and

mutual fund regulations issued from time to time by the Securities

and Exchange Board of India (SEBI). It has to submit a quarterly

report on the functioning of the funds to the trustees. The asset


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Management Company employs professionals from various fields for

conducting the research and taking investment decisions for the

maximization of return on investments made by the mutual fund in

the capital market. The general success of mutual fund lies in the

quantum of return on investments to any scheme of the fund.

To ensure efficient management, SEBI desires that existing

Asset Management Company should have a sound track record

(good net worth, dividend paying capacity and profitability, etc.)

general reputation and fairness in transactions. The directors of

AMC should be expert in relevant fields like portfolio management,investment analysis and financial administration.

TRUSTEESThe third essential of a mutual fund is the Trustee. A trustee

is a person who holds the property of mutual fund in trust for the

benefit of the unit holders. Trustees have the exclusive ownership of

the Trust Fund and are also vested with the general power of

superintendence, direction and management of the affairs of the

Trust. The Trustees ensure that Asset Management Company

fulfills the duties and functions assigned to it. The Trustees are the

persons of very high repute and experts in their fields.

Once a mutual fund trust is formed, virtually the role of thesponsor comes to an end, as it is mutual trust, which takes charge

of the mutual fund, which takes charge of the mutual fund to

interact with the SEBI. To ensure fair dealings, mutual fund

regulations require that one cannot be a trustee or a director of a

trustees company in more than one mutual fund. Further at least


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50% of the trustees are bound to be independent of the sponsors.

These independent trustees may enjoy multi-trusteeships. Asset

Management Company or its directors or its employee shall not act

as trustees of any mutual fund.

The trustees appoint Asset Management Company (AMC) to

float the mutual fund schemes in consultation with the sponsors.

The trustees are to evolve investment management agreement to be

entered into with Asset Management Company. It is the duty of the

trustee to observe and ensure the Asset Management Company is

managing the schemes in accordance with the trust deed. Trustees

are vested with the power to dismiss Asset Management Company if

they are not satisfied with the working of the AMC. For their

services, trustees are paid their trusteeship fees, which are specified

in the trust deed itself. Trustees are to present annual report to the

investors of the mutual fund.

Some of the main obligations of Asset Management Company

are as under:

1.To appoint the custodians of the mutual fund.

2.To appoint registrar and share transfer agents.

3.To file a detail of the transactions in securities with the

trustees.

4.To report the trustees about any investment made in acompany, which has invested more than 5% of net asset value

of any scheme of the mutual fund.

5.To ensure that investments of the mutual fund schemes are as

per the provisions of regulations.


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6.To file with the trustees the details of the transactions in

securities made by its officials in their own name or on behalf

of the asset Management Company.

7.To report the trustees any transaction in securities with any of

its associates.

CUSTODIANS

SEBI requires that each mutual fund shall have an

independent custodian. The custodian should be an agency, which

is registered with SEBI under the SEBI (Custodian of Securities)

regulations, 1996. In a mutual fund there is substantial work

involved for managing the scrips bought from the capital market.

Their safe custody and ready availability has to be ensured to

execute the quick decisions to buy or sell the scrips. Custodians

main function is safekeeping of securities and to participate in a

clearing system on behalf of the mutual fund to effect deliveries of

the securities. The main function of a custodian is to ensure

delivery of scraps only in receipt of payment and to make payment

only on receipt of scrip's.


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Review

of

Literature


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Review of Literature

CLASSIFICATION OF MUTUAL FUNDS

FUNCTIONAL CLASSIFICATION

OPEN-ENDED FUND

An open-ended fund or scheme is one that is available for

subscription and repurchase on a continuous basis. These schemes

do not have a fixed maturity period. Investors can conveniently buy

and sell units at Net Asset Value (NAV) related prices, which aredeclared on a daily basis. The key feature of open-end schemes is

liquidity.

CLOSE-ENDED FUND

A close-ended fund or scheme has a stipulated maturity period

e.g. 5-7 years. The fund is open for subscription only during aspecified period at the time of launch of the scheme. Investors can

invest in the scheme at the time of the initial public issue and

thereafter they can buy or sell the units of the scheme on the stock

exchanges where the units are listed. In order to provide an exit

route to the investors, some close-ended funds give an option of

selling back the units to the mutual fund through periodic

repurchase at NAV related prices. SEBI Regulations stipulate that

at least one of the two exit routes is provided to the investor i.e.

either repurchase facility or through listing on stock exchanges.

These mutual funds schemes disclose NAV generally on weekly

basis.


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INVESTMENT OBJECTIVE CLASSIFICATION

A scheme can also be classified on the basis of the investment

objectives that are they are designed to meet the objectives of

different types of savers. This classification can also be name as

portfolio classification. Such schemes may be open-ended or close-

ended schemes. Such schemes may be classified mainly as follows:

GROWTH / EQUITY ORIENTED SCHEME

The aim of growth funds is to provide capital appreciation over

the medium to long- term. Such schemes normally invest a major

part of their corpus in equities. Such funds have comparatively high

risks. These schemes provide different options to the investors like

dividend option, capital appreciation, etc. and the investors may

choose an option depending on their preferences. The investors

must indicate the option in the application form. The mutual funds

also allow the investors to change the options at a later date.

Growth schemes are good for investors having a long-term outlook

seeking appreciation over a period of time.

INCOME / DEBT ORIENTED SCHEME

The aim of income funds is to provide regular and steady

income to investors. Such schemes generally invest in fixed income

securities such as bonds, corporate debentures, Government

securities and money market instruments. Such funds are less

risky compared to equity schemes. These funds are not affected

because of fluctuations in equity markets. However, opportunities

of capital appreciation are also limited in such funds. The NAVs of


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such funds are affected because of change in interest rates in the

country. If the interest rates fall, NAVs of such funds are likely to

increase in the short run and vice versa. However, long-term

investors may not bother about these fluctuations.

BALANCED FUND

The aim of balanced funds is to provide both growth and

regular income as such schemes invest both in equities and fixed

income securities in the proportion indicated in their offer

documents. These are appropriate for investors looking for

moderate growth. They generally invest 40-60% in equity and debt

instruments. These funds are also affected because of fluctuations

in share prices in the stock markets. However, NAVs of such funds

are likely to be less volatile compared to pure equity funds.

MONEY MARKET OR LIQUID FUNDThese funds are also income funds and their aim is to provide

easy liquidity, preservation of capital and moderate income. These

schemes invest exclusively in safer short-term instruments such as

treasury bills, certificates of deposit, commercial paper and inter-

bank call money, government securities, etc. Returns on these

schemes fluctuate much less compared to other funds. These fundsare appropriate for corporate and individual investors as a means to

park their surplus funds for short periods.


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LEVERAGED FUNDS

Leveraged funds or borrowed funds are used in order to

increase the size of the value of the portfolio and benefit the

shareholders by gains exceeding the cost of the borrowed funds.

Funds are used in speculative and risky investments like short sale

to take advantage of declining market to realize gains in the

portfolio. Short sales decrease loss of the portfolio in a declining

market and vice versa in rising market.

DUAL PURPOSE FUNDS

Income and growth are two objectives, which are

achieved by offering half of the amount of funds to those investors

who wish regular income and half to those who wish growth. The

funds thus received are pooled together and used for investment.

Any income derived from the portfolio goes to the investors who

hold income shares. The investors who hold capital shares receive

no income. Instead they receive capital gains or losses that result

from investments of total portfolio.

REAL ESTATE FUND

Real estate fund is of closed-end type. The fund is named so

because of the primary investment in real estate ventures. Such

funds are of various types depending upon real estate transactions.

PERFORMANCE FUNDS

The investment is made in buying equity shares of small-

unseasoned companies with relatively high price earnings ratio and


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higher price volatility. Such funds were set up in USA in 1960s to

seek large profits in high-flying common stocks.

SPECIALITY FUNDS

The investment is made in good track record companies,

which offer long-term capital growth and provide handsome

dividend income.

INDEX FUNDS

Index Funds replicate the portfolio of a particular index such

as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These

schemes invest in the securities in the same weight age comprising

of an index. NAVs of such schemes would rise or fall in accordance

with the rise or fall in the index, though not exactly by the same

percentage due to some factors known as "tracking error" in

technical terms. Necessary disclosures in this regard are made in

the offer document of the mutual fund scheme. There are also

exchange traded index funds launched by the mutual funds, which

are traded on the stock exchanges.

GILT FUND

These funds invest exclusively in government securities.

Government securities have no default risk. NAVs of these schemes

also fluctuate due to change in interest rates and other economic

factors as are the case with income or debt oriented schemes.


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SPECIALIZED FUNDS

These are the funds/schemes, which invest in the securities of

only those sectors or industries as specified in the offer documents.

e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods

(FMCG), Petroleum stocks, etc. The returns in these funds are

dependent on the performance of the respective sectors/industries.

While these funds may give higher returns, they are more risky

compared to diversified funds. Investors need to keep a watch on

the performance of those sectors/industries and must exit at an

appropriate time. They may also seek advice of an expert.

TAX SAVING SCHEMES

These schemes offer tax rebates to the investors under specific

provisions of the Income Tax Act, 1961 as the Government offers

tax incentives for investment in specified avenues. e.g. Equity

Linked Savings Schemes (ELSS). Pension schemes launched by the

mutual funds also offer tax benefits. These schemes are growth

oriented and invest pre-dominantly in equities. Their growth

opportunities and risks associated are like any equity-oriented

scheme.

LOAD OR NO-LOAD FUNDA Load Fund is one that charges a percentage of NAV for entry

or exit. That is, each time one buys or sells units in the fund, a

charge will be payable. This charge is used by the mutual fund for

marketing and distribution expenses. Suppose the NAV per unit is

Rs.10. If the entry as well as exit load charged is 1%, then the


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investors who buy would be required to pay Rs.10.10 and those

who offer their units for repurchase to the mutual fund will get only

Rs.9.90 per unit. The investors should take the loads into

consideration while making investment as these affect their

yields/returns. However, the investors should also consider the

performance track record and service standards of the mutual fund,

which are more important. Efficient funds may give higher returns

in spite of loads.

A no-load fund is one that does not charge for entry or exit. It

means the investors can enter the fund/scheme at NAV and noadditional charges are payable on purchase or sale of units.

GEOGRAPHICAL CLASSIFICATIONMutual funds can be classified from the angle of territorial

jurisdiction of operations in two types:

DOMESTIC MUTUAL FUNDS (DMFS)

Domestic mutual funds launch schemes, which are

operational within political territorial limits of a country for the

residents or non-residents.

OFFSHORE MUTUAL FUNDS (OMFS)Offshore mutual funds are cross border funds meant to attract

foreign savings for investment in India.


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CRITICAL REVIEW OF MUTUAL FUNDS

Why mutual funds in India performed so poorly

Most investors associate mutual funds with Master gain,Monthly Equity Plans of SBI Mutual Fund, UTI and Canbank

Mutual Fund and of course Morgan Stanley Growth Fund. This is

so be

Cause these funds truly had participation from masses, with a

fund like Morgan Stanley having more than 1 million investors.

Investors feel that after 5 years, Morgan Stanley Growth Fund units

still trade below the original IPO price of Rs.10.

It is incorrect to think that all mutual funds have performed

poorly. If one looks at some income funds, they have come with

reasonable returns. It is only the performance of equity funds,

which has been poor. Their poor performance has been amplified by

the closed end discounts i.e. units of these funds quoting at sharp

discounts to their NAV resulting in an even poorer return to the

investor.

One must remember that a Mutual Fund does not provide

assured returns and neither can it "manufacture" returns out of

thin air. Returns provided by mutual funds are a function of the

returns in the underlying asset class in which the fund invests.

Good funds can beat returns in their asset class to some extent but

thats all. E.g. take the case of a sector specific fund like a pharma

fund, which invests only in shares of pharmaceutical companies. If

the Govt. comes with new regulation that severely restricts the

pricing freedom of these companies resulting in negative outlook for


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the sector, the prices of all stocks in the sector could fall

substantially resulting in severe erosion in the NAV of the fund. No

one can do anything about it. A good fund manager would probably

sell part of the fund before prices fall too much and wait for an

opportune time to reinvest at lower levels once the dust has settled.

In that case, the NAV of the fund would fall to a lesser extent but

fall it will. If the investor in the fund has invested in some stocks in

the sector on his own, in all probability, his personal investments

may have depreciated to a larger extent.

Let us extend this example to an analysis of the investmentclimate in the last 7 years. The stock markets have done very badly

in the last seven years. The BSE Sensex crossed 3000 for the first

time in early 1992. Since then it has gone up and come down

several times but has remained in the same range. Effectively, for a

seven-year investment period, the total return has been almost

zero. The prices of many leading stocks of yesteryear have fallen by

more than 50% in these seven years. If one considers the fact that

the sensex has been changed several times, with all the weak stocks

having been weeded out, the effective returns on the old sensex,

existing in 1992, have been substantially negative. The following

table gives some of the prices of stocks considered "blue chips" in

1992, in 1994 and the prices prevailing at present.


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Price in Rs

Name of the

Company

1992 high 1994 high Current price

Tata Steel 552 336 418.35

Grasim Industries 650 793 1212.85

Century Textiles 490 550 219.40

Reliance Industries 218 213 567.05

Raymond 250 263 312.85

Arvind Mills 353 290 115.75

ICICI 290 197 398.10

It is quite obvious that if a fund had invested in any of these

shares in 1992 or subsequently in the 1994 boom, and if it

remained invested in the share, then it would be confronting a huge

fall in NAV. This is exactly what has happened.

A similar table for prices of shares of Public Sector

Undertakings (PSUs) is given below.

Price in Rs

Name of the Company 1994 high Present price

MTNL 325 117.40

HPCL 550 310.75

Indian Oil n/a 431.60

ONGC n/a 860.95

SAIL 83 64.65

Most mutual fund managers took some time to realize the

changed circumstances wherein the open economy ushered in by


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the liberalization took the full impact of the global deflation in

commodity prices. This problem was compounded further by the

Asian crisis after which cheap imports from Asia caused severe

pressure on profits.

To add to this, most funds had invested some part of their

portfolio in medium sized "growth" companies. Many of these

companies have performed even worse than bigger ones and quite a

few have seen share prices dip more than 90% from their 1994

highs. More important, funds could not sell these shares because of

complete lack of liquidity with, at best, few hundred shares beingtraded every day.

Meanwhile, shares of companies in sectors like consumer

goods (FMCG) and software were showing good growth and they

went up rapidly in price. Most fund managers were unwilling to sell

shares of erstwhile "blue chips" at low prices and buy shares of

emerging "blue chips" at high prices. This resulted in poor

performance and negative returns.

One more issue is that the fund managers in many funds were

not "professionally qualified and experienced". This is especially

true of some of the funds floated by nationalized banks. Some of

these individuals were transferred from the parent organization and

did not really know much about investment management.

Lastly, investors would do well to have a look at the

investments, which they made on their own. In most cases, they

would have done much worse than the mutual funds. We have

received numerous requests for advice from individual investors on

what to do about their own investments. If that were any indicator,

investors would have done really badly.


36/102

Is it true that globally mutual funds under perform

benchmark indices? Why are smart money managers unable to do

as well as the market? Or is it that they are not smart at all? What

are the limitations of mutual funds?

It is 100% true that globally; most mutual fund managers

under perform the asset class that they are investing in. It is not

true that the fund managers are dumb; this under performance is

largely the result of limitations inherent in the concept of mutual

funds. These limitations are as follows:

Entry and exit costs:Mutual funds are a victim of their own

success. When a large body like a fund invests in shares, the

concentrated buying or selling often results in adverse price

movements i.e. at the time of buying, the fund ends up paying a

higher price and while selling it realizes a lower price. This problem

is especially severe in emerging markets like India, where, excluding

a few stocks, even the stocks in the Sensex are not liquid, let alone

stocks in the NSE 50 or the CRISIL 500. So, there is simply no way

that a fund can beat the Sensex or any other index, if it blindly

invests in the same stocks as those in the Sensex and in the same

proportion. For obvious reasons, this problem is even more severe

for funds investing in small capitalization stocks. However, giventhe large size of the debt market, excluding UTI, most debt funds do

not face this problem

Wait time before investment:It takes time for a mutual fund

to invest money. Unfortunately, most mutual funds receive money


37/102

when markets are in a boom phase and investors are willing to try

out mutual funds. Since it is difficult to invest all funds in one day,

there is some money waiting to be invested. Further, there may be a

time lag before investment opportunities are identified. This ensures

that the fund under performs the index. For open-ended funds,

there is the added problem of perpetually keeping some money in

liquid assets to meet redemptions.

Fund management costs:The costs of the fund management

process are deducted from the fund. This includes marketing and

initial costs deducted at the time of entry itself, called "load". Then

there is the annual asset management fee and expenses, together

called the expense ratio. Usually, the former is not counted while

measuring performance, while the latter is. A standard 2% expense

ratio means that, everything else being equal, the fund manager

under performs the benchmark index by an equal amount.

Cost of churn:The portfolio of a fund does not remain constant.

The extent to which the portfolio changes are a function of the style

of the individual fund manager ie whether he is a buy and hold type

of manager or one who aggressively churns the fund. It is also

dependent on the volatility of the fund size i.e. whether the fundconstantly receives fresh subscriptions and redemptions. Such

portfolio changes have associated costs of brokerage, custody fees,

registration fees etc. that lowers the portfolio return

commensurately.


38/102

Change of index composition: World over, the indices keep

changing to reflect changing market conditions. There is an

inherent survivorship bias in this process, with the bad stocks

weeded out and replaced by emerging blue chips. This is a severe

problem in India with the Sensex having been changed twice in the

last 5 years, with each change being quite substantial. Another

reason for change index composition is Mergers & Acquisitions. The

weightage of the shares of a particular company in the index

changes if it acquires a large company not a part of the index.

Tendency to take conformist decisions: From the above

points, it is quite clear that the only way a fund can beat the index

is through investment of some part of its portfolio in some shares

where it gets excellent returns, much more than the index. This will

pull up the overall average return. In order to obtain such

exceptional returns, the fund manager has to take a strong view

and invest in some uncommon or unfancied investment options.

Most people are unwilling to do that. They follow the principle "No

fund manager ever got fired for investing in Hindustan Lever" i.e. if

something goes wrong with an unusual investment, the fund

manager will be questioned but if anything goes wrong with the

blue chip, then you can always blame it on the "environment" or"uncontrollable factors" knowing fully well that there are many

other fund managers who have made the same decision.

Unfortunately, if the fund manager does the same thing as several

others of his class, chances are that he will produce average

results. This does not mean that if a fund manager takes "active"

views and invests in heavily researched "uncommon" ideas, the


39/102

fund will necessarily outperform the index. If the idea does not

work, it will result in poor fund performance. But if no such view is

taken, there is absolutely no chance that the fund will outperform

the index.


40/102

BENEFITS OF MUTUAL FUNDS

Professional Management

Mutual Funds provide the services of experienced and skilled

professionals, backed by a dedicated investment research team that

analyses the performance and prospects of companies and selects

suitable investments to achieve the objectives of the scheme.

Diversification

Mutual Funds invest in a number of companies across a broad

cross-section of industries and sectors. This diversification reduces

the risk because seldom do all stocks decline at the same time and

in the same proportion. You achieve this diversification through a

Mutual Fund with far less money than you can do on your own.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you

avoid many problems such as bad deliveries, delayed payments and

follow up with brokers and companies. Mutual Funds save your

time and make investing easy and convenient.

Return Potential

Over a medium to long-term, Mutual Funds have the potential

to provide a higher return as they invest in a diversified basket of

selected securities.


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Low Cost

Mutual Funds are a relatively less expensive way to invest

compared to directly investing in the capital markets because the

benefits of scale in brokerage, custodial and other fees translate

into lower costs for investors.

Well Regulated

All Mutual Funds are registered with SEBI and they function

within the provisions of strict regulations designed to protect the

interests of investors. The operations of Mutual Funds are regularly

monitored by SEBI.

Liquidity

In open-end schemes, the investor gets the money back

promptly at net asset value related prices from the Mutual Fund. In

closed-end schemes, the units can be sold on a stock exchange at

the prevailing market price or the investor can avail of the facility of

direct repurchase at NAV related prices by the Mutual Fund.

Transparency

We can get regular information on the value of your

investment in addition to disclosure on the specific investments

made by your scheme, the proportion invested in each class of

assets and the fund manager's investment strategy and outlook.


42/102

Flexibility

Through features such as regular investment plans, regular

withdrawal plans and dividend reinvestment plans, you can

systematically invest or withdraw funds according to your needs

and convenience.

Affordability

Investors individually may lack sufficient funds to invest in

high-grade stocks. A mutual fund because of its large corpus allows

even a small investor to take the benefit of its investment strategy.


43/102

REGULATORY ASPECTS OF MUTUAL FUND

SCHEMES OF MUTUAL FUND:

The asset management company shall launch no schemeunless the trustees approve such scheme and a copy of the

offer document has been filed with the Board.

Every mutual fund shall along with the offer document of

each scheme pay filing fees.

The offer document shall contain disclosures which are

adequate in order to enable the investors to make informed

investment decision including the disclosure on maximum

investments proposed to be made by the scheme in the

listed securities of the group companies of the sponsor.

No one shall issue any form of application for units of a

mutual fund unless the form is accompanied by the

memorandum containing such information as may be

specified by the Board.

Every close ended scheme shall be listed in a recognized

stock exchange within six months from the closure of the

subscription

The asset management company may at its option

repurchase or reissue the repurchased units of a close-

ended scheme.

A close-ended scheme shall be fully redeemed at the end of

the maturity period. "Unless a majority of the unit holders

otherwise decide for its rollover by passing a resolution".

The mutual fund and asset management company shall be

liable to refund the application money to the applicants, -


44/102

(i) If the mutual fund fails to receive the

minimum subscription amount referred to in

clause (a) of sub-regulation (1);

(ii) (ii) If the moneys received from the applicants

for units are in excess of subscription as

referred to in clause (b) of sub-regulation (1).

The asset management company shall issue to the applicant

whose application has been accepted, unit certificates or a

statement of accounts specifying the number of units allotted

to the applicant as soon as possible but not later than sixweeks from the date of closure of the initial subscription list

and or from the date of receipt of the request from the unit

holders in any open ended scheme.

RULES REGARDING ADVERTISEMENT:

The advertisement for each scheme shall disclose investmentobjective for each scheme.

An advertisement shall be truthful, fair and clear and shall not

contain a statement, promise or forecast which is untrue or

misleading.

Advertisements shall not be so framed as to exploit the lack of

experience or knowledge of the investors.

All advertisements issued by a mutual fund or its sponsor or

Asset Management Company shall state, "all investments in

mutual funds and securities are subject to market risks and

the NAV of the schemes may go up or down depending upon

the factors and forces affecting the securities market".


45/102

The advertisement shall not compare one fund with another,

implicitly or explicitly, unless the comparison is fair and all

information relevant to the comparison is included in the

advertisement.

The offer document and advertisement materials shall not be

misleading or contain any statement or opinion, which are

incorrect or false.

INVESTMENT OBJECTIVES AND VALUATION POLICIES:

The moneys collected under any scheme of a mutual fund

shall be invested only in transferable securities in the money

market or in the capital market or in privately placed

debentures or securities debts.

Provided that moneys collected under any money market

scheme of a mutual fund shall be invested only in money

market instruments in accordance with directions issued bythe Reserve Bank of India;

The mutual fund shall not borrow except to meet temporary

liquidity needs of the mutual funds for the purpose of

repurchase, redemption of units or payment of interest or

dividend to the unit holders.

The mutual fund shall not advance any loans for any purpose.

Every mutual fund shall compute and carry out valuation of

its investments in its portfolio and publish the same in

accordance with the valuation norms specified in Eighth

Schedule


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Every mutual fund shall compute the Net Asset Value of each

scheme by dividing the net assets of the scheme by the

number of units outstanding on the valuation date.

The Net Asset Value of the scheme shall be calculated and

published at least in two daily newspapers at intervals of not

exceeding one week:

The price at which the units may be subscribed or sold and

the price at which such units may at any time be repurchased

by the mutual fund shall be made available to the investors.

GENERAL OBLIGATIONS:

Every asset management company for each scheme shall

keep and maintain proper books of accounts, records and

documents, for each scheme so as to explain its

transactions and to disclose at any point of time the

financial position of each scheme and in particular give atrue and fair view of the state of affairs of the fund and

intimate to the Board the place where such books of

accounts, records and documents are maintained.

The financial year for all the schemes shall end as of March

31 of each year.

Every mutual fund or the asset management company shall

prepare in respect of each financial year an annual report

and annual statement of accounts of the schemes and the

fund as specified in Eleventh Schedule.

Every mutual fund shall have the annual statement of

accounts audited by an auditor who is not in any way


47/102

associated with the auditor of the asset management

company.

PROCEDURE FOR ACTION IN CASE OF DEFAULT:

On and from the date of the suspension of the certificate or

the approval, as the case may be, the mutual fund, trustees

or asset management company, shall cease to carry on any

activity as a mutual fund, trustee or asset management

company, during the period of suspension, and shall be

subject to the directions of the Board with regard to any

records, documents, or securities that may be in its custody

or control, relating to its activities as mutual fund, trustees

or asset management company.

RESTRICTIONS ON INVESTMENTS:

A mutual fund scheme shall not invest more than 15% of its

NAV in debt instruments issued by a single issuer, which

are rated not below investment grade by a credit rating

agency authorized to carry out such activity under the Act.

Such investment limit may be extended to 20% of the NAV

of the scheme with the prior approval of the Board of

Trustees and the Board of asset management company A mutual fund scheme shall not invest more than 10% of its

NAV in unrated debt instruments issued by a single issuer

and the total investment in such instruments shall not

exceed 25% of the NAV of the scheme. All such investments

shall be made with the prior approval of the Board of

Trustees and the Board of Asset Management Company.


48/102

No mutual fund under all its schemes should own more

than ten per cent of any company's paid up capital carrying

voting rights.

Transfers of investments from one scheme to another

scheme in the same mutual fund shall be allowed only if, -

1.Such transfers are done at the prevailing market price for

quoted instruments on spot basis.

2.The securities so transferred shall be in conformity with

the investment objective of the scheme to which such

transfer has been made. A scheme may invest in another scheme under the

same asset management company or any other

mutual fund without charging any fees, provided

that aggregate inter scheme investment made by all

schemes under the same management or in

schemes under the management of any other asset

management company shall not exceed 5% of the

net asset value of the mutual fund.

The initial issue expenses in respect of any scheme

may not exceed six per cent of the funds raised

under that scheme.

Every mutual fund shall buy and sell securities on

the basis of deliveries and shall in all cases of

purchases, take delivery of relative securities and in

all cases of sale, deliver the securities and shall in

no case put itself in a position whereby it has to

make short sale or carry forward transaction or

engage in badla finance.


49/102

Every mutual fund shall, get the securities

purchased or transferred in the name of the mutual

fund on account of the concerned scheme, wherever

investments are intended to be of long-term nature.

Pending deployment of funds of a scheme in

securities in terms of investment objectives of the

scheme a mutual fund can invest the funds of the

scheme in short term deposits of scheduled

commercial banks.

No mutual fund scheme shall make any investmentin;

Any unlisted security of an associate or group

company of the sponsor; or

Any security issued by way of private

placement by an associate or group company

of the sponsor; or

The listed securities of group companies of the

sponsor, which is in excess of 30% of the net

assets [of all the schemes of a mutual fund]

No mutual fund scheme shall invest more than 10

per cent of its NAV in the equity shares or equity

related instruments of any company. Provided that,

the limit of 10 per cent shall not be applicable for

investments in index fund or sector or industry

specific scheme.


50/102

A mutual fund scheme shall not invest more than

5% of its NAV in the equity shares or equity related

investments in case of open-ended scheme and 10%

of its NAV in case of close-ended scheme.

CRITICAL REVIEW OF MUTUAL FUNDS

Why mutual funds in India performed so poorly

Most investors associate mutual funds with Master gain,

Monthly Equity Plans of SBI Mutual Fund, UTI and Canbank

Mutual Fund and of course Morgan Stanley Growth Fund. This is

so be

Cause these funds truly had participation from masses, with a

fund like Morgan Stanley having more than 1 million investors.

Investors feel that after 5 years, Morgan Stanley Growth Fund unitsstill trade below the original IPO price of Rs.10.

It is incorrect to think that all mutual funds have performed

poorly. If one looks at some income funds, they have come with

reasonable returns. It is only the performance of equity funds,

which has been poor. Their poor performance has been amplified by

the closed end discounts i.e. units of these funds quoting at sharpdiscounts to their NAV resulting in an even poorer return to the

investor.

One must remember that a Mutual Fund does not provide

assured returns and neither can it "manufacture" returns out of

thin air. Returns provided by mutual funds are a function of the

returns in the underlying asset class in which the fund invests.


51/102

Good funds can beat returns in their asset class to some extent but

thats all. E.g. take the case of a sector specific fund like a pharma

fund, which invests only in shares of pharmaceutical companies. If

the Govt. comes with new regulation that severely restricts the

pricing freedom of these companies resulting in negative outlook for

the sector, the prices of all stocks in the sector could fall

substantially resulting in severe erosion in the NAV of the fund. No

one can do anything about it. A good fund manager would probably

sell part of the fund before prices fall too much and wait for an

opportune time to reinvest at lower levels once the dust has settled.In that case, the NAV of the fund would fall to a lesser extent but

fall it will. If the investor in the fund has invested in some stocks in

the sector on his own, in all probability, his personal investments

may have depreciated to a larger extent.

Let us extend this example to an analysis of the investment

climate in the last 7 years. The stock markets have done very badly

in the last seven years. The BSE Sensex crossed 3000 for the first

time in early 1992. Since then it has gone up and come down

several times but has remained in the same range. Effectively, for a

seven-year investment period, the total return has been almost

zero. The prices of many leading stocks of yesteryear have fallen by

more than 50% in these seven years. If one considers the fact that

the sensex has been changed several times, with all the weak stocks

having been weeded out, the effective returns on the old sensex,

existing in 1992, have been substantially negative. The following

table gives some of the prices of stocks considered "blue chips" in

1992, in 1994 and the prices prevailing at present.


52/102

Price in Rs

Name of the

Company

1992 high 1994 high Current price

Tata Steel 552 336 418.35

Grasim Industries 650 793 1212.85

Century Textiles 490 550 219.40

Reliance Industries 218 213 567.05

Raymond 250 263 312.85

Arvind Mills 353 290 115.75

ICICI 290 197 398.10

It is quite obvious that if a fund had invested in any of these

shares in 1992 or subsequently in the 1994 boom, and if it

remained invested in the share, then it would be confronting a huge

fall in NAV. This is exactly what has happened.

A similar table for prices of shares of Public Sector

Undertakings (PSUs) is given below.

Price in Rs

Name of the Company 1994 high Present price

MTNL 325 117.40

HPCL 550 310.75

Indian Oil n/a 431.60

ONGC n/a 860.95

SAIL 83 64.65


53/102

Most mutual fund managers took some time to realize the

changed circumstances wherein the open economy ushered in by

the liberalization took the full impact of the global deflation in

commodity prices. This problem was compounded further by the

Asian crisis after which cheap imports from Asia caused severe

pressure on profits.

To add to this, most funds had invested some part of their

portfolio in medium sized "growth" companies. Many of these

companies have performed even worse than bigger ones and quite afew have seen share prices dip more than 90% from their 1994

highs. More important, funds could not sell these shares because of

complete lack of liquidity with, at best, few hundred shares being

traded every day.

Meanwhile, shares of companies in sectors like consumer

goods (FMCG) and software were showing good growth and they

went up rapidly in price. Most fund managers were unwilling to sell

shares of erstwhile "blue chips" at low prices and buy shares of

emerging "blue chips" at high prices. This resulted in poor

performance and negative returns.

One more issue is that the fund managers in many funds were

not "professionally qualified and experienced". This is especially

true of some of the funds floated by nationalized banks. Some of

these individuals were transferred from the parent organization and

did not really know much about investment management.

Lastly, investors would do well to have a look at the

investments, which they made on their own. In most cases, they

would have done much worse than the mutual funds. We have


54/102

received numerous requests for advice from individual investors on

what to do about their own investments. If that were any indicator,

investors would have done really badly.

Is it true that globally mutual funds under perform

benchmark indices? Why are smart money managers unable to do

as well as the market? Or is it that they are not smart at all? What

are the limitations of mutual funds?

It is 100% true that globally; most mutual fund managers

under perform the asset class that they are investing in. It is not

true that the fund managers are dumb; this under performance islargely the result of limitations inherent in the concept of mutual

funds. These limitations are as follows:

Entry and exit costs:Mutual funds are a victim of their own

success. When a large body like a fund invests in shares, the

concentrated buying or selling often results in adverse price

movements i.e. at the time of buying, the fund ends up paying a

higher price and while selling it realizes a lower price. This problem

is especially severe in emerging markets like India, where, excluding

a few stocks, even the stocks in the Sensex are not liquid, let alone

stocks in the NSE 50 or the CRISIL 500. So, there is simply no way

that a fund can beat the Sensex or any other index, if it blindlyinvests in the same stocks as those in the Sensex and in the same

proportion. For obvious reasons, this problem is even more severe

for funds investing in small capitalization stocks. However, given

the large size of the debt market, excluding UTI, most debt funds do

not face this problem


55/102

Wait time before investment:It takes time for a mutual fund

to invest money. Unfortunately, most mutual funds receive money

when markets are in a boom phase and investors are willing to try

out mutual funds. Since it is difficult to invest all funds in one day,

there is some money waiting to be invested. Further, there may be a

time lag before investment opportunities are identified. This ensures

that the fund under performs the index. For open-ended funds,

there is the added problem of perpetually keeping some money in

liquid assets to meet redemptions.

Fund management costs:The costs of the fund management

process are deducted from the fund. This includes marketing and

initial costs deducted at the time of entry itself, called "load". Then

there is the annual asset management fee and expenses, together

called the expense ratio. Usually, the former is not counted while

measuring performance, while the latter is. A standard 2% expense

ratio means that, everything else being equal, the fund manager

under performs the benchmark index by an equal amount.

Cost of churn:The portfolio of a fund does not remain constant.

The extent to which the portfolio changes are a function of the style

of the individual fund manager ie whether he is a buy and hold type

of manager or one who aggressively churns the fund. It is also

dependent on the volatility of the fund size i.e. whether the fund

constantly receives fresh subscriptions and redemptions. Such

portfolio changes have associated costs of brokerage, custody fees,


56/102

registration fees etc. that lowers the portfolio return

commensurately.

Change of index composition: World over, the indices keep

changing to reflect changing market conditions. There is an

inherent survivorship bias in this process, with the bad stocks

weeded out and replaced by emerging blue chips. This is a severe

problem in India with the Sensex having been changed twice in the

last 5 years, with each change being quite substantial. Another

reason for change index composition is Mergers & Acquisitions. The

weightage of the shares of a particular company in the index

changes if it acquires a large company not a part of the index.

Tendency to take conformist decisions: From the above

points, it is quite clear that the only way a fund can beat the index

is through investment of some part of its portfolio in some shares

where it gets excellent returns, much more than the index. This will

pull up the overall average return. In order to obtain such

exceptional returns, the fund manager has to take a strong view

and invest in some uncommon or unfancied investment options.

Most people are unwilling to do that. They follow the principle "No

fund manager ever got fired for investing in Hindustan Lever" i.e. ifsomething goes wrong with an unusual investment, the fund

manager will be questioned but if anything goes wrong with the

blue chip, then you can always blame it on the "environment" or

"uncontrollable factors" knowing fully well that there are many

other fund managers who have made the same decision.

Unfortunately, if the fund manager does the same thing as several


57/102

others of his class, chances are that he will produce average

results. This does not mean that if a fund manager takes "active"

views and invests in heavily researched "uncommon" ideas, the

fund will necessarily outperform the index. If the idea does not

work, it will result in poor fund performance. But if no such view is

taken, there is absolutely no chance that the fund will outperform

the index.

BENEFITS OF MUTUAL FUNDS

Professional Management

Mutual Funds provide the services of experienced and skilled

professionals, backed by a dedicated investment research team that

analyses the performance and prospects of companies and selects

suitable investments to achieve the objectives of the scheme.

Diversification

Mutual Funds invest in a number of companies across a broad

cross-section of industries and sectors. This diversification reduces

the risk because seldom do all stocks decline at the same time and

in the same proportion. You achieve this diversification through aMutual Fund with far less money than you can do on your own.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you

avoid many problems such as bad deliveries, delayed payments and


58/102

follow up with brokers and companies. Mutual Funds save your

time and make investing easy and convenient.

Return Potential

Over a medium to long-term, Mutual Funds have the potential

to provide a higher return as they invest in a diversified basket of

selected securities.

Low Cost

Mutual Funds are a relatively less expensive way to invest

compared to directly investing in the capital markets because the

benefits of scale in brokerage, custodial and other fees translate

into lower costs for investors.

Well Regulated

All Mutual Funds are registered with SEBI and they function

within the provisions of strict regulations designed to protect the

interests of investors. The operations of Mutual Funds are regularly

monitored by SEBI.

Liquidity

In open-end schemes, the investor gets the money back

promptly at net asset value related prices from the Mutual Fund. In

closed-end schemes, the units can be sold on a stock exchange at

the prevailing market price or the investor can avail of the facility of

direct repurchase at NAV related prices by the Mutual Fund.


59/102

Transparency

We can get regular information on the value of your

investment in addition to disclosure on the specific investments

made by your scheme, the proportion invested in each class of

assets and the fund manager's investment strategy and outlook.

Flexibility

Through features such as regular investment plans, regular

withdrawal plans and dividend reinvestment plans, you can

systematically invest or withdraw funds according to your needs

and convenience.

Affordability

Investors individually may lack sufficient funds to invest in

high-grade stocks. A mutual fund because of its large corpus allows

even a small investor to take the benefit of its investment strategy.

REGULATORY ASPECTS OF MUTUAL FUND

SCHEMES OF MUTUAL FUND:

The asset management company shall launch no scheme

unless the trustees approve such scheme and a copy of the

offer document has been filed with the Board.


60/102

Every mutual fund shall along with the offer document of

each scheme pay filing fees.

The offer document shall contain disclosures which are

adequate in order to enable the investors to make informed

investment decision including the disclosure on maximum

investments proposed to be made by the scheme in the

listed securities of the group companies of the sponsor.

No one shall issue any form of application for units of a

mutual fund unless the form is accompanied by the

memorandum containing such information as may bespecified by the Board.

Every close ended scheme shall be listed in a recognized

stock exchange within six months from the closure of the

subscription

The asset management company may at its option

repurchase or reissue the repurchased units of a close-

ended scheme.

A close-ended scheme shall be fully redeemed at the end of

the maturity period. "Unless a majority of the unit holders

otherwise decide for its rollover by passing a resolution".

The mutual fund and asset management company shall be

liable to refund the application money to the applicants, -

(iii) If the mutual fund fails to receive the

minimum subscription amount referred to in

clause (a) of sub-regulation (1);

(iv) (ii) If the moneys received from the applicants

for units are in excess of subscription as

referred to in clause (b) of sub-regulation (1).


61/102

The asset management company shall issue to the applicant

whose application has been accepted, unit certificates or a

statement of accounts specifying the number of units allotted

to the applicant as soon as possible but not later than six

weeks from the date of closure of the initial subscription list

and or from the date of receipt of the request from the unit

holders in any open ended scheme.

RULES REGARDING ADVERTISEMENT:

The advertisement for each scheme shall disclose investment

objective for each scheme.

An advertisement shall be truthful, fair and clear and shall not

contain a statement, promise or forecast which is untrue or

misleading.

Advertisements shall not be so framed as to exploit the lack of

experience or knowledge of the investors. All advertisements issued by a mutual fund or its sponsor or

Asset Management Company shall state, "all investments in

mutual funds and securities are subject to market risks and

the NAV of the schemes may go up or down depending upon

the factors and forces affecting the securities market".

The advertisement shall not compare one fund with another,

implicitly or explicitly, unless the comparison is fair and all

information relevant to the comparison is included in the

advertisement.

The offer document and advertisement materials shall not be

misleading or contain any statement or opinion, which are

incorrect or false.


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INVESTMENT OBJECTIVES AND VALUATION POLICIES:

The moneys collected under any scheme of a mutual fund

shall be invested only in transferable securities in the money

market or in the capital market or in privately placed

debentures or securities debts.

Provided that moneys collected under any money market

scheme of a mutual fund shall be invested only in money

market instruments in accordance with directions issued by

the Reserve Bank of India;

The mutual fund shall not borrow except to meet temporary

liquidity needs of the mutual funds for the purpose of

repurchase, redemption of units or payment of interest or

dividend to the unit holders.

The mutual fund shall not advance any loans for any purpose.

Every mutual fund shall compute and carry out valuation ofits investments in its portfolio and publish the same in

accordance with the valuation norms specified in Eighth

Schedule

Every mutual fund shall compute the Net Asset Value of each

scheme by dividing the net assets of the scheme by the

number of units outstanding on the valuation date.

The Net Asset Value of the scheme shall be calculated and

published at least in two daily newspapers at intervals of not

exceeding one week:

The price at which the units may be subscribed or sold and

the price at which such units may at any time be repurchased

by the mutual fund shall be made available to the investors.


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GENERAL OBLIGATIONS:

Every asset management company for each scheme shall

keep and maintain proper books of accounts, records and

documents, for each scheme so as to explain its

transactions and to disclose at any point of time the

financial position of each scheme and in particular give a

true and fair view of the state of affairs of the fund and

intimate to the Board the place where such books of

accounts, records and documents are maintained.

The financial year for all the schemes shall end as of March

31 of each year.

Every mutual fund or the asset management company shall

prepare in respect of each financial year an annual report

and annual statement of accounts of the schemes and the

fund as specified in Eleventh Schedule. Every mutual fund shall have the annual statement of

accounts audited by an auditor who is not in any way

associated with the auditor of the asset management

company.

PROCEDURE FOR ACTION IN CASE OF DEFAULT: On and from the date of the suspension of the certificate or

the approval, as the case may be, the mutual fund, trustees

or asset management company, shall cease to carry on any

activity as a mutual fund, trustee or asset management

company, during the period of suspension, and shall be

subject to the directions of the Board with regard to any


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records, documents, or securities that may be in its custody

or control, relating to its activities as mutual fund, trustees

or asset management company.

RESTRICTIONS ON INVESTMENTS:


NAV in debt instruments issued by a single issuer, which

are rated not below investment grade by a credit rating

agency authorized to carry out such activity under the Act.

Such investment limit may be extended to 20% of the NAV

of the scheme with the prior approval of the Board of

Trustees and the Board of asset management company


NAV in unrated debt instruments issued by a single issuer

and the total investment in such instruments shall not

exceed 25% of the NAV of the scheme. All such investmentsshall be made with the prior approval of the Board of

Trustees and the Board of Asset Management Company.

No mutual fund under all its schemes should own more

than ten per cent of any company's paid up capital carrying

voting rights.

Transfers of investments from one scheme to another

scheme in the same mutual fund shall be allowed only if, -

3.Such transfers are done at the prevailing market price for

quoted instruments on spot basis.

4.The securities so transferred shall be in conformity with

the investment objective of the scheme to which such

transfer has been made.


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A scheme may invest in another scheme under the

same asset management company or any other

mutual fund without charging any fees, provided

that aggregate inter scheme investment made by all

schemes under the same management or in

schemes under the management of any other asset

management company shall not exceed 5% of the

net asset value of the mutual fund.

The initial issue expenses in respect of any scheme

may not exceed six per cent of the funds raisedunder that scheme.

Every mutual fund shall buy and sell securities on

the basis of deliveries and shall in all cases of

purchases, take delivery of relative securities and in

all cases of sale, deliver the securities and shall in

no case put itself in a position whereby it has to

make short sale or carry forward transaction or

engage in badla finance.

Every mutual fund shall, get the securities

purchased or transferred in the name of the mutual

fund on account of the concerned scheme, wherever

investments are intended to be of long-term nature.

Pending deployment of funds of a scheme in

securities in terms of investment objectives of the

scheme a mutual fund can invest the funds of the

scheme in short term deposits of scheduled

commercial banks.


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No mutual fund scheme shall make any investment

in;

Any unlisted security of an associate or group

company of the sponsor; or

Any security issued by way of private

placement by an associate or group company

of the sponsor; or

The listed securities of group companies of the

sponsor, which is in excess of 30% of the net

assets [of all the schemes of a mutual fund] No mutual fund scheme shall invest more than 10

per cent of its NAV in the equity shares or equity

related instruments of any company. Provided that,

the limit of 10 per cent shall not be applicable for

investments in index fund or sector or industry

specific scheme.

A mutual fund scheme shall not invest more than

5% of its NAV in the equity shares or equity related

investments in case of open-ended scheme and 10%

of its NAV in case of close-ended scheme.


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Chapter2

Objectives

of

Study


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Objectives of Study

Study various investment options in the market.

Study various Asset Management Companies andfunds offered by them.

Analysis of various mutual funds.

Conducting a survey to find out the perception of thepublic regarding the mutual funds.

Identify the market performance of these funds.

Analyze which one is better and most preferred by thecustomers.


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Chapter-3

RESEARCH

METHODOLOGY


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RESEARCH METHODOLOGY

Research methodology in which the data are collected for the research.

Research Methodology is the attempt to validate the rationale behind the

selected research design and provide justification of why it is

appropriate in solving the selected research problem. It is the process by

which we evaluate tools that produce knowledge.

Research Design

The Research Report is based on exploratory study based on Primary &

Secondary Data. Exploratory research is concerned with identification of

the real nature of research problem & perhaps of formulating relevant

hypothesis for various tests. The major benefit is that it is less expensive

& less time consuming. For assessing the tool used to deliver included

Personal interview of respondent.

Sources of Collecting Data

Data collection methods are generally of two types:

Primary Data

Secondary Data


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Primary data are those which are collected for the first time and thus

happen to be original in character. The primary data is collected in the

process of questionnaire and interview of the outlets.

Secondary data are those which have already been collected by

someone else and which have been already been passed through the

statistical process.

Primary data:

1.Questionnaire method

Secondary data:

1.Book

2.News papers

3. Internet

4.Magazines

It is a way to systematically solve the research problem ,

when we talk of research methodology we not only talk about

method but also consider the logic behind the method , we use in

context of our research , while keeping all the objective of the

project in mind following method of methodology are adopted.

The methodology the project data be summarized as follows:


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1.Choosing the Research Report topic:- the Research Report my

guide Mr. Suboor Khan suggested the Research Report topic.

2.Literary study about choosing topic :-Studyof Mutual Fund

Industry and Comparative Analysis of Top Asset Management

Companies: A Customer Perspective

3.The method used for the collection of data.

a) Questioner (subjective type): because to analyze the real view

of surveyor.

Then the short listed Organization , who were extremely co-

operative , helpful , who are interviewed and their responses

were recorded.

b) Visualization : to find out the correctness of the data sample

provided by the interviewer

c) Analyzing their response: their responses were analyzed , an

effort was made to recognize hidden expectations and unvoiced

demands .

Methodology Adopted

Methods used


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Through Questionnaire. While preparing the Questionnaire certain

dimensions are to be considered. These dimensions are come under

following heads: Management/Marketing

Sources of data

For the purpose of this Research report data has been collected from the

following sources:

Primary sources

New Joiners in the organization

Sample Size : 50

Secondary Sources

Organizations Policy Manual

Other relevant documents

Company website

Tools used for Analysis

Bar Graphs

Pie charts


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Chapter-4

Data Analysis

PRUDENTIAL ICICI


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OVERVIEW

Prudential ICICI Asset Management Company, (55%: 45%) a

joint venture between Prudential, UK's leading insurance companyand ICICI Bank Ltd, India's premier financial institution.

The joint venture was formed with the key objective of

providing the Indian investor mutual fund products to suit a variety

of investment needs. The AMC has already launched a range of

products to suit different risk and maturity profiles.

Prudential ICICI Asset Management Company Limited has a

net worth of about Rs. 69.89 crore (1 crore = 10 million) as of March

31, 2002. Both Prudential and ICICI Bank Ltd have a strategic long-

term commitment to the rapidly expanding financial services sector

in India.

GUIDING PRINCIPLES

Prudential CICI will conduct its business with

Honesty and trustworthiness in all interactions.

A pioneering spirit and excellence in action.

Collaboration and teamwork.

An understanding of customer needs and the desire to satisfy

them.

The highest service standards.

A consistently abov

Synopsis of Paras

Documents