Tuesday, September 21, 2010



There are a lot of investment avenues available today in the financial market for an investor with an investable surplus. He can invest in Bank Deposits, Corporate Debentures, and Bonds where there is low risk but low return. He may invest in Stock of companies where the risk is high and the returns are also proportionately high. The recent trends in the Stock Market have shown that an average retail investor always lost with periodic bearish tends. People began opting for portfolio managers with expertise in stock markets who would invest on their behalf. Thus we had wealth management services provided by many institutions. However they proved too costly for a small investor. These investors have found a good shelter with the mutual funds.

Mutual fund industry has seen a lot of changes in past few years with multinational companies coming into the country, bringing in their professional expertise in managing funds worldwide. In the past few months there has been a consolidation phase going on in the mutual fund industry in India. Now investors have a wide range of Schemes to choose from depending on their individual profiles.

My study gives an overview of mutual funds – definition, types, benefits, risks, limitations, history of mutual funds in India, latest trends, global scenarios. I have analyzed a few prominent mutual funds schemes and have given my findings.

The main purpose of doing this project was to know about mutual fund and its functioning. This helps to know in details about mutual fund industry right from its inception stage, growth and future prospects.
It also helps in understanding different schemes of mutual funds. Because my study depends upon prominent funds in India and their schemes like equity, income, balance as well as the returns associated with those schemes.
The project study was done to ascertain the asset allocation, entry load, exit load, associated with the mutual funds. Ultimately this would help in understanding the benefits of mutual funds to investors.

In my project the scope is limited to some prominent mutual funds in the mutual fund industry. I analyzed the funds depending on their schemes like equity, income, balance. But there is so many other schemes in mutual fund industry like specialized (banking, infrastructure, pharmacy) funds, index funds etc.

My study is mainly concentrated on equity schemes, the returns, in income schemes the rating of CRISIL, ICRA and other credit rating agencies.


• To give a brief idea about the benefits available from Mutual Fund investment
• To give an idea of the types of schemes available.
• To discuss about the market trends of Mutual Fund investment.
• To study some of the mutual fund schemes and analyse them
• Observe the fund management process of mutual funds
• Explore the recent developments in the mutual funds in India
• To give an idea about the regulations of mutual funds


To achieve the objective of studying the stock market data has been collected.
Research methodology carried for this study can be two types
1. Primary
2. Secondary

The data, which has being collected for the first time and it is the original data.
In this project the primary data has been taken from HSE staff and guide of the project.

The secondary information is mostly taken from websites, books, journals, etc.


• The time constraint was one of the major problems.
• The study is limited to the different schemes available under the mutual funds selected.
• The study is limited to selected mutual fund schemes.
• The lack of information sources for the analysis part.



This stock exchange, Mumbai, popularly known as “BSE” was established in 1875 as “The Native share and stock brokers association”, as a voluntary non- profit making association. It has an evolved over the years into its present status as the premiere stock exchange in the country. It may be noted that the stock exchanges the oldest one in Asia, even older than the Tokyo Stock Exchange, which was founded in 1878.
The exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressed of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes.

A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides the policies and regulates the affairs of the exchange.

The Executive director as the chief executive officer is responsible for the day today administration of the exchange. The average daily turnover of the exchange during the year 2000-01(April-March) was Rs 3984.19 crores and average number of daily trades 5.69 Lakhs.
However the average daily turn over of the exchange during the year 2001-02 has declined to Rs. 1244.10 crores and number of average daily trades during the period to 5.17 Lakhs.
The average daily turn over of the exchange during the year 2002-03 has declined and number of average daily trades during the period is also decreased.
The Ban on all deferral products like BLESS AND ALBM in the Indian capital markets by SEBI with effect from July 2,2001, abolition of account period settlements, introduction of compulsory rolling settlements in all scripts traded on the exchanges with effect from Dec 31,2001, etc., have adversely impacted the liquidity and consequently there is a considerable decline in the daily turn over at the exchange. The average daily turn over of the exchange present scenario is 110363(laces) and number of average daily trades 1057(laces).


In order to enable the market participants, analysts etc., to track the various ups and downs in the Indian stock market, the Exchange has introduced in 1986 an equity stock index called BSE-SENSEX that subsequently became the barometer of the moments of the share prices in the Indian Stock market. It is a “Market capitalization weighted” index of 30 component stocks representing a sample of large, well-established and leading companies. The base year of Sensex is 1978-79. The Sensex is widely reported in both domestic and international markets through print as well as electronic media.
Sensex is calculated using a market capitalization weighted method. As per this methodology, the level of the index reflects the total market value of all 30-component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of its stock by the number of shares outstanding. Statisticians call an index of a set of combined variables (such as price and number of shares) a composite Index. An Indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over a time. It is much easier to graph a chart based on Indexed values than one based on actual values world over majority of the well-known Indices are constructed using ”Market capitalization weighted method”.

In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. The Divisor keeps the Index comparable over a period or time and if the reference point for the entire Index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian Stock markets. Base year average is changed as per the formula new base year average = old base year average*(new market value/old market value).


The NSE was incorporated in Now 1992 with an equity capital of Rs 25 crores. The International securities consultancy (ISC) of Hong Kong has helped in setting up NSE. ISE has prepared the detailed business plans and installation of hardware and software systems. The promotions for NSE were financial institutions, insurances companies, banks and SEBI capital market ltd, Infrastructure leasing and financial services ltd and stock holding corporation ltd.
It has been set up to strengthen the move towards professionalisation of the capital market as well as provide nation wide securities trading facilities to investors.NSE is not an exchange in the traditional sense where brokers own and manage the exchange. A two tier administrative set up involving a company board and a governing aboard of the exchange is envisaged.
NSE is a national market for shares PSU bonds, debentures and government securities since infrastructure and trading facilities are provided.
The NSE on April 22, 1996 launched a new equity Index. The NSE-50. The new index, which replaces the existing NSE-100 index, is expected to serve as an appropriate Index for the new segment of futures and options.
“Nifty” means National Index for Fifty Stocks.
The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an aggregate market capitalization of around Rs. 1,70,000 crs. All companies included in the Index have a market capitalization in excess of Rs 500 crs each and should have traded for 85% of trading days at an impact cost of less than 1.5%.
The base period for the index is the close of prices on Nov 3, 1995, which makes one year of completion of operation of NSE’s capital market segment. The base value of the Index has been set at 1000.

The NSE madcap Index or the Junior Nifty comprises 50 stocks that represents 21 aboard Industry groups and will provide proper representation of the madcap segment of the Indian capital Market. All stocks in the index should have market capitalization of greater than Rs.200 crores and should have traded 85% of the trading days at an impact cost of less 2.5%.
The base period for the index is Nov 4, 1996, which signifies two years for completion of operations of the capital market segment of the operations. The base value of the Index has been set at 1000.
Average daily turn over of the present scenario 258212 (Laces) and number of averages daily trades 2160(Laces).

At present, there are 24 stock exchanges recognized under the securities contract (regulation) Act, 1956. They are

Bombay stock exchange,
Ahmedabad share and stock brokers association,
Calcutta stock exchange association Ltd,
Delhi stock exchange association Ltd,
Madras stock exchange association Ltd,
Indore stock brokers association Ltd,
Banglore stock exchange,
Hyderabad stock exchange,
Cochin stock exchange,
Pune stock exchange,
U.P.stock exchange,
Ludhiana stock exchange,
Jaipur stock exchange Ltd,
Gauhati stock exchange Ltd,
Manglore stock exchange,
Maghad stock exchange Ltd, Patna,
Bhuvaneshwar stock exchange association Ltd,
Over the counter exchange of India, Bombay,
Saurastra kuth stock exchange Ltd,
Vsdodard stock exchange Ltd,
Coimbatore stock exchange Ltd,
The Meerut stock exchange,
National stock exchange,
Integrated stock exchange

Rapid growth in industries in the erstwhile Hyderabad State saw efforts at starting the Stock Exchange. In November, 1941 some leading bankers and brokers formed the share and stock Brokers Association. In 1942, Mr. Gulab Mohammed, the Finance Minister formed a Committee for the purpose of constituting Rules and Regulations of the Stock Exchange. Sri Purushothamdas Thakurdas, President and Founder Member of the Hyderabad Stock Exchange performed the opening ceremony of the Exchange on 14.11.1943 under Hyderabad Companies Act, Mr. Kamal Yar Jung Bahadur was the first President of the Exchange. The HSE started functioning under Hyderabad Securities Contract Act of No. 21 of 1352 under H.E.H. Nizam’s Government as a Company Limited by guarantee. It was the 6th Stock Exchange recognized under Securities Contract Act, after the Premier Stock Exchanges, Ahmedabad, Bombay, Calcutta, Madras and Bangalore stock Exchange. All deliveries were completed every Monday or the next working day.
The Securities Contracts (Regulation) Act 1956 was enacted by the Parliament, passed into Law and the rules were also framed in 1957. The Government of India brought the Act and the Rules into force from 20th February 1957.
The HSE was first recognized by the Government of India on 29th September 1958, as Securities Regulation Act was made applicable to twin cities of Hyderabad and Secunderabad from that date. In view of substantial growth in trading activities, and for the yeoman services rendered by the Exchange, the Exchange was bestowed with permanent recognition with effect from 29th September 1983.
The Exchange has a significant share in achievements of erstwhile State of Andhra Pradesh to its present state in the matter of Industrial development.

The Exchange was established on 18th October 1943 with the main objective to create, protect and develop a healthy Capital Market in the State of Andhra Pradesh to effectively serve the Public and Investor’s interests.
The property, capital and income of the Exchange, as per the Memorandum and Articles of Association of the Exchange, shall have to be applied solely towards the promotion of the objects of the Exchange. Even in case of dissolution, the surplus funds shall have to be devoted to any activity having the same objects, as Exchange or be distributed in Charity, as may be determined by the Exchange or the High Court of judicature. Thus, in short, it is a Charitable Institution.
The Hyderabad Stock Exchange Limited is now on its stride of completing its 65th year in the history of Capital ‘Markets’ serving the cause of saving and investments. The Exchange has made its beginning in 1943 and today occupies a prominent place among the Regional Stock Exchanges in India. The Hyderabad Stock Exchange has been promoting the mobilization of funds into the Industrial sector for development of industrialization in the State of Andhra Pradesh.

The Hyderabad Stock Exchange Ltd., established in 1943 as a Non-profit making organization, catering to the needs of investing population started its operations in a small way in a rented building in Koti area. It had shifted into Aiyangar Plaza, Bank Street in 1987. In September 1989, the then Vice-President of India, Hon’ble Dr. Shankar Dayal Sharma had inaugurated the own building of the Stock exchange at Himayathnagar, Hyderabad. Later in order to bring all the trading members under one roof, the exchange acquired still a larger premises situated 6-3-654/A; Somajiguda, Hyderabad - 82, with a six storied building and a constructed area of about 4,86,842 sft (including cellar of 70,857 sft). Considerably, there has been a tremendous perceptible growth which could be observed from the statistics.
The number of members of the Exchange was 55 in 1943, 117 in 1993 and increased to 300 with 869 listed companies having paid up capital of Rs.19128.95 crores as on 31/03/2000. The business turnover has also substantially increased to Rs. 1236.51 crores in 1999-2000. The Exchange has got a very smooth settlement system.

At present, the Governing Board consists of the following:

Sri. HENRY RICHARD -- Registrar of Companies [Govt. of India.]

Dr. N.R. Sivaswamy (Chairman, HSE) -- Former CBDT Chairman
Justice V. Bhaskara Rao -- Retd. Judge High Court
Sri P. Muralimohan Rao -- Mogili&Co.-Chartered Accountants
Dr B. Brahmaiah -- G.M.

The Stock Exchange business operations are equipped with modern communication systems. Online computerization for simultaneously carrying out the trading transactions, monitoring functions have been introduced at this Exchange since 1988 and the Settlement and Delivery System has become simple and easy to the Exchange members.
The HSE On-line Securities Trading System was built around the most sophisticated state of the art computers, communication systems, and the proven VECTOR Software from CMC and was one of the most powerful SBT Systems in the country, operating in a WAN environment, connected through 9.6 KBPS 2 wire Leased Lines from the offices of the members to the office of the Stock Exchange at Somajiguda, where the Central System CHALLENGE-L DESK SIDE SERVER made of Silicon Graphics (SGI Model No. D-95602-S2) was located and connected all the members who were provided with COMPAQ DESKPRO 2000/DESKTOP 5120 Computers connected through MOTOROLA 3265 v. 34 MANAGEABLE STAND ALONE MODEMS (28.8 kbps) for carrying out business from computer terminals located in the offices of the members. The HOST System enabled the Exchange to expand its operations later to other prime trading centers outside the twin cities of Hyderabad and Secunderabad.

The Exchange set-up a Clearing House to collect the Securities from all the Members and distribute to each member, all the securities due in respect of every settlement. The whole of the operations of the Clearing House were also computerized. At present through DP all the settlement obligations are met.

The HSE was the convener of a Committee constituted by the Federation of Indian Stock Exchanges for implementing an Inter-connected Market System(ICMS) in which the Screen Based Trading systems of various Stock Exchanges was inter-connected to create a large National Market. SEBI welcomed the creation of ICMS.
The HOST provided the network for HSE to hook itself into the ISE. The ISE provided the members of HSE and their investors, access to a large national network of Stock Exchanges.
The Inter-connected Stock Exchange is a National Exchange and all HSE Members could have trading terminals with access to the National Market without any fee, which was a boon to the Members of an Exchange/Exchanges to have the trading rights on National Exchange (ISE), without any fee or expenditure.

HSE pays special attention to Market Surveillance and monitoring exposures of the members, particularly the mark to market losses. By taking prompt steps to collect the margins for mark to market losses, the risk of default by members is avoided. It is heartening that there have been no defaults by members in any settlement since the introduction of Screen Based Trading.

It is heartening that after implementing HOST, HSE's daily turnover has fairly stabilized at a level of Rs. 20.00 crores. this should enable in improving our ranking among Indian Stock Exchanges for 14th position to 6th position. We shall continuously strive to improve upon this to ensure a premier position for our Exchange and its members and to render excellent services to investors in this region.

The Exchange has introduced Trade Guarantee Fund on 25/01/2000. This will insulate the trading member from the counter-party risks while trading with another member. In other words, the trading member and his investors will be assured of the timely completion of the pay-out of funds and securities notwithstanding the default, if any, of any trading member of the Exchange. The shortfalls, if any, arising from the default of any member will be met out of the Trade Guarantee Fund. Several pay-ins worth of crores of rupees in all the settlements have been successfully completed after the introduction of Trade Guarantee Fund, without utilizing any amount from the Trade Guarantee Fund.
The Trade Guarantee Fund will be a major step in re-building this confidence of the members and the investors in HSE. HSE's Trade Guarantee Fund has a corpus of Rs. 2.00 crores initially which will later be raised to Rs. 5.00 crores. At present Rs. 3.20 Crores is stood in the credit of SGF.
The Trade Guarantee Fund had strict rules and regulations to be complied with by the members to avail the guarantee facility. The HOST system facilitated monitoring the compliance of members in respect of such rules and regulations.

The Exchange has also become a Depository Participant with National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Our own DP is fully operational and the execution time will come down substantially. The depository functions are undertaken by the Exchange by opening the accounts at Hyderabad of investors, members of the Exchange and other Exchanges. The trades of all the Exchanges having On-line trading which get into National depository can also be settled at Hyderabad by this exchange itself. In short all the trades of all the investors and members of any Exchange at Hyderabad in dematerialized securities can be settled by the Exchange itself as a participant of NSDL and CDSL. The exchange has about 15,000 B.O. accounts.
The Exchange had floated a Subsidiary Company in the name and style of M/s HSE Securities Limited for obtaining the Membership of NSE and BSE. The Subsidiary had obtained membership of both NSE and BSE. About 113 Sub-brokers may registered with HSES, of which about 75 sub-brokers are active. Turnover details are furnished here under.

History of mutual funds
The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank the. The history of mutual funds in India can be broadly divided into four distinct phases.

First Phase – 1964-87: Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase – 1987-1993 (Entry of Public Sector Funds): 1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds): With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996.
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.

Fourth Phase – since February 2003: In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. As at the end of September, 2004, there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.


There are numerous benefits of investing in mutual funds and one of the key reasons for its phenomenal success in the developed markets like US and UK is the range of benefits they offer, which are unmatched by most other investment avenues. We have explained the key benefits in this section. The benefits have been broadly split into universal benefits, applicable to all schemes, and benefits applicable specifically to open-ended schemes. Universal Benefits

Affordability: A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive. Each unit holder thus gets an exposure to such portfolios with an investment as modest as Rs.500/-. This amount today would get you less than quarter of an Infosys share! Thus it would be affordable for an investor to build a portfolio of investments through a mutual fund rather than investing directly in the stock market. Diversification The nuclear weapon in your arsenal for your fight against Risk. It simply means that you must spread your investment across different securities (stocks, bonds, money market instruments, real estate, fixed deposits etc.) and different sectors (auto, textile, information technology etc.). This kind of a diversification may add to the stability of your returns, for example during one period of time equities might under perform but bonds and money market instruments might do well enough to offset the effect of a slump in the equity markets. Similarly the information technology sector might be faring poorly but the auto and textile sectors might do well and may protect your principal investment as well as help you meet your return objectives. Variety Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers different types of schemes to investors with different needs and risk appetites; secondly, it offers an opportunity to an investor to invest sums across a variety of schemes, both debt and equity. For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk appetite and thus create a balanced portfolio easily or simply just buy a Balanced Scheme.
Professional Management: Qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money. When you buy in to a mutual fund, you are handing your money to an investment professional who has experience in making investment decisions. It is the Fund Manager's job to (a) find the best securities for the fund, given the fund's stated investment objectives; and (b) keep track of investments and changes in market conditions and adjust the mix of the portfolio, as and when required.
Tax Benefits: Any income distributed after March 31, 2002 will be subject to tax in the assessment of all Unit holders. However, as a measure of concession to Unit holders of open-ended equity-oriented funds, income distributions for the year ending March 31, 2003, will be taxed at a concessional rate of 10.5%.
In case of Individuals and Hindu Undivided Families a deduction upto Rs. 9,000 from the Total Income will be admissible in respect of income from investments specified in Section 80L, including income from Units of the Mutual Fund. Units of the schemes are not subject to Wealth-Tax and Gift-Tax.
Regulations: Securities Exchange Board of India (“SEBI”), the mutual funds regulator has clearly defined rules, which govern mutual funds. These rules relate to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements. Such a high level of regulation seeks to protect the interest of investors

Benefits of Open-ended Schemes:
Liquidity: In open-ended mutual funds, you can redeem all or part of your units any time you wish. Some schemes do have a lock-in period where an investor cannot return the units until the completion of such a lock-in period.
Convenience: An investor can purchase or sell fund units directly from a fund, through a broker or a financial planner. The investor may opt for a Systematic Investment Plan (“SIP”) or a Systematic Withdrawal Advantage Plan (“SWAP”). In addition to this an investor receives account statements and portfolios of the schemes.

Flexibility: Mutual Funds offering multiple schemes allow investors to switch easily between various schemes. This flexibility gives the investor a convenient way to change the mix of his portfolio over time.
Transparency: Open-ended mutual funds disclose their Net Asset Value (“NAV”) daily and the entire portfolio monthly. This level of transparency, where the investor himself sees the underlying assets bought with his money, is unmatched by any other financial instrument. Thus the investor is in the know of the quality of the portfolio and can invest further or redeem depending on the kind of the portfolio that has been constructed by the investment manager.

The Risk-Return Trade-off:
The most important relationship to understand is the risk-return trade-off. Higher the risk greater the returns/loss and lower the risk lesser the returns/loss.
Hence it is upto you, the investor to decide how much risk you are willing to take. In order to do this you must first be aware of the different types of risks involved with your investment decision.

Market Risk: Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This is known as Market Risk. A Systematic Investment Plan (“SIP”) that works on the concept of Rupee Cost Averaging (“RCA”) might help mitigate this risk.

Credit Risk: The debt servicing ability (may it be interest payments or repayment of principal) of a company through its cashflows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A ‘AAA’ rating is considered the safest whereas a ‘D’ rating is considered poor credit quality. A well-diversified portfolio might help mitigate this risk.

Inflation Risk: Things you hear people talk about:
"Rs. 100 today is worth more than Rs. 100 tomorrow."
"Remember the time when a bus ride costed 50 paise?"
"Mehangai Ka Jamana Hai."
The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people make conservative investment decisions to protect their capital but end up with a sum of money that can buy less than what the principal could at the time of the investment. This happens when inflation grows faster than the return on your investment. A well-diversified portfolio with some investment in equities might help mitigate this risk.

Interest Rate Risk: In a free market economy interest rates are difficult if not impossible to predict. Changes in interest rates affect the prices of bonds as well as equities. If interest rates rise the prices of bonds fall and vice versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified portfolio might help mitigate this risk.

Political/Government Policy Risk: Changes in government policy and political decision can change the investment environment. They can create a favorable environment for investment or vice versa.

Liquidity Risk: Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that lean towards purchase of liquid securities.

Various investment options in Mutual Funds offer
To cater to different investment needs, Mutual Funds offer various investment options. Some of the important investment options include:
Growth Option:
Dividend is not paid-out under a Growth Option and the investor realises only the capital appreciation on the investment (by an increase in NAV).

Dividend Payout Option:
Dividends are paid-out to investors under the Dividend Payout Option. However, the NAV of the mutual fund scheme falls to the extent of the dividend payout.

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

Retirement Pension Option:
Some schemes are linked with retirement pension. Individuals participate in these options for themselves, and corporates participate for their employees.

Insurance Option:
Certain Mutual Funds offer schemes that provide insurance cover to investors as an added benefit.

Systematic Investment Plan (SIP):
Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. The investor is allotted units on a predetermined date specified in the offer document at the applicable NAV.

Systematic Withdrawal Plan (SWP):
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount / units from his fund at a pre-determined interval. The investor's units will be redeemed at the applicable NAV as on that day.

Future of Mutual Funds in India
By December 2004, Indian mutual fund industry reached Rs 1,50,537 crore. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs 40,90,000 crore.

The annual composite rate of growth is expected 13.4% during the rest of the decade. In the last 5 years we have seen annual growth rate of 9%. According to the current growth rate, by year 2010, mutual fund assets will be double.


The Indian Mutual Fund has passed through three phases. The first phase was between 1964 and 1987 and the only player was the Unit Trust of India, which had a total asset of Rs. 6,700 crores at the end of 1988. The second phase is between 1987 and 1993 during which period 8 Funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to 61,028 crores at the end of 1994 and the number of schemes was 167.
The third phase began with the entry of private and foreign sectors in the Mutual Fund industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by the private sector in association with a foreign Fund.
As at the end of financial year 2000(31st march) 32 Funds were functioning with Rs. 1, 13,005 crores as total assets under management. As on august end 2000, there were 33 Funds with 391 schemes and assets under management with Rs 1, 02,849 crores.
The securities and Exchange Board of India (SEBI) came out with comprehensive regulation in 1993 which defined the structure of Mutual Fund and Asset Management Companies for the first time.
Several private sectors Mutual Funds were launched in 1993 and 1994. The share of the private players has risen rapidly since then.
Currently there are 34 Mutual Fund organizations in India managing 1,02,000 crores.

To study the currently available schemes I have taken the fact sheets available with the AMCs. The fact sheet provides the historical data about the various schemes offered by the AMC, investment pattern, dividend history, ratings given, Fund Managers’ Credentials, etc.
I have analyzed the schemes in the following three categories:
• Equity or Growth Scheme
• Balanced Scheme
• Income or Debt Scheme
I have studied the schemes of the following AMCs
• Kotak Mutual Fund
• SBI Mutual Fund
• Franklin Templeton India Mutual Fund
• Principal Mutual fund

Basis for Analysis
Net Asset Value (NAV) is the best parameter on which the performance of a mutual fund can be studied. We have studied the performance of the NAV based on the compounded annual return of the Scheme in terms of appreciation of NAV, dividend and bonus issues. WE have compared the Annual returns of various schemes to get an idea about their relative standings.


The net asset value of the Fund is the cumulative market value of the assets Fund net of its liabilities. In other words, if the Fund is dissolved or liquidated, by selling off all the assets in the Fund, this is the amount that the shareholders would collectively own. This gives rise to the concept of net asset value per unit, which is the value, represented by the ownership of one unit in the Fund. It is calculated simply by dividing the net asset value of the Fund by the number of units. However, most people refer loosely to the NAV per unit as NAV, ignoring the “per unit”. We also abide by the same convention.
Calculation of NAV
The most important part of the calculation is the valuation of the assets owned by the Fund. Once it is calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The detailed methodology for the calculation of the net asset value is given below.
The net asset value is the actual value of a unit on any business day. NAV is the barometer of the performance of the scheme.
The net asset value is the market value of the assets of the scheme minus its liabilities and expenses. The per unit NAV is the net asset value of the scheme divided by the number of the units outstanding on the valuation date.

Equity or Growth Scheme
These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.

In this equity or growth scheme segment I selected the following schemes in the selected AMC’s

Balanced Scheme
The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market.
Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.
In this balanced fund scheme segment I selected the following schemes in the selected AMC’s

SBI Magnum Balance Fund has not been given any rating by CRISIL but it has been performing well. The investments of the Funds are well diversified in both Equity and Debt. The total Equity Holdings as on April 30th stands at 67.77% of the total assets. It has out performed CRISIL Balanced Fund Index by 45.38% for the 52 weeks period.

Principal Balanced Fund has ranked CP3 by CRISAL, which means average in the open-ended balanced Fund category and ranks within the top 70% of the 19 schemes in this category. It has invested 67% in Equity and about 16% in Government Securities. In Equity it invested primarily in Pharmaceuticals, Construction Materials, Automobiles and banks.

Franklin Templeton India Balanced Fund invested about 70% of its assets in Equity and 75% in Debts. The recent additions to its portfolio are Reliance Industries, Asian paints and BPCL. It invests primarily in IT consulting, auto parts equipment, Banks, Tele Electrical industrial conglomerates. It invested mainly in the AAA rated Debts.

Kotak Balance Fund has invested close to 70% in Equity and about 30% in Debt instruments and Short Term Deposits. The Fund has a well-diversified portfolio of equity with prime investments in BHEL, Siemens EID parry, Bulrampur Chini and SBI. In the debt Instruments it has invested in Railway Bonds and 2003 maturing Government Stock.

SBI Magnum Income Fund is performing very well right from the inception with generous payment of dividends has been assigned AAA rating by CRISIL. The Fund invests about 90% in AAA rated securities and more than 60% of its investments have a maturity ranging between 3 to 10 years. I has come with bonuses in Jan 2003 1:3 and September 2003 1:10. However, it under perform vis-à-vis CRISIL Comp. Bond Fund index by 0.14.

Principal Income Fund has ranked CP3 by CRISAL, which means average in the open-ended debt category and ranks within the top 70% of the 21 schemes in this category. The investments have average maturity of 7.3 years with more than 50% investments having a maturity of above 7 years. It has invested close to 50% in Government Securities, above 40% in NCD/Deep Discount Bonds.

Franklin Templeton India Income Fund has most of the investments in low risk AAA and sovereign securities. Above 45% of the investments are in Gilt, 25% in PSU/PFI bonds and 24% in corporate Debts. The average maturity of this scheme is at 4.87 years. The performance of the Fund is inline with CRISIL Composite Bond Fund.

Kotak Liquid Fund has invested about close to 25% in corporate Debt, 10% in public sector undertakings, about 25% in money market instruments. It has also invested 40% in term deposits. The average maturity of portfolio is 2.3 years. Almost all the instruments are well rated implying they are safe instruments also their investments are highly diversified.


Four sequential steps will enable investor to decide effectively.
1. Divide the spectrum of Mutual Funds depending on major asset classes invested in.
Presently there are only two.
• Equity Funds investing in stocks.
• Debt Funds investing in interest paying securities issued by government, semi-government bodies, public sector units and corporates.
2. a) Categorizing equities
• Diversified – invest in large capitalized stocks belonging to multiple sectors.
• Sectorial – Invest in specific sectors like technology, FMCG, Pharma, etc.
b) Categorized Debt.
• Gilt – Invest only in government securities, long maturity securities with average of 9 to 13 years, very sensitive to interest rate movement.
• Medium Term Debt (Income Funds) – Invest in corporate debt, government securities and PSU bonds. Average maturity is 5 to 7 years.
• Short Term Debt – Average maturity is 1 year. Interest rate sensitivity is very low with steady returns.
• Liquid – Invest in money market, other short term paper, and cash. Highly liquid. Average maturity is three months.

3. Review Categories
• Diversified equity has done very well while sectorial categories have fared poorly in Indian market.
• Index Funds have delivered much less compared to actively managed Funds.
• Gilt and Income Funds have performed very well during the last three years. They perform best in a falling interest environment. Since interest rates are now much lower, short term Funds are preferable.
4. Specific scheme selection
Rankings are based on criteria including past performance, risk and resilience in unfavorable conditions, stability and investment style of Fund management, cost and service levels. Some recommended schemes are:
• Diversified equity – Zurich Equity, Franklin India Bluechip, Sundaram Growth. These Funds show good resilience giving positive results.
• Gilt Funds – DSP Merrill Lynch, Tata GSF, HDFC Gilt have done well.
• Income Fund – HDFC, Alliance, Escorts and Zurich are top performers
• Short Term Funds – Pru ICICI, Franklin Templeton are recommended

Within debt class, presently more is allocated towards short term Funds, because of low prevailing interest rates.
However if interest rates go up investor can allocate more to income Funds or gilt Funds.




Reference books:

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