a_report comparative study of mutual funds in karvy
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A reportOn
COMPARATIVE STUDY OF MUTUAL FUNDS
IN KARVY
at
by
Brij Mohan Sharma
MBA
(Finance)
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COMPARATIVE STUDY OF
MUTUAL FUNDS IN KARVY
PROJECT REPORT
Submitted in Fulfillment of the Requirements for
the Degree of MASTER OF BUSINESS
ADMINISTRATIONIn
Finance
IIMT COLLEGE, MEERUT
Submitted To: Submitted By:
Mr. N.N.Sengupta Brij Mohan SharmaH.O.D MBA 3rd semesterIIMT Management college IIMT College, MeerutMeerut
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ACKNOWLEDGEMENT
SUCCESS CAN NEVER BE ATTAINED WITHOUT PROPER
GUIDANCE
Nothing concrete can be achieved without an optimal combination ofinspiration and perspiration. No work can be accomplished without takingthe guidance of the import. It is only the critiques for the ingeniousintellectual that helps transform product.
This work is a synergistic product of many minds. This began as partof project semester of my MBA program. I am grateful for the inspiration;
encouragement information and wisdom of many resource people who helpme bring this report into life.
I thank Mr. Mahesh kaushik (Branch head) for giving me theopportunity to work in the finance dept., that is the field I wanted to work inand would like to take up in the future as my career.
I am grateful to Mr. Pankaj Shukla (Marketing executive), Mr.Amit Tyagi (Finance Controller), Mr. Prabjoth Singh & Mr.ShobhitRastogi (Reporting officers), who extended his whole-hearted andunreserved help to me throughout this project and enabled me to give theproject its present shape.
Words fail to express adequately, my feeling
of deep gratitude, which I owe to all Karvy staff for
there invaluable counsel, constant help and
continuous encouragement al all stages of this
work.Special thank to Mr Ashish Dwevadi (Branch head shivpuri) for his
support.
I would also like to extend my thanks to Mr. N.N.Sengupta (H.O.D),Ms. Padma(Project guide) & my supporting faculties ofINTERNATIONAL INSTITUTE OF MANAGEMENT AND
TECHNOLOGY.
Thank you all!
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DECLARATION
I, BRIJ MOHAN SHARMA, Student of MBA Session 2004-2006, declare
that the present work titled COMPARATIVE STUDY OF MUTUAL
FUNDS IN KARVY is an original work. I anywhere else for the award of
any degree/ diploma/ certificate or for any prize have not submitted this
project report. All the data given in the report is to the best of my
knowledge and all references whether of any person or organization can
be crosschecked.
BRIJ MOHAN SHARMA
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PREFACE
This project has been prepared in the fulfillment of the degree ofMaster ofBusiness Administration (U. P. Technical University, Lucknow).I have tried my best to present the best for my project titleCOMPARATIVE STUDY OF MUTUAL FUNDS IN KARVYunder theable guidance of all Karvy staff and my faculties of IIMT College.
Mutual funds are now the most appropriate investment option for theinvestors. As financial markets become more sophisticated and complex,
investors need a financial intermediary who provides the requiredknowledge and professional expertise on successful investing. It is nowonder then that the birthplace of the mutual funds the USA the fundindustry has already overtaken the banking industry, more funds are beingunder mutual fund management than deposit with banks.
The Indian Mutual Fund industry has already started opening up manyof the exciting investment opportunities to the Indian investors. We havestarted witnessing the phenomenon of more savings now being entrusted tothe funds than to the banks. Despite the expected continuing growth in theindustry, Mutual Funds are still a new financial intermediary in India. Henceit is important for the investors, the Mutual Fund agents, the Mutual Funddistributors, then investment advisors and even the fund employees acquirebetter knowledge of what Mutual Funds are, what they cannot, and how theyfunction differently from other intermediaries such as banks.
An intensive effort has been made to provide a detailed study of theproject title. This project has been presented into three parts. The very firstpart of the project deals with the Introduction of KARVY. Thesecond part deals with Mutual funds. The third part related to the
Analysis of Various Mutual Fund Schemes and Suggestions and
Conclusions.
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CHAPTER ONE
COMPANY PORTFOLIO
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OVERVIEW
KARVY, is a premier integrated financial services provider, and ranked among
the top five in the country in all its business segments, services over 16 million individual
investors in various capacities, and provides investor services to over 300 corporates,
comprising the who is who of Corporate India. KARVY covers the entire spectrum of
financial services such as Stock broking, Depository Participants, Distribution of
financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,
Commodities Broking, Personal Finance Advisory Services, Merchant Banking &
Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional
management team and ranks among the best in technology, operations and research of
various industrial segments.|
KARVY- EARLY DAYS
The birth of Karvy was on a modest scale in 1981. It began with the vision and
enterprise of a small group of practicing Chartered Accountants who founded the flagship
company .Karvy Consultants Limited. We started with consulting and financial
accounting automation, and carved inroads into the field of registry and share accounting
by 1985. Since then, we have utilized our experience and superlative expertise to go from
strength to strengthto better our services, to provide new ones, to innovate, diversify
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and in the process, evolved Karvy as one of Indias premier integrated financial service
enterprise.
Thus over the last 20 years Karvy has traveled the success route, towards building
a reputation as an integrated financial services provider, offering a wide spectrum of
services. And we have made this journey by taking the route of quality service, path
breaking innovations in service, versatility in service and finallytotality in service.
Our highly qualified manpower, cutting-edge technology, comprehensive infrastructure
and total customer-focus has secured for us the position of an emerging financial services
giant enjoying the confidence and support of an enviable clientele across diverse fields in
the financial world.
Our values and vision of attaining total competence in our servicing has served as
the building block for creating a great financial enterprise, which stands solid on our
fortresses of financial strength - our various companies.
With the experience of years of holistic financial servicing behind us and years of
complete expertise in the industry to look forward to, we have now emerged as a premier
integrated financial services provider.
And today, we can look with pride at the fruits of our mastery and experience
comprehensive financial services that are competently segregated to service and manage
a diverse range of customer requirements.
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THE KARVY CREDO
Our Clients. Our Focus
Clients are the reason for our being.
Personalized service, professional care; pro-activeness are the values that help us
nurture enduring relationships with our clients.
Respect for the individual
Each and every individual is an essential building block of our organization.
We are the kiln that hones individuals to perfection. Be they our employees,
shareholders or investors. We do so by upholding their dignity & pride, inculcating trust
and achieving a sensitive balance of their professional and personal lives.
Teamwork
None of us is more important than all of us.
Each team member is the face of Karvy. Together we offer diverse services with
speed, accuracy and quality to deliver only one product: excellence. Transparency, co-
operation, invaluable individual contributions for a collective goal, and respecting
individual uniqueness within a corporate whole, is how we deliver again and again.
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Responsible Citizenship
A social balance sheet is as rewarding as a business one.
As a responsible corporate citizen, our duty is to foster a better environment in the
society where we live and work. Abiding by its norms, and behaving responsibly towards
the environment, are some of our growing initiatives towards realizing it.
Integrity
Everything else is secondary.
Professional and personal ethics are our bedrock. We take pride in an environment
that encourages honesty and the opportunity to learn from failures than camouflage them.
We insist on consistency between works and actions. Milestones
MILESTONES
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WORKING NETWORK OF
KARVY
As the flagship company of the Karvy Group, Karvy Consultants Limited has
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always remained at the helm of organizational affairs, pioneering business policies, work
ethic and channels of progress.
Having emerged as a leader in the registry business, the first of the businesses that we
ventured into, we have now transferred this business into a joint venture with
Computershare Limited of Australia, the worlds largest registrar. With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business, we believe that we were best positioned to venture into this activity as a
Depository Participant. We were one of the early entrants registered as Depository
Participant with NSDL (National Securities Depository Limited), the first Depository in
the country and then with CDSL (Central Depository Services Limited). Today, we
service over 6 lakhs customer accounts in this business spread across over 250
cities/towns in India and are ranked amongst the largest Depository Participants in the
country. With a growing secondary market presence, we have transferred this business to
Karvy Stock Broking Limited (KSBL), our associate and a member of NSE, BSE and
HSE.
IT enabled services
Our Technology Services division forms the ideal platform to unleash our
technology initiatives and make our presence felt on the Internet. Our past achievements
include many quality websites designed, developed and deployed by us. We also possess
our own web hosting facilities with dedicated bandwidth and a state-of-the-art server
farm (data center) with services functioning on a variety of operating platforms such as
Windows, Solaris, Linux and Unix.
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The corporate website of the company, www.karvy.com, gives access to in-
depth information on financial matters including Mutual Funds, IPOs, Fixed Income
Schemes, Insurance, Stock Market and much more. A link called Resource Center,
devoted solely to research conducted by our team of experts on various financial aspects
like Sector Research, deals exclusively with in-depth analysis of the key sectors of the
Indian economy. Besides, a host of other links like My Portfolio which acts as a
personalized and customized financial measure, makes this site extremely informative
about investment options, market trends, news as also about our company and each of the
services offered here.
KARVY STOCK BROKING LIMITED
Member - Natio nal Stock Exchange (NSE), The Bombay Stock Exchange (BSE), and
The Hyderabad Stock Exchange (HSE).
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice,
flows freely towards attaining diverse goals of the customer through varied services.
Creating a plethora of opportunities for the customer by opening up investment vistas
backed by research-based advisory services. Here, growth knows no limits and success
recognizes no boundaries. Helping the customer create waves in his portfolio and
empowering the investor completely is the ultimate goal.
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Stock Broking Services
It is an undisputed fact that the stock market is unpredictable and yet enjoys a
high success rate as a wealth management and wealth accumulation option. The
difference between unpredictability and a safety anchor in the market is provided by in-
depth knowledge of market functioning and changing trends, planning with foresight and
choosing ones options with care. This is what we provide in our Stock Broking services.
We offer services that are beyond just a medium for buying and selling stocks and
shares. Instead we provide services which are multi dimensional and multi-focused in
their scope. There are several advantages in utilizing our Stock Broking services, which
are the reasons why it is one of the best in the country.
We offer trading on a vast platform National Stock Exchange, Bombay Stock
Exchange and Hyderabad Stock Exchange. More importantly, we make trading safe to
the maximum possible extent, by accounting for several risk factors and planning
accordingly. We are assisted in this task by our in-depth research, constant feedback and
sound advisory facilities. Our highly skilled research team, comprising of technical
analysts as well as fundamental specialists, secure result-oriented information on market
trends, market analysis and market predictions. This crucial information is given as a
constant feedback to our customers, through daily reports delivered thrice daily The
Pre-session Report, where market scenario for the day is predicted, The Mid-session
Report, timed to arrive during lunch break , where the market forecast for the rest of the
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day is given and The Post-session Report, the final report for the day, where the market
and the report itself is reviewed. To add to this repository of information, we publish a
monthly magazine Karvy The Finapolis, which analyzes the latest stock market
trends and takes a close look at the various investment options, and products available in
the market, while a weekly report, called Karvy Bazaar Baatein, keeps you more
informed on the immediate trends in the stock market. In addition, our specific industry
reports give comprehensive information on various industries. Besides this, we also offer
special portfolio analysis packages that provide daily technical advice on scrips for
successful portfolio management and provide customized advisory services to help you
make the right financial moves that are specifically suited to your portfolio.
Our Stock Broking services are widely networked across India, with the number
of our trading terminals providing retail stock broking facilities. Our services have
increasingly offered customer oriented convenience, which we provide to a spectrum of
investors, high-networth or otherwise, with equal dedication and competence.
But true to our spirit, this success is not our final destination, but just a platform to
launch further enhanced quality services to provide you the latest in convenient,
customer-friendly stock management.
Over the years we have ensured that the trust of our customers is our biggest
returns. Factors such as our success in the Electronic custody business has helped build
on our tradition of trust even more. Consequentially our retail client base expanded very
fast.
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To empower the investor further we have made serious efforts to ensure that our
research calls are disseminated systematically to all our stock broking clients through
various delivery channels like email, chat, SMS, phone calls etc.
Our foray into commodities broking has been path breaking and we are in the
process of converting existing traders in commodities into the more organized
mainstream of trading in commodity futures, both as a trading and risk hedging
mechanism.
In the future, our focus will be on the emerging businesses and to meet this
objective, we have enhanced our manpower and revitalized our knowledge base with
enhances focus on Futures and Options as well as the commodities business.
Depository Participants
The onset of the technology revolution in financial services Industry saw the
emergence of Karvy as an electronic custodian registered with National Securities
Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998.
Karvy set standards enabling further comfort to the investor by promoting paperless
trading across the country and emerged as the top 3 Depository Participants in the
country in terms of customer serviced.
Offering a wide trading platform with a dual membership at both NSDL and
CDSL, we are a powerful medium for trading and settlement of dematerialized shares.
We have established live DPMs, Internet access to accounts and an easier transaction
process in order to offer more convenience to individual and corporate investors. A team
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of professional and the latest technological expertise allocated exclusively to our demat
division including technological enhancements like SPEED-e, make our response time
quick and our delivery impeccable. A wide national network makes our efficiencies
accessible to all.
Distribution of Financial Products
The paradigm shift from pure selling to knowledge based selling drives the
business today. With our wide portfolio offerings, we occupy all segments in the retail
financial services industry.
A 1600 team of highly qualified and dedicated professionals drawn from the best
of academic and professional backgrounds are committed to maintaining high levels of
client service delivery. This has propelled us to a position among the top distributors for
equity and debt issues with an estimated market share of 15% in terms of applications
mobilized, besides being established as the leading procurer in all public issues.
To further tap the immense growth potential in the capital markets we enhanced
the scope of our retail brand, Karvy The Finapolis, thereby providing planning and
advisory services to the mass affluent. Here we understand the customer needs and
lifestyle in the context of present earnings and provide adequate advisory services that
will necessarily help in creating wealth. Judicious planning that is customized to meet the
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future needs of the customer deliver a service that is exemplary. The market-savvy and
the ignorant investors, both find this service very satisfactory. The edge that we have over
competition is our portfolio of offerings and our professional expertise. The investment
planning for each customer is done with an unbiased attitude so that the service is truly
customized.
Our monthly magazine, Finapolis, provides up-dated market information on
market trends, investment options, opinions etc. Thus empowering the investor to base
every financial move on rational thought and prudent analysis and embark on the path to
wealth creation.
Advisory Services
Under our retail brand Karvy The Finapolis, we deliver advisory services to a
cross-section of customers. The service is backed by a team of dedicated and expert
professionals with varied experience and background in handling investment portfolios.
They are continually engaged in designing the right investment portfolio for each
customer according to individual needs and budget considerations with a comprehensive
support system that focuses on trading customers' portfolios and providing valuable
inputs, monitoring and managing the portfolio through varied technological initiatives.
This is made possible by the expertise we have gained in the business over the years.
Another venture towards being investor-friendly is the circulation of a monthly magazine
called Karvy - the Finapolis'. Covering the latest of market news, trends, investment
schemes and research-based opinions from experts in various financial fields. Research
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Private Client Group
This specialized division was set up to cater to the high net worth individuals and
institutional clients keeping in mind that they require a different kind of financial
planning and management that will augment not just existing finances but their life-style
as well. Here we follow a hard-nosed business approach with the soft touch of dedicated
customer care and personalized attention.
For this purpose we offer a comprehensive and personalized service that
encompasses planning and protection of finances, planning of business needs and
retirement needs and a host of other services, all provided on a one-to-one basis.
Our research reports have been widely appreciated by this segment. The delivery
and support modules have been fine tuned by giving our clients access to online portfolio
information, constant updates on their portfolios as well as value-added advise on
portfolio churning, sector switches etc. The investment recommendations given by our
research team in the cash market has enjoyed a high success rate.
KARVY INVESTOR SERNICES LIMITED
Merchant Banking
Recognized as a leading merchant banker in the country, we are registered with
SEBI as a Category I merchant banker. This reputation was built by
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capitalizing on opportunities in corporate consolidations, mergers and acquisitions and
corporate restructuring, which have earned us the reputation of a merchant banker.
Raising resources for corporate or Government Undertaking successfully over the past
two decades have given us the confidence to renew our focus in this sector.
Our quality professional team and our work-oriented dedication have propelled us
to offer value-added corporate financial services and act as a professional navigator for
long term growth of our clients, who include leading corporates, State Governments,
foreign institutional investors, public and private sector companies and banks, in Indian
and global markets.
We have also emerged as a trailblazer in the arena of relationships, both at the
customer and trade levels because of our unshakable integrity, seamless service and
innovative solutions that are tuned to meet varied needs. Our team of committed industry
specialists, having extensive experience in capital markets, further nurtures this
relationship.
Our financial advice and assistance in restructuring, divestitures, acquisitions, de-
mergers, spin-offs, joint ventures, privatization and takeover defense mechanisms have
elevated our relationship with the client to one based on unshakable trust and confidence.
Karvy offerings Investment Banking
KARVY COMPUTERSHARE PRIVATE LIMITED
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We have traversed wide spaces to tie up with the worlds largest transfer agent, the
leading Australian company, Computershare Limited. The company that services more
than 75 million shareholders across 7000 corporate clients and makes its presence felt in
over 12 countries across 5 continents has entered into a 50-50 joint venture with us.
With our management team completely transferred to this new entity, we will aim
to enrich the financial services industry than before. The future holds new arenas of client
servicing and contemporary and relevant technologies as we are geared to deliver better
value and foster bigger investments in the business. The worldwide network of
Computershare will hold us in good stead as we expect to adopt international standards in
addition to leveraging the best of technologies from around the world.
Excellence has to be the order of the day when two companies with such similar
ideologies of growth, vision and competence, get together. www.karisma.karvy.com
We have attained a position of immense strength as a provider of across-the-board
transfer agency services to AMCs, Distributors and Investors.
Mutual Fund Services
Nearly 40% of the top-notch AMCs including prestigious clients like Deutsche
AMC and UTI swear by the quality and range of services that we offer. Besides
providing the entire back office processing, we provide the link between various Mutual
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Funds and the investor, including services to the distributor, the prime channel in this
operation.
Carrying the limitless' ideology forward, we have explored new dimensions in
every aspect of Mutual Fund servicing right from volume management, cost effective
pricing, delivery in the least turnaround time, efficient back-office and front-office
operations to customized service. We have been with the AMCs every step of the way,
helping them serve their investors better by offering them a diverse and customized range
of services. The first to market' approach that is our anthem has earned us the reputation
of an innovative service provider with a visionary bent of mind.
Our service enhancements such as Karvy Converz', a full-fledged call center, a
top-line website (www.karvymfs.com), the m-investor' and many more, creating a
galaxy of customer advantages.
Issue Registry
In our voyage towards becoming the largest transaction-processing house in the
Indian Corporate segment, we have mobilized funds for numerous corporate, Karvy has
emerged as the largest transaction-processing house for the Indian Corporate sector. With
an experience of handling over 700 issues, Karvy today, has the ability to execute
voluminous transactions and hard-core expertise in technology applications have gained
us the No.1 slot in the business. Karvy is the first Registry Company to receive ISO 9002
certification in India that stands testimony to its stature
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Karvy has the backing of skilled human resources complemented by requisite
technological packages to ensure a faster processing capability. Karvy has the benefit of a
good synergy between depositories and registry that enables faster resolution to related
customer queries. Apart from its unique investor servicing presence in all the phases of a
public Issue, it is actively coordinating with both the main depositories to develop special
models to enable the customer to access depository (NSDL, CDSL) services during an
IPO.
Our trust-worthy reputation, competent manpower and high-end technology and
infrastructure are the solid foundations on which our success is built.
http://karisma.karvy.com
Corporate Shareholder Services
Karvy has been a customer centric company since its inception. Karvy offers a
single platform servicing multiple financial instruments in its bid to offer complete
financial solutions to the varying needs of both corporate and retail investors where an
extensive range of services are provided with great volume-management capability.
Today, Karvy is recognized as a company that can exceed customer expectations
which is the reason for the loyalty of customers towards Karvy for all his financial needs.
An opinion poll commissioned by The Merchant Banker Update and conducted by the
reputed market research agency, MARG revealed that Karvy was considered the Most
Admired in the registrar category among financial services companies.
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We have grown from being a pure transaction processing business, to one of
complete shareholder solutions.
KARVY GLOBAL SERVICES LIMITED
The specialist Business Process Outsourcing unit of the Karvy Group. The
legacy of expertise and experience in financial services of the Karvy Group serves us
well as we enter the global arena with the confidence of being able to deliver and deliver
well.
Here we offer several delivery models on the understanding that business needs
are unique and therefore only a customized service could possibly fit the bill. Our service
matrix has permutations and combinations that create several options to choose from.
Be it in re-engineering and managing processes or delivering new efficiencies, our
service meets up to the most stringent of international standards. Our outsourcing models
are designed for the global customer and are backed by sound corporate and operations
philosophies, and domain expertise. Providing productivity improvements, operational
cost control, cost savings, improved accountability and a whole gamut of other
advantages.
We operate in the core market segments that have emerging requirements for
specialized services. Our wide vertical market coverage includes Banking, Financial and
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Insurance Services (BFIS), Retail and Merchandising, Leisure and Entertainment, Energy
and Utility and Healthcare.
Our horizontal offerings do justice to our stance as a comprehensive BPO unit
and include a variety of services in Finance and Accounting Outsourcing Operations,
Human Resource Outsourcing Operations, Research and Analytics Outsourcing
Operations and Insurance Back Office Outsourcing Operations. www.karvyglobal.com
KARVY COMMODITIES BROKING PVT. LTD.
At Karvy Commodities, we are focused on taking commodities trading to new
dimensions of reliability and profitability. We have made commodities trading, an
essentially age-old practice, into a sophisticated and scientific investment option.
Here we enable trade in all goods and products of agricultural and mineral origin
that include lucrative commodities like gold and silver and popular items like oil, pulses
and cotton through a well-systematized trading platform.
Our technological and infrastructural strengths and especially our street-smart skills
make us an ideal broker. Our service matrix is holistic with a gamut of advantages, the
first and foremost being our legacy of human resources, technology and infrastructure
that comes from being part of the Karvy Group.
Our wide national network, spanning the length and breadth of India, further
supports these advantages. Regular trading workshops and seminars are conducted to
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hone trading strategies to perfection. Every move made is a calculated one, based on
reliable research that is converted into valuable information through daily, weekly and
monthly newsletters, calls and intraday alerts. Further, personalized service is provided
here by a dedicated team committed to giving hassle-free service while the brokerage
rates offered are extremely competitive.
Our commitment to excel in this sector stems from the immense importance that
commodities broking has to a cross-section of investors farmers, exporters, importers,
manufacturers and the Government of India itself.
KARVY INSURANCE BROKING PVT. LTD.
At Karvy Insurance Broking Pvt. Ltd., we provide both life and non-life
insurance products to retail individuals, high net-worth clients and corporates. With the
opening up of the insurance sector and with a large number of private players in the
business, we are in a position to provide tailor made policies for different segments of
customers. In our journey to emerge as a personal finance advisor, we will be better
positioned to leverage our relationships with the product providers and place the
requirements of our customers appropriately with the product providers. With Indian
markets seeing a sea change, both in terms of investment pattern and attitude of investors,
insurance is no more seen as only a tax saving product but also as an investment product.
By setting up a separate entity, we would be positioned to provide the best of the
products available in this business to our customers.
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Our wide national network, spanning the length and breadth of India, further
supports these advantages. Further, personalized service is provided here by a dedicated
team committed in giving hassle-free service to the clients.
With our growing ambitions of reaching out to investors across the shores of this
country, we have set up Karvy Inc. in the US located in New York to provide various
financial products and information on Indian equities to potential foreign institutional
investors (FIIs) in the region. This entity soon would be ACC registered and would also
become a member of various important stock exchanges in the US. This entity would
extensively facilitate various businesses of Karvy viz., stock broking (Indian equities),
research and investment by QIBs in Indian markets for both secondary and primary
offerings, outsourcing of various assignments for the multiple streams of business in
Karvy Global Services Ltd (KGSL).
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CHAPTER TWO
MUTUAL FUNDS
Introduction
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is invested by the fund
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manager in different types of securities depending upon the objective of the scheme.
These could range from shares to debentures to money market instruments. The income
earned through these investments and the capital appreciation realized by the scheme are
shared by its unit holders in proportion to the number of units owned by them (pro rata).
Thus a Mutual Fund is the most suitable investment for the common man as it offers an
opportunity to invest in a diversified, professionally managed portfolio at a relatively low
cost. Anybody with an investigable surplus of as little as a few thousand rupees can
invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective
and strategy.
A Mutual fund is the ideal investment vehicle for today's complex and modern
financial scenario. Markets for equity shares, bonds and other fixed income instruments,
real estate, derivatives and other assets have become mature and information driven.
Price changes in these assets are driven by global events occurring in faraway places. A
typical individual is unlikely to have the knowledge, skills, inclination and time to keep
track of events, understand their implications and act speedily. An individual also finds it
difficult to keep track of ownership of his assets, investments, brokerage dues and bank
transactions etc.
A mutual fund is the answer to all these situations. It appoints professionally
qualified and experienced staff that manages each of these functions on a full time basis.
The large pool of money collected in the fund allows it to hire such staff at a very low
cost to each investor. In
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Objective of Study and Methodology
The structure of the Indian mutual fund industry has been transformed during the
last ten years or so from a monolithic to a highly competitive structure. The investors
now have to choose from amongst a large number of MF organizations and schemes. An
important aspect examined in this study is how far competition has progressed and what
kind of pattern can be discerned in regard to the investors' preferences among MF
organizations/schemes. We also attempt to examine the MF industry's development
against a wider perspective by comparing the investors' preferences for MF products with
their preferences for other major financial products, including equity shares, bonds, bank
FDs and government savings schemes.
METHODOLOGY
The methodology of the research work for this project includes:
Literature Research
Different Mutual Fund Scheme
Classification of Mutual fund scheme
Data Collection
Analysis
Results
Writing up
Literature Research
To study the various aspects of the mutual funds various literature works
has been considered which includes various books related to the Mutual
Funds, AMFI guidelines, SEBI and SBI guidelines, various business
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magazines and news papers. All the basic information from this source
regarding the various aspects of Mutual Fund helps in understanding the
Mutual Fund industry.
Different Mutual Fund Scheme
Next to the literature work it is important to look over the various Mutual
Fund schemes, the service providers and other related information. This
may be gathered from the prospectus and websites of the Mutual Fund
service providers, various magazines and news papers.
Classification of Mutual fund scheme
For the analysis among different mutual fund schemes proper
classification of the schemes is the important. The scheme are available in
various pre classified forms.
So for the purpose of analysis here six different categories of mutual fund
schemes have been considered.
Equity Funds
Liquid Funds
Balanced Funds
Floating Rate Funds
Gilt Funds
Monthly Income Plan Funds
Data Collection
The main data required for the purpose of the analysis are:
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List of Various Mutual fund schemes
For the analysis to know the various mutual funds schemes available
for the Indian investors it is important to look over then various
schemes. This information is being collected from the website
High rated Mutual funds schemes
The mutual funds schemes analyzed in for the present analysis are
highly rated on annual average till 30 June 2004 as rated by Credit
Rating Information Services India Limited (CRISIL). The data
collected for this purpose is sourced from http://www.infoline.com.
Various Data Related to Mutual Funds
Data like monthly returns, quartly returns, annual returns, corpus
size, risks involved, maturity period, expenses ratio etc. are also
important for the analysis of various mutual funds. Such
informations are collected from the prospectus and websites of
various matual funds services providers like Prudential ICICI
Mutual Fund , Tata Mutual Fund, Birla Sun Life Mutual Fund,
Kotak Mutual Fund, Tempelton Mutual Fund, SBI Mutual Fund,
UTI Mutual Fund etc.. The data are also collected from
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Objectives
To define and maintain high professional and ethical standards in all areas of
operation of mutual fund industry.
To recommend and promote best business practices and code of conduct to be
followed by members and other engaged in the activities of mutual fund and asset
management including agencies connected or involved in the field of capital
markets and financial services.
To interact with the Securities and Exchange Board of India (SEBI) and to
represent to SEBI on all matters concerning the mutual fund industry.
To represent to the Government, Reserve Bank of India and other bodies on all
matters
relating to the Mutual Fund Industry.
To develop a cadre of well-trained Agent distributors and to implement a program
of training and certification for all intermediaries and others engaged in the
industry.
To undertake nation wide investor awareness program so as to promote proper
understanding of the concept and working of mutual funds.
To disseminate information on Mutual Fund Industry and to undertake studies and
Research directly and/or in association with other bodies.
Mutual Fund-Concept, Organizational Structure, Advantages and
Types
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CONCEPT
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities. The income earned
through these investments and the capital appreciation realized are shared by its unit
holders in proportion to the number of units owned by them. Thus a Mutual Fund is the
most suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a mutual fund:
Mutual funds operation flow
:ORGANISATION OF A MUTUAL FUND
There are many entities involved and the diagram below illustrates the
organizational set up of a mutual fund:
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orignisation of a Mutual Fund
ADVANTAGES OF MUTUAL FUNDS
The advantages of investing in a Mutual Fund are:
Professional Management
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Diversification
Convenient Administration
Return Potential
Low Costs
Liquidity
Transparency
Flexibility
Choice of schemes
Tax benefits
Well regulated
MUTUAL FUND SCHEMES
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Wide variety of Mutual Fund Schemes exists to cater to the needs such as
financial position, risk tolerance and return expectations etc. The figure below gives an
overview into the existing types of schemes in the Industry.
TYPES OF MUTUAL FUND SCHEMES
BY STRUCTURE
Open-Ended Schemes
Close-Ended Schemes
Interval Schemes
BY INVESTMENT OBJECTIVE
Growth Schemes
Income Schemes
Balanced Schemes
Money Market Schemes
OTHER SCHEMES
Tax Saving Schemes
Special Schemes
Index Schemes
Sector Specie Schemes
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Structure of the Indian mutual fund industry
The Indian mutual fund industry is dominated by the Unit Trust of India which
has a total corpus of Rs 700bn collected from more than 20 million investors. The UTI
has many funds/schemes in all categories ie equity, balanced income etc with some being
open-ended and some being closed-ended. The Unit Scheme 1964 commonly referred to
as US 64, which is a balanced fund, is the biggest scheme with a corpus of about Rs 200
bn. UTI was floated by financial institutions and is governed by a special act of
Parliament. Most of its investors believe that the UTI is government owned and
controlled, which, while legally incorrect, is true for all practical purposes.
The second largest category of mutual funds are the ones floated by nationalized
banks. Canbank Asset Management floated by Canara Bank and SBI Funds Management
floated by the State Bank of India are the largest of these. GIC AMC floated by General
Insurance Corporation and Jeevan Bima Sahayog AMC floated by the LIC are some of
the other prominent ones. The aggregate corpus of funds managed by this category of
AMCs is about Rs 150 bn.
the third largest category of mutual funds is the ones floated by the private sector and by
foreign asset management companies. The largest of these are Prudential ICICI AMC and
Birla Sun Life AMC>The aggregate corpus of assets managed by this category of AMCs
is in excess of Rs 250 bn.
Some of the AMCs operating currently are :
Name of the AMC Nature of ownership
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Alliance Capital Asset management (I) Private Limited Private foreign
Birla Sun Life Asset Management Company Limited Private Indian
Mank of Baroda Asset management Company Limited Banks
Bank of India Asset Management Company Limited Banks
Canbank Investment Management Servies Limited Banks
Cholamanadalam Cazenove Asset Management Company Private foreign
Limited
Dundee Asset Management Company Limited Private foreign
DSP Merrill Lynch Asset Management Company Limited Private foreign
Escorts Asset Management Limited Private Indian
First India Asset Management Limited Private Indian
GIC Asset Management Company Limited Institutions
IDBI Investment Management Company Limited Institutions
Indfund Management Limited Banks
ING Investment Asset Management Company Private Private foreign
Limited
JM Capital Management Limited Private Indian
Jardine Fleming (I) Asset Management Limited Private foreign
Kotak Mahindra Asset Management company Limited Private Indian
Jeevan Bima Sahayog Asset Management Company Institutions
Limited
Morgan Stanley Asset Management Company Private Private foreign
Limited
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Punjab National Bank Asset Management Company Banks
Limited
Reliance Capital Asset Management Company Limited Private Indian
State Bank of India Funds Management Limited Banks
Shriram Asset Management company Limited Private Indian
Sun F and C Asset Management (I) Private Limited Private foreign
Sundaram Newton Asset Management Company Limited Private foreign
Tata Asset Management Company Limited Private Indian
Credit Capital Asset Management Company Limited Private Indian
Templeton Asset Management (India) Private Limited Private foreign
Unit Trust of India Institutions
Zurich Asset management Company (I) Limited Private foreign
Recent trends in mutual funds industry
The most important trend in the mutual fund industry is the aggressive expansion
of the foreign owned mutual fund companies and the decline of the companies floated by
nationalized banks and smaller private sector players.
Many nationalized banks got into the mutual fund business in the early nineties
and got off to a good start due to the stock market boom prevailing then. These banks did
not really understand the mutual fund business and they just viewed it as another kind of
banking activity. Few hired specialized staff and generally chose to transfer staff from the
parent organizations. The performance of most of the schemes floated by these funds was
not good. Some schemes has offered guaranteed returns and their parent organizations
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had to bail out these AMCs by paying large amounts of money as the difference between
the guaranteed and actual returns. The service levels were also very bad. Most of these
AMCs have not been able to retain staff, float new schemes etc. and it is doubtful
whether, barring a few exceptions, they have serious plans of continuing the activity in a
major way.
The experiece of some of the AMCs floated by private sector Indian companies was also
very similar. They quickly realized that the AMC business is a business, which makes
money in the long term and requires deep-pocketed support in the intermediate years.
Some have sold out to foreign owned companies, some have merged with others and
there is general restructuring going on.
The foreign owned companies have deep pockets and have come in here with the
expectation of a long haul. They can be credited with introducing many new practices
such as new product innovation, sharp improvement in service standards and disclosure,
usage of technology, broker education and support etc. In fact, they have forced the
industry to upgrade itself and service levels of organizations like UTI have improved
dramatically in the last few years in response to the competition provided by these.
Types of Mutual Funds
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Mutual fund schemes may be classified on the basis of its structure and its investment
objective.
By Structure:
Open-ended Funds
An open-end fund is one that is available for subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value (NAV) related prices. The key feature of open-end schemes is liquidity.
Closed-ended Funds
A Closed-end fund has a stipulated maturity period which generally ranging from
3 to 15 years. The und is open for subscription only during a specified period. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can buy
or sell the units of the scheme on the stock exchanges where they are listed. In order to
provide an exit route to the investors, some close-ended funds give an option of selling
back the units to the Mutual Fund through periodic repurchase at NAV related prices.
SEBI Regulations stipulate that at least one of the two exit routes is provided tot he
investor.
Interval Funds
Interval funds combine the features of open-ended and close-ended schemes.
They are open for sale or redemption during pre-determined intervals at NAV related
prices.
By Investment Objective :
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Growth Funds
The aim of growth funds is to provide capital appreciation over the medium to
long-term. Such schemes normally invest a majority of their corpus in equities. It has
been proven that returns from stocks, have outperformed most other kind of investments
helf over the long term. Growth schemes are ideal for investors having a long-term
outlook seeking growth over a period of time.
Income Funds
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 and government securities. Income Funds are ideal for capital stability and
regular income.
Balanced Funds
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 equites and fixed
income securities in the proportion indicated in their offer documents. In a rising stock
market, the NAV of these schemes may not normally keep pace, or fall equally when the
market falls. These ar5e ideal for investors looking for a combination of income and
moderate growth.
Money Market Funds
The aim of money market funds is to provide easy liquidity, preservation of
capital and moderate income. These schemes generally invest in safer short-term
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instruments such as treasury bills, certificates of deposit commercial paper and inter-bank
call money. Returns on these schemes may fluctuate depending upon the interest rates
prevailing in the market. These are ideal for Corporate and individual investors as a
means to part their surplus funds for short periods.
Load Funds
A Load Fund is one that charges a commission for entry or exit. That is, each time
you buy or sell units in the fund, a commission will be payable. Typically entry and exit
loads range from 1% to 2%. It could be worth paying the load, if the fund has a good
performance history.
No-Load Funds
A No-Load Fund is one that does not charge a commission for entry or exit. That
is, no commission is payable on purchase or sale of units in the fund. The advantage of a
no load fund is that the entire corpus is put to work.
Other Schemes :
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the
Indian Income Tax laws as the government offers tax incentives for investment in
specified avenues.
Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are
allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides
opportunities to investors to save capital gains u/s 54EA and 54EB by investing in
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Mutual Funds, Provided the capital asset has been sold prior to April 1, 2000 and the
amount is invested before September 30, 2000.
Special Schemes
Industry Specific Schemes
Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like Info Tech,
FMCG, Pharmaceuticals etc.
Index Schemes
Index funds attempts to replicate the performance of a particular index number as
the BSE Sensex or the NSE 50.
Sectoral Schemes
Sectoral funds are those which invest excusively in a specified industry or group
of industries or various segments such as A Group shares or initial public
offering.
Benefits of Mutual Funds Investment
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 Costs
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.
Liquidity
In open-end schemes, the investor gets the money back promptly at net asset
value related prices from the Mutual Fund. In close-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
You 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.
Choice of Schemes
Mutual Funds offer a family of schemes to suit our varying needs over a lifetime.
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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.
Net Asset Value (NAV)
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 asset
value is given below.
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Asset value is equal to
Sum of market value of shares/debentures + Liquid assets/cash held, if any +
Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid.
Details on the above items
For liquid shares/debentures, valuation is done on the basis of the last or closing
market price on the principal exchange where the security is traded.
For illiquid and unlisted and/or thinly traded shares/debentures, the value has to
be estimated. For shares, this could be the book value per share or an estimated market
price if suitable benchmarks are available. For debentures and bonds, value is estimated
on the basis of yields of comparable liquid securities after adjusting for illiquidity. The
value of fixed interest bearing securities moves in a direction opposite to interest rate
changes Valuation of debentures and bonds is a big problem since most of them are
unlisted and thinly traded. This gives considerable leeway to the AMCs on valuation and
some of the AMCs are believed to take advantage of this and adopt flexible valuation
policies depending on the situation.
Interest is payable on debentures/bonds on a periodic basis say every 6 months.
But, with every passing day, interest is said to be accrued, at the daily interest rate, which
is calculated by dividing the periodic interest payment with the number of days in each
period. Thus, accrued interest on a particular day is equal to the daily interest rate
multiplied by the number of days since the last interest payment date.
Usually, dividends are proposed at the time of the Annual General meeting and
become due on the record date. There is a gap between the dates on which it becomes due
and the actual payment date. In the intermediate period, it is deemed to be accrued.
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Expenses including management fees, custody charges etc. are calculated on a daily
basis.
HISTORY OF MUTUAL FUNDS
Mutual Funds in India (19642000)
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. Then the 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.
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His ideas took the form of the Unit Trust of India, an intermediary that would help
fulfill the twin objectives of mobilizing 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, scop of
business, powers and functions of the Trust as well as accounting, disclosures and
regulatory requirements for the Trust.
One thing is certainthe fund industry is here to stay. The industry was one-entity
show till 1986 when the UTI monopoly was broken when SBI and Canbank 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 0.25b in 1964 the
industry has grown at a compounded average growth rate of 26.34% to its current size of
Rs 1130bn.
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.
Out of ten public sector players five will sell out, close down or merge with
stronger players in three to four years. In the private sector this trend has already started
with two mergers and one takeover. Here too some of them will down their shutters in the
near future to come.
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But this does not mean there is no room for other players. The market will witness
a flurry of new players entering the arena. There will be a large number of offers from
various asset management companies in the time to come. Some big names like Fidelity,
Principal, Old Mutual etc. are looking at Indian market seriously. One important reason
for it is that most major players already have presence here and hence these big names
would hardly like to get left behind.
The mutual fund industry is awaiting the introduction of derivatives in India as
this would enable it to hedge its risk and this in turn would be reflected in it's Net Asset
Value (NAV).
SEBI is working out the norms for enabling the existing mutual fund schemes to
trade in derivatives. Importantly, many market players have called on the Regulator to
initiate the process immediately, so that the mutual funds can implement the changes that
are required to trade in Derivatives.
May the Net Asset Values grow!!
Market Trends
A lone UTI with just one scheme in 1964, now competes with as many as 400 odd
products and 34 players in the market. In spite of the stiff competition and losing market
share, UTI still remains a formidable force to reckon with.
Last six years have been the most turbulent as well as exiting ones for the
industry. New players have come in, while others have decided to close shop by either
selling off or merging with others. Product innovation is now passe with the game
shifting to performance delivery in fund management as well as service. Those directly
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associated with the fund management industry like distributors, registrars and transfer
agents, and even the regulators have become more mature and responsible.
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.
1999-2000 Year of the funds
Mutual funds have been around for a long period of time to be precise for 36 yrs
but the year 1999-2004 were immense future potential and developments in this sector.
These years signaled the years of resurgence of mutual funds and the regaining of
investor confidence in these MF's. This time around all the participants are involved in
the revival of the funds---the AMC's, the unit holders, the other related parties. However
the sole factor that gave lifr 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 in provided later.
It provided centrestage 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 IPO's were inevitable. The quest
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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 cam 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.
Future Scenario
The asset base will continue to grow at an annual rate of about 30 to 35% over the
next few years as investor's shift their assets from banks and other traditional avenues.
Some of the older public and private sector players will either close shop or be taken
over.
The industry is also having a profound impact on financial markets. While UTI
has always been a dominant player on the bourses as well as the debt markets, the new
generation of private funds which have gained substantial mass are now seen flexing their
muscles. Fund managers, by their selection criteria for stocks have forced corporate
governance on the industry. By rewarding honest and transparent management with
higher valuations, a system of risk-reward has been created where the corporate sector is
more transparent then before.
Funds have shifted their focus to the recession free sectors like pharmaceuticals,
FMCG and technology sector. Funds performances are improving. Funds collection,
which averaged at less than Rs 100bn per annum over five-year period spanning 1993-98
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doubled to Rs 210 bn in 1998-99. In the current year mobilization till now have exceeded
Rs 300 bn. total collection of the current financial year ending March 2004 was archived
Rs 450 bn.
What is particularly noteworthy is that bulk of the mobilization has been by the
private sector mutual funds rather than public sector mutual funds. Indeed private MFs
saw a net inflow of Rs. 7819.34 Crore during the first nine months of the year 2004 as
against a net inflow of Rs. 604.40 crore in the case of public sector funds.
Mutual funds are now also competing with commercial banks in the race for retail
investor's savings and corporate float money. The power shift towards mutual funds has
become obvious. The coming few years will show that the traditional saving avenues are
losing out in the current scenario. Many investors are realizing that investments in
savings accounts are as good as locking up their deposits in a closet. The fund
mobilization trend by mutual funds in the current year indicates that money is going to
mutual funds in a big way. The collection in the first half of the financial year 2003-2004
matches the whole of 2001-2002.
India is at the first stage of a revolution that has already peaked in the U.S. the
U.S. boasts of an Asset base that is much higher than its bank deposits. In India' mutual
fund assets are not even 10% of the bank deposits, but this trend is beginning to change.
Recent figures indicate that in the first quarter of the current fiscal year mutual fund
assets went up by 115% whereas bank deposits rose by only 17% (Source : Thinktank,
The Financial Express September, 03). This is forcing a large number of banks to adopt
the concept of narrow banking wherein the deposits are kept in gilts and some other
assets which improves liquidity and reduces risk. The basic fact lies that banks cannot be
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ignored and they will not close down completely. Their role as intermediaries cannot be
ignored. It is just that Mutual Funds are going to change the way banks do business in
the future.
COMPARISION BETWEEN BANKS V/S MUTUAL FUNDS
BASICS BANKS MUTUAL FUNDS
Returns Low Better
Administrative exp. High Low
Risk Low Moderate
Investment options Less More
Network High penetration Low but improving
BASICS BANKS MUTUAL FUNDS
Liquidity At a cost Better
Quality of assets Not transparent Transparent
Interest calculation Minimum balance Everyday
between 10th.& 30th.
of every month
Guarantee Maximum Rs. 1 lakh on deposits None
Global Scenario
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Some basic facts
The money market mutual fund segment has a total corpus of $ 1.48 trillion in the
U.S. against a corpus of $ 100 million in India.
Out of the top 10 mutual funds worldwide, eight are bank-sponsored. Only
Fidelity and Capital are non-bank mutual funds in this group.
In the U.S. the total number of schemes is higher than that of the listed companies
while in India we have just 277 schemes.
Internationally, mutual funds are allowed to go short. In India fund managers do
not have such leeway.
In the U.S. about 9.7 million households will manage their assets on-line by the
year 2003, such a facility is not yet of avail in India.
On-line trading is a great idea to reduce management expenses from the current
2% of total assets to about 0.75% of the total assets.
72% of the core customer base of mutual funds in the top 50-broking firms in the
U.S. are expected to trade on-line by 2003.
Internationally, on-line investing continues its meteoric rise. Many have debated
about the success of e-commerce and its breakthroughs, but it is true that this aspect
of technology could and will change the way financial sectors function. However,
mutual funds cannot be left far behind. They have realized the potential of the
Internet and are equipping themselves to perform better.
In fact in advanced countries like the U.S.A. mutual funds buy-sell transactions have
already begun on the Net, while in India the Net is used as a source of Information.
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Net investors would prefer online: Mutual funds can target investors who are
young individuals and who are Net savvy, since servicing them would be easier
on the Net.
India has around 1.6 million net users who are prime target for these funds and
this could just be the beginning. The Internet users are going to increase
dramatically and mutual funds are going to be the best beneficiary. With smaller
administrative costs more funds would be mobilized. A fund manager must be
ready to tackle the volatility and will have to maintain sufficient amount of
investments which are high liquidity and low yielding investments to honor
redemption.
Net based advertisements: There will be more sites involved in ads and
promotion of mutual funds. In the U.S. sites like AOL offer detailed research and
financial details about the functioning of different funds and their performance
statistics a is witnessing a genesis in this area. There are many sites such as
indiainfoline.com and indiafn.com that are doing something similar and providing
advice to investors regarding their investments.
In the U.S. most mutual funds concentrate only on financial funds like equity and
debt. Some like real estate funds and commodity funds also take an exposure to physical
assets. The latter type of funds are preferred by corporates who want to hedge their
exposure to the commodities they deal with.
For instance, a cable manufacturer who needs 100 tons of Copper in the month of
January could buy an equivalent amount of copper by investing in a copper fund. For
Example, Permanent Portfolio Fund, a conservative U.S. based fund invests a fixed
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percentage of its corpus in Gold, Silver, Swiss francs, specific stocks on various bourses
around the world, short-term and long-term U.S. treasuries etc.
In U.S.A. apart from bullion funds there are copper funds, precious metal funds
and real estate funds (investing in real estate and other related assets as well.) In India,
the Canada based Dundee mutual fund is planning to launch a gold and a real estate fund
before the year-end.
In developed countries like the U.S.A there are funds to satisfy everybodys requirement,
but in India only the tip of the iceberg has been explored. In the near future India too will
concentrate on financial as well as physical funds.
Mutual funds and the Budget 2004-2005
Important measures
Deletion of sections 54 EA and 54 EB of the Income Tax Act, 1961
The above two sections provided relief from capital gains tax if investments were made
in specified securities and locked in for a period of 3 years in the case of 54 EA and 7
years in the case of 54EB. Mutual funds units were one of the specified securities and this
resulted in a lot of money realized as profit from sale of securities being reinvested in the
market through mutual funds.
With the withdrawal of the exemption to mutual funds, investors have lost out on
a very viable alternative for tax saving and funds also would be faced with the problem of
`hot money as there would no longer be any lock in period for investments. It is
estimated that 54EA investments formed approximately 15% of the corpus.
Increase in dividend tax from 10% to 20% for debt funds.
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The existing dividend tax payable by debt schemes has been doubled to 20%. This
would lead to a reduction in returns available to investors by approximately 1.5% from
the average of approximately 14%. This is expected to hurt retail investment in debt
schemes and could lead to a pull out and reduced mobilization. Two implications of this
move could be :
Reinvestment of dividends by investors, since capital gains would be taxed at a
lower rate as compared to dividend, investors would prefer to reinvest dividend
and earn long-term capital appreciation.
Switch over from debt to equity schemes; since open ended equity schemes are
free from paying dividend tax, these schemes could attract some of the investment
that is pulled out from debt schemes.
Instead of taxing debt schemes so as to bring parity between the banks and mutual
funds, it is widely felt that the finance minister could have simply extended some of the
benefits enjoyed by mutual funds to banks and FIs. The experience with mutual funds has
in any case shown that turning dividends tax free in the hands of investors has simply
improved collections, widened the tax base and reduced procedural delays.
Tax implication for income received from schemes other than open-end equity
oriented scheme
By definition all schemes that are not open-end equity oriented schemes must pay
a distribution tax. This tax has been fixed at 10%. In fact, the actual tax will be 11% since
the mutual fund must pay a 10% surcharge as well.
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Regulatory Aspects
Schemes of a 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.
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. 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,-
(i) If the mutual fund fails to receive the minimum subscription amount referred to in
clause (a) of sub-regulation (1);
(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 six weeks
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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 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 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 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.
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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.
No mutual fund under all its schemes should own more than ten per cent of any
companys paid up capital carrying voting rights.
Such transfers are done at the prevailing market price for quoted instruments on
spot basis.
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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 interscheme 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 in 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 investments
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 investment in;
i. Any unlisted security of an associate or group company of the
sponsor, or
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ii. 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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FREQUENTLY USED TERMS
Net Asset Value (NAV)
Net Asset Value is the market value of the assets of the scheme minus its
liabilities. The per unit NAV is the net asset value of the scheme divided by the number
of units outstanding on the Valuation Date.
Advisor
The organization employed by a mutual fund to give professional advice
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