analysis on axis bank

7/29/2019 Analysis on axis bank

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A

Report on

Investment Behavior of the Customers

(A comparison between Mutual funds and other products)at

Axis Bank

By

Apoorv Raj

11BSPHH010171

IBS Hyderabad


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A

Report on

Investment Behavior of the Customers

(A comparison between Mutual funds and other products)

ByApoorv Raj

11BSPHH010171

A report submitted in partial fulfillment of the requirement ofMBA program of

IBS Hyderabad

Distribution List:

Axis BankLucknow


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ACKNOWLEDGEMENT

Knowledge is an experience gained in life, it is the choicest

possession, which should not be shelved but should be happily

shared with others.I take this opportunity to express my heartfelt gratitude to my company guide

Mr. Chetan Srivastava (Operations Head) for allowing me to undertake this project

and for all the facilities provided to me.

I would also like to thank all the staffs of Axis Bank for their support towards my task,

I take this opportunity to sincerely express my profound gratitude to them who took

time out of their busy schedules and provided me the knowledge of Mutual Funds

and all other technical aspects. Their kindness and suggestions stood me in good

stead all along the project work.

I take this opportunity to thank Faculty Guide Prof. S.C Bihari for his guidance and

valuable advice and constant encouragement, all through the project and provided

with the necessary facilities for completion of the project.

Apoorv Raj

11BSPHH010171


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Content:

Chapters Page. No1. INTRODUCTION 7-10

a. Abstract 8

b. Objective of the Project 9c. Research Methodology 10

d. Limitation of the Study 11

2. PROFILE 12-25

a. Overview of the Indian Banking Industry 13

b. Fiscal and Monetary Policy 20

c. Demand Drivers for Banking Segment 21

d. Critical Success Factors 22

e. Key Risk Factors 23

f. Global Economic Environment 24

3. LITERATURE REVIEW 26-37a. Introduction of Mutual Funds 27

4. ECONOMY INDUSTRY ANALYSIS 38-49

a. Mutual Fund Market in India: A Macro EconomicOverview

39

5. COMPANY ANALYSIS 50-63

a. Introduction: Axis Bank 51

b. Axis Mutual Funds 60

c. About Axis Mutual Funds 62

6. PROJECT SPECIFIC ANALYSIS 64-79

a. Basics of Fund Fact Sheets 65b. Risk, Return and Performance 68

c. Evaluating Risks 69

d. Risk-Adjusted Return 70

e. Risk from Tactical Asset Allocation 70

f. Equity and Debt Fund Information 71

g. Portfolio Diversification 72

h. Sector Allocation 72

i. Mutual Fund Offer Document 75

j. Fund Ratings and Rankings 76

k. Consolidated Mutual Fund Information 797. Analysis of Questionnaire 80-91


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Executive Summary:

In few years Mutua l Fund has emerged as a too l fo r ensur ing one s

financial well being. Mutual Funds have not only contributed to the India growth story

but have alsohelped families tap into the success of Indian Industry. As information and

awareness isrising more and more people are enjoying the benefits of investing

in mutual funds. The main reason the number of retail mutual fund investors remainssmall is that ninein ten people with incomes in India do not know that mutual

funds exist. But once people are aware of mutual fund investment opportunities, the

number who decide toinvest in mutual funds increases to as many as one

in f i ve peop le . The t r ick fo r conver t ing a person wi th no knowledge o f

mutua l funds to a new Mutua l Fundcus tomer is to unders tand wh ich o f

the potent ia l investors are more l ikely to buymutual funds and to use the

right arguments in the sales process that customers willaccept as important and

relevant to their decision.

This Project intends to get in-depth knowledge about the Mutual Fundsas well as know asto what is the knowledge of people about Mutual Funds and learn what all are the reasons

for the lack of knowledge among the people. In order to know about all the mentioned

points a survey was done through questionnaire of 100 customers arriving at Axis Bank.


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List of Illustrations:

Tables:

Table1: Key players In Indian Banking SectorTable 2: Top funds in Mutual Fund MarketTable3: Key Information of Axis Mutual FundTable4: Balanced SchemesTable5: Equity Diversified SchemesTable6: Exchange Traded Fund SchemesTable7: FMP SchemesTable8: Fund of Funds SchemesTable9: Gilt SchemesTable10: Debt SchemesTable 11: Liquid SchemesTable 12: Monthly Income Schemes

Figures:

Figure 1: Role of BanksFigure 2: Porters Five Forces ModelFigure 3: Growth in Asset under ManagementFigure 4: Reasons for Non-Investment in Mutual FundsFigure 5:Reasons for InvestmentFigure 6-16: Questionnaire Pie Charts


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INTRODUCTION


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Abstract:

This project report provides detailed information on the Mutual Funds and its popularity

among the people. For the better understanding of the project the main contents of the

project are divided into seven chapters. These are:

First chapter contains the objective of the project, its research methodology and the

limitations of the study.

Second chapter provides the information about thebanking industry its fiscal and

monetary policies, demand drivers, major players etc.

Third chapter of the report contains theoretical knowledge about the Mutual Funds.

Fourth chapter explains about the macro-economic analysis of Mutual Funds. It tells

about the current economic condition of the mutual funds.

Fifth chapter tells about the bank, its mutual funds and also the different types of

schemes that the bank offers.

Sixth chapter contains the details about the functioning of mutual fund products and

everything related to mutual fund products.

Seventh chapter contains the analysis of the questionnaire used during the research.

Finally there are findings and recommendations conclusion and annexure.


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1.1 Objective of the Project:

To understand the concept of Mutual Funds.

To know the insight about the peoples knowledge about Mutual Funds.

To know which investment option is more prefered by the people.

To know what are the reasons for people not opting for Mutual Funds nd going for

other investment options.

To introduce and provide the kind of work done by me in the organization during my

SIP.


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1.2 Research Methodology:

Type of Research:

The study is descriptive in nature. This research report analyzes the credit appraisal

system with reference to Axis Bank in detail. It also touches few topics which are the

subject area of an exploratory design like problem with mutual funds, peoples knowledge

about it.

Data Collection:

The data is collected through both Primary and secondary sources:

Primary Data is collected through the responses given by the people visiting axis bank

of the questionnaire provided to them.

Secondary Data is collected through many sources like:

Websites

Reading materials provided by bank to their employees

Books

Information provided by the bank staff.

Data Analysis:

The data collected is qualitative and quantitative in nature. The data is interpreted by the

researcher as per his knowledge. The report does not involve any specific research

technique. The packages which can use for the analysis are limited to Microsoft Excel.


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1.3 Limitations of the study:

I could have gone to the other banks and collected the data of their customers.

The official staff shows a great support and very helpful but because of their high

work pressure they cannot give much time to us.

This report gives major emphasis only on a sub part of Mutual Funds.

The response given by the respondents are limited to their individual knowledge

about the subject.

Apart from these time and resource constraints are always there.


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PROFILE


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2.1 Overview of Indian Banking Industry:

EVOLUTION OF THE INDIAN BANKING INDUSTRY:

The Indian banking industry has its foundations in the 18 th century, and has had a varied

evolutionary experience since then. The initial banks in India were primarily traders,

banks engaged only in financing activities. Banking industry in the pre-independence era

developed with the Presidency banks, which were transformed into the Imperial Bank of

India and subsequently into State Bank of India. The initial days of the industry saw a

majority private ownership and a highly volatile work environment. Major strides towards

public ownership and accountability were made with nationalization in 1969 and 1980

which transformed the face of banking in India. The industry in recent times has

recognized the importance of private and foreign players in a competitive scenario and

has moved towards greater liberalization.

ROLE OF BANKS:

The Banking industry plays a dynamic role in the economic development of a country.

The growth story of an economy depends on the robustness of its banking industry.

Banks act as the store as well as the power house of the countrys wealth. They accept

deposits from individuals and corporate and lends to the businesses. They use the

deposits collected for productive purposes which help in the capital formation in the

country.

Today, the Indian Banking System is known the world over for its robustness. The

Reserve Bank of India is the central/ apex Bank which regulates the functioning of all

banks operating within the country.

The banking system largely, comprises of schedules banks (banks that are listed under

the Second Schedule of the RBI Act, 1934). Unscheduled banks form a very small

component (function in the form of Local Area Bank). Scheduled banks are further

classified into commercial and cooperative banks, with the basic difference in their

holding pattern. Cooperative banks are cooperative credit institutions that are registeredunder the Cooperative Societies Act and work according to the cooperative principles of

mutual assistance.

The role of Bank credit is an important factor to be examined, as it helps to create

favorable situation as well as maintain it for a long period to boost economy.


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Figure1: Role of Banks

MAJOR PLAYERS: Public Sector Banks (SBI and associates + Nationalized Banks)

control more than 74-75% of the credit and deposits businesses in India whereas Private

Sector Banks around 17-18%.

The core operating income of a bank is interest income (comprises 75-85% in the total

income of almost all Indian Banks). Besides interest income, a bank also generates fee-

based income in the form of commissions and exchange, income from treasury

operations and other income from other banking activities. As banks were assigned a

specific role in the economic development of the country, RBI ahs stipulated that a

portion of bank lending should be for the development of under-banked and under-

privileged sections, which is called the priority sector. Current rules stipulate that

domestic banks should lend 40% and the foreign banks should lend 32% of their net

credit to the priority sector. On the cost sides, the major items for a bank are interest paid

on different types of deposits, bonds issued and borrowings, and provisioning cost for

Non-performing Assets (NPAs).

While the Indian banking sector features a large number of players competing against

each other, the top 10 banks accounted for a significant 57% share of the total credit ason March 31, 2011 in which State Bank of India accounting for the highest share of 18%.


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EMERGING ISSUES IN THE BANKING SECTOR IN INDIA:

1. The first issue is the issue of consolidation which is the current buzzword in the

banking industry worldwide. The largest bank in China with an asset base of over US$400 billion. In contrast, the total asset of the largest two banks in India, one in public

sector and another private entity, are US $105 billion and US $38 billion. These figures

are extremely illuminating and the onus is on Indian banks to take cognizance of this

fact. The government has raised the cap on FDI in private banks. The Reserve Bank

has, on its part, suggested certain changes in the Banking Regulation (Amendment)

Bill, 2003 that seek to address some of the legal impediments arising in the

consolidation process.

2. The second issue is that of Management of costs. Cost Containment is a key to

sustainability of bank profit as well as their long-term viability. Operating cost of banks is

expressed as per cent of total average assets.

Another related challenge is in reducing the cost of funds of the banking sector. With the

rise in oil prices and its cascading effects on inflation along with the raising of policy rates

by several central banks, sooner or later, this reversal of the existing comfortable liquidity

conditions is likely to have ramifications on domestic financial markets, and with that, on

the cost of funds of banks as well. Diversification into fee- based activities coupled with

prudent asset liability management hold the key to future profitability.


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3. Lately the issue of credit delivery system has come into focus. The persistence of

divergence between the informal and formal sector interest rates in effect has meant

that, with deregulation, the formal credit mechanisms have not been able to pierce the

informal system. The differences in apparent cost and total real cost might be an

important factor behind this divergence. Reducing the total real cost in the formal

sectors is likely to be an important consideration to bring about a degree of convergence

between the price of credit between the formal and informal sectors. In recognition of thisfact, the last several annual policies have placed explicit emphasis on streamlining credit

delivery through certain measures like widening the scope of infrastructure lending,

revamping the rural credit delivery system by restructuring of the rural banking segment,

widening the scope of priority sector lending.

4. The fourth issue is the management of sticky assets. This is a key to the stability and

continued viability of the banking sector. Although the ratio of nonperforming loans to

total assets is higher in comparison to international standards, the Indian banks have

done a great job in containment of nonperforming loans (NPL) in recent times. Non-

performing loans to total loans of Indian banks was 2.4 per cent in 2010.

5. The fifth issue concerns the management of risks. Banking in modern economy is all

about risk management. The successful negotiation and implementation of Base II is

likely to lead to an even closer focus on risk measurement and risk management at the

institutional level. Over the past few years, the Reserve Bank of India has initiated

several steps to promote adequate risk management systems across market

participants. Among the measures that were instituted to insulate the financial institutions

from the vagaries of the market were gradual increase in the cushion of capital, frequentrevaluation of the portfolio based on market fluctuations, increasing transparency and a

framework for asset liability management (ALM) to combat the risks facing the Indian

financial Sector. The RBI has taken a lead in providing guidance to banks by bringing out

guidance notes on how to identify, monitor, measure and control the various facets of

risks. However, in the ultimate analysis, the onus is on the banks themselves to adopt an

integrated risk management approach, based on coherent risk models suited to their risk

appetite, business philosophy and expansion strategies. Such improved risk

management systems are not only crucial stepping stones towards Base II but also are

expected to enable banks to shed their risk averse attitude and contributing more financeto unbaked segments of agriculture, industry and services.


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Industrial Analysis: Porters Five Force Model

Figure2: Portes Five Forces Model

Overall Analysis:

The key issue is how banks can leverage their strengths to have a better future. Sincethe banks have a great threat from the substitutes like Mutual funds, T-bills, Governmentsecurities so they should concentrate on bringing these products to their customers. Asthere is a expected rivalry in the Indian economy Banks have a major role to play.


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SWOT Analysis:

STRENGTH

Indian banks have compared favourably on growth, asset quality and profitabilitywith other emerging economies banks over the last few years.

Policy makers have made some notable changes in policy and regulation to helpstrengthen the sector. These changes include strengthening prudential norms.enhancing the payments system and integrating regulations between commercialand co-operative banks.

Bank lending has been a significant driver of GDP growth and employment.

Extensive reach: the vast networking & growing number of branches & ATMs.Indian banking system has reached even to the remote corners of the country.

In terms of quality of assets and capital adequacy, Indian banks are considered tohave clean, strong and transparent balance sheets relative to other banks incomparable economies in its region.

Foreign banks will have the opportunity to own up to 74 per cent of Indian privatesector banks and 20 per cent of government owned banks

WEAKNESS:

PSUs need to fundamentally strengthen institutional skill levels especially in salesand marketing, service operations, risk management and the overallorganisational performance ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skilllevels.

The cost of intermediation remains high and bank penetration is limited to only a

few customer segments and geographies.

Refusal to dilute stake in PSU banks: The government has refused to dilute itsstake in PSU banks below 51% thus choking the headroom available to thesebanks for raining equity capital.


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OPPORTUNITY:

The market is seeing discontinuous growth driven by new products and servicesthat include opportunities in credit cards, consumer finance and wealthmanagement onthe retail side, and in fee-based income and investment bankingon the wholesalebanking side. These require new skills in sales & marketing,credit and operations.

With increased interest in India, competition from foreign banks will onlyintensify.

Given the demographic shifts resulting from changes in age profile and householdincome, consumers will increasingly demand enhanced institutional capabilitiesand service levels from banks.

New private banks could reach the next level of their growth in the Indianbanking sector by continuing to innovate and develop differentiated businessmodels to profitably serve segments like the rural/low income and affluent/HNI

segments; actively adopting acquisitions as a means to grow and reaching thenext level of performance in their service platforms. Attracting, developing andretaining more leadership capacity

Foreign banks committed to making a play in India will need to adopt alternativeapproaches to win the race for the customer and build a value-creatingcustomerfranchise in advance of regulations potentially opening up post 2009. Atthe same time,they should stay in the game for potential acquisitionopportunities as and when theyappear in the near term. Maintaining afundamentally long-term value-creation mindset.

Reach in rural India for the private sector and foreign banks.

With the growth in the Indian economy expected to be strong for quite sometime-especially in its services sector-the demand for banking services, especiallyretail banking, mortgages and investment services are expected to be strong.

THREATS:

Threat of stability of the system: failure of some weak banks has oftenthreatened the stability of the system.

Rise in inflation figures which would lead to increase in interest rates.

Increase in the number of foreign players would pose a threat to the PSB as wellas the private players.


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2.2 FISCAL AND MONETARY POLICY:

The Word Globalization can be defined as Growing interdependence of countries

world-wide through the increasing volume and variety of cross border transactions in

goods and services and of international capital flows, and also through the more rapid

and widespread diffusion of technology. It is argued that the negative integration of

breaking down trade and protective barriers and consequences of the speed and size ofthe capital flows in international financial markets, which led to the distressing costs of

the developed countries in the form of subprime crisis is the reason for Global financial

crisis.

As a result of the global financial crisis central banks across the world have responded in

terms of fiscal and monetary levels. The Reserve bank of India has also responded with

certain fiscal and monetary measures.

Impact over Indian Banking Sector:

As a result of the financial crisis of the US and globalization, most of the European, UKand Asian countries were adversely affected. However, the Indian economy was affected

very less. Indian banks having incredibly low revelation to the subprime mortgage assets

of the developed countries has not experienced many losses when compared to other

western countries banks. This is because of the major role played by the nationalized

banks and their controls over domestic finance. Also the strictly adopted rules of the

Reserve Bank of India could protect India from getting insulated from the traits of the

western counteracts. It is predicted that the future exposure of Indian banks to the

investment bankers, of the USA could show its adverse impacts over Indian banking

sector.

RBIs Policy Response:

RBI has taken certain measures to ensure systematic operation of financial markets and

financial stability which included extension of liquidity support to banks. The financial

crisis in developed countries led to lack of trust among the major players which almost

froze the un-collateralized interbank money markets. Central banks in larger economies

have taken steps to increase the short term liquidity requirement and also lost collateral

requirement to provide the short term liquidity in some cases.

Though India was not much affected by the turmoil it was under pressure and RBI with

its consistent monetary policies effectively managed the monetary conditions and

domestic liquidity. This was enabled with the appropriate use of multiple instruments like

repo and reverse repo; statutory liquidity ratio (SLR), Cash reserve ratio (CRR), open

market operations, including the Liquidity Adjustment Facility (LAF) and market

stabilization scheme (MSS), special market operations and sector specific liquidity

facilities.

Further, due to our forex market operations the money market liquidity was impactedwhich in turn reflected the developing capital flows. Various policy initiatives imposed by


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RBI have provided sufficient rupee liquidity to ensure ease of dollar liquidity and maintain

a market environment responsible for sustained credit flows to productive sectors.

2.3 DEMAND DRIVERS FOR BANKING SEGMENT:

Market Dynamics:

Increasing reach of banks into rural areas and tier2/tier 3 cities. Banks aim to achieve

penetration level of 74% and 81.5% in 2013 and 2018 respectively.

Micro finance emerging as a major thrust area.

Increasing mergers and acquisitions to reap the benefi ts of consolidation.

Improving competitiveness in terms of lower interest rates, increased productivity, better

working capital management, deleveraging.

Growth in Indian exports and imports.

Technology:

Technology in banking is drawing more and more customers for banking related

products and services as they become more cost effective and customer friendly. Banks

renders various technology based services such as mobile banking, net banking, tele

banking, ATM/credit cards etc.

Banking sector spend about 46% of its technology budget in business continuity, 32% for

adding product functionality/new products/new features and the remaining 22% in newtechnology which can change the business process.

Household savings:

Bank deposits have been the mainstay of the saving process in the Indian economy and

banks have played an increasingly important role in stepping up the financial savings

rate, physical savings, nevertheless, have tended to grow in tandem with the financial

savings. With the shrinking of household sector deposits in total deposits, banks need to

explore ways of broadening the depositor base, especially in rural and semi-urban areasby offering customized products and features suitable to individual risk-return

requirements.


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2.4 CRITICAL SUCCESS FACTORS:

1. Outsourcing of activities to achieve greater efficiencies and reduce overheads. While

new entrants and substantial industry growth drive outsourcing among the private

and foreign players, inefficiency among the employees to handle front-end functions

drives the public sector banks. Banking industrys outsourcing size is estimated as

Rs. 4.08 billion and is expected to grow at a CAGR of 47% for the next 4 years. This

is expected to generate significant employment opportunities.

2. Consolidation through mergers and acquisitions to reduce the operating cost of banks

which has increased at an annual growth rate of 21% during 2010.

3. Six Sigma strategies in banking to bring down the transaction time for customers. For

example, ICICI bank adopting six-sigma to reduce the transaction time to almost one

third of the current transaction time.

4. Ability to adopt technology. Indian banks have been making significant investments in

technology. In addition to the computerization of their front-office operations, the

banks have moved towards back-office centralization. Banks are also implementing

Core Banking or Centralized Banking, which provides connectivity between

branches and helps offer a large number of value added products, benefitting a large

number of customers. A number of banks have joined together in small clusters to

share their ATM networks.

5. Ability to tap the retail market can be an important success factor banks. Retail

Finance market has grown rapidly over the last 4-5 years and the momentum is

expected to continue.

6. Ability to tap into new markets and to venture into new areas such as Micro finance,

investment banking, banc assurance etc.

7. Ability to transform Plain Vanilla banking to multi-specialist banking offering wide

range of services to increase reach ability and to retain customers.

8. Ability to offer new customized product for the targeted population.

9. Proper Asset liability management.


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2.5 KEY RISK FACTORS:

Asset Quality Stress: Liquidity shortage faced by small and leveraged companies

might translate into a solvency crisis and uncertainty on personal incomes of the

borrower has increased the risk of banks. Operating expenses of public sector bank is much higher than the Private and foreign

banks.

Customer defaults will affect the performance of the banks.

Increase in interest rates reduces the competitiveness of banks in lending.

Liberalization of norms for the entry of foreign players. Pose a threat to Indian players.


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2.6 GLOBAL ECONOMIC ENVIRONMENT:

Introduction:

The global financial system suffered a profound and traumatic shock in September 2008when US investment bankLehman Brothers collapsed. As market players withdrew fromthe financial system, credit dried up and world tradecollapsed, there was a real and

immediate fear that the world was heading for a repeat of the Great Depression ofthe1930s. Two years on and there is growing optimism that both the world economy and thebanking industry are recovering from the impact of the financial crisis. But it is equallyclear that the financial world has changed permanently, both in terms of who holds thebalance of power within global industry and how banks will be allowed to operateinfuture.

Global shifts in banking:

While the growing power of emerging markets is a long-term structural phenomenon, ithas accelerated in the bankingindustry thanks as much to the relative decline of the west

as to expansion in the east. There has been a pronouncedshift from west to east and,to some extent, from north to south in the wake of the crisis. Banks on both sidesof theAtlantic are expected to have written down more than $2.1trn of assets by the end of2010, according to theInternational Monetary Fund. The equivalent figure for Asianbanks is just $115bn.Banks in emerging markets are nowwell capitalised and well fundedand big enough to be able to compete directly against their western counterparts intheglobal marketplace. The two largest banks by market capitalisation are both Chinese ICBC and China ConstructionBank. Although third place is taken by a British bank,HSBC, it is largely an Asian operation. A league table, compiled byBloomberg in April shows that Citi, once the worlds largest bank, comes in at fifth, whilebanks from Brazil, Russia andIndia the other members of the BRIC grouping alongsideChina are all in the top 25.

Stephen Green, Group Chairman of HSBC, referred to this trend just a month after thecollapse of Lehman, when hesaid there was a long-term shift towards Asia and theMiddle East. It is this shift that will affect financial markets mostprofoundly, he told aglobal financial summit in Dubai. The rapid growth of emerging markets does not signalan absolutedecline in the economies of mature nations. The pie will grow. But it doesentail a loss of share the developed world willhave a smaller share ofa larger pie.Therise of China is the most obvious feature of this shift. Chinas banking marketisdominated by the big four state owned commercial banks, of which three are listed on

the Shanghai stock market.As well as ICBC, the worlds largest bank , there is Bank ofChina, the countrys foreign exchange and trade financebank and China ConstructionBank, which specialises in infrastructure projects. The last one and the only one still infull state control is the Agricultural Bank of China, which is gearing up for a flotation in2010. The key role of the statein investment banking is also evident in India, where threequarters of the banking sector is in government hands. TheState Bank of India alonecontrols about one quarter of the market. The countrys largest private sector bank andsecondbiggest lender is ICICI Bank, which is 23rd in the global table. HDFC Bank isanother significant private bank.


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But this is not just an Asian story. Brazil has three out of the top 25 global banks: ItaUnibanco is the pre-eminent privatebank and seventh in the global league table, justahead of rival Bradesco, while state owned Banco do Brasil is 15th. InRussia, theindustry is dominated by Sberbank, a state controlled institution that holds a third of thecountrys deposits,and by VTB Bank, which is also in government ownership. Singapore,Turkey and South Korea also have banks with marketvalues above $20bn, the cut-offpoint for the top 25. South Africa often known as the S in the BRICS is now a

globalplayer thanks to Standard Bank, in which ICBC holds a 20% stake.

Focus on emerging markets:

The interesting question is why these emerging market banks were better able toweather what is always described as aglobal financial crisis better than their US andEuropean counterparts. For many in Asia, the answer is simple, there was no financialcrisis in India, says K.R. Muthu Manickam, Vice-President of Finance at HDFC Bank inIndia. Andrew Lockhart,Head of the Banking and Finance Group at Baker & McKenzieHong Kong, says Chinese banks were far more insulatedthan their western counterpartsboth in terms of direct exposure and in the impact on their share price. At the time when

there was almost paralysis in the global banking lending market, the Chinese banks werestill doing transactions, he says.These sentiments are echoed in other emergingmarkets. Alfred Ramosedi, Managing Director of Nedbank Private Bank, part of SouthAfricas fourth largest bank, says: Banks here did not get hit by the financialcrises. Theimpact of the creditcrunch and on these emerging market banks was largelypsychological, with many emerging market banks using the crisisas an opportunity to re-evaluate their growth plans, risk management principles and governance.

Looking ahead, banks in emerging markets have a greater potential for growth becauseof the relatively immaturedevelopment of their domestic financial markets. Consultancyfirm McKinsey estimates that 2.2 billion out of the 2.5billion people globally who do not

use a bank live in Africa, Asia, Latin America and the Middle East.4 This offers hugepotential for expansion based on innovations such as mobile phone banking andmicrofinance lending. Bradesco has opened a floating branch on a riverboat on theAmazon River system, the first of its kind in the world, as well as an outlet in Helipolis,the largest slum in the Brazilian city of So Paulo. As Noel Gordon, a consultant atAccenture, told TheEconomist, while western banks were fiddling with rocket-sciencefinance, emerging market banks were innovating moreproductively.Even moresignificant is the rise of the middle class across emerging markets and a consequentincreaseddemand for credit. As wage levels increase in industrialising countries, demandfor mortgages and consumer loans for carsand household appliances is likely to

increase.

Furthermore, emerging market banks are well placed to exploit the marked revival ingrowth. According to the WorldBank, developing countries will enjoy annual economicgrowth of 6% over the next three years, compared with 2.2-2.6% in the OECD area.6 Asbusinesses find new market opportunities they will need access to corporatefinance,which will open up markets for bond and share issues. Giles Keating, Head ofGlobal Research at Credit Suisse, sayssome Asian banks, which are already strong andvery large but domestic focused, are likely to play a much larger rolein intermediatingcapital flows at the global level.


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LITERATURE

REVIEW


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3.1 INTRODUCTION OF MUTUAL FUNDS:

A mutual fund is a type of professionally-managed collective investment scheme thatpools money from many investors to purchase securities. While there is no legaldefinition of mutual fund, the term is most commonly applied only to those collective

investment schemes that are regulated, available to the general public and open-endedin nature. Hedge funds are not considered a type of mutual fund.

The term mutual fund is less widely used outside of the United States. For collectiveinvestment schemes outside of the United States, see articles on specific types of fundsincluding open-ended investment companies, SICAVs, unitized insurance funds, unittrusts and Undertakings for Collective Investment in Transferable Securities.

In the United States, mutual funds must be registered with the Securities and ExchangeCommission, overseen by a board of directors or board of trustees and managed by aregistered investment advisor. They are not taxed on their income if they comply with

certain requirements.Mutual funds have both advantages and disadvantages compared to direct investing inindividual securities. They have a long history in the United States. Today they play animportant role in household finances.

There are 3 types of U.S. mutual funds: open-end, unit investment trust, and closed-end.The most common type, the open-end mutual fund, must be willing to buy back itsshares from its investors at the end of every business day. Exchange-traded funds areopen-end funds or unit investment trusts that trade on an exchange. Open-end funds aremost common, but exchange-traded funds have been gaining in popularity.

Mutual funds are classified by their principal investments. The four largest categories offunds are money market funds, bond or fixed income funds, stock or equity funds andhybrid funds. Funds may also be categorized as index or actively-managed.

Investors in a mutual fund pay the funds expenses. There is controversy about the level

of these expenses. A single mutual fund may give investors a choice of differentcombinations of expenses by offering several different types of share classes.

3.1.1 Structure:

In the United States, a mutual fund is registered with the Securities and ExchangeCommission (SEC) and is overseen by a board of directors (if organized as acorporation) orboard of trustees (if organized as a trust). The board is charged withensuring that the fund is managed in the best interests of the fund's investors and withhiring the fund manager and other service providers to the fund.

The fund manager, also known as the fund sponsor or fund managementcompany, trades (buys and sells) the fund's investments in accordance with the fund'sinvestment objective. A fund manager must be a registered investment advisor. Fundsthat are managed by the same fund manager and that have the same brand name are

known as a "fund family" or "fund complex".
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Mutual funds are not taxed on their income as long as they comply with requirementsestablished in the Internal Revenue Code. Specifically, they must diversify theirinvestments, limit ownership of voting securities, distribute most of their income to theirinvestors annually, and earn most of the income by investing in securities andcurrencies.

Mutual funds pass taxable income on to their investors annually. The type of income theyearn is unchanged as it passes through to the shareholders. For example, mutual funddistributions of dividend income are reported as dividend income by the investor. Thereis an exception: net losses incurred by a mutual fund are not distributed or passedthrough to fund investors.

Mutual funds may invest in many kinds ofsecurities. The types of securities that aparticular fund may invest in are set forth in the fund's prospectus, which describes thefund's investment objective, investment approach and permitted investments. Theinvestment objective describes the type of income that the fund seeks. For example, a"capital appreciation" fund generally looks to earn most of its returns from increases inthe prices of the securities it holds, rather than from dividend or interest income. Theinvestment approach describes the criteria that the fund manager uses to selectinvestments for the fund.

A mutual fund's investment portfolio is continually monitored by the fund's portfoliomanageror managers, who are employed by the fund's manager or sponsor.

Hedge funds are not considered a type of mutual fund. While they are another type ofcommingled investment scheme, they are not governed by the Investment Company Actof 1940 and are not required to register with the Securities and Exchange Commission(though many hedge fund managers now must register as investment advisors).

3.1.2 How mutual funds earn money:

A mutual fund is a means of investing that enables individuals to share the risks ofinvesting with other investors. All contributors to the fund experience an equal share ofgains and losses for each dollar invested. A mutual fund owns the securities of severalcorporations. A mutual fund pools money from hundreds and thousands of investors toconstruct a portfolio of stocks, bonds, real estate, or other securities, according to thekind of investments the mutual fund trades. Investors purchase shares in the mutual fundas if it was an individual security. Fund managers hired by the mutual fund company arepaid to invest the money that the investors have placed in the fund. Heeding the adage"Don't put all your eggs in one basket" the holders ofmutual fund shares are able to gain

the advantage of diversification which might be beyond their financial means individually.
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3.1.3 Professional management of mutual funds:

Mutual funds use professional managers to make the decisions regarding whichcompanies' securities should be bought and sold. The managers of the mutual funddecide how the pooled funds will be invested. Investment opportunities are abundant andcomplex. Fund managers are expected to know what is available, the risks and gainspossible, the cost of acquiring and selling the investments, and the laws and regulations

in the industry. The ability of the managers to select profitable investments and to sellthose likely to decline in value is a key factor for the mutual fund to earn money for theinvestors.

3.1.4 Mutual fund ranking:

Funds are ranked based upon their performance as a whole and performance againsttheir peers by such companies as Morning Star which has an industry recognized ratingsystem for mutual funds. They have a one-to-five star system in which five stars is thebest. Usually the higher the rank, the higher the quality of the fund. For example Morning

Star rates mutual funds from 1 to 5 stars based on how well they've performed (afteradjusting for risk and accounting for sales charges) in comparison to similar funds.Within each Morning Star Category, the top 10% of funds receive 5 stars and thebottoms 10% receive 1 star. Funds are rated for up to three time periods: three-, five-and 10- years and these ratings are combined to produce an overall rating. Funds withless than three years of history are not rated. Ratings are objective, based entirely on amathematical evaluation of past performance. The ratings are a useful tool for identifyingfunds worthy of further research, but should not be considered signals to buy or sell.

3.1.5 Mutual fund share classes:

MorningStar is a generally accepted authority on divides most stocks into classesortypes. The use eight type designations: Distressed, Hard Asset, Cyclical, SpeculativeGrowth, Aggressive Growth, Classic Growth, Slow Growth and High Yield. Eachdesignation defines a broad category of investment characteristics. Stocks are assignedto a type based on objective financial criteria and MorningStar's proprietary algorithm, sostocks of the same type have similar economic fundamentals. Every stock has individualidiosyncrasies, but in general, when evaluating investments, many of the same concernsand evaluation methods will apply across the stocks in one type. By establishing stocktypes one has an easy way to narrow down the stock universe to those best filling

specific investment needs. Stock Types also help you quickly determine thediversification level of portfolios.

MorningStar's classes/types are:

DistressedThese companies are having serious operating problems. This could mean decliningcash flow, negative earnings, high debt, or some combination of these. Such"turnaround" stocks tend to be highly risky but also harbour some intriguing investments.
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Hard AssetThese companies' main businesses revolve around the ownership or exploitation of hardassets like real estate, metals, timber, etc. Such companies typically sport a lowcorrelation with the overall stock market and investors have traditionally looked to themfor inflation hedges.

Cyclical

Cyclical companies core businesses can be expected to fluctuate in line with the overalleconomy. In a booming economy such companies will look excellent; in a recession,their growth stalls, and they might even lose money.

Speculative GrowthDon't expect consistency from speculative growth-companies. At best their profits arespotty. At worst they lose money. In fact, many companies never make it beyondspeculative growth, going instead to bankruptcy court. That's why they're speculative.But current profitability isn't what makes speculative-growth companies interesting. It'sfuture profits. Hopefully, a speculative-growth company will eventually blossom into aworld-class company.

Aggressive GrowthAggressive-growth companies show a bit more maturity than their speculative-growthcounterparts: They post rapid growth in profits, not just in sales-a sign of more stayingpower. At this point, it's time to make some money.

Classic GrowthThese firms are in their prime and have little left to prove. The best classic growers haveblossomed into money machines, churning out steady growth, high returns on capital,positive free cash flows, and rising dividends. The catch is, their growth is nowhere nearthat of the aggressive-growth group.

Slow Growth and High YieldThe growth of these companies is a fading memory. Having run out of attractiveinvestment opportunities, most of them pay out the bulk of their earnings in dividendsexpects - high payout ratios - rather than plow the profits back into their businesses.


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3.1.6 MUTUAL FUNDS VS. OTHER INVESTMENTS:

From investors viewpoint mutual funds have several advantages such as:

Professional management and research to select quality securities

Spreading risk over a larger quantity of stock whereas the investor has limited to buy

only a hand full of stocks. The investor is not putting all his eggs in one basket

Ability to add funds at set amounts and smaller quantities such as $100 per month

Ability to take advantage of the stock market which has generally out performed other

investment in the long run

Fund manager are able to buy securities in large quantities thus reducing brokerage

fees

However there are some disadvantages with mutual funds such as:

The investor must rely on the integrity of the professional fund manager

Fund management fees may be unreasonable for the services rendered

The fund manager may not pass transaction savings to the investor

The fund manager is not liable for poor judgment when the investor's fund loses value

There may be too many transactions in the fund resulting in higher fee/cost to the

investor - This is sometimes call "Churn and Earn"

Prospectus and Annual report are hard to understand

Investor may feel a lot of control of his investment dollars

There may be restrictions on when and how an investor sells/redeems his mutual fund

shares.
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3.1.7 Advantages of Mutual Funds:

1. Advanced Portfolio Management:You pay a management fee as part of yourexpense ratio, which is used to hire aprofessional portfolio manager who buys and sells stocks, bonds, etc. This is a relativelysmall price to pay for help in the management of an investment portfolio.

2. Dividend Reinvestment:As dividends and other interest income is declared for the fund, it can be used topurchase additional shares in the mutual fund, thus helping your investment grow.

3. Risk Reduction (Safety):A reduced portfolio risk is achieved through the use ofdiversification, as most mutualfunds will invest in anywhere from 50 to 200 different securities - depending on theirfocus. Several index stock mutual funds own 1,000 or more individual stock positions.

4. Convenience and Fair Pricing:Mutual funds are common and easy to buy. They typically have low minimum

investments (some around $2,500) and they are traded only once per day at theclosing net asset value (NAV). This eliminates price fluctuation throughout the day andvarious arbitrage opportunities that day traders practice.

3.1.8 Disadvantages of Mutual Funds:

1. High Expense Ratios and Sales Charges:If you're not paying attention to mutual fund expense ratios and sales charges, they canget out of hand. Be very cautious when investing in funds with expense ratios higherthan 1.20%, as they will be considered on the higher cost end. Be weary of12b-

1 advertising fees and sales charges in general. There are several good fundcompanies out there that have no sales charges. Fees reduce overall investmentreturns.

2. Management Abuses:Churning, turnover and window dressing may happen if your manager is abusing his orher authority. This includes unnecessary trading, excessive replacement and selling thelosers prior to quarter-end to fix the books.

3. Tax Inefficiency:Like it or not, investors do not have a choice when it comes to capital gain payouts in

mutual funds. Due to the turnover, redemptions, gains and losses in security holdingsthroughout the year, investors typically receive distributions from the fund that are anuncontrollable tax event.

4. Poor Trade Execution:If you place your mutual fund trade anytime before the cut-off time for same-day NAV,you'll receive the same closing price NAV for your buy or sell on the mutual fund. Forinvestors looking for faster execution times, maybe because of short investmenthorizons, day trading, or timing the market, mutual funds provide a weak executionstrategy.
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3.1.9 Types of mutual funds:

Most funds have a particular strategy they focus on when investing. For instance, someinvest only in Blue Chip companies that are more established and are relatively low risk.On the other hand, some focus on high-risk startup companies that have the potential fordouble and triple digit growth. Finding a mutual fund that fits your investment criteria and

style is important.

Types of mutual funds are:

1. Value stocks:

Stocks from firms with relative low Price to Earning (P/E) ratio, usually pay gooddividends. The investor is looking for income rather than capital gains.

2. Growth stock:

Stocks from firms with higher low Price to Earning (P/E) ratio, usually pay small

dividends. The investor is looking for capital gains rather than income.

Based on company size, large, mid, and small cap:

Stocks from firms with various asset levels such as over $2 Billion for large; in between$2 and $1 Billion for mid and below $1 Billion for small.

3. Income stock:

The investor is looking for income which usually comes from dividends or interest. Thesestocks are from firms which pay relative high dividends. This fund may include bondswhich pay high dividends. This fund is much like the value stock fund, but accepts a little

more risk and is not limited to stocks.

4. Index funds:

The securities in this fund are the same as in an Index fund such as the Dow JonesAverage or Standard and Poor's. The number and ratios or securities are maintained bythe fund manager to mimic the Index fund it is following.

5. Enhanced index:

This is an index fund which has been modified by either adding value or reducingvolatility through selective stock-picking.

6. Stock market sector:

The securities in this fund are chosen from a particular marked sector such asAerospace, retail, utilities, etc.

7. Defensive stock:

The securities in this fund are chosen from a stock which usually is not impacted byeconomic down turns.
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8. International:

Stocks from international firms.

9. Real estate

Stocks from firms involved in real estate such as builder, supplier, architects andengineers, financial lenders, etc.

10. Socially responsible:

This fund would invest according to non-economic guidelines. Funds may makeinvestments based on such issues as environmental responsibility, human rights, orreligious views. For example, socially responsible funds may take a proactive stance byselectively investing in environmentally-friendly companies or firms with good employeerelations. Therefore the fund would avoid securities from firms who profit from alcohol,tobacco, gambling, pornography etc.

11. Balanced funds:

The investor may wish to balance his risk between various sectors such as asset size,income or growth. Therefore the fund is a balance between various attributes desired.

12. Tax efficient:

Aims to minimize tax bills, such as keeping turnover levels low or shying away fromcompanies that provide dividends, which are regular payouts in cash or stock that aretaxable in the year that they are received. These funds still shoot for solid returns; theyjust want less of them showing up on the tax returns.

13. Convertible:

Bonds or Preferred stock which may be converted into common stock.

14. Junk bond:

Bonds which pay higher that market interest but carry higher risk for failure and are ratedbelow AAA.

15. Mutual funds of mutual funds:

This funds that specializes in buying shares in other mutual funds rather than individualsecurities.

16. Closed end:

This fund has a fixed number of shares. The value of the shares fluctuates with themarket, but fund manager has less influence because the price of the underlining ownedsecurities has greater influence.

17. Exchange traded funds (ETFs):

Baskets of securities (stocks or bonds) that track highly recognized indexes. Similar tomutual funds, except that they trade the same way that a stock trades, on a stockexchange.


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3.1.10 Mutual Fund Expenses:

Investors in a mutual fund pay the fund's expenses. These expenses fall into fivecategories: distribution charges (sales loads and 12b-1 fees), the management fee, otherfund expenses, shareholder transaction fees and securities transaction fees. Some ofthese expenses reduce the value of an investor's account; others are paid by the fund

and reduce net asset value.Recurring fees and expenses -- specifically the 12b-1 fee, the management fee andother fund expenses -- are included in a fund's total expense ratio, or simply the"expense ratio". Because all funds must compute an expense ratio using the samemethodology, it allows investors to compare costs across funds.

Distribution charges:

Distribution charges pay for marketing, distribution of the fund's shares as well asservices to investors.

Front-end load or sales charge:

A front-end load orsales charge is a commission paid to a brokerby a mutual fund whenshares are purchased. It is expressed as a percentage of the total amount invested orthe "public offering price," which equals the net asset value plus the front-end load pershare. The front-end load often declines as the amount invested increases,through breakpoints. The front-end load is paid by the shareholder; it is deducted fromthe amount invested.

Back-end load:

Some funds have a back-end load, which is paid by the investor when shares areredeemed. If the back-end load declines the longer the investor holds shares, it is calleda contingent deferred sales charges (or CDSC). Like the front-end load, the back-endload is paid by the shareholder; it is deducted from the redemption proceeds.

12b-1 fees:

Some funds charge an annual fee to compensate the distributor of fund shares for

providing ongoing services to fund shareholders. This fee is called a 12b-1 fee, after theSEC rule authorizing it. The 12b-1 fee is paid by the fund and reduces net asset value.

No-load funds:

A no-load fund does not charge a front-end load under any circumstances does notcharge a back-end load under any circumstances and does not charge a 12b-1 feegreater than 0.25% of fund assets.
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Management fee:

The management fee is paid to the fund manager or sponsor who organizes the fund,provides the portfolio management or investment advisory services and normally lendsits brand name to the fund. The fund manager may also provide other administrativeservices. The management fee often has breakpoints, which means that it declines asassets (in either the specific fund or in the fund family as a whole) increase. Themanagement fee is paid by the fund and is included in the expense ratio.

The fund's board of directors reviews the management fee annually. Fund shareholdersmust vote on any proposed increase in the management. However, the fund manager orsponsor may agree to waive all or a portion of the management fee in order to lower thefund's expense ratio.

Other fund expenses:

A mutual fund may pay for other services including:

Board of directors or trustees fees and expenses Custody fee: paid to a custodian bank for holding the fund's portfolio in safekeeping and

collecting income owed on the securities

Fund administration fee: for overseeing all administrative affairs of the fund such aspreparing financial statements and shareholder reports, preparing and filing a myriad ofSEC filings required of registered investment companies, monitoring compliance withinvestment restrictions, computing total returns and other fund performance information,preparing/filing tax returns and all expenses of maintaining compliance with state "bluesky" laws

Fund accounting fee: for performing investment or securities accounting services andcomputing the net asset value (usually each day the equity market's are open)

Professional services fees: legal and auditing fees

Registration fees: for 24F-2 fees owed to the SEC for net sales of registered fund sharesand state blue sky fees owed for selling shares to residents of states in the US andjurisdictions such as Puerto Rico and Guam

Shareholder communications expenses: printing and mailing required documents toshareholders such as shareholder reports and prospectuses

Transfer agent service fees and expenses: for keeping shareholder records, providingstatements and tax forms to investors and providing telephone, internet and or otherinvestor support and servicing

Other/miscellaneous fees

The fund manager or sponsor may agree to subsidize some of these other expenses inorder to lower the fund's expense ratio.
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Shareholder transaction fees:

Shareholders may be required to pay fees for certain transactions. For example, a fundmay charge a flat fee for maintaining an individual retirement account for an investor.Some funds charge redemption fees when an investor sells fund shares shortly afterbuying them (usually defined as within 30, 60 or 90 days of purchase); redemption feesare computed as a percentage of the sale amount. Shareholder transaction fees are notpart of the expense ratio.

Securities transaction fees:

A mutual fund pays expenses related to buying or selling the securities in its portfolio.These expenses may include brokerage commissions. Securities transaction feesincrease the cost basis of the investments. They do not flow through the incomestatement and are not included in the expense ratio. The amount of securitiestransaction fees paid by a fund is normally positively correlated with its trading volume or"turnover."

Controversy:Critics of the fund industry argue that fund expenses are too high. They believe that themarket for mutual funds is not competitive and that there are many hidden fees, so that itis difficult for investors to reduce the fees that they pay. They argue that the mosteffective way for investors to raise the returns they earn from mutual funds is to invest infunds with low expense ratios.

Fund managers counter that fees are determined by a highly competitive market and,therefore, reflect the value that investors attribute to the service provided. In addition,they note that fees are clearly disclosed.

3.1.11 Mutual Fund Danger:

Unfortunately there have been incidences in which mutual fund managers have traded

stocks at prices other than reported to the investor. An example is the use of closing

share price for reported trades for the day the investor request an execution of his

shares. Whereas the mutual fund manager may have received a more advantageous

share price before the closing share price is set. The mutual fund managerretains the

additional gain for himself or his firm. Since there are usually large volume trades the

gain may be substantial even with a fraction of a share price.
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ECONOMY

INDUSTRYANALYSIS


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4.1 MUTUAL FUND MARKET IN INDIA: A MACRO-ECONOMIC

OVERVIEW:

4.1.1 Trends in Mutual Fund Market:

The origin of mutual fund industry in India is with the introduction of the concept ofmutual fund by UTI in the year 1963. Though the growth was slow, but it acceleratedfrom the year 1987 when non-UTI players entered the industry.

In the past decade, Indian mutual fund industry had seen dramatic improvements, bothqualitywise as well as quantitywise. Before, the monopoly of the market had seen anending phase, the Assets Under Management (AUM) was Rs. 67bn. The private sectorentry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004; itreached the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is

less than the deposits of SBI alone, constitute less than 11% of the total deposits held bythe Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in thecountry. Large sections of Indian investors are yet to be intellectuated with the concept.Hence, it is the prime responsibility of all mutual fund companies, to market the productcorrectly abreast of selling.

The mutual fund industry can be broadly put into four phases according to thedevelopment of the sector. Each phase is briefly described as under.

First Phase - 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set upby the Reserve Bank of India and functioned under the Regulatory and administrativecontrol of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and theIndustrial Development Bank of India (IDBI) took over the regulatory and administrativecontrol in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At theend of 1988 UTI had Rs.6,700crores of assets under management.

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

Entry of non-UTI mutual funds. SBI Mutual Fund was the first followed by Can bankMutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank MutualFund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC in1989 and GIC in 1990. The end of 1993 marked Rs.47,004 as assets undermanagement.


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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 fundindustry, giving the Indian investors a wider choice of fund families. Also, 1993 was theyear 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 registeredin July 1993.The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensiveand revised Mutual Fund Regulations in 1996. The industry now functions under theSEBI (Mutual Fund) Regulations 1996.

Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated into two separate entities.One is the Specified Undertaking of the Unit Trust of India with AUM of Rs.29,835crores

(as on January 2003). The Specified Undertaking of Unit Trust of India, functioning underan administrator and under the rules framed by Government of India and does not comeunder the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations. With thebifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000crores ofAUM and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual FundRegulations, 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 atthe end of September, 2004, there were 29 funds, which manage assets of Rs.153108

crores under 421 schemes.

The major players in the Indian Mutual Fund Industry are:

Figure3: GROWTH IN ASSETS UNDER MANAGEMENT

Note:Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit Trust of India effective

from February 2003. The Assets under management of the Specified Undertaking of the Unit Trust of India hastherefore been excluded from the total assets of the industry as a whole from February 2003 onwards.


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4.1.2 Performance of Mutual Funds in India:

The performance of mutual funds in India in the initial phase was not even closer tosatisfactory level. People rarely understood, and of course investing was out of question.But yes, some 24 million shareholders were accustomed with guaranteed high returns bythe beginning of liberalization of the industry in 1992. This good record of UTI becamemarketing tool for new entrants. The expectations of investors touched the sky in

profitability factor. However, people were miles away from the preparedness of risksfactor after the liberalization.

The Assets under Management of UTI was Rs. 67bn. by the end of 1987. Let meconcentrate about the performance of mutual funds in India through figures. From Rs.67bn. the Assets under Management rose to Rs. 470 bn. in March 1993 and the figurehad a three times higher performance by April 2004. It rose as high as Rs. 1,540bn.

The net asset value (NAV) of mutual funds in India declined when stock prices startedfalling in the year 1992. Those days, the market regulations did not allow portfolio shiftsinto alternative investments. There was rather no choice apart from holding the cash orto further continue investing in shares. One more thing to be noted, since only closed-end funds were floated in the market, the investors disinvested by selling at a loss in thesecondary market.

The performance of mutual funds in India suffered qualitatively. The 1992 stock marketscandal, the losses by disinvestments and of courses the lack of transparent rules in thewhereabout rocked confidence among the investors. Partly owing to a relatively weakstock market performance, mutual funds have not yet recovered, with funds trading at anaverage discount of 1020 percent of their net asset value.

The supervisory authority adopted a set of measures to create a transparent andcompetitive environment in mutual funds. Some of them were like relaxing investmentrestrictions into the market, introduction of open-ended funds, and paving the gatewayfor mutual funds to launch pension schemes.

The measure was taken to make mutual funds the key instrument for long-term saving.The more the variety offered, the quantitative will be investors.

At last to mention, as long as mutual fund companies are performing with lower risks andhigher profitability within a short span of time, more and more people will be inclined toinvest until and unless they are fully educated with the dos and donts of mutual funds.


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4.1.3 Mutual Fund Companies in India:

The concept of mutual funds in India dates back to the year 1963. The era between 1963and 1987 marked the existence of only one mutual fund company in India with Rs. 67bnassets under management (AUM), by the end of its monopoly era, the Unit Trust of India(UTI). By the end of the 80s decade, few other mutual fund companies in India took theirposition in mutual fund market.

The new entries of mutual fund companies in India were SBI Mutual Fund, CanbankMutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank ofIndia Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund industry. By theend of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector fundsstarted penetrating the fund families. In the same year the first Mutual Fund Regulationscame into existence with re-registering all mutual funds except UTI. The regulations werefurther given a revised shape in 1996.

Kothari Pioneer was the first private sector mutual fund company in India which has nowmerged with Franklin Templeton. Just after ten years with private sector playerspenetration, the total assets rose up to Rs. 1218.05 bn. Today there are 33 mutual fundcompanies in India.

4.1.4 Major Mutual Fund Companies in India:

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India)

Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India)Ltd. was incorporated on November 4, 2003. Deutsche Bank A G is the custodian ofABN AMRO Mutual Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun LifeFinancial. Sun Life Financial is a global organisation evolved in 1871 and is beingrepresented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apartfrom India. Birla Sun Life Mutual Fund follows a conservative long-term approach toinvestment. Recently it crossed AUM of Rs. 10,000 crores.

Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 underthe sponsorship of Bank of Baroda. BOB Asset Management Company Limited is theAMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche BankAG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsorersnemely Housing

Development Finance Corporation Limited and Standard Life Investments Limited.
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HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and CapitalMarkets (India) Private Limited as the sponsor. Board of Trustees, HSBC Mutual Fundacts as the Trustee Company of HSBC Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named TrusteeCompany. It is a joint venture of Vysya and ING. The AMC, ING InvestmentManagement (India) Pvt. Ltd. was incorporated on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of thelargest life insurance companies in the US of A. Prudential ICICI Mutual Fund was setupon 13th of October, 1993 with two sponsorers, Prudential Plc. and ICICI Ltd. The TrusteeCompany formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI Asset

Management Company Limited incorporated on 22nd of June, 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India FinancialCorporation Ltd. as the sponsor. Sahara Asset Management Company Private Limitedincorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-upcapital of the AMC stands at Rs 25.8 crore.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launchoffshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately. Todayit is the largest Bank sponsored Mutual Fund in India. They have already launched 35Schemes out of which 15 have already yielded handsome returns to investors. StateBank of India Mutual Fund has more than Rs. 5,500 Crores as AUM. Now it has aninvestor base of over 8 Lakhs spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsorers for

Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. Theinvestment manager is Tata Asset Management Limited and its Tata Trustee CompanyPvt. Limited. Tata Asset Management Limited's is one of the fastest in the country withmore than Rs. 7,703 crores (as on April 30, 2005) of AUM.

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It ispresently having more than 1,99,818 investors in its various schemes. KMAMC startedits operations in December 1998. Kotak Mahindra Mutual Fund offers schemes catering

to investors with varying risk - return profiles. It was the first company to launchdedicated gilt scheme investing only in government securities.
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Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003, managesthe UTI Mutual Fund with the support of UTI Trustee Company Privete Limited. UTIAsset Management Company presently manages a corpus of over Rs.20000 Crore. Thesponsorers of UTI Mutual Fund are Bank of Baroda (BOB), Punjab National Bank (PNB),

State Bank of India (SBI), and Life Insurance Corporation of India (LIC). The schemes ofUTI Mutual Fund are Liquid Funds, Income Funds, Asset Management Funds, IndexFunds, Equity Funds and Balance Funds.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882.The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co.Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital MutualFund which was changed on March 11, 2004. Reliance Mutual Fund was formed forlaunching of various schemes under which units are issued to the Public with a view to

contribute to the capital market and to provide investors the opportunities to makeinvestments in diversified securities.

Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by StandardChartered Bank. The Trustee is Standard Chartered Trustee Company Pvt. Ltd.Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which wasincorporated with SEBI on December 20, 1999.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company with aglobal AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financialservices groups in the world. Investors can buy or sell the Mutual Fund through theirfinancial advisor or through mail or through their website. They have Open endDiversified Equity schemes, Open end Sector Equity schemes, Open end Hybridschemes, Open end Tax Saving schemes, Open end Income and Liquid schemes,closed end Income schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the marketin securities, investment management and credit services. Morgan Stanley InvestmentManagement (MISM) was established in the year 1975. It provides customized assetmanagement services and products to governments, corporations, pension funds andnon-profit organisations. Its services are also extended to high net worth individuals andretail investors. In India it is known as Morgan Stanley Investment Management PrivateLimited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF). This is thefirst close end diversified equity scheme serving the needs of Indian retail investorsfocussing on a long-term capital appreciation.


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Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as itssponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC wasincorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance CapitalManagement Corp. of Delaware (USA) as sponsorers. The Trustee is ACAM TrustCompany Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd.with the corporate office in Mumbai.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt.Ltd. as the sponsorers and Benchmark Trustee Company Pvt. Ltd. as the TrusteeCompany. Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark

Asset Management Company Pvt. Ltd. is the AMC.

Can bank Mutual Fund

Can bank Mutual Fund was setup on December 19, 1987 with Canara Bank acting asthe sponsor. Can bank Investment Management Services Ltd. incorporated on March 2,1993 is the AMC. The Corporate Office of the AMC is in Mumbai.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance

Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is theTrustee Company and AMC is Cholamandalam AMC Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. Itcontributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund wasconstituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. .The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund

have appointed Jeevan Bima Sahayog Asset Management Company Ltd as theInvestment Managers for LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), aGovernment of India undertaking and the four Public Sector General InsuranceCompanies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd.(NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII)and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act,1882.


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4.1.5 Mutual funds are an under tapped market in India:

Despite being available in the market for over two decades now with assets undermanagement equalling Rs 7,81,71,152 Lakhs (as of 28 February 2010) (Source:Association of Mutual Funds, India), less than 10% of Indian households have investedin mutual funds. A recent report on Mutual Fund Investments in India published byresearch and analytics firm, Boston Analytics, suggests investors are holding back from

putting their money into mutual funds due to their perceived high risk and a lack ofinformation on how mutual funds work. This report is based on a survey of approximately10,000 respondents in 15 Indian cities and towns as of March 2010. There are 43 MutualFunds recently.

The primary reason for not investing appears to be correlated with city size. Amongrespondents with a high savings rate, close to 40% of those who live in metros and Tier Icities considered suchinvestments to be very risky, whereas 33% of those in Tier II citiessaid they did not how or where to invest in such assets.

Figure4: Reasons for non-investment in Mutual Funds
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analysis on axis bank

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