insurance vs mutual fund

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A

Summer Training Report

ONON

Insurance vs. Mutual fundInsurance vs. Mutual fund

CONDUCTED AT

SUBMITTED TO:

Kurukshetra University, Kurukshetra

In the partial fulfillment for the degree of Master in Business Administration

(SESSION 2009-2011)

UNDER THE GUIDANCE OF: SUBMITTED BY:

Ms. Sneha Sharma Nanvinder Singh

Faculty (MBA) MBA Final

Semester 3rd

Roll no. - .

HARYANA ENGINEERING COLLEGE, JAGADHRI

(Affiliated to Kurukshetra University, Kurukshetra and Approved by AICTE)

DECLARATION

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I Nanvinder Singh student of HARYANA ENGINEERING COLLEGE ,JAGADHRI

here by state that the Summer Training Report entitled Insurance vs. Mutual Fund

Submitted is partial fulfillment for the requirement of degree of Master of Business

Administration. It is the original work done by me and the information provided in the

study is authentic to the best of my knowledge .This study report has not been submitted

to any other Institution and University for the award of any other degree.

Date:

Place: (Nanvinder Singh)

PREFACE

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Summer training is an integral part of MBA course. It is meant to make the student

familiar with the actual functioning of the real atmosphere of an organization. Apart from

the theoretical knowledge, we get the practical training to understand the natural andnormal industrial atmosphere through the participation and observations. Project is a

bridge between theoretical and practical knowledge. I, as a student of MBA of Haryana

Engineering College took up the industrial training at Anand Rathi

Today rapidly changing business world is characterized by Liberalization, Privatization

and Globalization which poses a challenge for management. The information technology

has caused a revolution in the field of communication and manner of doing business as

most of the information / data is available online just whit a click of a button resulting in

reduced response time. The business is facing competition not only from the national

players but also from those in the outside world. To be a world class organization is no

longer a pious wish or a matter of pride but it is a prerequisite for the survival.

The challenges for the topic Insurance VS Mutual fund Have increased as never before. It

is imperative for an organization to offer quality goods and services at a competitive price

at the time and place as per the customers requirement.

The project undertaken entitled topic INSURANCE vs. MUTUAL FUND at Anand

Rathi is an attempt to assess the effectiveness of the FINANCE and training programs

whit a view to improved them.

The project has been done up to the best of the researchers abilities but there can be some

erro She will be highly obliged if they are brought to his notice. He welcomes the

suggestions and criticism from the reader for the improvements in the project.

ACKNOWLEDGEMENT

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A drop of ink makes million think

Although Training work is thought and is based on ones shoulder but many remains

unseen. Any research is never an individuals effort. It is Contributory effort of many

hearts, hands & heads.

My debt to those who have helped me in one way or other way is heavy indeed. While, I

take this opportunity to thanks all of them. They are too numerous to be mentioned in this

brief Acknowledgement

This piece of acknowledgement may not be sufficient to express the feeling of gratitude

towards people, who have helped me successfully in completing my training.

I am also thankful to Mr. Naveen Bajaj, Mr. Sachin Walia,and Mr. Charan Singh, Mr.

Ujjawal Kumar for their constant guidance of Dr. O.P Taneja (Principal), Dr.

Dharamveer (HOD),Ms Sneha Sharma (Faculty) co-operation and their valuable time,

without their help the project would not have proven meaningful.

Last but not least, I would pay my regards to my parents & friends. Without their

wholehearted support, the report would have never seen the light of the day and also I pay

my great regards to my almighty.

Nanvinder Singh

M.B.A

Contents

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Page No.

Certificate.

Declaration

Preface

Acknowledgement..

1. INTRODUCTION.

2. REVIEW OF LITERATURE: .

3. RESEARCH METHODOLOGY.

Objectives of the study Significance of the study

Scope/area of study

Nature of the study

Nature of the data to be used

Data collection techniques

Limitations of the study

4. INTRODUCTION OF TOPIC

5. ANALYSIS OF DATA..

Tabular/graphical presentation

Used statistical techniques

Interpretation of each table

6. FINDINGS AND SUGGESTIONS

7. CONCLUSION.............................................................

BIBLIOGRAPHY:

ANNEXURE:

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CHAPTER 1

INTRODUCTION

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Company Overview

Anand Rathi Share and Stockbrokers Ltd. is a boutique investment bank that offers

financial advisory services to institutions, corporations, high net worthindividuals, and families. It provides mergers and acquisitions, private

placements, transaction structuring, pricing, potential financing,

restructuring, capital market, initial public offerings (IPOs), advisory

services. Additionally, the firm offers fairness opinions and valuation

analysis, due diligence, bid evaluation, and negotiation services. Anand

Rathi Financial Services caters to industrial and capital goods, business

services, real estate, retail, education, healthcare, transportation, and telecom

sectors and financial institutions. Anand Rathi Financial Services Ltd. was

formerly known as Anand Rathi Securities Limited and changed its name to

Anand Rathi Shareand Stockbrokers Ltd. on 5th March, 2008. The firm

was founded in 1994 and is based in Mumbai, India.

Anand Rathi is a leading full service investment bank founded in 1994 offering a wide

range of financial services and wealth management solutions to institutions,

corporations, highnet worth individuals and families. The firm has rapidlyexpanded its footprint to over 350 locations across India with international

presence in Dubai, Hong Kong. Founded by Mr. Anand Rathi and Mr.

Pradeep Gupta, the group today employs over 2,500 professionals

throughout India and its international offices.

The firms philosophy is entirely client centric, with a clear focus on

providing long term value addition to clients, while maintaining the highest

standards of excellence, ethics and professionalism. The entire firm

activities are divided across distinct client groups: Individuals, Private

Clients, Corporate and Institutions. Anand Rathi has been named The Best

Domestic Private Bank in India by Asia money in their Fifth Annual Private

Banking Poll 2009. The firm has emerged a winner across all key segments

in Asia moneys largest survey of high net worth individuals in India.

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MANAGEMENT TEAM

Anand Rathi, Founder & Chairman

A gold medalist Chartered Accountant and former President Bombay Stock

Exchange (BSE). Key Executive of the Birla Group. The driving force

behind the setting up of the Birla Groups Cement and Financial Services

business among of the And in the setting up of the online trading system and

the Central Depository Services Ltd in India. With over 40 years in the

industry.

Pradeep Gupta, Co-founder & Vice chairman

With over twenty years experience in the securities market. Co-founder and

key driver of the Retail and Institutional Equities business of the group.

Amit Rathi, Managing Director

A rank holder chartered Accountant and an MBA from Leonard N. Stern

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School of Business, New York University joined the group in 1998. He was

instrumental in establishing the group's private wealth management and

investment banking businesses. Calling him a 'financial guru', the Times of

India group, listed Amit in 2008 amongst the top 51 young Marwaris in

India (under the age of 40).

P G Kakodkar, Director

Former Chairman of State Bank of India. Director in Financial Technologies

(India). Director in Sesa Goa Ltd. Director in SBI Funds Management Pvt.

Ltd. & the Multi Commodity Exchange of India Ltd and a M. A. inEconomics .

Dr. S A Dave, Director

Former Chairman Securities & Exchange Board of India (SEBI) and Deputy

Director of the RBI. Former Chairman Unit Trust of India (UTI). Member of

General Committees of Government of India & Financial Reforms and

Chairman CMIE 1998 till date. And a M. A. (USA) with Ph D in Economics.

C D Arha, Director

Formerly Secretary in the Union Ministry of Mines. Special Secretary &

Additional Secretary in the Ministry of Coal. Resident Chief Information

Commissioner -AP (Right to Information Act). Commissioner Civil Supplies

(AP). Chairman & MD, APSEC. With a M .A. (History) and diploma

Management & Administration of Rural Development (Birmingham, UK)

SERVICES OF ANAND RATHI10


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1. Call N Trade

2. Mutual Fund

3. Depository Services

4. Commodities

5. Insurance

6. IPOs

7. Online Trading

BRANCHES OF ANAND RATHI

1. Andhra Pradesh

2. Jammu & Kashmir

3. Punjab

4. Assam

5. Jharkhand

6. Rajasthan

7. Bihar

8. Karnataka

9. Tamil Nadu

10. Chhattisgarh

11. Kerala

12. Uttar Pradesh

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13. Delhi

14. Madhya Pradesh

15. Uttaranchal

16. Goa

17. Maharashtra

18. Gujarat

19. Orissa

20. Haryana

21. West Bengal

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CHAPTER 2

REVIEW OF LITERATURE

Since 1992, a number of articles and brief essays have been published in financial dailies,

periodicals, professional and research journals, explaining the basic concept

of Mutual Funds and life insurances and behavior of investors on them.

They underline the importance of mutual funds and life insurances in the Indian capital

market environment. They touch upon varied aspects like regulation of

mutual funds and life insurances, investor expectations, investor safety

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,trend in growth and some other critical views on the performance and

functioning of mutual funds/life insurance schemes.

.

Gupta (1994)

Made a household investor survey with the objective to provide data on the investor

preferences on MFs and other financial assets. The findings of the study

were more appropriate, at that time, to the policy makers of mutual funds to

design the financial products for the future.

Jambodekar (1996)

Conducted a study to assess the awareness of MFs among investors, to identify the

information sources influencing the buying decision and the factors

influencing the choice of a particular fund. The study reveals among other

things that Income Schemes and Open Ended Schemes are more preferred

than Growth Schemes and Close Ended Schemes during the then prevalent

market conditions. Sikidar and Singh (1996) carried out a survey with an

objective to understand the behavioral aspects of the investors of the North

Eastern region towards mutual funds investment portfolio. The survey Vol.

3, No. 10 International Journal of Business and Management 92 revealed

that the salaried and self-employed formed the major investors in mutual

fund primarily due to tax concessions.

Sundar (1998)

Conducted a survey to get an insight into the mutual fund operations of private

institutions with special reference to Kothari Pioneer. The survey revealed

that agents play a vital role in spreading the Mutual Fund culture; open-end

schemes were much preferred then age and income are the two important

determinants in the selection of the fund/scheme; brand image and return are

the prime considerations while investing in any Mutual Fund.

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Black (2004)

Observed that in recent years, investors' attitudes towards the securities industry

plummeted, in reaction to both the conflicted research and the mutual fund

scandals. He concluded that the most optimistic assessment is that the SEC

has plenty of unfinished business to attend to

Keli (2005) is of opinion that Past performance and Funds Investment Strategy

continued to be the top two drivers in the selection of a new fund manager.

Rajeswari and Mothy 2000.observed that investors demand inter-temporal

wealth shifting as they progress through the life cycle.

Headen and Lee (1974)

studied the effects of financial market behavior and consumer expectations on purchase of

ordinary life insurance and concluded that life insurance demand is inelastic

and positively affected by change in consumer sentiments; interest rates

playing a role in the short run as well as in the long run.

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CHAPTER 3

RESEARCH METHODOLOGY

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OBJECTIVES OF THE STUDY

The present study focuses on the comparative analysis of mutual funds schemes

performance. The objectives of the research are:

To evaluate the schemes on the basis of risk and return by calculating

To identify the features as the retail investors look for in investment products.

To identify the scheme preference of investors.

To identify the factors those influence the investors fund/scheme selection

To identify the source of information that influences the fund/scheme selection decision.

Average daily returns of the funds.

To find out the best investment plan from Insurance and Mutual fund .

To calculate the maximum return.

To know the performance of mutual funds and insurance in corporate sector.

Significance OF THE STUDY

It has great practical implications in investment decisions. An investment portfolio can be

suggested on the basis of the study.

This research work can be used for further analysis and study.

This study clears which alternative is better whether Mutual Fund or Insurance.

This research work also helps for future decisions while making new investments.

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SCOPE OF THE STUDY

The scope of the study is kept limited to the period beginning from 1st April 2005 to 31st

March 2008. It is important to point out that NVAs have been taken on

daily basis. The study basically focused on the study regarding mutual funds

and insurance that how much the consumers are aware about these

investment avenues,the rate of satisfaction regarding the returns they are

getting.

Research design

Exploratory type of research designs adopted because sources of information are

relatively few and the purpose is merely to find and to understand the

possible actions.

The major purposes of exploratory study are:

Identification of problem.

The precise formulation of problems including the identification of variables.

Formulation of alternative course of action.

An exploratory research is often the first in the series of projects that culminates in oneconcerned with the drawing of inferences that aroused as a basis of

monetary action. Exploratory study is often used as an introductory phase of

a larger study and results are used in 38.

Study on Procurement and Development of Life advisors

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Developing specific technique for larger study. Of the study the relevant questionnaire

was prepared and circulated among a stratified sample of 50 employees of

Anand Rathi Limited. This questionnaire formed the basis for the views on

each of the points raised in the questionnaire. The data thus obtained formed

the basis of information regarding the existing recruitment and selection

processes at Anand Rathi LTD. and the same is analyzed and interference is

drawn regarding the various aspects of recruitment and the entire process of

selection at Anand Rathi ltd.

RESEARCH DESIGN

A Research Design is the framework or plan for a study, which is used as a guide in

collecting and analyzing the data collected. It is the blue print that is

followed in completing the study. The basic objective of research cannot be

attained without a proper research design. It specifies the methods and

procedures for acquiring the information needed to conduct the research

effectively. It is the overall operational pattern of the project that stipulates

what information needs to be collected, from which sources and by what

methods.

This chapter has been divided into 10 sections that consist of Statement of the problem,

Objectives of the Study, values taken in the study, Research Methodology,

Scope of the study, Statistical tools, Problems encountered, Importance of

study, its limitations and organization of the study.

Each section gives the complete description of the things included in it. In the sections,

the topic related to particular section is very clearly written to enhance the

understanding of the concepts.

Type of research

For the purpose of the study Descriptive cum Analytical Research has been used. The

main characteristic of Descriptive research is that the researcher has no19


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control over the variables. He can only report what has happened or what is

happening. In Analytical Research, the researcher has to use facts and

information already available and make an analysis on the basis of these

only. The researcher cannot manipulate the information.

Sampling

Sample unit: Mutual Funds schemes have been selected for the purpose of the study.

Sample size:Due to a large number of Mutual Fund schemes in existence, it was notfeasible to analyze the performance of each of them separately. Therefore, sample has

been collected of 24 schemes of 8 mutual fund companies namely Reliance, DSPML,

BOB, ING Vysya, Kotak, HSBC, Principal and Birla Sun Life mutual fund.

Sampling Technique: In the present study Convenience Sampling technique has

been used. The Mutual Fund Houses are selected on the basis of the ease of availability of

their NAV

Data Collection Method

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Primary Data Sources:

Primary data is that data which is collected for the first time by the user.

1) Data can be collected by Primary as well as secondary method Primary Data Sources.

2) Questionnaire methods and discussions with the HR and the Employees were used to

collect data.

3) Study on Procurement and Development of Life advisors Questionnaire Designed

Questionnaire was used for the Survey.

Best examples are: mail survey, interviews, observations etc.

Secondary Data Sources:

The secondary data sources were collected from the company manuals, handbooks, and

management books and are edited to suite the purpose.

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Data Collection

Method

Primary Data

Interviews,surveys

etc.

Secondary Data

Magazines,

Journals etc.


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CHAPTER 4

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INTRODUCTION OF

INSURANCE AND

MUTUAL FUNDS

INTROCUTION TO INSURANCE

What is Insurance

"Insurance is a contract between two parties whereby one party called insurer undertakes

in exchange for a fixed sum called premiums, to pay the other party called

insured a fixed amount of money on the happening of a certain event."

Insurance is a protection against financial loss arising on the happening of an unexpected

event. Insurance companies collect premiums to provide for this protection.

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A loss is paid out of the premiums collected from the insuring public and the

Insurance Companies act as trustees to the amount collected.

For Example, in a Life Policy, by paying a premium to the Insurer, the family of the

insured person receives a fixed compensation on the death of the insured.

Similarly, in car insurance, in the event of the car meeting with an accident, the insured

receives the compensation to the extent of damage.

It is a system by which the losses suffered by a few are spread over many, exposed to

similar risks.

Why should you take Insurance

Insurance is desired to safeguard oneself and one's family against possible losses on

account of risks and perils. It provides financial compensation for the losses

suffered due to the happening of any unforeseen events.

By taking life insurance a person can have peace of mind and need not worry about the

financial consequences in case of any untimely death.

Certain Insurance contracts are also made compulsory by legislation. For example, MotorVehicles Act, 1988 stipulates that a person driving a vehicle in a public

place should hold a valid insurance policy covering Act risks. Another

example of compulsory insurance pertains to the Environmental Protection

Act, wherein a person using or carrying hazardous substances (as defined in

the Act) must hold a valid public liability (Act) policy.

Who provides Insurance

In India, prior to liberalization Insurance protection was made available through Public

sector Insurance Companies, namely, Life Insurance Corporation of India

(LIC) and the four subsidiaries of Life Insurance Corporation of India .

By the passing of the IRDA Bill, the Insurance sector has been opened up for private

companies to carry on Insurance business.

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What is the procedure to obtain insurance

The simplest procedure to obtain insurance is:

1. Approach the Insurance Companies directly or through Insurance agents of theconcerned companies or through Intermediaries.

2. Complete a proposal from giving full details. Submit Date of Birth Certificate and other

relevant documents.

3. Insurance contracts are based on good faith i.e. the details furnished by the proposer are

accepted in good faith and this will form the basis of the contract.

What are the other alternatives to Insurance

One alternative to Insurance is to provide self-Insurance i.e. the individual has to create a

fund to meet risk agencies. Specified trusts have also tried to provide

insurance by a scheme of self-insurance. However, these are not very

popular.

The postal department provides Insurance coverage to all working people. There are many

financial instruments which advocate savings and provide future returns at

specific intervals such as the provident fund and pension plans. However,

none of these provide for life coverage.

What are the other benefits of taking Insurance

Tax Relief: Under Section 88 of Income Tax Act, a portion of premiums paid for life

insurance policies are deducted from tax liability. Similarly, exemption is available for

Health Insurance Policy premiums. Money paid as claim including Bonus under a life

policy is exempted from payment of Income Tax. However annuities received under

certain pension plans are taxable.

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Encourages Savings : An insurance scheme encourages thrift among individuals. It

inculcates the habit of saving compulsorily, unlike other saving instruments,

wherein the saved money can be easily withdrawn.

The beneficiaries to an insurance claim amount are protected from the claims of creditors

by affecting a valid assignment.

For a policy taken under the MWP Act 1874, (Married Women's Property Act), a trust is

created for wife and children as beneficiaries.

Life Policies are accepted as a security for a loan. They can also be surrendered for

meeting unexpected emergencies.

Based on the concept of sharing of losses, the society will benefit as catastrophic losses

are spread globally.

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Insurance Principles

Main principles of Insurance:

Utmost Good Faith

As a client it is your duty to disclose all material facts to the risk being covered. A

material fact is a fact which would influence the mind of a prudent

underwriter in deciding whether to accept a risk for insurance and on what

terms. The duty to disclose operates at the time of inception, at renewal and

at any point mid term.

Indemnity

On the happening of an event insured against, the Insured will be placed in the samemonetary position that he/she occupied immediately before the event taking

place. In the event of a claim the insured must:

Prove that the event occurred .

Prove that a monetary loss has occurred .

Transfer any rights which he/she may have for recovery from another source to the29

PRINCIPLES OF

INSURANCE

UTMOST GOOD FAITH INDEMNITY

SUBROGATION CONTRIBUTION

PROXIMATE CAUSE INSURABLE INTEREST


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M

embers should be persons of ability integrity and standing

They should have an experience in the fields of

Life insurance

General Insurance

Actuarial Science

Finance

Economics

Law

Accountancy

Administration

FUNCTIONS OF IRDA

To protect the interest of policy holders in the matter of insurance contract with the

company.

To specify requisite qualification, code of conduct and training for insurance

intermediaries and agents.

To specify code of conduct for surveyors/loss assesso

To promote efficiency in the conduct of insurance business.

To promote and regulate professional organization connected with the insurance and

reinsurance business.

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To undertake inspection, conduct enquires and investigation including audit of insurers

and insurance intermediaries.

To control and regular the rates, terms and conditions to be offered by the insurer

regarding general insurance business not so controlled by Tariff Advisory

Committee u/s 604 of Insurance Act, 1938.

To regulate investment of funds by the insurance companies.

To adjudicate dispute between insurers and intermediaries of insurance.

LIFE INSURANCE CORPORATION OF INDIA ACT, 1956.

Life insurance business was nationalized in India with effect from 19 th January 1956.

The life insurance business of 154 Indian life officers constituted by 16 non-Indian

insurers operation in Indian and 75 provident societies was taken over by the

Govt. of India.

LIC of India Act was passed by the Parliament on 16th June 1956 and it came into effect

from 1st July 1956.

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Joint Venture of BIRLA SUN LIFE INSURANCE CO. LTD

74 %

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26%

10=


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Aditya Birla Group

The group is India's leading business house

1 .Turnover of over` 37,200 crores (US$ 8.3 billion)33


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2 .Market Capitalization of ` 100,300 crores

3. Fixed assets worth `26,500 crores (US$ 5.7 billion)

4. Total employee strength of 100,000 people.

5. 800,000 share holders in 40 companies, in 18 countries, situated around the globe.

JOINT VENTURE IN BUSINESS STRATEGY

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RATIONAL FOR JOINT VENTURES

Companies of Aditya Birla Group

Aditya Birla Nuvo

GRASIM

Indo Gulf Fertilizers Ltd

UltraTech Cement Ltd

Birla Globe Finance Ltd

HINDALCO

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Birla Sun Life Insurance

Indian Aluminum Co. Ltd.

Birla Sun Life Asset Mgmt.

Birla Sun Life Distribution

Idea Cellular Ltd.

THE COMPANY THAT GO FOR JOINT VENTURE IN INDIA

Integrity

Commitment

Passion

Seamlessness

Speed

About Birla Sun Life Insurance company limited.

Birla Sun Life Insurance pioneered the unique Unit Linked Life Insurance Solutions in

India.

Within 4 years of its launch, BSLI has cemented its position as a leading player in the

Private

Life Insurance Industry.

There has been focus on Investment Linked Insurance Products, supported with protectionproducts to maintain leadership in product innovation.

Multi Distribution Channels- Direct Sales Force, Alternate Channels and Group

offering convenient channels of purchase to customer

Web-enabled IT systems for superior customer services

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First to have issued policies over the Internet

Corporate governance and a high degree of transparency in all business practices and

procedures.

First to have an operational Business Continuity Plan.

First to have issued policies over the Internet.

BIRLA SUN LIFE CHILDRENS DREAM PLAN

V/S HDFC CHILD PLAN

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BIRLA SUN LIFE CHILDRENS DREAM PLAN V/S

ICICI SMART KID

38

Sr.

No

Features HDFC CHILD PLAN BIRLA SUN LIFE

CHILDREN,S DREAM

PLAN

1) Min. Max child

age

0-13 Years

2) Min.Max Age of

parents

18-60 Years 18-60 Years

3) Life Assured Policy Holder Policy Holder

4) Beneficiary Child Policy Holder

5) Flexibility The customer has to

choose amongst 3 plans,

with different premiums.

The customer has to

choose amongst 3

options, with differentpremiums

6) Death of Parent 1)SA + Bonuses paid

upfront

2) SA + Bonuses paid on

maturity

3) SA paid on death +

bonuses

1) SA + Bonus

7) Death of

Children

They give nothing. SA with accrued

bonuses will be paid

8) Riders Available None ADB


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Sr.

No

FEATURES ICICI SMART KID BIRLA SUN LIFE

CHILDREN,S DREAM PLAN

1) Min. Max child

age

10-25 0-13 Years

2) Min.Max Age of

parents

22-25 Years 18-60 Years

3) Life Assured Policy Holder Policy Holder

4) Beneficiary Child Policy Holder

5) Flexibility Two structures-

when the child

reaches his critical

mile stones. Last 4

years before

maturity.

The customer has to choose

amongst 3 options, with

different premiums

6) Death of Parent SA is paid up front.

All future premiums

are waived.

1) SA + Bonus

2) Family Income Benefit

7) Death of

Children

Policy continues as

it is.

SA with accrued bonuses will

be paid

8) Riders Available ADBR/IBR/WOP ADBR

LIFE INSURANCE IN INDIA

Life Insurance in its existing form came to India form the United Kingdom with the

establishment of a British from Oriental Life Insurance Company in Calcutta

in 1818 followed by Bombay Life Assurance Company in 1823.

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The Indian Life Assurance Companies Act, 1912 was the first statutory measure to

regulate life insurance business. Later in 1928 the Indian Insurance

Companies Act was enacted to enable the Government to collect statistical

information about both life and non-life insurance business transacted in

India by Indian and foreign insurers including provident insurance societies.

In 1948 with a view to protecting the interest of insuring public earlier

legislation was consolidated and effective control over the activities of

insure

The Act was amended in 1950 resulting in far reaching changer in the insurance sector.

These included a statutory requirement of equity capital for companies

carrying on life insurance business, ceiling on share holdings in such

companies, stricter control on investments, submission of periodical returns

relation to investments and such other information to the controller. The

controller could also call for appointment of administrators and put a ceiling

on expenses of management and agency commission for mismanaged

companies.

By 1956, 154 Indian insurers, 16 foreign insurers and 75 provident societies were carrying

on life insurance business in India. Life Insurance business was concentratedin urban areas and confined to the higher strata of the society. On January

19, 1956 the management of Life Insurance business of 245 Indian and

foreign insurers and provident societies then operating in India was taken

over by the Central Government. Life Insurance Corporation was formed in

September 1956 by an Act of Parliament, viz. LIC Act 1956 with a capital

contribution of Rs 50 million.

Then the Finance Minister MR C.D. Deshmukh while piloting the bill for nationalization

outlined the objectives of LIC thus:

TO CONDUCT THE BUSINESS WITH ATMUST ECONOMY WITH THE SPIRIT

OF TRUSTEESHIP; TO CHARGE PREMIUM NO HINNER THAN

WARRANTED BY STRICT ACTURAL CONSIDERTION ; TO INVEST

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THE FUNDS FOR OBTAINING MAXIMUM YIELD FOR THE POLICY

HOLDERS CONSISTENT WITHSAFETYOF CAPITAL; TO RENDER

PROMPT AND EFFICIENT SERVICE TO POLICY HOLDERS THERBY

MAKING INSURANCE WIDELY POPULAR.

INTRODUCTION TO MUTUAL FUNDS

This chapter has been divided into 19 sections that consist of Introduction of Mutual

Funds, its Concept, Organization, Terminology, Types and allocation of

Assets, Instruments of Investments, mutual fund industry, its evolution,

trends etc. Each section gives the complete explanation of the conceptincluded in it. In the sections, the topic related to particular section is very

clearly written to enhance the understanding of the concepts. This chapter

also includes the sub sections along with the sections wherever the need

occurs

INTRODUCTION

Mutual funds are financial intermediaries which pool the savings of numerous individuals

and invest the money thus raised in a diversified portfolio of securities,

including equity,bonds, debentures and other instruments, thus spreading

and reducing risk. The object is tomaximize the return to the investor who

participates in equity indirectly through mutual funds.

Actually, it is a pool of money collected from investors and is invested according to

stated investment objectives. Mutual Fund investors are like shareholders

and they own the fund. They are not lenders or deposit holders in a mutual

fund. Everybody else associated with a mutual fund is a service provider,

who earns a fee. The money in the mutual fund belongs to the investors and

nobody else.

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Mutual funds invest in marketable securities according to the investment objective. The

value of the investments can go up or down, changing the value of the

investors holdings. NAV of a mutual fund fluctuates with market price

movements. The market value of the investors fund is also called as net

assets. Investors hold a proportionate share of the fund in the mutual fund.

New investors come in and old investors can exit, at prices related to net

asset value per unit.

A mutual fund is the ideal investment vehicle for todays 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. Prices 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 timebasis. The large pool of money collected in the fund allows it to hire such

staff at a very low cost to each investor. In effect, the mutual fund vehicle

exploits economies of scale in all three areas- researches, investments and

transaction processing. While the concept of individuals coming together to

invest money collectively is not new, the mutual fund in its present form is a

20th century phenomenon. In fact, mutual funds gained popularity only

after the Second World War. Globally, there are thousands of firms offering

tens of thousands of mutual funds with different investment objectives.

Today, mutual funds collectively manage almost as much as or more money

as compared to banks. The assets of the funds and perhaps a third one to

handle registry work for the unit holders (subscribers) of the fund. In the

Indian context, the sponsors promote the Asset Management Company also,

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in which it holds a majority stake. In many cases a sponsor can hold a 100%

stake in the Asset Management Company (AMC).

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SEBI looks at track records of the sponsor and its financial strength in granting approval

to the fund for commencing operations. A sponsor then hires an asset

management company to invest the funds according to the investment

objective. It also hires another entity to be the custodian of A draft offer

document is to be prepared at the time of launching the fund. Typically, it

pre specifies the investments objectives of the fund, the risk associated, the

costs involved in the process and the broad rules for entry into and exit from

the fund and other areas of operation. In India, as in most countries, these

sponsors need approval from a regulator, SEBI in our case.

44

Pool

of

Money

100

Cr.

F

invests

5000

E

invests

5000

B

invests

5000

A

invests

5000

C

invests

5000

Dinvests5000

Pool of money

is managed by

AMC


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CONCEPT OF MUTUAL FUND

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 its unit holders in share the

capital appreciations realized

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 Fund Operation Flow Chart

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ORGANISATION OF MUTUAL FUND

A mutual fund is set up in the form of a trust, which has sponsor, trustees, Asset

Management Company (AMC) and custodian. The trust is established by a

sponsor or more than one sponsor who is like promoter of a company. The

trustees of the mutual fund hold its property for the benefit of the unit holde

Asset Management Company (AMC) approved by SEBI manages the funds

by making investments in various types of securities. Custodian, who is

registered with SEBI, holds the securities of various schemes of the fund in

its custody. The trustees are vested with the general power of

superintendence and direction over AMC. They monitor the performance

and compliance of SEBI regulations by the mutual fund.SEBI Regulations

require that at least two thirds of the directors

Organizational set up of a mutual fund

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of trustee company or board of trustees must be independent i.e. they should not be

associated with the sponso Also, 50% of the directors of AMC must be independent. All

mutual funds are required to be registered with SEBI before they launch any scheme. The

entities involved in mutual fund are also explained following diagram:

MUTUAL FUND TERMINOLOGY

Net Asset Value (NAV)

Net Asset Value (NAV) denotes the performance of a particular scheme of a mutual

fund. Mutual funds invest the money collected from the investors in

securities markets. In simple words, Net Asset Value is the market value of

the securities held by the scheme. Since market value of securities changes

every day, NAV of a scheme also varies on day-to-day basis. The NAV per

unit is the market value of securities of a scheme divided by the total

number of units of the scheme on any particular date.

For example:

If the market value of securities of a mutual fund scheme is 200 Lacs and the mutual fund

has issued 10 Lacs units of 10 each to the investors, then the NAV per unit

of the fund is 20. NAV is required to be disclosed by the mutual funds on a

regular basis - daily or weekly- depending on the type of scheme.

Loads or No Load Fund

A load fund is one that charges a percentage of NAV of entry or exit. That is, each time

one buys or sells units in the fund, a charge will be payable. That is, each

time one buys or sells units in the fund, a charge will be payable. This

charge is used by the mutual fund for marketing and distribution expenses.

Suppose the NAV per unit is 10. If the entry as well as exit load charged is

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1%, then the investors who buy would be required to pay 10.10 and those

who offer their units for repurchase to the mutual fund will get only 9.90 per

unit. The investors should take the loads into consideration while making

investment as these their yields/ returns. However, the investors should also

consider the performance track record and service standard of the mutual

fund, which are more important. Efficient funds may give higher returns in

spite of loads.

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

enter the fund/scheme at NAV and no additional charges are payable on

purchase on purchase or sale of units.

Sale or Repurchase/ Redemption Price

The price or NAV a unit holder is charged while investing in an open-ended scheme is

called sales price. It may include sales load, if applicable.

Repurchase or redemption price is the price or NAV at which an open-ended scheme

purchases or redeems its units from the unit holde It may include exit load,

if applicable.

TYPES OF MUTUAL FUND SCHEMES

1. According to Maturity Period

Open Ended

Close Ended

2. According to Investment Objective

Equity funds

Debt funds

Balanced funds

Money Market funds

3. Other types of schemes

Tax Saving schemes

Index schemes

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1. SCHEMES ACCORDING TO MATURITY PERIOD:

A mutual fund scheme can be classified into open -ended scheme or close-ended schemedepending on its maturity period.

Open-ended Fund / Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on

a continuous basis. These schemes do not have a fixed maturity period.

Investors can conveniently buy and sell units at Net Asset Value (NAV)

related prices that are declared on a daily basis. The key feature of open-

ended schemes is liquidity. The AMC is always ready to accept money from

investors and is always willing to return the amount to the investo

Close-ended Fund/ Scheme

A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 yea The fund is

open for subscription only during a specified period at the time of launch of

the scheme. Investors can invest in the scheme at the time of the NFO (New

Fund Offer) and thereafter they can buy or sell the units of the units of the

scheme on the stock exchange where the units are listed. In order to provide

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

selling back the units to the mutual funds through periodic repurchase at

NAV related prices. SEBI Regulations stipulate that at least one of the exit

routes is provided to the investor i.e. either repurchases facility or through

listing on stock exchanges. These mutual funds schemes disclose NAV

generally on weekly basis.

2. SCHEMES ACCORDING TO INVESTMENT OBJECTIVE:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme

considering its investment objective. Such schemes may be open ended or

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close-ended schemes as described earlier. Such schemes may be classified

mainly as follows:

Growth /Equity Oriented Scheme

The aim of growth funds is to provide capital appreciation over the medium to long-term.

Such schemes normally invest a major part of their corpus in equities. Such

funds have comparatively high risks. These schemes provide different

options to the investors like dividend option, capital appreciation, etc. and

the investors may choose an option depending on their preferences. The

investors must indicate the options at a later date. Growth schemes are good

for investors having a long-term outlook seeking appreciation over a period

of time.

Various kinds of equity funds

Simple diversified equity funds

Sector specific funds

Simple diversified equity funds

This fund invests in equity across all sectors, companies. These funds invest a pre-

dominant portion of the funds mobilized in equity, and equity related

products. In most cases about 80-90% of their investments are in equity

shares. These funds have the freedom to invest both in primary and

secondary markets for equity. A simple diversified equity fund can be made

by selecting companies based on their market capitalization or some other

predetermined criteria.

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Sector specific funds

The investment objective of a sectoral fund is to invest in securities of a specific sector.

The choice of the sector could vary depending on the investor preference

and the return risk attributes of the sector. For example: banking stocks have

shown quite decent growth in the last four yea Investors who wanted to

participate in this sector could do so, by investing in sect oral funds. Sectoral

funds are not as well diversified as simple equity funds, as they tend to focus

on fewer sectors in the equity markets. They can exhibit very volatile

returns. Few examples:

a) Banking sector fund b) Power sector fund

c) IT sector fund d) FMCG sector fund .

e) Petroleum sector fund

Income / Debt Oriented Schemes

The aim of income funds is to provide regular and steady income to investo Such schemes

generally invest in fixed income securities such as bonds, corporate

debentures, Government securities and money market instruments. Such

funds are less risky compared to equity schemes. These funds are not

affected because of fluctuations in equity markets. However, opportunities

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

funds are affected because of change in interest rates in the country. If the

interest rates fall, NAVs of such are likely to increase in the short run and

vice versa. However, long-term investors may not brother about these

fluctuations.

Various kinds of debt funds:

Diversified debt funds

Gilt funds

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Focused debt funds

High yield debt funds

Liquid and money market mutual funds

Floating rate debt funds

Fixed term plan series

Diversified debt funds

These funds invest in a portfolio of debt securities issued by entities across all sectors and

industries.

Gilt Fund

These funds invest exclusively in government securities. Government securities have no

default risk. NAVs of these schemes also fluctuate due to change in interest

rates and other economic factors as are the case with income or debt oriented

schemes.

Focused debt funds

These funds invest in a predetermined subset of the debt markets, and hence have a

narrower focus with less diversification in its investment. For example,

sector specific funds, offshore funds etc.

High yield debt funds

High yield debt fund invests in securities, which have high risk (below investment grade)to obtain high returns. However in India, SEBI guidelines do not allow a

fund to invest more than 25% of its net assets in a below investment grade

or unrated debt security.

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Money Market or Liquid Fund

The funds are also income funds and their aim is to provide easy liquidity, preservation of

capital and moderate income. These schemes invest exclusively in safer

short-term instruments such as treasury bills, certificates of deposit,

commercial paper and inter-bank call money, government securities, etc.

Returns on these schemes fluctuate much less compared to other funds.

These funds are appropriate for corporate and individual investors as a

means to park their surplus for short periods.

Floating rate debt funds

These funds invest their money only in securities, which pay interest on a floating rate

basis. The interest is not fixed and keeps on adjusting itself to the market

rates.

Fixed term plan series

FTP has been designed to meet the needs of those investors who want assured or stable

returns. In a FTP, is a series of close-end plans are offered and units are

issued at frequent intervals for short-term durations. A FTP makes one time

offer of units, but such an offer is made in the form of a series of plan under

one scheme and offer document.

Balanced schemes

A balanced fund invests in debt and security in comparable proportion. The proportion

need not be exactly same but comparable. In India, balanced funds are

normally invested 60% in debt and remaining in equity. A balanced fund

tends to provides investors an exposure to both equity and debt markets in a

one product. This provides asset call diversification, as equity and debt

markets are not subject to the same kinds of external risk facto A balanced

fund gives an investor exposure in equity at a relatively lower volatility.

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3. OTHER SCHEMES:

Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the IndianIncome Tax laws as the Government offers tax incentives for investment in

specified avenues. Investments made in Equity likened Savings Schemes

(ELSS) and Pension Schemes are allowed as deduction under Section 88 of

the Indian Income Tax Act, 1961

Index Funds

Index funds replicate the portfolio of a particular index such as the BSE Sensitive index;S&P NSE 50 index (NIFTY), etc. These schemes invest in the securities in

the same weight age comprising of an index. NAVs of such schemes would

rise or fall in accordance with the rise or fall in the index, though not exactly

by the same percentage due to some factors known as tracking error" in

technical terms. Necessary disclosures in this regard are made in the offer

document of the mutual fund scheme.

ALLOCATION OF ASSETS

Investment Pattern of Mutual Funds

The most important feature in a mutual fund scheme is the allocation of its assets. The

investment pattern of a scheme is to a large extent determined by the broad

guidelines issued by SEBI. But these are of a generalized nature and

applicable to all mutual fund schemes. What primarily distinguishes one

scheme from another is the manner in which a fund manager actually

deploys the amount raised from investor.

INSTRUMENTS OF INVESTMENT

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At the outset, therefore, it is essential to consider the various instruments in which mutual

funds deploy their funds.

1. Equity

Equity represents the shares of a company. Mutual funds can invest in the shares with the

claim to participate in the whole range of activities in the net profits after the

company has satisfied all charges due to it and met all liabilities, including

the fixed are entitled, in addition, to dividend, rights and bonus issues, as

and when announced. The recent amendments in the Companies Bill 1993

have a proposed voting right to the mutual funds to enable them to have a

legitimate say on behalf of their investors in the affairs of a company.

The advantage of investing in equity is the prospect of growth and capital appreciation,

which, in turn, should be reflected, in similar appreciation of the units of

mutual funds.

2. Convertible debentures

These come under the head of equity related instruments. Once the convertible portion of

debentures is converted into equity it gives the same benefits as shares. It is

equally attendant with the same risks as outlined above.

3. Fixed income Securities

In addition, mutual funds invariably invest a part of their money in fixed income

securities. This is necessary in order to generate some income to pay for

their own establishment and operating expenses and also in order to pay

annual dividend to investo These are:

Debt instruments, like non convertible debentures; and

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Bonds, particularly those issued by the public sector undertakings.

4. Short term Securities

These are:

Certificates of deposit;

Treasury bills;

Bill discounting;

Commercial paper; and

Call money

These are meant for shot term investments. Their yield is relatively low but there is

greater liquidity. Mutual Funds invest a portion of their money market

investments in order to meet their need for money at short notice, whether to

meet dividend liabilities or for redemption of units upon the maturity of a

scheme.

2.7 INVESTORS INTERESTS

A mutual funds foremost duty is towards its investors and hence it has at all times to

safeguard their interests. Without making a sweeping generalization it can

reasonably be stated as a truism that the average Indian investors primary

consideration is that of the safety of his capital. It is all the more so since he

is essentially risk averse. Mutual funds are primarily meant for the small

investor, who neither has aptitude nor professional background, let alone the

funds- to place them alternately, at the mercy of the bulls and the bears in

the stock market. Those with even streaks of adventurism choose to

participate directly in equity. Safety should, therefore, get the top priority.

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Next to safety what the investor values most is liquidity. He should be able to get a fair

price for his investment whenever he desires instead of waiting till the

termination of a scheme. This can be possible either if his units are

repurchased by the mutual fund scheme itself or else if his units are

repurchased by the mutual fund scheme itself or else if he is able to sell

them in market once they are listed. He also justifiably expects that in the

market once they be listed. He also justifiably expects that for meeting

short-term commitments he should be able to get loans from the nationalized

banks and other recognized institutions by pledging the units of the mutual

fund scheme held by him. At no point of time should they become a

millstone around his neck.

MEASURING AND EVALUATING MUTUAL FUND PERFORMANCE

Change in NAV= NAV at the end of the period NAV at the beginning of the period

Advantage: Very simple method.

Disadvantage: However does not give the correct picture, in case the fund has

distributed dividend.

Total Return = [Dividend distributions + change in NAV] *100

Beginning NAV

Advantage: Corrects the shortcomings of the first method by taking into account the

divided distributed. Suitable for all types of funds. Performance must be interpreted in

the light of market conditions and investment objectives.

Disadvantage:However, it ignores the fact that distributed dividend also get reinvested.

Expense Ratio:

Total expense/average net assets of the fund. Is an indicator of the funds efficiency andcost effectiveness?

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Income Ratio:

Net Investment Income

Net Assets

Portfolio Turnover Ratio

It measures the amount of buying and selling done by a fund. It gives an idea of how fast

the fund manager is churning his portfolio.

High turnover ratio also indicates high transaction costs.

Transaction Costs include all expenses related to trading such as brokerage commission

paid; stamp duty on transfer registrar fees and custodians fees. It has

significant bearing a fund performance.

Fund Size

Small Funds

Easy to manage.

Achieve objective in focused manner with limited holding.

Large Funds

Economies of scale.

Lower Expense Ratio.

Cash Holdings

Enables meeting redemption needs.

A cushion against decline in market prices of shares/bonds.

May reduce the return on the portfolio.

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Evaluating Fund Performance

Basis of choosing an appropriate performance Benchmark:

The asset class if invests in.

An equity fund should be judged against another equity fund &equity benchmark

(indices).

Equity Funds

Index Fund An Index fund invests in the stock comprising of the index in the sameratio.

For example,

Market Index Fund - BSE Sensex

Nifty Index Fund - NIFTY

This is a passive management style.

TRACKING ERROR can explain the difference between the return of this fund and its

index benchmark.

Active Equity Funds The fund manager actively manages this fund. To evaluate

performance in such case we have to select an appropriate benchmark. Large

diversified equity fund BSE 100

Sector fund -- Sectoral Indices

Even when two funds with similar characteristics are otherwise comparable, their returns

must be calculated on a comparable basis. Hence,

Compare returns of two funds over the same periods only.

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Similarly, only average annualized compound returns are comparable.

Only after tax returns of two different schemes should be compared.

NET ASSET VALUE (NAV) OF MUTUAL FUND UNITS

The net asset value (NAV) of the units of a mutual fund scheme is of vital importance to

determine its performance and health.

Formula for Determination of NAV

The calculation of NAV is based on the total market value of a mutual fund schemes

assets, to which are added the following:

Receivables. b) Accrued income .c) Other assets.

From the total of the above is deducted the aggregate of:

Accrued expenses. b) Payables. c) Other net liabilities.

Total market value of mutual fund schemes assets _ _ _

+ Receivables. _ _ _

+ Accrued income. _ _ _

+ Other assets. _ _ _

---------------

---------------

- Accrued expenses. _ _ _

- Payables. _ _ _

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- Other net liabilities. _ _ _

-----------------

Net figure -----------------

No. of units outstanding

-------------------------------

NAV

-------------------------------

INVESTOR SERVICES

No mutual fund scheme is worth considering unless it is backed by adequate investor

services. The issue has assumed increased importance with the entry of

private mutual funds that are vying with each other to provide better

response to investor

Investor services comprise:

Collection of subscription at convenient locations.

Dispatch of unit certificates.

Effecting change in address, if any.

Suitable transfer mechanism in the case of units of schemes listed on the stock exchanges.

Timely dispatch of dividend warrants and other cheques in respect of bonus growth.

Timely redemption and dispatch of cheques relating to the proceeds of redemption.

ADDITIONAL FACILITIES PROVIDED BY MUTUAL FUNDS TO THE INVESTORS

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Systematic Investment Plan (SIP)

Systematic Withdrawal Plan (SWP)

Systematic Transfer Plan (STP)

Dividend Transfer Plan (DTP)

Auto debit facility and Electronic Clearing Service (ECS)

Switching

Systematic Investment Plan (SIP)

An existing unit holder can benefit under this facility by investing specified amounts

regularly. By investing a fixed amount of rupees at regular intervals, one

would end up buying more units of the fund when the price is low and fewer

units when the price is high. As a result, over a period, the average cost per

unit to the unit holder will always be less than the average subscription price

per unit, irrespective of whether it is a rising, falling or fluctuating market.

Thus, the unit holder automatically gains and averages out the fluctuations

of market, without having to monitor prices on a day-to-day basis. This

concept is called Rupee Cost Averaging.

The following points should be noted regarding SIP:

In case of a SIP, the minimum amount for investing is much lower around 500 to 1000.

The minimum number of payments that should be invested in order to get this facilitymight be 12 cheques of 500 each or 6 cheques of 1000 each.

It is mandatory that cheques should be of same value.

The frequency of investment offered for SIP varies from fund to fund. In general allmutual funds offer monthly and quarterly investment facility.

5.The first cheque can be of any date in the month but the subsequent cheques should bearany of the dates offered by the mutual fund for this facility.

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Systematic Withdrawal Plan (SWP)

Under a Systematic Withdrawal Plan, an investor can receive regular/quarterly payments

from the scheme into his account. The unit holder can opt to withdraw a

fixed amount subject to a prescribed minimum amount per month or per

quarter. The amount withdrawn by redemption shall be converted into units

at the applicable NAV and such units shall be subtracted from the unit

balance of the unit holder.

Systematic Transfer Plan (STP)

A systematic transfer plan gives investor facility to transfer amount from one scheme to

another scheme at periodic intervals. In STP, investors can choose between

a fixed systematic transfer plan and capital appreciation STP. Each mutual

fund specifies the schemes in which the amount can be transferred .

Dividend Transfer Plan (DTP)

Under DTP, investors can choose to transfer their dividends of one scheme on to the other

scheme as and when dividends are paid out. If such a plan is chosen than the amount of

dividend distribution will be automatically invested on the ex-dividend date into the

scheme selected by the investor and the units will be allotted accordingly.

Auto debit facility and Electronic Clearing Service (ECS)

A SIP can be affected in two ways. The investor can pay post-dated cheques dated at

requisite intervals or the investor can choose for an auto debit facility/ECS.

In auto debit/ECS facility, the amount mentioned in his application form

would be automatically debited on the date of investment and amount would

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be invested in the scheme. The investor opting for auto debit/ECS facility

will be required to sign up a mandate form based on which the mutual fund

will arrange for his account to be debited as per the frequency, amount &

date chosen by the investor.

Switching

Unit holders have an option to switch all or part of their investment in one scheme plan to

another scheme plan established by the fund that is available for investment

at that time. The switch will be affected by way of redemption of units and a

re-investment of the redemption proceeds in another scheme. To affect the

switch the unit holder must provide clear instructions to the fund, such

instructions may be provided by completing a form or lodging the same on

any business day with any of the investor service or collection center.

BENEFITS OF MUTUAL FUND INVESTMENT

Professional management

Mutual Funds provide the services of experienced and skilled professionals, backed by a

dedicated investment research team that analyses the performance and

prospects of companies and selects suitable investments to achieve the

objectives of the scheme.

Diversification

Mutual Funds invest in a number of companies across a broad cross section of industries

and secto This diversification reduces the risk because seldom do all stocks

decline at the same time and in the same proportion. You achieve this

diversification through a Mutual Fund with far less money than you can do

on your own.

Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such

as bad deliveries, delayed payments and follow up with brokers and

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companies. Mutual Funds save your time and make investing easy and

convenient.

Return Potential

Over a medium to long term, Mutual Funds have the potential to provide a higher return

as they invest in a diversified basket of selected securities.

Low 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 investor.

Liquidity

In open-end schemes, the investor gets the money back promptly at net asset value related

prices from the Mutual Fund. In closed end schemes, the units can be sold

on a stock exchange at the prevailing market price or the investor can avail

of the facility of directly 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 managers 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

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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.

Choices of Schemes

Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.

Well Regulated

All Mutual Funds are registered with SEBI and they function within the provisions of

strict regulations designed to protect the interests of investor. The

operations of Mutual Funds are regularly monitored by SEBI.

Tax Benefits

It is essential for the investor to know about the tax benefits available for mutual funds.

These benefits fall into three categories:

Those available to mutual funds.

Those available to corporate bodies and trusts investing in mutual funds.

Tax benefits available to individual investors for investing in mutual funds.

(a) Tax benefits for mutual funds

So far as the mutual fund itself is concerned, i.e. the asset management company, the

income accrued to it by way of dividends on investment, or by way of

capital gains, is totally exempt from payment of income tax Section 10

(23D) and Section 196 of the Income Tax Act, 1961. This is meant to

provide a much higher yield to the mutual funds to enable them to distribute

a higher than average return to the investor.

(b) Benefits for corporate and trusts

For the corporate the dividend on Unit Scheme 64 was totally exempted from tax under

Section 80M of the Income Tax Act, 1961, thus making this an attractive

scheme for parking their funds. The concessions have since been withdrawn

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on a graded scale: 1994-95 is the last year when 40% concessions would be

available.

(c) Tax benefits to individual investors

The most important aspect is the tax relief available to individual investors in their

single or joint capacity. It should, however, be noted that in the case of joint unit holders,

only the first named holder of the mutual fund units is entitled to such tax benefits. These

benefits are available in respect of all the scheme of mutual funds-open ended or close

ended, both in the private as well as public sector. These tax benefits are:

All units of mutual funds are totally exempt from Wealth Tax under Section (IA) of

Section 5 of the Wealth Tax Act.

Gift Tax is exempted up to the present annual ceiling of 30000.

Income from mutual fund units qualifies, along with other eligible income, for deduction

under Section 80L of the Income Tax Act, subject to a maximum amount of

10000 per year.

The difference between the purchase price and the indexed price at the time of sale or

repurchase/redemption of the units attracts the provision of long term capital

gains if held continuously for one year and is taxable at a flat rate of 20%.

Under Section 196A of the Income tax Act, there shall be no deduction of tax at source by

the fund from any income payable to unit holders in respect of the units held

by them.

Specific mention of tax benefits

It is essential that the investor should not be kept in the dark about the admissibly of tax

benefits. There have been instances of mutual funds being ambiguous in

their language on this issue; many a time they are totally silent. This is

because they do not approach CBDT for the requisite clarification or

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relaxation. In many cases they just get the opinion of some eminent tax

consultants instead of seeking unequivocal instructions from CBDT. This

tendency is more pronounced in scheme, which gives cumulative returns. It

is essential that the position be clarified in unequivocal terms in the offer

document.

Another gray area is the cumulative monthly income schemes wherein the dividend is not

physically paid to the investor every month but is instead reinvested and the

original investment gets doubled on maturity. The difference between the

amounts received on maturity. The difference between the amount received

on maturity and the amount invested is to be treated accumulated income

subject to benefits under Section80L every year, and not as capital gains, as

per general guidelines issued by Vikas Patras of the National Saving

Organization which should normally apply in such cases. The offer letters

are, however, silent on this point leading the individual investor to fight his

own battle with the tax authorities.

Transparency in operations is an essential requirement for mutual funds and both the

government and SEBI should enforce it with stern measures.

DRAWBACKS

REGULATORY ASPECTS

Mutual funds in India are regulated by SEBI (Securities and Exchange Board of India).

All mutual funds in India are regulated by SEBI. SEBI has framed the SEBI

(Mutual Funds) Regulations, 1996, which provides the scope of the

regulation of mutual funds in India. It is mandatory for all mutual funds to

get registered with SEBI.

Apart from SEBI there are some other agencies that regulate mutual funds in their

respective fields. These are

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1. RBI : RBI acts as regulator of sponsors of bank-sponsored mutual funds,

especially in case of funds offering guaranteed returns. No mutual fund can bring out

a guaranteed return scheme without taking approval from RBI.

Companies Act, 1956 AMC: Under the Act, Company Law Board is the regulator. CLB

has to be approached for filling complaints against directors of AMC and

Trustee Company. RoC is responsible for compliances: The RoC

oversees the compliance by the AMC and trustee company, with the

provisions of the companies act. Periodic reports and annual accounts have

to be filed by these companies with the RoC.

2. Stock Exchange The listing of close-ended funds are subject to listing regulation of

stock exchanges. Mutual funds have to sign the listing agreement and abide by itsprovisions.

3. Indian Trust Act, 1882: Mutual funds have to follow the provisions of

the Indian Trusts Act, 1882.

4. Ministry of Finance: The finance ministry is the supervisor of both the RBI and

SEBI. Aggrieved parties can make appeals to the MOF on the SEBI rulings relating to

mutual funds.

AMFI (Association of Mutual Funds in India)

With the increase in mutual fund players in India, a need for mutual fund association in

India was generated to function as a non-profit organization. Association of

Mutual Funds in India (AMFI) was incorporated on 22 August 1995.

AMFI is an apex body of all Asset Management Companies (AMC) that has been

registered with SEBI. Till date all the AMCs are that have launched mutualfund schemes are its membe it functions under the supervision and

guidelines of its Board of Director

Association of Mutual Funds India has brought down the Indian Mutual Fund Industry to

a professional and healthy market with ethical lines enhancing and

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maintaining standards. It follows the principle of both protecting and

promoting the interests of mutual funds as well as their unit holde

The Objectives of Association of Mutual Funds in India

The Association of Mutual Funds of India works with 30 registered AMCs of the country.

It has certain defined objectives, which juxtaposes the guidelines of its

Board of Director the objectives are as follows:

This mutual fund association of India maintains high professional and ethical standards in

all areas of operations of the industry.

It also recommends and promotes the top class business practices and code of conduct

which is followed by members and related people engaged in the activitiesof mutual fund and asset management. The agencies who are by any means

connected or involved in the field of capital markets and financial services

also involved in this code of conduct of the association.

AMFI interacts with SEBI and works according to SEBIs guidelines in the mutual fund

industry.

Association of Mutual Fund of India does represent the Government of India. Reserve

Bank of India and other related bodies on matters relating to the Mutual

Fund Industry.

It develops a team of well-qualified and trained Agent distributo It implements a program

of training and certification for all intermediaries and other engaged in the

mutual fund industry

AMFI undertakes all India awareness program for investors in order to promote proper

understanding of the concept and working of mutual funds.

At last but not the least association of mutual fund of India also disseminate information

on Mutual Fund Industry and undertakes studies and research either directly

or in association with other bodies.

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STRUCTURE OF THE INDIAN MUTUAL FUND INDUSTRY

The Indian Mutual Fund industry is dominated by the Reliance mutual fund, which has a

total corpus of ` 70,000 crores with an investor base of around 40 lakh.

Reliance has many funds/schemes in all categories i.e. equity, balanced,

income etc with some being open ended and some being close ended.

Reliance mutual fund was floated by Reliance Capital Limited.

The second largest categories of mutual funds are the ones floated by nationalized banks.

UTI, 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 AMC is about

`150bn.

The third largest category of mutual funds is the one floated by the private sector and by

foreign asset management companies. The largest of these are Reliance

Mutual Fund, ICICI Prudential AMC, HDFC AMC and Birla Sun Life

AMC. The aggregate corpus of assets managed by this category of AMC is

in excess of` 1,50,000 crores.

SOME OF THE AMCS CURRENTLY OPERATING ARE:

Bank Sponsored

BOB Asset Management Co. Ltd.

Canbank Investment Management Services Ltd.

SBI Fund Management Ltd.

UTI Asset Management Company Pvt. Ltd.

Institutions

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GIC Asset Management Co. Ltd.

Jeevan Bima Sahayog Asset Management Co. Ltd.

Private Sector

Indian: -

Benchmark Asset Management Co. Pvt. Ltd.

Cholamandalam Asset Management Co. Ltd.

Credit Capital Asset Management Co. Ltd.

Escorts Asset Management Ltd.

JM Financial Mutual Fund

Kotak Mahindra Asset Management Co. Ltd.

Reliance Capital Asset Management Ltd.

Sahara Asset Management Co. Pvt. Ltd

Sundaram Asset Management Company Ltd.

Tata Asset Management Private Ltd.

Predominantly Indian Joint Ventures:-

Birla Sun Life Asset Management Co. Ltd.

DSP Merrill Lynch Fund Managers Limited

HDFC Asset Management Company Ltd.

ICICI Prudential Asset Management Co. Ltd.

Predominantly Foreign Joint Ventures: -

ABN AMRO Asset Management (I) Ltd.

Alliance Capital Asset Management (India) Pvt. Ltd.

Deutsche Asset Management (India) Pvt. Ltd.

Fidelity Fund Management Private Limited

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Franklin Templeton Asset Mgmt. (India) Pvt. Ltd.

HSBC Asset Management (India) Private Ltd.

ING Investment Management (India) Pvt. Ltd.

Morgan Stanley Investment Management Pvt. Ltd.

Principal Asset Management Co. Pvt. Ltd.

Standard Chartered Asset Mgmt Co. Pvt. Ltd.

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 of ABN

AMRO Mutual Fund.

Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital

Management Corp. of Delaware (USA) as sponsored. The Trustee is ACAM Trust

Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India (Pvt) Ltd.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life

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Financial. Sun Life Financial is a global organization evolved in 1871 and is being

represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart from

India. Birla Sun Life Mutual Fund follows a conservative long-term approach to

investment. Recently it crossed AUM of 10,000 crores.

BOB Mutual Fund

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under

the sponsorship of Bank of Baroda. BOB Asset Management CompanyLimited is the AMC of BOB Mutual Fund and was incorporated on

November 5, 1992. Deutsche Bank AG is the custodian.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt.

Ltd. asthe sponsorer and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company.

Incorporated on October 16, 2000 and headquartered in Mumbai, Benchmark Asset

Management Company Pvt. Ltd. is the AMC.

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Canbank Mutual Fund

in Mumbai Canbank Mutual Fund was setup on December 19, 1987 with Canara Bank

acting as the sponsor. Canbank Investment Management Services Ltd. incorporated on

March 2, 1993 is the AMC. The Corporate Office of the AMC is.

Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Excorts Finance Limited as its

sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was

incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company with a

global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial

services groups in the world. Investors can buy or sell the Mutual Fund through their

financial advisor or through mail or through their website. They have Open end

Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid schemes,

Open end Tax Saving schemes, Open end Income and Liquid schemes, closed end Income

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schemes and Open end Fund of Funds schemes to offer.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely

Housing Development Finance Corporation Limited and Standard Life

Investments Limited.

HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital

Markets (India) Private Limited as the sponsor. HSBC Mutual Fund acts as the Trustee

Company of HSBC.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee

Company. It is a joint venture of Vysya and ING. The AMC, ING Investment

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Management (India) Pvt. Ltd. was incorporated on April 6, 1998.

ICICI Prudential Mutual

The mutual fund of ICICI is a joint venture with Prudential Plc. of UK,

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