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Project Report By Vikram Dhumal(523) Topic: Mutual und Analysis & Portfolio Managemaent Firm: Vantage Wealth Management Solutions Pvt. Ltd. College(MMM): Sinhgad Institute of Business Administration And Computer Application

CONTENT

CHAPTER 1:- INTRODUCTION ..4

1.1 OBJECTIVE OF THE PROJECT ...5 1.2 SELECTION OF THE TOPIC ...6 1.3 OBJECTIVE OF THE STUDY ...7 1.4 METHODOLOGY OF THE PROJECT ...8 1.5 SCOPE OF THE STUDY ...9 1.6 LIMITATIONS OF THE PROJECT ..10

CHAPTER 2:- PROFILE OF THE ORGANISATION .11

2.1 A] COMPANY PROFILE .12 B] COMPANY MISSION .14 2.2 AREA OF SERVICES .16

CHAPTER 3:- INVESTMENT MANAGEMENT .19

3.1 EQUITY PORTFOLIO MANAGEMENT .20 3.2 EQUITY FUNDS .21 3.3 TYPES OF EQUITY INSTRUMENTS .23 3.4 EQUITY CLASSES .24 3.5 DEBT PORTFOLIO MANAGEMENT .25 3.6 A REVIEW OF INDIAN DEBT MARKET .26 3.7 INVESTMENT POLICIES & RESTRICTIONS .32

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CHAPTER4:- INTRODUCTION OF MUTUAL FUNDS ..36

4.1 CONCEPT OF MUTUAL FUND ..37 4.2 EMERGENCE OF MUTUAL FUNDS ..38 4.3 HISTORY OF MUTUAL FUNDS ...39 4.4 PLACE OF MUTUAL FUNDS IN FINANCIAL MARKET 44 4.5 THE ADVANTEGES OF MUTUAL FUNDS ...47 4.6 THE DISADVANTAGES OF MUTUAL FUNDS ...50 4.7 CLASSIFICATION OF MUTUAL FUNDS ...53 4.8 WHO CAN INVEST? ...55 4.9 INVESTORS RIGHTS & OBLIGATION 55 4.10 OFFER(DOCUMENTS) BY MUTUAL FUNDS . ...57 4.11 ACCOUNTING OF MUTUAL FUNDS 59

CHAPTER 5:- MEASURING & EVALUATING OF MUTUAL FUND PERFORMANCE 63

5.1 NECESSARY FOR MEASURING MUTUAL FUND ....64 PERFORMANCE

5.2 DIFFERENT MEASURES OF FUND PERFORMANCE ..65

CHAPTER 6:- MUTUAL FUND FEES & EXPENSES 72

CHAPTER 7:- ACCOUNTING & VALUATION OF MUTUAL FUND 75

CHAPTER 8:-SECURITIES & EXCHANGE BOARD OF INDIA..79

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8.1 MANAGEMENT BOARD OF INDIA ..81 8.2 FUNCTIONS OF BOARD ..82 8.3 REGISTRATION CERTIFICATE ..83

CHAPTER 9:- RULES & REGULATIONS 87

CHAPTER 10:- PENALTIES & ADJUDICATION 92

CHAPTER 11:- SUGGESTIONS .95

GLOSSERY 100

BIBLIOGRAPHY .131

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CHAPTER 1:-

INTRODUCTION

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1. INTRODUCTION

1.1 OBJECTIVE OF THE PROJECT

Theoretical Knowledge without Practical Experience is like a Body without Soul. So without Practical implementations, theory remains no use. Hence we need to gain the Practical Experience. And what better would be, then a Project work for the same.

Also as a part of our MBA curriculum, we need to undergo the training programmed for minimum of 60 days, in a company.

I selected area of MUTUAL FUND INDUSTRY, which pools the funds & reduces risk by investing in different diversified assets. I studied as to how this industry proves to an option for the investors, by studying the performance of mutual funds for few months considering their Net Asset Values.

Hence this is a project work on a Mutual Fund Analysis & Portfolio Management .

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1.2 SELECTION OF TOPIC

Generally when we decide to study the investment options available in today s complex & risky scenario, we should thoroughly evaluate the option upon various factors. These factors should include:

The Past Performance of the option under study

Risk adjusted returns from the invested plan Share in the Portfolio Policy

Fund House

When observed the above parameters for the evolution of The Financial Performance of the option under study, then immediate concept that clicks our mind is MUTUAL FUNDS . So for this, I have selected Mutual Funds performance to study as investment option.

Study of Mutual Fund includes

Study of Equity, Debt, Bonds, Securities, etc.

Investment Decision Risk Measurement & risk diversifications Portfolio Management

Analyzing the Option (a Particular Security/ Instrument).

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1.3 OBJECTIVE OF THE STUDY

Vision is a long term policy & to reach there you can t just leap & jump. To there the stairs of objectives need to be climbed successfully an so objectives of this project are

How to find the RIGHT SCRIPT to buy & sell at RIGHT TIME , thereby mobilizing the saving aptly.

How to get good return on investment

How to achieve Capital appreciations

How to form a right PORTFOLIO & How to invest in

RIGHT PORTFOLIO . To analyze the performance of Mutual Funds.

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1.4 METHODOLOGY OF THE PROJECT

Defining objective won t suffice unless & until a proper methodology is to achieve the objectives.

1. The methodology of the project here is to analyse the investments Opportunities available for the investors & study the returns & risk involved in various investment opportunities.

2. Study of investment management, risk management & portfolio

Diversification.

3. The methodology of the project here is to analyze the Mutual Fund performance based on:-

NAV (NET ASSET VALUE) :- It tracked the daily NAV s Of the Mutual Funds to compute the performance.

Total Return Basis: By taking into account dividends distributed by the funds between the two NAV s change To arrive at a total return.

Portfolio turnover Ratio: This means the Amount of Buying

& selling done by a fund.

Asset Purchased/ Sold

PTR= Funds Net Assets

Study Financial & Legal obligations of Mutual Funds.

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1.5 SCOPE OF THE STUDY

The study encompasses different aspects from point of view of investors as follows.

1. Investment portfolio selection 2. types of Mutual Funds 3. Expected returns on investment 4. Investment in Tax Saving Schemes.

Despite various problems, India Could still have a lot of profitable opportunities to offer in this sector. And given the fact it is the major emerging market to open up. It is equally important that, even if its various Fund Investments can harness a small part of the total funds available internationally, Indian Foreign Exchange reserves will shoot up.

According to World Bank Study, portfolio investment in the emerging markets will rise above a massive $100 Billion by 2002. Actual figures are yet not published for the same.

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1.6 LIMITATIONS OF THE STUDY

This project is not funded one, hence it gets restricted to a mere in

depth study & few guidelines for investors. This study is carried out in pursuance of curriculum MBA, which

is mandatory for period of two months; hence exhaustive data is not available upon which conclusion can be relied upon.

NAV are prone to environmental factors 7 which would influence

the value during trading.

Investments in Securities carry risks & Mutual Fund units are no

exception.

Risk being erosion in the Market value of the Investment of

decrease in the percentage dividends declared by the Mutual Fund. The risk factors inherent in a Mutual Fund Schemes are the schemes, market risk, & the investment experience of the Asset Management Company.

Factors affecting the Market Price of Investment may be due to

Market forces, performance of the companies, Govt. Policies, Interest rates & so on.

Study for all the existing Mutual Fund Schemes is not feasible, Sample schemes of all Mutual Fund Types are considered for

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the Study.

CHAPTER 2 :-

PROFILE OF THE ORGANIZATION

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2. PROFILE OF THE ORGANIZATION

VANTAGE INSURANCE SERVICES PVT. LTD. VANTAGE WEALTH MANAGEMENT SOLUTIONS PVT. LTD.

2.1 A] COMPANY PROFILE:-

Vantage is Financial intermediary with diversified presence across various Financial services encompassing a range of Risk & Wealth Mgmt. solutions with a PAN India presence spreader across- Mumbai, Pune, Bangalore, Chennai, Hyderabad & Gurgaon, the group has created a mark in the Financial Services market with the unique concept of being a one stop solution for Corporates & Individuals catering to needs in the field of Insurance- Life & General, Investments, such as Mutual Funds, Fixed Income Instruments, Portfolio Advisory, Life stage planning among others & also Tax Planning.

Vantage Wealth Mgmt. is primarily focused on an end to end solutions provider for all investment & insurance needs of an Individual. Vantage Insurance Services, an IRDA mandated, Direct Insurance Broker, with a License in both Life & General Insurance is focused on providing the best

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Risk Mgmt. solution to a Corporate. A synergy of both the group companies offers a wide array of services & products to suit Individual & Corporate needs.

Later, it forayed into the Register & Share transfer activities & subsequently into Financial Services. All along, Vantage Group is Strong ethic & Professional background leveraged with Information Technology enabled it to deliver quantity to the individual.

A decade of Commitment, Professional Integrity & Vision helped Vantage to achieve a leadership position in its field when it handled the number of issues ever handled in the history of the Indian Stock Market in a year.

Thereafter, Vantage Group made inroads into a host of Capital market services- Corporate & Retail which provided to be a sound Business Synergy. Today, Vantage has assessed to millions of Indian Shareholders, besides companies, Banks, Financial Institutes & regulatory agencies. Over the Past one & decades, Vantage has evolved as a veritable link between Industry, Finance & people.

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2.1 B] COMPANY MISSION

We endeavor to move beyond a Transactional Approach in Insurance Broking & Investment Advisory to faster growth of Consultative relationship with our Clients aimed at delivering an Integrated Solution in the areas of Risk & Wealth Management.

To achieve & retain leadership, Vantage Group shall aim for complete Customer Satisfactions, by combining its Human & Technology Resources, to provide superior quality Financial Services.

QUALITY OBJECTIVES

As per the Quality Policy, Vantage Group will:-

Build in-house processes that will ensure transparent & harmonious relationships with its Clients & Investors to provide high quality of services.

Establish a partner relationship with its Investors Service agents & Vendors that will help in keeping Commitments to the Customers.

Provide high quality of Work Life for all its Employees & Equip

them with adequate Knowledge & Skills so as to respond to Customer s needs.

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Continue to uphold values of Honesty & Integrity & Strive to

Establish unparalleled standards in Business ethics.

Use State-of-the art Information Technology in developing new & Innovative Financial Products & Services to meet changing needs Of Investors & Clients.

Strives to be a reliable source of value added Financial Products &

Services & constantly guide the Individuals& Institutions in making A Judicious choice of same.

Strive to keep all Stale-holders (Share-holders, Clients, Employees, Suppliers & Regulatory authorities ) proud & satisfied.

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2.2 AREA OF SERVICES/ PRODUCTS RANGE

ASSETS PRODUCTS

Mutual Fund

Tax Saving Bonds

Capital Gain Bonds

State & Central Govt. Bonds

Equity Funds

SERVICES PRODUCTS

Insurance Advisory Services

Tax Advisory Services

Stock Broking Services

Investment Consultancy Services

Project Finance & Consultancy

Portfolio Management

Sub- Broker for the New Issues

BSE Trading & settlement

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NSE Trading & settlement

BUSINESS GROUPS:- Corporates Solution Groups

Personal Financial Consultancy Group

CORPORATES SOLUTION GROUPS

1. I.R.D.A recognized Direct Insurance Broker with License to intermediate in both General Insurance & Life Insurance Business.

2. Focus on delivering Integrated Risk Mgmt. solution across diverse areas such as:-

Employee Benefit Insurance PAN India more than 2, 50.000 Members covered through Vantage managed Health, Accident & Life Insurance solutions. Over 45-50 Corporates including, some of the largest most respected corporate in the IT & ITes Industry, have entrusted up with their Employee benefit Insurance Programme.

Property Insurance Including Extensive experience in Project & Machinery Insurance. Business Interruption / Loss of Profit insur -ence is another area where we have rendered our expertise to cer -tain key corporates.

Liability Insurance Experienced in delivering solution for Comp lex Global Liability Exposures worked with many leading IT & ITes companies in this area.

Specialized Risk covers including Movie & Event Insurance. 1. Web enabled solution in Employee Benefit Insurance. 2. Vantage draws Technical Expertise in Risk Mgmt.with Advisory

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Support from the core group consisting of experienced Experts From Insurance Cooperation, Valuers, Loss Assessors, Property.

PERSONAL FINANCIAL CONSULTANCY GROUP:-

Vantage is an AMFI Registered Mutual Fund Distributors.

Focus on delivering customized Financial Planning Solution keeping in a view an Individual s requirements such as:

1) Financial Goals & Investment Objective. 2) Life Insurance Coverage 3) Retirement Planning 4) Tax Planning

Online Portfolio updates.

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CHAPTER 3 :-

INVESTMENT MANAGEMENT

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3. INVESTMENT MANAGEMENT

3.1 EQUITY PORTFOLIO MANAGEMENT

An equity portfolio manager s task consists of two major steps:

a) Constructing a Portfolio of Equity shares or equity linked instrument That is consistent with the Investment objective of the fund &

b) Managing or constantly re-balancing the portfolio to produce capital

Appreciation & earning that would reward the investors with superior Returns.

STOCK SELECTION

The equity Portfolio manager has available to him a whole universe of equity shares & other instruments such as preference shares, warrants or convertible debentures issued by many companies. However, more specially, the equity portfolio manager will choose from a universe of shares in accordance with:

A) The nature of the Equity instrument, or a particular stock s unique characteristics, &

B) A certain investment styles or Philosophy in the process of choosing.

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3.2 EQUITY FUNDS

Form categories based on risk-return profile - Diversified , Index , Sectorial & Specialized

Form categories based on fund manager s style - Value and Growth Evaluate Performance - Peer Group and Benchmark comparison

Consider Structural Characteristics - Size of the Fund - Fund History - Portfolio Manager Experience - Cost of Investing: Expense Ratio

Consider Portfolio Characteristics - Percentage Cash - Portfolio Concentration - Market Capitalization of Fund - Portfolio Turnover: Churn - Portfolio Risk Characteristics

R-squared

Beta

Dividend Yield - High R Squared , Low Beta And High Dividend yield preferred

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OTHER VARITIES OF EQUITY FUNDS

Specialized Funds:-

1) Sector Funds 2) Offshore Funds 3) Small Cap Equity Funds 4) Option Income funds - writes options

5) ELSS - Indian Variety 6) Equity Index Funds 7) Value Funds 8) Equity Income Funds - invest in co. with higher dividend yields

i.e. Power/utilities

Other Equity Oriented Funds:

Hybrid Funds -Balanced Funds -Growth & Income Funds -Assets Allocation Funds

Commodity Funds

Real Estate Funds

Debt Funds :

Diversified Debt Funds Focused Debt Funds

Sector / Specialized / Offshore Municipal bonds / infrastructure cost bond funds Mortgaged backed

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High yield debt funds Assured Return Funds - Indian variety Liquid Funds

3.3 TYPES OF EQUITY INSTRUMENTS

Ordinary Shares:

Ordinary Shareholders are the true owners of the company, & each share entitles the holders of ownership privileges such as dividends declared by the company & voting right at the meetings. Losses as well as profits are shared by the equity shareholders. Without any guaranteed income or security, equity share are risk investment briefing with them potential for the capital appreciation in return for the addition that the investors undertakes in the comparison to debt instrument with guaranteed income.

PREFERENCE SHARES

Unlike equity share, preferences share entitled the holder to dividend at the rate subject to availability of profit after tax. If preference shares are cumulative, unpaid dividend for years of inadequate are paid in subsequently year preference share do not entitled the holder to ownership privileges such as voting right at the meeting. This preference shares are generally redeemed after certain period.

EQUITY WARRANTS

These are long terms right offer holder the right to purchase equity share in a company at a fixed price (Usually Higher than current Market Price) within the specified period. Warrants are in the nature of option on stocks.

CONVERTIBLE DEBENTURE

As the term suggest, this are fixed rate debt instrument that are covered into a specified number of equity share at the end of specified period for Ex.- A

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company may issue 10% CD for Rs. 100 each that would be conversed into 5 equity share after 2 years. That is a holder of 1 debenture at the time issue would become a holder of 5 equity share in the 2 years time.

3.4 EQUITY CLASSES

Equity shares generally classified on the basic of either the market capitalization or the anticipated movement of the accompany earning. It is a imperative for the Fund Manager to understand these elements of the stocks before he selects form the inclusion in the portfolio.

CLASSIFICATION IN TERMS OF MARKET CAPITALIZATION

Market is the equivalent to the current value of a company i.e. current market price per share time per the number of outstanding shares. There are large capitalization company, Mid-cap Company & small company. Different scheme of a fund may define there fund objective as a preference for large or mid or small-cap companies shares. Large cap share are more liquid & hence easily tradable. Mid or small cap share may be thought of as having to track this different classes of share.

CLASSIFICATION IN TERMS OF ANTICIPATED EARNING

In terms of anticipated earning of the share are generally classified on the basis of their market price in relation to one of the following measures:-

1] PRICE / EARNING RATIO (P/E Ratio)

Price/ Earning ratio is a price of share divided by the earning per share & indicates weather the investors are willing to pay for a company earning prudential. Young &/or fast growing companies usually high P/E ratios. Established companies in nature industries may have P/E Ratios. The P/E analysis is sometimes supplemented with the rate such as Market Priceto Book Value & Market Price to cash flow per share.

2] EARNING PER SHARE (EPS)

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Earning per Share is the amount of total earning received on each share. The values of EPS are got by dividing total earning by number of shares. Thus more the EPS more beneficial is for the Shareholder.

3.5 DEBT PORTFOLIO MANAGEMENT

Debt portfolio has to contend with the construction & management of portfolio debt instrument, the primary objective of generating income. Just as the inquiry fund manager has to go through a stock selection process, a debt fund manager has to select from whole universe of debt securities he wants to invest in.

Classification of Debt Securities

Many instruments give regular income. However, in the context of debt

mutual funds, manager invest only in market-trader instrument (not in loans as done by the bank) debt instrument may be secured by the assets of the borrowers as in case of corporate, or be unsecured as is the case with Indian Financial Bond.

A Debt is issued by a borrower & is often known by the issuer category thus giving us Government security & Corporate Securities or FI Bonds. Debt instrument are also distinguished by their maturity profile. Thus, instrument issued with short term maturities, typically under one year maturities are classified as Money Market Securities instrument carrying Long then one year maturities are generally called Debt Securities.

Most debt securities are interested bearing. However, there are securities that are discounted securities or zero coupon bonds that are generally fixed that pay interest on a Floating Rate basis. There are lots of new instruments coming in the debt markets.

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3.6 A REVIEW OF THE INDIAN DEBT MARKET

Instruments in the Indian Debt Market

The objective of a debt is to provide investors with a stable income stream. Hence, a debt fund invests mainly in instrument that yields a fixed rate of return & where the principal is secured. The debt market in Indian offers the following instruments for investment for by Mutual Funds.

Certificates of Deposits

Certificates of Deposit (CD) are issued by scheduled commercial banks excluding regional rural banks. These are unsecured negotiable promissory notes. Banks CDs have a maturity period of 91 days to one year, while those issued by FI s have maturities between one & three years.

Commercial Paper

Commercial Paper (CP) is a short term, unsecured issued by corporate bodies (Public & Private) to meet short-term working capital requirement. Maturity varies between 3 months & 1 year. This instrument can be incorporated in Indian. CP s can be issued to NRI s on non-repatriable & non- transferable basis.

Corporate Debentures

The debentures are usually issued by manufacturing companies with physical assets, as secured instruments; in the form of certificates they are

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assigned a credit rating by rating agencies. Trading in Debentures is generally based on the current yield & market values are based on yield of maturity. All publicly issued Debentures is listed on exchange.

Floating Rate Bonds

These are short to medium term bearing instruments issued by the financial intermediaries & corporate. The typical maturity of these bonds is 3 to 5 years. FRB s issued by Financial Institutions are generally unsecured while those from private corporate are secured. The FRB s are pegged to different reference as much as T- bill or bank deposits rates. The FRB s issued by the Government of Indians are in the form of Stock Certified of issued by credit to SGL accounts maintained by the RBI.

Government Security

These are medium to long term interest bearing obligations issued through the RBI by the Government of India & State Governments. The RBI decides The cut-off on the basis of bids received during the auctions. These are issued where the rates are pre-specified & the investor s only bids for the quality. In most cases, the coupon is paid semi annually with bullet redemption features.

A large part of the trading is concentrated in those government securities that are eligible for repost (repurchase) transition, i.e. sale of a security with a parallel agreement to repurchase the same at a future date. The RBI acts as the depository, its public debt office maintain an SGL account for various banks & Financial Institution, & issues or transfers the securities in the form of book entries made in SGL accounts. If a fund does not have an SGL account, it may open a constitution account with any RBI- registered bank.

Treasury Bills

T- Bills are shortly obligation issued through the RBI by the Government of India at a discount the RBI Issues T-Bills for different tenures: 14 days, 91

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days & 364 days. These treasury bills are issued through an auction procedure. The yield is determined on the basis bids tendered & accepted.

Bank/ FI Bond

Most of the institutional bonds are in the form of promissory notes transferable by endorsement & delivery. These are negotiable, issued by the Financial Institution such as IDB/ ICICI/ IFCI or by commercial bank. These instruments have been issued both as regular income bonds & as discounted long term instruments (deep discount bonds).

Public Sector Undertaking (PSU) Bonds

PSU Bonds are medium & long term obligation issued by Public sector companies in which the government share holding is generally greater then 51% . Some PSU Bonds carry tax exemptions. The maximum maturity is 5 year for Taxable bonds & 7 years for Tax- Free Bonds. PSU bonds are generally not guaranteed by the government & are in the form of promissory notes transferable by endorsement & delivery. PSU bonds in Electronic form (Demat) are eligible report transactions.

Basic Characteristics of Money Market Security

Money Market fund invest always exclusively in money market security, which are instrument of under 1 Year Maturity many of them of discounted or zero coupon delivery. Money market fund portfolios may include government corporate of bank issued security. In India, certificates of deposits, treasury bills & commercial papers from the three major types of Instruments where MF s usually invest in.

Basic Characteristics of Bonds or Debt Security

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A debt fund or a bond fund generally invest a large part of its corpus in longer term fixed income in debit securities issued by government, companies or Banks/ FI s. A small part is invested in money market. In Indian context, long dated government securities, corporate debentures & FI Bonds from the bulk of debt fund portfolios.

Bonds have the following four keys characteristics set at the time of issue:

Par Value : This is the principal amount that investors will be paid upon Maturity of the bonds, & is also known as the face value.

Coupon : This is the annual rate of interest paid on the par value of the Bond to the investor.

Maturity : This refers to the term of the bond that is , the date on which the Bond that is , the date on which the issuer has to repay the principle amount of the Bond.

Call or Provision: These are included in some bond contracts to allow the issuer the option to redeem the bonds before Maturity thereby allow -ing refinance of debt at lower interest rates

Measuring of Bond Yields: Returns on a fixed income security is generally computed in the form of Current Yield or a Yield to Maturity.

Current Yield: This relates interest on a Bond to its Current Market Price by dividing the annual coupon interest by the current market price.

1) Yield to Maturity (YTM): This is a sophisticated technique of bond analysis. Posen defines YTM (also known as the bonds IRR) as the annual rate of return & investors would realize if he a bond at a particular price, & received the principal at maturity. YTM allows investors to compare bond with different coupons, maturities & price & is quoted for trading purposes. The relationship between the price & YTM of a bond is expressed by the following formula:

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PRICE= Coupon / (1+ YTM) + Coupon2 / (1+ YTM) 2 . + (Coupon Principle) / (1+ YTM) n

The inverse relation between price & YTM is important in bond portfolio management.

Yield Curve: This is the graph showing yields for bonds various maturities, using a benchmark group of bond, such as the Government Securities. This is also known as the Term Structure of Interest Rates (TRIR). This yields curve usually upwards sloping become longer maturities generally offer higher yields. This is because longer term debt carries higher risk on account of inflation & other economic factors. The yield curve is important indicators of expected trends in interest rates.

RISK IN INVESTING IN BOND:

1) Interest Rates-Risk: The price of bond will change in a direction opposite to movement in interest rates. When interest rates rises bond price will fall, thus an existing bond portfolio losing valve. A sound analysis of interest rates movement is therefore essential.

2) Reinvestment Risk: A bonds yield to maturity assumes reinvestment of interest received during the term at a constant rate. This not may be possible if interest rate changes & risk is of uncertain cash flow being reinvested at a lower rate.

3) Call Risk: If a bond has been issued with a call provision the issuer may call them back & return the proceeds to the investors whenever interest rates fall, so the borrowing can be replaced with cheaper debt. The investor thus cannot keep a high yield bond.

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4) Default Risk: A bond is a subject to the risk that is assured may default on its obligation to make timely principle & interest payments. A fund needs to assess this risk based on the bonds rating & the analysis generated by its research on issuer s cash flows.

5) Inflation Risk: When the inflation rate rises, purchasing power decline. Therefore, the value of interest payment is reduced. Investors will therefore expect higher yields in bonds. Higher interest rate will make the existing bond lose value again.

6) Liquidity Risk: This refer to the ease with which investment in a bond can be liquidated (or sold) at a price near its value. This element is important for a fund because its investments are made on behalf of unit-holder & market conditions may require the fund to liquidate a part of its portfolio within a short time.

Instruments in the market

§ Equity 1) Ordinary shares 2) Pref. shares 3) Equity warrants 4) Convertible Debentures

§ P/E Ratio § Dividend Yield § Cyclical / Growth / Value Stocks

Market Capitalization =Sum total of CMP of shares * no. of shares

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3.7 INVETMENT POLICIES AND RESTRICTION

Investment Policy: Investment Policies of each scheme are dictated by its investment objective as stated in the offer document. In practice the board policy guidelines are included in the offer documents while the day-to-day policies are laid down by the AMC management for the fund manager to conform to fund manager do have some flexibility in alerting the strategy in the light of changing market condition & in specific selection.

Investment strategy of an equity fund will lay down guideline on which sectors & what ki8nd of companies to invest in, what percentage will be held in the form of cash or money market securities or how much in debt securities. Usually minimum & maximum allocation of funds to each class- Equity & Cash is specified.

Investment policies of a debt fund will also lay down guidelines on the portfolio & their average maturity. Minimum & Maximum percentage of Cash / money market instruments in the portfolio has to be specified too.

Investment policy of balanced funds will specify the minimum & maximum asset allocations to equity & debt / cash besides the normal guidelines for the equity & debt components.

Investment policies of the money market funds will largely specify the type of instrument preferred & their profile.

Investment Restriction by SEBI:

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While the AMC management the AMC determines the investment policies & its fund manager must also comply with the restriction imposed by regulator-mostly SEBI & in case of money market fund the RBI.

SEBI s main objective in laying down restriction on AMC s is to ensure investor protection.

The objective is attained by:

1. Maintaining minimum level of diversification in Mutual Fund Investments &

2. Ensuring that the Investor s funds are used to favour a few or associated invested in approved securities only. To attain this Regulatory objectives, some major restrictions imposed by SEBI.

Minimum Portfolio Diversification Norms

Investment in equity shares or equity related instruments of a single company are restricted to 10% of the NAV as a scheme. However the limit of 10 % does not apply in case of sector / industry specified schemes subject to adequate discloser in the offer documents. The basic objective here is to ensure that a fund a fund has an adequately diversified portfolio unless the specified objective if the scheme is to limit the investments.

Similarly for debt schemes, SEBI restricts the investment in rated investment grade debt instrument issued by a single issuer is not allowed to exceed 10% of the NAV subject to approval of board of AMC & trustee company?

These restriction do not apply to & money & government securities. SEBI s restriction on the investment in unlisted share to a minimum of 10 % of the NAV of a scheme for closed end

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scheme. In case of open ended the limits may be made more stringent to 5% of the NAV of the scheme as there is continuous purchase by investors in such a scheme.

Approved and Unapproved Investment:

1. A Mutual Fund under all its scheme taken together will not own more than 10 % of any company paid up capital voting rights. The objective is not only to assure diversified investment but also to prevent fund sponsor trying to acquire control of any company through fund investment route.

2. Scheme may invest in another scheme under the same AMC or any other Mutual Fund without charging any fees, provided that the aggregate inter scheme investment made by all scheme under the same management does not exceed 5% of the net asset value of the Mutual Fund. The objective here is to prevent an artificial inflection of fund size by inter scheme investment.

3. Debt instrument in which scheme invests must be rated as investment Grade by at least one recognized rating agency. Unrated investment could denote favors extended to a borrower or in any case do not protect the investor.

4. Mutual Funds may buy & sell securities only on the basis deliveries as Short selling or carry forward transaction is not in general consonance with Mutual Funds as investment vehicles.

5. In case of long term investment securities should be purchased or transferred in the name of Mutual Scheme. Securities cannot be held in a general account & transferred later various scheme to main certain profile or loss objective. Each investment must be done with the objective of a scheme in mind therefore be immediately assigned to a given scheme.

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6. Pending investment of funds pursuant to the objective the fund may invest the same in short term deposit of scheduled commercial banks. Case is to the scheduled banks for general investor protection.

7. Mutual Funds are not allowed to advance any loans. But lead security in accordance with SEBI s Stock Leading Scheme. Mutual Fund must invest in marketable securities not in unmarketable loans.

8. A Mutual Fund is prohibited from investing in any unlisted security or a security issued through private placement by an associated or Group Company of the sponsor. In the case of listed securities of group companies of the sponsor or group company of the sponsor, it is not allowed to invest an amount in exceed of 25% of the net assets of any of its scheme of fund. The objective is to ensure that the fund sponsor do not use investor funds to bolster their other group companies.

9. A Mutual Fund may transfer investment from one scheme to another Provided the transfer is at the current market rate & in conformity with the investment objective of the scheme to which to losses form one group of investor to another.

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CHAPTER 4:-

INTRODUCTION TO MUTUAL FUNDS

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4. INTRODUCTION TO MUTUAL FUND

4.1 THE CONCEPT OF A MUTUAL FUND

A Mutual Fund is a common pool money into which investor place their contribution that is to be investors in accordance with a stated objective. The ownership of the joint or Mutual , the fund belongs to the contribution make a single investor s ownership of the fund to the total amount of the fund.

A mutual fund is a collective investment that allows many investors, with a common objective, to pool individual investments and give to a professional manager who in turn would invest these monies in line with the common objective.

A Mutual Fund used the money collected from investors to buy those assets, which are specifically permitted by its stated investment objective. Thus an equity fund would buy equity asset- ordinary shares, preferences share, warrants etc. a bond fund would buy debt instrument such as debentures, bonds, or government securities. It is these assets, which are owns by the investor in the same proportion as their contribution bears to the total contribution of all investor put together.

Since each owner is a part owner of a Mutual Fund, it is necessary to establish the value of his part. In other words, each share or unit that investors hold needs to be assigned a value. Since the unit held by investors

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evidence the ownership of the funds asset, the value of total asset of the fund. When divided by the total number of units issued by the Mutual Fund gives us the value of one unit. This is generally called the net asset value (NAV) of the number of unit held.

4.2 EMERGENCY OF MUTUAL FUNDS

Mutual Funds now represent perhaps the most appropriate investment opportunity for most investor, as financial markets become more sophisticated & complex. Investors need a Financial Intermediary who provides the required knowledge & professional expertise on successful investing. It is no wonder then in the birthplace of Mutual Fund

the U.S.A. the fund industry has already overtaken the banking industry more funds being under Mutual Fund Management than deposited with the bank.

The Indian Mutual Fund Industry is a fast growing segment of the economy. The Industry consists of 36 Mutual Funds including Unit Trust of India. With 397 schemes spread over variety products the industry today manages assets close to Rs. 97,000 crores.

The Indian Mutual Fund Industry has already started opening up, of many of exciting investment opportunity to Indian investors. We have started witnessing the phenomenon of more saving now being entrusted to the funds than to the banks. Mutual Funds as still a new Financial Intermediary in India. Hence it is important that the investors should make proper analysis of the available scheme in the market. The investment advisor & even the fund employees acquire better knowledge of what Mutual Funds are. What, they can do for investor & what they cannot & how they function differently from other intermediaries such as the banks. The association of Mutual Funds in India has commissioned a workbook, as the basic compellation of the

39

minimum knowledge requires by both fund distributors & the employees. The workbook provided by AMFI can serve as a guide distributors & employees.

4.3 HISTORY OF MUTUAL FUNDS IN INDIA

The Indian Mutual Fund Industry began with the formation of the Unit Trust of India (UTI) in 1964 by the Government. UTI was formed as a non-profit organization governed under a special legislation, the Unit Trust of India Act, 1963. It had a monopoly up to 1987 & during this period, UTI launched a series of equity & debt schemes & established itself as a household name with assets under management of Rs. 4563 crore & unit holder accounts of slightly under 3 Million by mid 1987. UTI s growth continued up to 1996 when the strong entry of private sector players saw its share of the market reducing sharply although UTI continues to be a dominant force in the Indian Financial Services industry with assets of over Rs. 67,000 crore as of December 31, 1999.

In 1987, the Industry saw the entry of Public Sector Mutual Funds, i.e. funds promoted by public sector banks & financial institutions, such as SBI, Canara Bank, LIC & IDBI. Predictably they were given the brand of their promoters such as SBI Mutual Fund, Canbank Mutual Fund, and LIC Mutual Fund & IDBI Mutual Fund. Other Public Sector Mutual Funds also entered the market but UTI continued to remain the dominant player with a share of 84% in 1991-92.

The Government first allowed private sector participation in 1993 & the subsequent entry of a large number of players has made the industry very competitive. The diagram below shows the three segments & a few of the players in each segment.

40

UTI was started, at the initiative of the Reserve Bank of India & the Government of India. The objective then was to attract the small investors & introduce them to market investment. Since, then the History of Mutual Funds in India can be broadly divided into three distinct phases.

Phase I: 1964 87 (Unit Trust Of India)

This phase spans from 1964 to 1988. In 1963, UTI was established by an act of Parliament & given a monopoly. Operationally, UTI was set up by the Reserve Bank of India, but was later de-linked from the RBI. The first & still one of the largest schemes, launched by the UTI was Unit Scheme 1964. Over the years, US-64 attracted & probably still has the largest number of investors in any single investments schemes.

First Phase (1964- 1987) :-

Establishment of UTI in 1963.

In 1978, UTI was delinked from the RBI & the Industrial Development Bank of India (IDBI) & took over the regulatory & administrative control in place of RBI.

The first scheme launched by UTI was Unit Scheme in 1964.

At the end of 1988 UTI had Rs.6, 700 crores of assets under Mgmt.

UTI had grown large as evidence by the following statistics:

1987- 88

Amount mobilized (Cr)

Asset Under Mgt (Cr) Mobilization as % GDP

41

UTI 2175 670 3.1 %

Phase II: 1987-1993 (Entry of Public Sector Funds)

1987, Marked the entry of non-UTI public sector Mutual Funds, bringing in competition. With the opening of economy, many public sector bank & financial institution were allowed to establish Mutual Funds. The State Bank of India established the first non-UTI Mutual Fund- SBI Mutual Fund- in November 1987. This was followed by Can Bank Mutual Fund ( launched in December, 1987), LIC Mutual Funds ( launched in 1989 ) & Indian Bank Mutual Funds ( launched in 1990 ) followed by Bank Of India Mutual Fund, GIC Mutual Fund & PNB Mutual Fund.

The private sector players, after an indifferent start in the early years, have made a strong impression especially in the larger cities, with a high quality of fund management, sales & customer service. This sector has dented UTI s dominance resulting in a falling market share towards the end of the last millennium.

Assets under Management June 30, 2000 Sep. 30, 2001

UTI 57.09 % 53.60 % Bank Sponsored 3.66 % 3.78 % Institutions 4.12 % 4.46 % Private Sector 35.13 % 38.16 % Total 100.00 % 100.00 % Total ( Rs. In Crore ) 97953 91811

OPEN END

CLOSE END

ASSURED RETURN

TOTAL

INCOME 85 28 29 142

42

GROWTH 96 15 - 111 BALANCED 31 4 - 35 LIQUID/ MONEY MARKET

28 - - 28

GILT 24 - - 24 ELSS 19 52 - 71 TOTAL 283 99 29 411

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

1987 marked the entry of Non- UTI, Public Sector Mutual Fund setup by Public Sector Banks & LIC of India & General Insurance Corporation of India (GIC)

SBI Mutual Fund was the First Non-UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec.1987), Punjab National Bank Mutual Fund (Aug.1989), Indian Bank Mutual Fund (Nov.1989), Bank of India (Jan.1990), Bank of Baroda Mutual Fund (Oct. 1992).

LIC established its Mutual Fund in June 1989 while GIC had setup its Mutual Fund in Dec. 1990.

At the end of 1993, THE Mutual Fund Industry had assets under Mgmt. Of Rs. 47,004 Crores.

Gilt Funds

1. Next only to money market fund in risk order 2. Gilts- government securities with medium to long term maturities over one year 3. Investment in government paper called dated securities 4. Negligible risk of default 5. Risk arising out of changes in market price of debt securities 6. Debt securities prices fall when interest rate rise.

Debt Funds

1. Invest in debt securities issued not only by government but also

43

Corporate & financial institutions 2. Target low risk & stable income 3. Higher price fluctuation risk as compared to money market funds

due to significantly higher maturity period exposures 4. Higher credit risk than gilt funds due to corporate profile 5. Do not target capital appreciation; generate high current income &

distribution substantial part of surpluses to investors.

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

1993, the entry of Private Sector a new era started in the Indian Mutual Fund Industry, giving the Indian Investor a wider choice of Fund Family

Also 1993, was the year in which the First Mutual Fund Regulation came into being, under which all Mutual Fund expects UTI were to be register & Governed. The Kothari Pioneer (now merged with Franklin Temleton) was the First Private Sector Mutual Fund registered in July 1993.

In 1993 SEBI (MF) Regulations were substituted by a more Comprehensive & revised MF Regulations in 1996.

At the end of Jan.2003 there were 33 MF with Total Assets of Rs.1,21,80 5 Crore. The UTI with Rs.44, 541 Crores of Asset under Mgmt. was way

ahead of other MF Industry has witnessed several Merges & Acquisitions.

Fourth Phase (Since Feb. 2003):-

In Feb.2003, UTI was bifurcated into two separate entities. 1. One is the specified Undertaking of the UTI with assets under Mgmt. of Rs. 29,835 Crores as at end of Jan.2003, functioning under an administrator & under the rules framed by Govt. of India & does not come under preview of MF Regulation. 2. The second is UTI MF Ltd. Sponsored by SBI, PNB, BOB & LIC. It is Registered with SEBI & Functions under the MF Regulations.

Bifurcation of UTI in Mar.2000 more than Rs. 76,000 Crores of assets Under Mgmt. & with the setting up of a UTI MF conforming to the SEBI

44

MF Regulations.

At the end of Sept.2004, there were 29 Funds which Manages assets of Rs. 1, 53,108 Crores under 421 Schemes.

4.4 PLACE OF MUTUAL FUND IN FINANCIAL MARKET

Indian household started allocating more of their saving to the capital market in 1980 s with the investment flowing into equity & Debt instrument beside the conventional mode of the bank deposits.

Until 1992 Primary Market investors were assured good return as the price of the new equity issues was controlled. After Introduction of free pricing of shares & with greater volatility in the Stock Markets, many investors who bought over priced shares lost money & withdrew from the markets altogether. Even those investors who continued as direct investors in the Stock Market realized that the key to the successful investing on the capital markets lay in the building a diversified portfolio that in turn require substantial capital. Besides selecting securities with growth & income was not possible for all investor. Under similar circumstances in other countries, Mutual Fund had emerged as Professional Intermediaries.

Besides providing the expertise in stock market, investing these funds allows investing in small amount& yet holding a diversified portfolio to limit risk. In India, Unit Trust of India occupied this place as the only capital market intermediary Institution is emerging in India, as elsewhere as a good alternative to direct investing in the Capital Market.

Mutual Funds serves as a link between the saving public & the capital market in that they mobilized saving from investors & bring them to borrower in the Capital Market. By the Very nature of their activities & by virtue of being knowledgeable & informed investors , they influence the Stock Market & play an active role in promoting good corporate

45

governance, investor protection & the health of capital market. Mutual Fund have imparted much needed liquidity into the financial system & challenged the hitherto dominant role of banking & financial institution in the Capital Markets.

Mutual Fund Operation Flow Chart:

FUND MANAGER

SECURITIES

RETURNS

INVESTORS

46

Organization of a Mutual Fund :

MUTUAL FUND - FRAMEWORK- India

Fund Management

Registrar Custody

Marketing Operations

Distribution

Trustee Company

Sponsor

Asset Management Company

Fiduciary responsibility to

the

Investors

Bank

Brokers

Markets

Structure

Trust

Trustee

Asset Management

Company

Scheme 1

Scheme 2

Scheme 3

Other Service

Providers

Sponsor

Foreign

Partner

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4.5 THE ADVANTAGES OF MUTUAL FUNDS

Portfolio Diversification: Each Investor in a Fund is a part of the funds entire asset, thus enabling him to hold a diversified investment Portfolio even with a small amount of investment, which would otherwise requires big capital.

Professional Management: Even if an investor has a big amount of Capital available to him, he benefits from the professional management Skill brought in by the fund in the management of the investor s portfolio. The investment management skills, along with the needed research into available investment option, ensure a much better return than what an Investor can manage on his own. Few investors have the skill & resource

of their own to success in today s fast moving, global & sophisticated markets.

48

Reduction / Diversification of Risk: When an investor invest directly, all the risk of Potential loss is his own, weather he places deposits with a company or bank, or buys a share debenture on his own or in any other instrument benefits of a collective investment vehicle is from the Mutual Fund.

Reduction of Transaction Costs: What is true of risk is also the transaction costs. The investors bear all the cost of investing such as brokerage or custody of securities. When through a fund, he has the benefit of economic of scale; the fund pay lesser costs because of large volume, a benefit passed on to is investor.

Liquidity : Often, investors hold share or bonds they cannot directly, easily & quickly sell. When they invest in the units of a fund, they can generally case their investment any time, by selling their units to the fund if open-ended , or selling them in the market if the fund is closed end. Liquidity of investment is clearly a big benefit.

Open-ended -Assures liquidity -As liquid as the banks. Close-ended -Buying and selling can be done through the stock exchange

Conventional & Flexibility: Mutual Fund Management companies offer many investors services that a direct market investor cannot get. Investors can easily transfer their holding form one scheme to the other,get updated market information, easy to Invest, Reduces excessive Paperwork etc,

Safety: SEBI & RBI have a control over Mutual Fund Making investme nt in Mutual Fund a safe investment. A very good example here quoted can be of Government of India coming to rescue of UTI s US- 64 Schemes.

49

Affordability: -Provides an opportunity for a small investor -Invest as less as an amount of

Wide Choice: -Offers a Varieties of Schemes -Meet the investment needs of all Investors

MF s and Tax Benefits: Income Tax Benefits

-Equity funds - 10% TDS -Debt Funds - Dividends are taxable

Capital Gain Benefits - Section 112 (1) -Long term capital gain tax of 10% without indexation, or -Long term capital tax of 20% with indexation

50

4.6 THE DISADVANTAGES OF MUTUAL FUNDS

No Control Over Costs: An investors in a Mutual Fund has no control Over the overall cost of investing. He pays investment management fees

Mutual Funds: A Packaged Product

Professional

Management

Convenience

Tax Benefits

Liquidity

Diversification

51

as long as he remains with the funds, in return for the professional manag ment & research. Fees are payable even while the value of his investment may be declining. A mutual fund investors also pays fund distribution costs, which he would not incur in direct investing.

No Tailor-made Portfolios: Investors who invest on their own can build their own portfolios of shares, bonds & other securities. Investing through Funds means he delegates this decision to the fund manager. The very high -net-worth individuals or large corporate investors may find this to be a constraint in achieving their objectives.

Managing a Portfolio of Funds: Availability of a large number of funds can actually mean too much choice for the investor. He may again need advice on how to select a fund achieve his objectives, quite similar to the situation when he has to select individual shares or bonds to invest in.

Developing a Model Portfolio

Work with Investor to develop long-term goals

Determine Asset Allocation of the investment

Determine the sector distribution

Select specific Fund Manager & their schemes

Model Portfolio

Creativity & forecasting

Shortcomings in Operation of Mutual Fund

1. The Mutual Funds are externally managed. They do not have emplo yees of their own. Also there is no specific law to supervise the

52

Mutual Fund in India. There are multiple regulations. While UTI is governed by its own regulations, the banks are supervised by Reser ved Bank of India, the Central Government & Insurance Company mutual regulations funds regulated by Central Government.

2. At present, the investors in India prefers to invest in Mutual Fund as a substitute of fixed deposits in Banks. About 75% of the investors are not willing to invest in Mutual Funds unless there was a promise of a minimum return.

3. Sponsorship of Mutual Funds has a bearing on the integrity & efficiency of fund management, which are key to establishing investor s confidence. So far, only public sector sponsorship or ownership of Mutual Fund organizations had taken care of this need.

4. Unrestrained fund rising by schemes without adequate supply of scrip can create severe imbalance in the market & exacerbate the distortions.

5. Many small companies did very well last year, by schemes with out adequate imbalance in the market but Mutual Funds cannot reap their benefits because they are not allowed to invest in smaller companies.

6. The Mutual Funds in India are formed as trusts. As there is no Distinction made between sponsors, trustees & fund managers, the trustees play the roll of fund managers.

7. The increase in the number of Mutual Funds & various schemes has increased competition. Hence it has been remarked by Senior

Broker Mutual Funds are too busy trying to race against each other. As a result they lose their stabilizing factor in the market.

8. While UTI publishes details of accounts their investments but Mutual Funds have not published any profit & loss Account & Balance Sheet even after its operation.

53

9. The Mutual Fund have eroded the Financial clout of institution in the Stock market for which cross transaction between Mutual Funds & Financial institutions are not only allowing speculators to manipulate price but also providing cash leading to distortion of balanced growth of market.

10. As the Mutual Fund is very poor in standard of efficiency in Investors service; such as dispatch of certificates, repurchase & attending to inquiries lead to the detoriation of interest of the investors towards Mutual Fund.

11. Transparency is another area in Mutual Fund, which was neglect till recently. Investors have right to know & asset management companies have an obligation to inform where how his money has been deployed. But investors are deprived of getting information.

4.7 CLASSIFICATION OF MUTUAL FUNDS

Types of Mutual Fund

54

By Constitution

By Investment Objective

By Nature Of Investment

By Constitution

OPEN-END: No fixed maturity Variable Corpus Not Listed Buy from and sell to the Fund Entry/Exit at NAV related prices

CLOSED-END: Fixed Maturity Fixed Corpus Generally Listed Buy and sell in the Stock Exchanges Entry/Exit at the market prices

LOAD or NON-LOAD FUNDS

TAX EXEMPT or NON-TAX EXEMPT

By Nature of Investments

Financial Assets (Equity/Debt/Money Market) Physical Assets (Metal/ Real Estate)

Diversified Growth Funds : Diversified Debt Funds

Focused Debt Funds : Sector / Specialized / Offshore Municipal bonds/ infrastructure cost bond fund

Mortgaged backed

55

High yield debt funds : Assured Return Funds - Indian variety Liquid Funds

By Investment objective / patterns

1) Growth - Equity 2) Income - Debt 3) Balanced - Equity and Debt 4) Money Market - Liquid Debt 5) Tax Saving - Equity 6) Specialized - Equity 7) Assured Return - Equity and Debt

Mutual Fund can also be classified as open/ closed ended Mutual Fund

Open Ended Mutual Fund Close Ended Mutual Fund Units available for the sale & repurchase

Unavailable

Investor can buy or redeem units from the Mutual Fund itself

Investors can buy units from fund only at IPO subsequently buying & selling at the Stock Exchange

Unit Capital is variable Unit capital is fixed Pricing at NAV +/- depending on load charges

Prices may be quoted at premium or discount on the exchange depending on perception about fund s future performance

4.8 WHO CAN INVEST?

1. Resident including : 1) Resident Indian Individual

56

2) Indian Companies 3) Indian Trust/ Charitable Institution 4) Banks / FIs/ Partnership Firms

5) NBFC s 6) Insurance companies 7) Provident Funds

2. Non- residents including : 1) NRI s 2) OCBs

3. Foreign entities : 1) FIIs registered with SEBI

4.9 INVESTORS RIGHTS AND OBLGATION

Investors Rights

1. Proportionate right to beneficial ownership of scheme s assets 2. Right to obtain information from trustees 3. Entitled to receive divided warrants within 30 days of declaration of

Dividend 4. Inspect major documents of the funds 5. Appointment of the AMC can be terminated by 75% of the unit

holders of the scheme present & voting 6. Right to approve of changes in fundamental attributes of a close

ended schemes so that they can redeem 7. Receive Annual Reports & A/C Statements

Legal limitations to Investors Rights

1. Unit holders cannot use the Trust 2. Can imitate legal proceeding against trustees 3. Buyers beware

57

4. Sponsor of Mutual Funds have no obligation to meet any shortfall in the assured return-unless explicitly guaranteed in the offer document

5. No rights to a prospective investor

Minimum portfolio diversification

1. Equity schemes- single company under 10% of NAV, not applicable to index & sector funds

2. Debts funds- single issuer not more than 15% of NAV, can be relaxed to 20% with approval of trustees % AMC

3. Unrated as well as rated but below investment grade, not more than 10% of NAV per issuer

4. All such issuers put together not more than 25% of NAV.

Investors Obligations

1. Carefully study the offer document before investing 2. Monitor his investment in a scheme by referring Financial statements,

performance updates & research report sent by the AMC 3. Complaints readdress 4. SEBI entertains complaints

Required sponsor to appoint compliance office who has to give due diligence certificate can remove AMC with 75% vote to this effect. No recourse to any company law.

4.10 OFFER ( DOCUMENT) BY MUTUAL FUND

Contents of an offer document

58

1. Summary information- at a glance 2. Type of scheme growth / income / balanced 3. Name of AMC 4. Price of units 5. If assured return-name of guarantor 6. Opening & Closing dates of the schemes 7. Disclaimer clause of SEBI 8. Details of the sponsor & the AMC 9. Description of the scheme & the investment philosophy 10. Terms of issue 11. Historical statistics 12. Investors rights & services 13. Abridged offer document/key information memorandum with

application form

Significance

Legal document that protects and governs the right of the investor to information

Is the primary vehicle for the investment decision

Is the operating document and describes the fundamental attributes of schemes.

One of the most important sources of information for the prospective investor

Is a reference document for the investor to look for relevant information at any time.

Mandatory Information

§ Details of the Sponsor § Description of the scheme and investment objective/strategy

59

§ Terms of issue § Historical statistics § Investors Rights and Services

Key Information Memorandum that is distributed with the application form is an abridged version of the offer document.

Investment Options & Features

Options

Growth

Dividend and Dividend Reinvestment

Plans

Systematic Investment Plan - SIP

Value Averaging Plan - VAP

Systematic Withdrawal Plan - SWP

Systematic Transfer Plan - STP

Other

Nomination facility

4.11 ACCOUTING OF MUTUAL FUND

Balance Sheet of a Mutual Fund is different from that of a bank. All the

Funds belong to the investors & are held in fiduciary capacity for them.

60

NAV : Investor s subscriptions are unit capital rather than deposits or liability. Investments made on behalf on investors are reflected on assets side There are liabilities but of strictly short term nature.

NAV= (Market value of investment + Receivables + Other Accrued income + Other Assets) (Accrued Expense + Other Payables + Other Liabilities) / No: of Units Outstanding as at NAV date.

NAV of all schemes to be calculated & published daily. Close- Ended schemes that are not mandatory required to be listed on Stock Exchange may declare NAV once in a month or quarter as permitted by SEBI.

Mutual Fund NAV is affected by four set of factors Purchase & sale of investment securities

Valuation of all investment securities held

Others assets & liabilities

Units sold or redeemed

Other assets include any income due to the fund but not actual received as on the valuation date. Other liabilities includes similar liabilities include similar liabilities. These are to be accounted for on an accrual basis. Major expenses like Mana gement fee to be accrued on a daily basis. If non-accrual does not affect the NAV by more than 1% then it may not be accrued for that valuation date.

Non-recording of addition /sales of investments transaction or Sales/purchase of units can be postponed to the next valuation date in case such non-recording is not impacting the NAV by more then 2%.

61

NAV

NAV = Net assets of scheme / No of units Outstanding

i.e. Market value of investments+ Receivables+ Other accrued income+ Other assets- accrued expenses- Other Payables- Other liabilities

No. of units outstanding as at the NAV date

HOW NAV IS COMPUTED

§ Market value of Equities - Rs.100 crore - Asset § Market value of Debentures - Rs.50 crore - Asset § Dividends Accrued - Rs.1 crore - Income § Interest Accrued - Rs.2 crore - Income § Ongoing Fee payable - Rs.0.5 crore - Liability § Amt..payable on shares purchased -Rs.4.5 crore - Liability § No. of units held in the Fund : 10 crore units

§ NAV per unit = [(100+50+1+2)-(0.5+4.5)]/10 = [153-5]/10 = Rs. 14.80

NAV - Other information

Open end funds to declare NAV daily

62

NAV to be published at least weekly

Close end Schemes (which are not listed) may publish NAV monthly/qt with prior approval from SEBI (MIP)

NAV has to consider up to date transactions

Non - recorded transactions not to affect NAV calculation by more than 2%

§ NAV is influenced by- 1) Purchase and sale of Investment 2) Valuation of Investment 3) Other assets and Liabilities 4) Units sold or redeemed.

CHANGE IN NAV

FORMULA :

For NAV change in absolute terms = (NAV at end of period - NAV at beginning of period) * 100 NAV at beginning of period

For NAV change in annualised terms = ( NAV change in % in absolute terms) * (365 / No. of days)

Loads

§ Entry Load or front ended load Paid at the time of purchase Sale Price = NAV / (1- Sales Load, if any)

63

§ Exit Load or back ended load Paid at the time of exit Redemption Price = NAV/ (1+ Exit Load)

§ Contingent Deferred Sales Load (CDSL) Deferred exit load depending on the period Also known as deferred load

Sale Price

§ Sale Price is the price at which units are sold to investors. § Sale Price = NAV + Entry load § Formula for computation of Sale Price =

NAV/ (1-Load) Assuming an entry load of 2% in the earlier NAV computation example Sale Price = 14.80/ (1- 0.02)

= 15.10

64

CHAPTER 5 :-

MEASURING & EVALUATING FUND PERFORMANCE

5. MEASURING & EVALUATING OF MUTUAL FUND

65

5.1 NECESSARY FOR MEASURING MUTUAL FUND PERFORMANCE

When an investing entrusts his saving to Mutual Fund naturally he hopes to increase wealth by seeing the value of his investment grow. Having understood the conceptual & operation aspects of Mutual Funds it is important to analyze the issues involved in the evaluation of Fund performance.

The Investor Perspective: - The investor would naturally be interested In tracking through the value of as investment whether invests directly in the markets or indirectly through Mutual Funds. He would have to make intelligent decisions on whether he gets an acceptable return on his investment in the funds selected by him. Or if he needs to switch to another fund, he therefore needs to understand the basis of appropriate performance measurement for the fund & acquire the basic knowledge of the different measures of evaluating the performance well or not, & make the right decisions.

The Adviser s Perspective: - If you were an intermediary recommend A Mutual Fund to a potential investor he would accept you to give him proper advice on which funds have a performance track record. If you want to be an effective investment adviser, then you too have to known how to measure & evaluate the performance of the different funds that are available to the investor. The need to compare different fund s per formance required the advisor to have the knowledge of the correct & appropriate measure of evolution the fund performance.

5.2 DIFFERENT MEASURES OF FUND PERFORMANCE

66

§ Different valuation methods § Change in NAV § Total Return § Total Return with dividend reinvested at NAV § Change in NAV - The most common

NAV on day 1 = Rs.10 NAV on day x = Rs.12 % Change in NAV = dayx-day1/day1 * 100

= 2/10 *100 = 20 % Limitations:

Does not account for dividend Suitable only for growth plans

Total Return

NAV on day 1 = Rs.20 NAV on day x = Rs.22 Dividend = Rs.4 per unit Total Return = ((Distribution + Change in NAV)/day1 NAV)* 100 = ((4+ (22-20)/20)*100 = 30%

Limitation: Does not account for reinvestment

§ Return on Investments - most suitable § NAV on day 1 = Rs.20 § Dividend = Rs.4 per unit NAV at Rs. 21 § Div reinvested = Rs (4 /21) = 0.19 units allotted § Total units = 1.19 (original +new allotted) § NAV at year end = Rs.22 § Total Return = (NAV on year end*total units )-day1

NAV)/ day 1 NAV* 100 = ((22*1.19) - 20))/20*100

= 30.9%

Performance Measure

67

Section one:

Equity Funds: NAV Growth

Total Return

Total Return with reinvestment at NAV annulized Return & Distributed

Computing Total Return (per share Income & Expenses, Per Share Capital Change , Ratio, Share Outstanding )

The expenses Ratio Portfolio Turnover Rate Fund Size

Transaction Cost

Cash Flow Leverage

Debt Funds: Peer Group Companies

The Income Ratio Industry Exposure & Concentration NPA s

Besides NAV Growth

Expenses Ratio

Section Two: Concepts of benchmarking for performance evolution

Performance benchmarking in the Indian Contest

Active Fund Performance against market indices as bench Mark

Debt Fund-interest rate on alternative investment as bench

68

Mark.

Total Return Index

Money Market Funds Short Term Govt. Instrument Interest rates as benchmarks.

Section Three: Tracking a funds performance Newspaper, Periodicals, Research, Annual Report, Prospectus, Reports from Tracking agencies, Internet & Interpretation of Data.

Other Parameters

§ Expense ratios - indicates fund efficiency and cost effectiveness § Portfolio Turnover ratio - measures amount of buying and selling

done by the fund § Transaction cost § Fund size § Cash holdings

Working of Mutual Fund & Their Performance :- It needs to be certified that MF invest their funds in Capital market instruments such as Shares,

69

Debentures, Bonds, & Money Market Instruments & therefore the NAV of such investments will reflect the market values of underlying assets. These Market values fluctuate & therefore the NAV of the MF Schemes also fluctuate. All the capital market instruments have varying degrees of risk, the Degree of risk being the highest in equities & the risk factor is highlighted in the respective offer documents as well as in the abridged offer documents.

The investors therefore are in the full knowledge & understanding of the risks involved in various schemes. As per SEBI Regulation all MF disclose their portfolio periodically & all open-ended Funds offer exit option to investors at NAV based price.

RISK RETURN GRID

Risk / Tolerance / Return Excepted

Focus Suitable Products Benefits offered by MF

Low Debt Bank / Company FD, Debt Funds

Liquidity, Better post- Tax Returns

Medium

Partially Debt, Partially Equity

Balanced Funds, some Diversified Equity Funds & some Debt Funds, Mix of Shares & FD

Liquidity, Better Post- Tax Returns Better Mgmt, Diversification

High Equity Capital Market, Equity Funds ( Diversified as well as Sector )

Diversification, Expertise in Stock Picking, Liquidity, Tax

70

The Risk Return Trade-off

Free Dividends.

Risk

Potential for return

Liquid Funds

Debt Funds

The Risk Return Trade-off

Growth Funds Aggressive, Value,

Growth

Balanced Funds

Sectoral Funds

Gilt Funds, Bond Funds, High Yield Funds

Ratio of Debt : Equity

Hedge Funds

71

56%63%

86%

37%

14%

44%

1 year

3 year

5 year

Equities are the best long term bet percentage of studied period in which

Other investment outperformed

Stocks outperformed

Source : RBI Report on Currency and Finance (1997-98) BSE Sensitive Index of Equity Prices - BSE

72

9.2%7.62%

9.74%

14.47%

20.16%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Inflation Gold Bank FD Co. FD Equities

Inflation Gold Bank FD Co. FD Equities

Source: RBI report on Currency & Finance (1997-98); BSE Sensitive index of Equity prices -

BSE

Equities are the best long term bet Cumulative annualised returns (1980 - 98)

9.2%7.62%

9.74%

14.47%

20.16%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Inflation Gold Bank FD Co. FD Equities

Inflation Gold Bank FD Co. FD Equities

73

CHAPTER 6:-

MUTUAL FUND FEES & EXPENSES

74

6. MUTUAL FUND FEES & EXPENSES

Initial Issue Expenses

Transaction Cost: Entry / Exit Load

CDSE for No-Load Fees

Annual Recurring Expenses: AMC Fee

Custodian Fee Registry Exp. Trustee Fee Audit Fee Marketing & Selling Exp. Brokerage Exp. Others

§ Initial Issue expenses For launching of the scheme Can charge up to 6%

§ Recurring Expenses Marketing exp including brokerage Transaction cost R&T cost Custodian Fees Audit fees etc Investor Communication s cost

§ AMC a charge Investment management fee to the fund on weekly avg. net assets.

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§ The limits are: (Subject to overall limit of 6%) 1.25% for up to Rs.100 cr of weekly avg net assets 1% in excess of Rs.100 cr. No Load schemes can charge an additional fee of 1%

§ Total Expenses that can be charged to the Fund ( excluding entry and exit loads):

Equity Debt On the first Rs.100 cr 2.50% 2.25% On the next Rs.300 cr 2.25% 2.00% On the next Rs.300 cr 2.00 % 1.75% On the balance assets 1.75% 1.50%

Based on average weekly net assets

§ Initial issue expenses Charge to the scheme capped at 6% of the initial resources raised under that scheme

§ Entry/Exit Loads - Transaction costs Sale price not greater than 107% / Re-purchase price not lower than 93% (95% for close-ended schemes) of the NAV

§ Contingent Deferred Sales Charge ( For No-Load Schemes) Ceiling For redemption within 1year 4%

For redemption within 2years 3% For redemption within 3years 2% For redemption within 4years 1%

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CHAPTER 7:-

ACCOUTING & VALUATION OF MUTUAL FUND

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7. ACCOUNTING & VALUATION OF MUTUAL FUND

Accounting Policies

§ Investments to be marked to market on market prices. § Unrealised appreciation cannot be distributed. § Purchase & sale of investments to be recognised on the trade date and

not on settlement date. § Investments to be taken as NPA if it gives no return through interest

for more than 6 months § Dividend / Bonus/ rights to be recognised on ex-dividend / ex-bonus

dates and not on declared dates. § Income receivable on Invest NOT accrued for more than 3 months

should be provided for. § For determining gain/ loss on investments - avg cost is to be taken

Mutual Fund Valuation

§ Marking to Market § Equity Valuation Norms - Listed, Unlisted, NPA, Untreated § Debt valuation norms - Listed, Unlisted, Illiquid § Money Market Instruments - valuation norms § Effect of Buybacks, Mergers § Valuation Models - CRISIL

Valuation

§ TRADED SECURITIES Last quoted closing price on the SE where principally traded If Not traded on any SE on a particular day, then earliest previous day price is taken (not more than 30 days) Valuation = MP * current holding

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§ NON - TRADED SECURITIES Stocks which are not traded for more than 30 days on any SE are valued on good faith basis by AMC within following parameters

§ Debt - YTM basis § Equity capitalization of earning or NAV or combination of both

Disclosures and Reporting

§ Audit by independent auditor § Audited Annual report every year § Un-audited accounts to be published within 1 month after March 31 &

September 30 § Within 6 months of closure, publish abridged summary of report

scheme-wise in newspapers § Summary to be forwarded to SEBI & unit holders § Full portfolio disclosure to be made within a month from the half-year

ended March 31 & September 30

§ Reporting to SEBI Annual audited accounts Six monthly unaudited a/cs Half yearly statement of movements in net assets of each scheme Qtr portfolio statement Monthly amount mobilized

§ Communication to investor Qtr portfolio Annual report

Taxation

§ Capital Gain Benefits

Long term capital gain tax of 10% without indexation

Long term capital gain tax of 20% with indexation.

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Investment Restrictions as a % of Net assets - AMC

§ Max. Investment under all schemes of the AMC in paid up capital carrying voting rights in single Co. - 10 %

§ Max. Inter scheme investments of the same AMC - 5 % (no AMC fee payable)

§ Inter scheme transfers at CMP and within the objectives of scheme § Max. Investment in listed shares of Group Co s - 25 % for each

scheme. § No investments allowed in unlisted/private placement of

group/associate cos. § Can borrow only to meet liquidity requirements. Max for 6 months &

not more than 20% of NAV of scheme.

Investment Restrictions as a % of Net Assets -Debt

§ Max. Investment in Rated paper in single Co - 15% (can be increased to 20% with approval by Board of AMC/Trustee)

§ Max.Investment in Unrated/ Rated but below investment grade in single issuer- 10% of NAV

§ Max. Investment in Unrated/Rated but below investment grade in all cost - 25% (subject to approval of Board of AMC /Trustee).

§ Restrictions not applicable to Govt. Securities/Money Market § Can only invest in marketable securities - no loans

Investment Restrictions as a % of Net Assets -Equity

§ Max. Investment in Equity/Equity related instruments of single - 10% § No restrictions in case of Index Fund § Max. Investment in Unlisted Cos. - 10% in close ended & 5% in open

ended funds § Buy & Sell securities on Delivery position , No short selling/ carry

forward allowed.

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CHAPTER 8:-

SEBI

[SECURITIES EXCHANGE BOARD OF INDIA]

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SEBI

[THE SECURITIES & EXCHANGE BOARD OF INDIA ACT]

In 1992, an Act to provide for the establishment of a Board to Protect the interests of Investors in Securities & to promote the development of & to regulate the Securities market & for matters connected therewith or incidental thereto on the 30 Jan. 1992 under Section 3.

8.1 MANAGEMENT OF BOARD

A Chairman

2 Members from the Officials of the (Ministry) of the Central Govt. dealing with Finance (& Administration of the Companies Act, 1956 2 of 1934)

1 Member from the Officials of RBI.

5 Other Members of whom at least 3 shall be the whole time members.

The General Superintendence, Director, Mgmt. of the Affairs of the Board as exercise all powers & do all acts & things which may be exercised or done by the Board.

The Chairman & Members referred in clauses (1) & (4) are appointed by the Central Govt. of India & the Members referred in clauses (2) &(3) are nominated by the Central Govt. & RBI.

The Central Govt. has a right to terminate the Service of the Chairman or Other appointed Members by giving him a Notice of not less than 3 Months in writing or 3 Months salary & allowance in lieu.

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Removal of Members from Office: - The Central Govt. shall remove a Member from Office if He/ She

1. Adjudicated as insolvent

2. Unsound mind & Stands so declared by a Competent Court

3. Convicted of an Offence, involves a Moral Turpitude

4. Abused his / her Position as to render his / her Continuation in Office detrimental to the Public Interest.

Members not to Participate in Meetings in Certain Cases: - Any Member, who is a Director of a Company & who as such Director has any Direct or indirect pecuniary interest in any Matter coming up for consideration at a meeting of a Board.

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8.2 FUNCTIONS OF BOARD

Subjects to the provisions of this Act; it shall be Duty of Board to Protect the Investors in Securities to Promote & Development & to Regulate the Securities Market by such measures as it thinks fit.

Registering & Regulating the Working of Stock Brokers, Sub-Brokers, transfer agents, bankers to an Issue, trustees of Trusts deeds, Registrars to an Issue, Merchant bankers, underwriters, portfolio managers, invest ment adverse & such other intermediaries who may be associated with securities markets in any manner.

Registering & Regulating the Working of the Depositories, (Participants) Custodians of Securities, Foreign Institution Investors credit rating agencies & such other intermediaries.

Promoting & Regulating the Self- Regulatory Organization.

Prohibiting fraudulent & unfair trade practices relating to securities market insider trading in Securities.

Calling for Information from, undertaking Inspection, conducting inquiries & audits of the Stock Exchanges, (Mutual Fund) & other persons associated with the Securities market & intermediaries & self- regulatory organization in the Securities Market.

Conducting Research

Summoning & enforcing the attendance of Persons & examining them on oath.

Board to Regulate or Prohibit issue of Prospectus, offer document or advertisement soliciting money for issue of Securities.

The investigating Authority shall keep in its custody the Books, Registers, other documents & record seized under this section for such period later than the conclusion of the investigation.

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8.3 REGISTRATION CERTIFICATE

No Stock- Broker, sub- Broker, Share Transfer Agent, Banker an Issue, Trustee of Trust deed, Register to an Issue, Merchant Banker, under writer, portfolio manager, investment adviser& such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under & in accordance with the regulation made under this Act.

No Depository, (Participant), custodian of Security, foreign institutional Investor, Credit rating agency or any other intermediary associated with the Securities markets as the Board may be notification in this behalf Specify.

No person shall Sponsor or cause to be Sponsored or carry on or cause to be carried on any venture Capital Funds or collective investment Schemes including Mutual Fund, unless he obtains a certificate of Registration from the Board in accordance with the Regulations.

The Board may by order, suspend, cancel or Certificate of Registration in such manner as may be determined by Regulations.

Prohibition of Manipulative & Deceptive Devices, insider trading & Substantial acquisition of Securities & Control :-

Use or Employ, in connection with the issue, purchase or sale of any Security listed or proposed to be listed on a recognized Stock Exchange & any manipulative or deceptive device or contrivance in contravention of the provisions of this Act or the rules or the regulations made under.

Employ any device, scheme or artificial to defraud in connection with Issues or dealing in Securities which are listed or proposed to be listed on a recognized Stock Exchange.

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Grants by the Central Govt. for all Grants, fees & charges received by the Board under SEBI Act made by Parliament:-

All sums received by the Board from such other sources as may be decided upon by the Central Govt.

The salaries allowances & other remuneration of members officers & other employees of the Board & other expenses of the Board on objects & for other purposes are funded by Central Govt.

The Board shall maintain proper accounts & other relevant records & prepare an annual statement of A/C in such form as may be prescribed by the Central Govt. in consultation with the comptroller & Auditor- General of India.

Only then can the Mutual Funds hope to stage a recovery & regains some of the recent heavy losses with a reshuffling of portfolios & net appreciation in equity values.

All Mutual Funds / AMC/ Trustee Companies to be registered with SEBI

Responsible for protecting investors interest and promote orderly growth of Mutual Fund Industry

Formulates regulations, monitors performance and conduct of Mutual funds and enforces compliance to regulations through reviewing reports and regular inspections

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Reserve Bank of India & SE

RBI

Dual supervision for bank sponsored AMC s Issue concerning ownership bank promoted AMC falls with RBI

Stock Exchange (SE) Close ended MF listed of SE. Needs to comply with listing guidelines.

Office of public Trustee

MF being public trustee - governed by Indian Trust Act , 1882

Trustee Co or Board of Trustee accountable to office of Public Trustee

Public trustees reports to Charity Comm.

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Trustee and AMC to comply with Cos Act 1956

Ministry of Law & Justice

Company Law Board (CLB)

Department of Company Affairs

Registrars of Companies (ROC)

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CHAPTER 9:

RULES & REGULATIONS

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9. RULES & REGULATIONS

Legal Frame Work: - 20 Sept.1995 The Depositories Act, 1996 Companies Act, 1956 30 Jan.1992 SEBI Act 16 Feb. 1957 The Securities Contracts (Regulations) Act 1956

I] 1. Short Title, Extent & Commencement: a) This Act may be called as Depositories Act, 1956 b) It extends to the whole of India c) Come into force on 20 day of Sept. 1995

2. Definitions :- 1) Beneficial Owner means a person whose name is Recorded as such with a depository. 2) Board means SEBI est. Under section 3 of SEBI Act , 1992. 3) Bye- Laws means made by a Depository under section 26. 4) Company Law Board means the Board of Company Law Administration constituted under Section 10 E of the Companies Act, 1956. 5) Depository means a Company formed & register under the Companies Act, 1956 & which has been garneted a Certificate of Registration under Sub- section (1A) of section 12 of the SEBI Act, 1992. 6) Issuer means any person making an Issue of Securities. 7) Participant means a Person Registered as such Under, sub-section (1A) of section of SEBI Act. 8) Prescribed means a Prescribed by Rules made under this Act.

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9) Record includes the records maintained in the Form of Books or stored in a Computer or in such form as may be determined by Regulations. 10) Registered Owner means a Depository whose name

entered as such in the Register of the Issuer. 11) Regulation means Regulation made by the Board. 12) Security means Security as may be specified by the Board. 13) Service means any Service connected with the

Recording of Allotment of Securities or Transfer of Ownership of Securities in the Record of Depository.

II ] Certificate of Commencement of Business by Depositories:-

1. No Depository shall act as a Depository unless it obtains a Certificate of Commencement of Business from the Board.

2. The Board shall not grant a Certificate under sub- section; unless it is satisfied that the Depository has adequate Systems & Safeguards to prevent Manipulation of Records & Transactions.

III] Rights & Obligations of Depositories, Participants, Issuers & Beneficial Owners:-

Agreement between Depository & Participant: With one or more participants as its Agents, Specified by the Bye- Laws.

1. Services of Depository- Any Person, through a Participant may enter into an Agreement, in such form as may be specified by the Bye- Laws, with any Depository for availing its services.

Surrendered of Certificate of Security :

1. Any Person who has entered into an Agreement under section 5 shall surrendered the Certificate of Security, for which he seeks to avail the Services of a Depository.

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2. The issuer, on receipt of Certificate of Security under Sub- Section (1) shall cancel the Certificate of Security & Substitute in its Rewards the name of Depository as a registered Owner in respect of that Security & inform the Depository accordingly.

3. A Depository shall on receipt of information under Sub-section (2), enter the name of the Person referred in Sub-section (1) in its records as the Beneficial Owner.

Registration of Transfer of Securities with Depository:

1. Every Depository shall, on receipt of intimation from a Participant, Register the Transfer of Security in the name of the Transferee.

2. If a beneficial owner or a Transferee of any Security seeks to have Custody of such Security, the Depository shall inform the Issuers accordingly.

Options to Receive Security Certificate or Hold Securities with a

Depository: - Where a Person opts to hold a security with a Depository, the issuer shall intimate such Depository the details of allotment of the Securities, & on its receipt of such information the Depository shall enter in its records the name of the auoltee as the beneficial owner of that Security.

Securities in Depositories to be in Fungible Form: - Nothing contained in Sections 153, 153A, 153B, 187B, 187C & 372 of companies Act, 1956 shall be apply to the Securities held by a Depository on behalf of a Beneficial Owners.

Rights of Depositories & Beneficial Owner :- 1. Depository shall be deemed to be the registered Owner for the Purpose of effecting transfer of Ownership of Security on behalf of a Beneficial owner. 2. The Depository as a registered owner shall not have any voting rights or any other rights in respect of Securities held by it. 3. The beneficial owner shall be entitled to all the Rights, benefits & be

subjected to all the liabilities in respect of his securities held by a Depository.

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Register of Beneficial Owner: Every Depository shall maintain a Register & an Index of Beneficial Owners in the manner provided in section 150, 151, & 152 of the Companies Act, 1956.

Pledge or Hypothecation of Securities held in a Depository:

1. Every Beneficial Owner shall give intimation of such Pledge or Hypothecation to the Depository & such Depository shall there upon make entries in its Records accordingly.

2. Any entry in the records of a Depository under Sub-section (2) shall be evidence of s Pledge or Hypothecation.

Furnishing of Information & records by Depository & Issuer:- 1. Every Depository shall furnish to the issuer information about the transfer of Securities in the name of beneficial owners at such interval & in such manner as may be Specified by the Bye- Laws. 2. Every issuer shall make available to the Depository Copies of the relevant records in respect of securities held by such Depository.

Option to opt out in respect of any Security:- 1. If a beneficial owner seeks to opt out of a Depository in respect of any Security he shall inform the Depository accordingly. 2. The Depository shall on receipt of intimation under Sub- section (1) make appropriate entries in its records & shall inform the Issuer. 3. Every Issuer shall, within 30 days of the receipt of intimation from the Depository & on fulfillment of such conditions & on payment of such Fees as may be specified by the regulations, issue the Certificate of Securities to the beneficial Owner or the Transferee, as to the case.

Depositories to indemnify loss in certain Cases:- 1. Any loss caused to the Beneficial Owner due to the negligible of the Depository or the Participant, the Depository shall identify such Beneficial Owner. 2. Where the loss due to the negligible of Participant under sub-section (1) is indemnified by the Depository, the Depository shall have the Right to recover the same from such Participant.

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CHAPTER 10:-

PENALTIES & ADJUDICATION

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10. PENALTIES & ADJUDICATION

I] Penalty for Failure to Furnish Information, Return, etc

1. To furnish any document, return or report to the Board fails (A Penalty of 1 Lac Rs. for each day during which such failure continues or 1 Crore Rs. whichever is less)

2. To fail any return or furnish any information, books or other documents Within the time specified (A Penalty or 1 Lac Rs. for each day during which such failure continues or 1 Crore Rs. whichever is less)

3. To maintain books of accounts or records, fails (A Penalty of 1 Lac Rs. for each day during which such failure continues, 1 Crore Rs whichever is less)

II] Penalty for Failure by any Person to enter into an Agreement with clients- 1 Lac Rs. for each day during which such failure continues or 1 Crore Rs, whichever is less.

III] Penalty for certain defaults in case of MF- sponsoring or carrying on any collective investment schemes.

IV] Penalty for failure to observe Rules & Regulations by an Asset Management Company.

V] Penalty for failure in case of Stock Brokers

If fails to issues contract notes in the form & manner specified by the Stock Exchange of which such Broker is a member he shall be liable to a Penalty not exceeding five times the amount for which the contract note was require to be issued by that Broker.

VI] Fails to deliver any Security or fails to make payments of the amount due to the Investor in the manner or within the period specified in the Regulations.

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VII] Penalty:-

Offences : Whosever contravenes or attempts to Contravene shall be Punishable with imprisonment for a term which may extend to five Years or with fine or with both.

Power of Central Govt. to make Rules: The Central Govt. may, by notification in the Official Gazette, make rules for carrying out the provisions of this Act.

Power of Board to make Regulations

Power of Depositories to make Bye- Laws.

Establishment, Jurisdiction, Authority & Procedure of Appellate Tribunal: - Establishment of Securities Appellate Tribunals- The central Govt. shall by notification, establish one or more Appellate Tribunal to exercise the Jurisdiction, powers & authority conferred on such Tribunal by or under this Act.

Qualification for appointment as presiding officer or member of the Securities Appellant Tribunal-

Unless he is a sitting or retired Judge of the Supreme Court / High Court, shall be appointed by the Central Govt. in consultation with the Chief Justice of India or his nominee.

A member of Board or any person holding a post of senior Mgmt. level equivalent to Executive Director in the Board shall not be appointed as presiding officer or member of a Securities Appellate Tribunal during his Service or tenure as such with the Board or within 2 Yrs. from the date on which he ceases to hold office as such in the Board.

Tenure of Office of Presiding Officer & other members of Security Appellate Tribunal: - Hold office for a term of 5 years from the date on which he enters upon his office & shall be eligible for re-appointment.

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CHAPTER 11:-

SUGGESTIONS

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11. SUGGESTIONS

Strategy To Smart Investing :

Identify Objective Start early Focus long-term and stay invested Beware of the effects of inflation & taxes

The Ground Rules of Mutual Funds Investing: - Moses gave to his followers 10 Commandments that were to be followed.

1. Assess yourself-self-assessment of One s needs: Expectations & risk Profile is of Prime importance failing which one will make more mistakes in putting money in Right places than otherwise. One should identify the degree of risk bearing capacity one has & also clearly state the expectations will only bring pain.

2. Try to Understand where the money is going : It is important to Identify the nature of investment. One can lose substantially if one picks the wrong kind of MP. In order to avoid any confusion, it is better to go through the literature such as Offer Documents etc.

3. Don t rush in Picking Funds, think first: One first has to decide what what he wants the money for & it is this investment goal that should be the guiding light for all investments done. It is thus important to know the risks associated with the fund & align it with the quantum of risk one is willing to take. One should take a look at the portfolio of the funds for the purpose

4. Invest, Don t Speculate : A Common Investor is limited in the degree of risk that he is willing to take. One should attain from speculating which in other words would mean getting out of one fund & investing in another with the intention of making quick money. One could do well to remember that nobody can perfectly time the Market so staying invested is the Best option unless there are compel reasons to exit.

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5. Don t pull all the eggs in one Basket: No matter what the risk profile of a person is, it is always advisable to diversify the risks associated.

So putting one s money in different classes is generally best option as it averages risks in each category.

6. Be Regular: Investing should be a habit & not an exercise undertake at one s wishes, if one has to really benefit from them. As said earlier,

Since it is extremely difficult to know when to enter/exit the market, it is important to beat the market by being systematic. The AIP s (Automatic Investment Plans) amount on be directly transferred from the Investor.

7. Do your Homework: It is important for all investors to research the avenues available to them irrespective of the investor category they belong to. This is important because an informed investor is in a better decision to make right decisions.

8. Find the Right Funds: Funds that charge more will reduce the yield to the Investors. Investors of equity should keep in mind that all dividends are currently Tax-Free in India & so their Tax liabilities can be reduced if the dividend payout option is used. Investors of debt will be charged a Tax on dividend distribution & so can easily avoid the payout options.

9. Keep Track of your Investment: It is important to keep on track of the way they are performing in market. If the market is beginning to enter or bearish, then investor of equity too will benefit by switching to debt funds as the losses can be minimized. One can always switch back to equity if the equity market starts to show some buoyancy.

10. Know when to sell your Mutual Fund: Knowing when to exit a fund too is of utmost importance. One should book profits immediately when enough has been earned i.e. the initial expectation from the fund has been meet with. Other factors like non-performance hike in fee charged & change in any basic attribute of the fund etc. are some of the reasons for to exit.

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: When to Say Goodbye to Your Mutual Fund / Exit Point :

Not to Chase Returns

Fund is not performing

When calculating performance one shouldn t look at too short a period & make a mistake by comparing apples to oranges. It is important to base the decision on Relative Performance, & not absolute performance. When studying Relative Performance, one should look at his fund & compare it to its peers. However, comparisons should be drawn between parallels & so equity funds cannot & should be compared with debt funds. If fund has underperformed the average of its peers in all cases.

A change in life stage- A young man can afford to take more risks than a person nearing his retirement can. In such cases, it pays to withdraw money from the equity investment made earlier & put them in safer, more conservative debt funds that offer stable return without compromising on Risk.

A major change in any basic attribute of the fund- As mentioned earlier in its offer documents, the investors have a choice of getting out of it. Changes like a change in Asset Mgmt. Company, in investment style of Fund or change of structure says from closed-end to open-end etc.

Fund doesn t comply with its objectives- One of the important parameter in the selection of funds is alignment of risk profiles of the investor & Fund. The objective of the fund says a lot about how funds plan to invest.

The Fund s Expenses Ratio Rises- A small rise in an expense ratio is not a big deal, but in a case of Bond Funds on Money Market Funds, it is highly unlikely that the Fund can increase its return enough to justify an an increase in the Funds expenses.

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The Fund Manager has Changed: If it is an actively managed fund, then has to keep the eyes open on the new manager. Observing the styles, stock picking & rises under- taken by the new manager is important for it discloses a lot about how the fund might fare in the future. If satisfied one will have no reason to complain later but the process needs time, so an investor has to observe the Fund Manager for sometime before one takes a decision.

Enough has been earned- However, nothing is as important as to rein the horses in time. The primary principle behind safety of investment is to take risks that can be tolerated. Just as it is important to set realistic target that one hopes to achieve from the investment, it is also important to exit when target as excepted has been achieved irrespective of the fact that it might be generating better returns in a short-term, would be Cursing them for not exiting.

Remember : 1) Investment Decision are Long Term Decision 2) 1% Superior Return can make 20% difference in 25 yrs. 3) Understand the Virtues of Rupee Cost Averaging 4) Discipline is more Important than Intelligence 5) Avoid Wastage, look at Returns Net of Taxes

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GLOSSARY

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: GLOSSARY OF MUTUAL FUND:

Advisor- The Organization employed by a Mutual Fund to give Professio ional advice on the fund s investment & to surprise the Mgmt of its assets.

Asked- The price at which a MF s Shares can be purchased. The asked or offering price is based on the Current Net Asset Value (NAV) per Share plus any Sales Charge.

Asset Allocation Fund- A Fund that spreads its portfolio among a wide variety of investments, including domestic & foreign Stocks & Bonds some of these funds keep the proportions allocated between different Sectors relatively constant, while others alter the mix to market conditions.

Automatic Reinvestment- A service that most MF offer whereby a share holder income dividends & capital gains distributions are automatically re invested in additional Shares.

Adjusted NAV- The Net Asset Value of a unit adjusting for all changes caused due to divided declaration, bonus, etc. assuming reinvestment of distributions made to the investors at the prevailing NAV.

Age of Fund- The time elapsed since the inception of the Fund.

Alpha Co-efficient- It is the excess return of fund above risk adjusted market return, given its level of risk as measured by Beta. An Investment with a +ve indicates that the fund has under performed, for the level of risk taken by it.

Amortization- The systematic repayment (Ex. Monthly, quarterly, or Yearly) of a debt or loan such as a bond or mortgage, over a specific time Period.

Annual Report- It is yearly record of a MF Performance in a Current Year. Under SEBI s guidelines, it is distributed to investors &/or Share

Holders.

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Annual Return- The percentage change in NAV of any Fund over a

horizon of one year; assuming reinvestment of distribution such as dividend payments & bonus.

Annualized Returns- It is the absolute return over a period either greater or less than a year aggregated to a period of one year.

Applicable NAV- The applicable NAV, if the application is received before that cut-off time on a day as set by the fund. All investments or redemptions are processed at that particular NAV. A different NAV holds if received thereafter.

Arbitrage- The simultaneous purchase & selling of a Security in order to profit from a differential in the Price. This usually takes place on different exchange or market places.

Asset- Anything that has monetary value. Typical personal assets include Stocks, real estate, jewelry, art, cars, & Bank A/C. Corporate asset receive, Short & Long Term Investments, Investors, & Prepaid Expenses.

Asset Allocation- It is a means of diversifying the risk associated with a Fund & refers to the distribution of total funds available with the fund into instruments of various types such as Stocks, Bonds etc. based on the Funds investments objectives.

Asset-Backed Securities- Securities that represent a participation in, or are secured by & payable from, payments generated by Credit Cards, Motor Vehicle or trade receivables & the like.

Asset Classes- The three major asset classes are cash (Short Term investment ) Bond & Stocks.

Asset Mgmt. Company (AMC)- It is the Investment Manager for a MF. It is a Company set up primarily for managing the investment of MF & makes investment decisions in accordance with the Schemes Objectives, deed of Trust & Other provisions of the Investment Mgmt. Agreement.

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Automatic Investment Plan- A Plan introduced in MF that enables the Investor to give the mandate of allotting fresh units at specified intervals (Monthly, Quarterly) against which the investor provide postdated Cheque On the specified dates, the cheques are realized by the MF & on realization Additional Units are allotted to the investor at the prevailing NAV.

Automatic Reinvestment Plan- An investment option available to MF Unit holders in which the proceeds from either the Fund dividends, bonus etc. is automatically used to buy more units of the Funds.

Av. Cost Method- It is the method of finding out cost per unit by adding up all the costs involved in purchasing all the units of investment & then dividing the sum by the Total No. of units.

Av. Credit Quality- A measure of the Creditworthiness of debt Securities held by a Debt fund. It is weighted dv. of the Credit rating of the Securities given their relative weights in the portfolio. For these Calculation, Govt. of India Securities, Cash & call money instruments are taken as AAA Credit Quality & non-rated debt instrument are taken having BBB Credit quality.

Av. Maturity - The av. Of all maturity dates for securities in a Money market or Bond Fund. The longer av. Maturity, the more Volatile a Fund s

share price will be, moving up or down an Interest rates change.

Bank Deposits- Cash, Cheque or Draft deposited in Financial institution for Credit to a Customer s Account. Bank differentiate between demand

deposits (checking accounts on which the customer may draw) & time deposit, which pay interest & have a specified Maturity or require 30 Days notice before withdrawal.

Balanced Funds- A Class of MF that aims at allocating the total assets with it in the portfolio mix of debt as well as equity instruments.

Balanced Maturity Tenure of a Scheme- It is defined in a case of close ended schemes as the Balance period till the redemption of the Scheme.

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Balanced Sheet- A Company s Financial Statement that reports into asset, Liabilities & Net worth at a specific time.

Basic Point- Most often used relating to changes in interest rates. One Basic Point in 1/ 100 of a percentage point; therefore 1000 Basic Points make 1%. A phrase used to describe the difference in Bond Yields. Ex. If Bond A Yields 7.5 & Bond B Yields 7.25 . Then the difference is 0.25 is a Basic Point.

Bear Market- It is a period in market when investors are on a selling spree 7 the share prices are going down.

Benchmark- It is the platform or the parameter with which a scheme can be compared. For e.g. the performance of an index fund can Benchmarked against the appropriate index specified by it.

Below Investment Grade (High Yield) Securities- Lower rated, higher yielding Securities issued by corporations. They are generally rated below investment- grade (i.e. Bal/ BB+ & below) by National Bond Rating Agencies, or if unrated, are judged by the Adviser to be of equivalent quality. They are considered speculative & are sometimes called as

Junk Bonds .

Beta ( )- It is the measure of a Relative Sensitivity of a Stock or MF to a Market. The market is assigned a of 1. The higher the , more sensitive

the Stock or fund is considered to be Relative to the market as a whole. In other words, funds with more than 1 will react more to any fluctuations

(whether upward or downward) in Market than funds with B less than 1.

Blue Chip Stock- Usually high period scrip of a major corporation with a long, fairly stable record of earnings & dividend payments & with good expected future growth.

Bond- An interest bearing promise to pay a specified sum of money due on a specific date in the future (Maturity Date).

Bond Rating- An evaluation of the possibility of default by a bond issuer based on an analysis of the issuer s Financial condition & profit potential.

Bond Rating services are provided by, among others, CRISIL 7 Fitch.

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Bonus- Bonus is allocation of additional units to the investors on basis of their existing holdings. Basically, there is a split of existing units into more than one unit resulting in the reduction of the NAV per unit.

Book Value- A Company s assets, minus any liabilities & intangible assets. Book Value is literally the value of a company that can be found in the accounting ledger & is often represented as per-share value by taking

the Company s Shareholder equity & dividing by Current No. of Share outstanding.

Bottom- Up Investing- An investing approach in which securities are researched & chosen individually with less consideration to economic or market cycles.

Broker- A Broker is an intermediary who guides the Investors on one or more investment avenues available to an investor & facilitates the process of investment.

Brokerage- It is the fee payable to a Broker for acting as an Intermediary in a transaction (normally a Buy Transaction). For ex. Brokerage is paid by an investments from Investors.

BSE Index- An Index reflecting the Stock Prices of 30 Companies listed on the (Bombay Stock Exchange) which is taken to be representative of a stock market movement. It is usually considered as the Benchmark for performance evaluation of equity funds.

Bull Market- Period during which the prices of Stocks in a Stock Market keep continuously rising for a significant period of time on the back of sustained demand for the Stocks.

Bid/ Sell Price- The price at which a MF s Shares are redeemed (bought back) by the fund. The Bid or redemption price is the current NAV per share, less any redemption fee or back-end load.

Bond Fund- A MF whose portfolio consists primarily of corporate, Municipal or U.S. Govt. Bonds. These funds generally emphasize income rather than growth.

107

Capital- A amount of Money invested by an Investor.

Capital Appreciation Fund- A MF that seeks maximum Capital Apprec-

ation by investing in Companies that do not pay dividends. These Funds may use techniques involving greater than ordinary risk, such as borrow ing money in order to provide leverage, short selling & high portfolio turnover.

Capital Gains- The profit realization on sale of securities & certain other Capital assets (including units of MF) are called Capital gains. The gains can be classified into Long Term or Short Term depending on the period of holding the assets & are charged to tax at different rates. Gains on MF 12 months or more are Long Term gains.

Cash Flow- A measure that tells an investor whether a Company is actually bringing cash into the Company s Offer s.

Certificate of Deposit (CD)- CD is issued by scheduled commercial bank excluding regional rural bank. These are unsecured negotiable promissory

notes. Bank CD s have maturity of 91 Days to 1 Yr. while those issued by DFI s have maturities between 1&3 yrs.

Commission- A fee charged by a broker for executing a securities trans- action.

Compliance Officer- He/ she is the officer appointed by the AMC to Comply with various regulatory requirement to redress investor grievance associated with the Funds.

Compounding- When an investment generates earnings on reinvested Earnings.

Consumer Price Index (CPI)- An inflation tracker, much followed by the mainstream media. It is the measure of the price change in consumer goods & services.

108

Contingent Deferred Sales Charge (CDSC)- It is the sales load charged by funds in the event of redemption made within a pre-specified period of purchase.

Corporate Bonds- Fixed income securities issued by corporations.

Corpus- The total amount of money invested by all investors in a Scheme.

Cost of Churning / Turnover Cost- It refers to costs associated with the Churning (or changes made to the holdings) of the portfolio. Portfolio changes have associated costs of Brokerage, Custody Fees, &Transaction fees & registration fees which lower is the returns.

Coupon Rate- The Annual Rate of interest payable on a Debt Security, expressed as a Percentage of the face value of an Instrument.

Current Load- It refers to the Load Structure applicable currently on any fund. Funds keep revising the Load Structures from time to time.

Current Yield- The ratio of interest to the actual market price of the Bond expressed as a %:- Annual Interest = Current Yield Current Market Value

Custodian - The keeper of a Fund s Securities & other Assets.

Cut off Time- In respect of all MF regulated by SEBI, fresh subscriptions & redemptions are processed at an particular NAV. Every fund specifies a cut off time in respect of fresh subscription & redemption of units. All requests received before the cut off times are processed at that day s NAV

& thereafter at the next day s NAV.

Cyclical Stock- Stock of a company whose performance is generally related (or thought to be related) to the performance of a economy as a whole. Paper, steel & the automotive stocks are thought to be Cyclical because their earnings tend to be hurt when the economy slows & are strong when the economy turns up. Food & Drug Stocks, on the other

hand, are not considered Cyclical , as consumers pretty much need to eat & care for their Health regardless of the performance of the economy.

109

Capital Gains Distributions- Payments made usually at the end of a yr to MF Shareholders of gains realized on the sale of Securities in the MF Portfolio.

Capital Growth- A rise in market value of a MF s Securities, reflected in it s Asset Value per Share. This is a specific Long-Term objective of MF.

Confirm Date- The date at which the fund processed at your transaction, typically on the same day or a day after your Trade Date.

Debenture- A debt obligation i.e. not backed by collateral but usually rated by credit rating agencies.

Derivative- A Financial Contract whose value is derived from another underlying asset, such as Stocks, Bonds, Commodities, or a Market Index such as NSE 5O. The most common type of Derivatives are option, future & mortgage-backed Securities.

Debt / Income Funds- Funds that invest in income bearing instruments such as corporate Debentures, PSU Bonds, Gilts, Treasury Bills, C P & Certificates of Deposits.

Discount- When the market price of a listed Scheme is less than the actual NAV of the units, then it is said to be trading at a Discount.

Diversification- Spreading a risk; MF spread investments among a No. of different Securities to reduce the risk inherent in investing.

Dividend Distribution Tax - A Tax payable by a debt oriented MF (a MF that invests more than 50% of its portfolio in a debt Market) before Dividend is distributed to the unit Holders. The Current Dividend Distribution Tax is 10% plus the 10% surcharge. There is no such Tax Applicable on Open-End Equity Schemes.

Dividend Frequency-The periodicity of Dividend payout of scheme. This is especially valid in a case of an Income / Debt Schemes like monthly income plans that normally have regularity in such distributions.

Dividend History- The track record of Dividends declared by a fund till Date.

110

Dividend per Unit- Total amount of dividend declared by a fund for a Scheme dividend by total No. of units issued to all the Investors.

Dividend Plan- In a dividend plan, the fund pays dividend from time to time as & when the dividend is declared.

Dividend Reinvestment- In a dividend reinvestment plan, the dividend is reinvested in a Scheme itself & is not paid out to the investors i.e. instead of receiving dividend in cash, the unit holder receive units allotted to them at the Ex-dividend NAV.

Dividend Warrant- It is an instrument issued by Companies/ MF to an investors for the purpose of payments of dividends.

Dividend Yield- It refers to the dividend earned per unit of a Scheme at the prevailing per unit price.

Deferred Compensation Plan-A Tax- Sheltered investment plan to which Employees of state & local Govt. can defer percentage of their Salary.

Dividends- MF Dividends are paid out of income from the Schemes investments & can be announced out of the realized gains only. While dividends in the hands of investors are free from Tax, MF are now require to pay a distribution Tax dividend declared from debt oriented Scheme.

Dow Jones Index- It is an American Index similar to BSE Index. Here the Basket Comprises 30 Blue Chip American Stocks whose prices are indica -tive of a Health of a Economy.

Duration- A Calculation of the Average Life of a Bond (or Portfolio of Bonds) i.e. a useful measures of a Bond s Price Sensitivity to interest rate

changes. The higher duration No. the greater the risk & reward potential of the Bond.

Daily Dividend Fund- This term applies to funds which declare their Income Dividends on a Daily basis & reinvest or distribute monthly.

111

Distributor- An individual or a corporation serving as Principle under- Writer of a MF Shares, Buying Shares directly from the funds & reselling them to other Investors.

Distributions- Can be used to mean either withdrawal made by the owner from an individual retirement account (IRA) or payments of dividend &/or Capital Gains by a MF.

Dollar- Cost Averaging- The Technique of investing a fixed sum at a regular intervals regardless of Stock Market movements. This reduces average Share Cost to the investor, who acquires more Shares in period of lower Security prices & fewer Shares in period of High prices. In this way, investment risk is spread overtime.

Earnings per Share (EPS) - A Company s earnings, also known as Net Income or Net Profit divided by the No. of Shares Outstanding.

Equities- Shares of Stock in a company. Because they represent a propor- tional Shares in the Business, they are Equitable Claims on the Business

itself.

Entry Load - It is the Load Charged by Fund when one invests into other Fund. It increases the price of units to more than the NAV & is expressed as a percentage of NAV.

Equity Linked Savings Scheme- A special product offered by MF. These Schemes invest in equity i.e. Shares & generally have a lock-in period of 3 Yrs. The basic features of ELSS Schemes are : Tax rebate of 20% under Section 88 of the Income Tax Act on an (Maxi.) investment of Rs.10, 000/.

Equity Schemes- Schemes where more than 50% of investment are done in equity Shares of various companies.

Ex-Bonus NAV- The NAV declared post record date in case of a bonus Issues are the Ex-Bonus NAV.

Ex-Dividend Date- It is effective date of a dividend distribution. When the dividend is paid, the NAV of fund drops by the amount of dividend.

112

Ex-Dividend NAV-The NAV declared post record date is the ex-dividend NAV.

Exit Load

- It is the load charged by the Fund, when one redeem the unit

from the Fund. It reduces the price of the units to less than the NAV & is expressed as a % of NAV.

Expense Ratio

The Expenses of a MF include Mgmt. fees & all the fees associated with the Fund s daily Operations. Expense Ratio refers to the annual % of fund s assets that is paid out in expenses.

Exchange Traded Funds- Exchange traded funds are a hybrid of MF & Stock which track an underlying index. These funds have the flexibility of Trading throughout the day like a Security & also offers benefits like Diversification Professional Mgmt, low expense ratio, etc.

Equity Income Fund-A MF that invest in a portfolio of bonds & dividend - paying Stocks. While similar to growth & income funds, they are more likely to hold bonds & focus on Stocks that pay Higher-than-av. Dividend.

Exchange Privilege / Switching Privilege - The Right to transfer invest- ment from one fund into another, generally within the same fund group, at nominal cost.

Equity Linked Saving Schemes (ELSS)- These Schemes generally offer Tax rebates to the Investor under section 88 of a Income Tax Law. These Schemes generally diversify the Equity risk by investing in a wider array of Stocks across sectors. ELSS is considered as a variant of diversified Equity Schemes but with a Tax Friendly offer. Typically returns for such Schemes have been found to be between 15-20%.

Fiscal Year- A 12-Month accounting. From April 1st to March 31st.

Fixed Income Securities-Bonds & other securities that are used by issuers to borrow money from investors. Typically, the issuer pays the investor a fixed, variable or floating rate of interest must repay the borrowed amount at a specified time in the future (Maturity).

113

Floating Rate Bonds- These are Short to medium term interest bearings instruments issued by Financial Intermediaries & corporate.

Free Loading- A term used when MF Investors who have purchased load Funds switch from one fund family to another family of funds without having to pay another sales charge. Not all fund families have free loading procedures.

Face Value- The original issue price of one unit of a Scheme.

First-In, First-Out (FIFO)- A commonly used mechanism for taxation purpose of redeemed MF Shares, it is accounting method, which assumes that the units purchased first are the units sold first.

Fund Category- Classification of a Scheme depending on the type of assets in which the MF Company invests the corpus. It could be a growth, Debt, balanced, gilt or liquid scheme.

Fund Family- All the Schemes, which are managed by one MF.

Fund Mgmt. Costs -The charge levied by an AMC on a MF for managing their funds.

Fund Manager- Appointed by the AMC, he/she is the person who makes all the Final Decisions regarding investments of a Scheme.

Fannie Mae (Federal Mortgage Association) - An agency est. by the Federal Govt. but owned by private Stock holders, which issues mortgage - backed Certificates in $ 25,000 denominations. Timely payment of both interest & principal are issued. A growing No. MF emphasize investments in these & other mortgage backed securities.

Gilts / Govt. Securities- Securities created & issued by the central Govt. & / or a State Govt.; & may include Securities unconditionally graduated by the Govt.

Global Funds-MF that invest in Stocks of companies from all over World.

114

Govt. Securities

These are medium to long-term obligations issued by

RBI on behalf of Govt. of India& various State Govt. The RBI decides the cut-off coupon on the basis of the bids received. These Securities are issued by auction process on certain issues.

Gilt Funds - Funds that invest only in Govt. Securities of different Mature They offer lower returns as the credit risk is virtually absent & there are No chances of Govt. defaulting on its payment obligations.

Growth Funds- Funds, which invest a majority of their corpus in equity.

Growth Style Investing- An investing approach that involves buying Stocks of Companies i.e. generally industry leaders with above average, sustainable growth rates. Typically, Growth Stocks are the Stocks of the fastest growing Companies in the most rapidly growing sector of the Economy Growth Stock valuation level (e.g. Price-to-earnings Ratio) will generally be higher than value Stocks.

Ginnie Mae (Govt. National Mortgage Association)- GNMA or Ginnie Mae , is an agency within the U.S. Dept of Housing & Urban

Development. A govt. owned agency, it buys mortgages from lending Institutions & pools them to form Securities, which it is then sells to Investors. The agency guarantees timely payment of both interest & Principal.

Growth Fund- A MF whose primary investment objective is long-term growth of Capital. It invest principally in common Stocks with significant growth potential.

Growth & Income Fund- A MF that seeks both long-term growth of Capital & current dividend Income from Stocks.

Income/ Debt Funds- They are MF that invest primarily in fixed income Securities & aim to provide reasonable returns with low degree of risks.

Index Funds- A type of MF in which the portfolio are constructed to Mirror a specific market index. Index funds are expected to provide a rate of return over time that will approx. or match, but not exceed, that of the market, which they are mirrors.

115

Indexation - The Central Govt. specifies an index linked to the wholesale Price Index. The indices of 2 yrs. (Yrs. Of purchase & the yr. of sale) are used for the purpose Price is multiplied by the Index of the yr of purpose.

i-Money Net First Tier Retail Average- An Average consisting of non- Govt. funds that hold paper considered to be the highest credit quality by at least one nationally recognized statistical rating organization.

Inflation- Defined as the fall in the value of a currency, it results in rise in Prices of goods & services over a period of time.

Inflation Risk- The chance that the value of assets or income will be diminished as inflation shrinks the value of a currency.

Initial Public Offering (IPO) Institute Investors - A Company s first offering of common Stock to the Public. Institutions Investors include Pension Funds, Insurance Funds, MF, & Hedge Funds.

International Funds/ Emerging Market Funds- Funds investing in asset or Bonds/ Shares of companies from emerging Economies. These are not permissible in India due to regulations against investing abroad. Most of the Schemes of Foreign Institutional Investors (FII s) investing in India is

funds of this type.

Investment Advisor- An entity that makes the recommendations & / or Decisions regarding a Portfolio s investments. Alternatively called a Port folio Manager.

Investment Mgmt- Investment analysis & execution of investment plans in keeping with certain objectives.

Investment Objectives- The declared purpose of Investment of a MF Schemes.

Investment Strategy- The internal guidelines that a Fund follows in investing the Money received from the Investors.

116

Initial Load- A kind of sales charge i.e. paid before any amount gets invested into the MF during its Initial Offer.

i-SEC Bond Index (I-BEX) - An Index created by ICICI Securities as a Benchmark for returns from debt instruments in the Market.

Issuer- The Company, Municipality or Govt. agency that issues Security, Such as a Stock, Bond or Money Market Security.

Issued Share Capital- The portion of a Corporation s equity obtained from issuing Shares in return for case or other considerations.

Income Fund- A MF that primarily seeks current, income rather than Growth of Capital. It will tend to invest in Stocks & Bonds that normally Pay High Dividends & interest.

Individual Retirement A/C (IRA)- A personal, tax-sheltered retirement A/C available to Individuals. Depending on Individual circumstances, IRA contributions may be fully or partially tax deductible.

IRA Rollover- A provision in IRA Law allowing individuals who receive Lump-sum payments from pension or profit-sharing plans to roll-over in to, or invest that sum in, an IRA. IRA Funds can be rolled-over from one investment to another.

Intermediate Bond Fund- A MF that invests in bonds with Maturities Within the 5-10 yrs range.

Investment Company- A Corporation, Partnership or Trust that Invests the pooled monies of many investors. It provides greater Professional mgmt. & diversification of investment Companies, are the most popular form of Investment Company.

Large- Cap Stocks- Stocks issued by large companies. Unless otherwise defined by Fund Manager or a Advisor, a Large-Cap Company is defined as one with a Market Capitalization of $5 Billion or more. Typically, large -cap companies are est. well-known Companies; some may be MNC s.

117

Launch Date- The date on which a Scheme is first made upon open to the Public for subscription.

Liabilities - Outstanding Debts.

LIBOR (London Inter Bank Offer Rate) - This is the rate of interest at which borrow Funds from other Banks, in marketable size, in the London Inter Bank Market.

Liquid Funds/ Money Market Funds- Funds investing only in Short- Term Money Market instruments including treasury, Bills, Commercial Paper & Certificates of Deposit. The objectives is to provide Liquidity & preserve Capital. Due to the low degree of risks available, they generally provide lower returns than other avenues.

Liquidity - The cash & cash equivalent assets available with a Fund to meet expenses & immediate redemption requirements of the Investors. It refers to the ability to buy or sell an asset quickly or the ability to convert to cash quickly.

Load- A Charge that may be levied as a percentage of NAV at the time of time of exiting from the Schemes.

Lock in Period- The period after investment in Fresh units during which the Investor cannot redeem the units. It is normally a key features of Tax- Schemes.

Mgmt. Expense Ratio- The ratio of Mgmt. expenses to the Total Funds under Mgmt. It is usually specified in the offer documents as a percentage of the Assets under Mgmt. of the Fund.

Mgmt. Fee/ Expense - The charge made to a MF for supervision of its Portfolio, usually expressed as percentage of Assets.

Market Capitalization- Value of Corporation/other entity as determined by the market price of its Securities.

Market Risk- It refers to the risk posed by the Market in itself i.e. the risk that the Price of a Security will raise or falls due to changing economic, political, or market conditions or due to a Company s Individual Situation.

118

Maturity / Maturity Date- The date upon which the Principal of Security becomes due & payable to the Security Holder.

Mid-cap Stocks- Stocks issued by mid-sized companies, unless otherwise defined by a Fund Manager or the Advisor, a mid-cap company is defined as one with a Market Capitalization between $1.5 Billion & $5 Billion, this is similar to the range of the Std. & poor Mid-Cap 400 Index (S&P 400).

MIBOR (Mumbai Inter Bank Offer Rate)- This is the rate of interest at which Banks borrow funds from other Banks, in Marketable Size, in the Mumbai Inter Bank Market.

Minimum Additional Investment - The minimum amount, which an existing investor should invest for purchasing fresh units.

Minimum Balance- It is minimum amount specified by Fund that should remain invested in a Scheme after any redemption.

Minimum Subscription- It refers to the minimum amount required to be invested to purchase units of a Scheme of a MF.

Minimum Withdrawal- The smallest sum that investor can withdraw (get redeemed) from the Fund at one time.

Money Market-It refer to Market for very Short- Term Securities. Money Market instruments are forms of Debt that mature in less than a yr & are very liquid in nature. Securities such as Treasury bill & call Money makes up the Bulk of trading in Money Market.

Minimum Fill- This is one of the Special Conditions where a minimum Quantity is specified for an Order. The quantity of a Trade involving an order with a Minimum Fill attribute should at least be this minimum quantity specified.

Money Market Instruments- Refers to CP, Treasury bill, GOI Securities Etc. with an unexpired Maturity less than or up to one yr. Call Money, Certificates of Deposits & any other instrument specified by the RBI.

119

Municipal Securities- Fixed Income obligations of State & Local Govt. Investments in Municipal Securities may support special construction Projects, such as Roads or Hospitals, in the Municipality that issues them. Interest from Municipal Bonds is usually exempt from Federal Taxes & from State Taxes only in the State of Issue. Some Municipal Securities insured & guarantee timely payment of Interest & repayment of Principal.

Money Market Fund-A MF that aims to pay Money Market interest rates. This is accomplished by investing in safe, highly Liquid Securities, include Bank Certificates of Deposit, CP, U.S. Govt. Securities & Repurchase Agreements. Money Market Funds make these High Interest Securities available to the Av.

Mortgage Backed Securities- Certificate backed by pooled Mortgages (e.g. Freddie Mac or Ginnie Mae). Issuing agencies buy Mortgages from lending institutions & repackage them as Securities which they sell to investors. Yields, which stem from interest & principal on underlying.

Junk Bond- A Speculative Bond rated BB or below by std & poor corp- oration & Ba or below by Moody s Investor Service. Junk Bonds are

generally issued by corporation of questionable Financial Strength or with out proven track records. They tend to be more Volatile & Higher Yielder

than Bonds with Superior quality ratings. Junk Bond Funds emphasize diversified investments in these low-rated, High-Yielding debt issue.

Keogh plan- A Tax-deferred retirement account for self employed Individuals or employed of unincorporated Businesses. Keogh plans can be funded with MF Shares.

Load Fund- A MF that levies a sales charge upto 8.5 %. There are various types of Load Funds including a front-end Load where the fee is levied when buying Shares & a back-end load where fee is charged when selling Shares.

Long-Term Bond Fund-A MF that invest in Bonds that mature than 10yr.

Long-Term Capital Gain- A Profit on the Sale of MF Shares that has been held for more than 1 yr.

120

Low-Load Fund- A MF that charges a small sales commission, of 3.5% or Less, for the Purchase of its Shares.

Net Asset Value (NAV)- The Value of Fund s Portfolio at Market value less Current Liabilities divided by the No. of units outstanding. NAV is normally computed daily or weekly & can be found in Financial Section of the Daily Newspaper.

Net Worth-The amount by which a Person Assets exceed their Liabilities.

Nifty- An Index of Prices of a gr. of 50 Stocks listed on the NSE.

No-Load MF / No-Load Scheme- It refers to the Fund that does not Charges any Load for buying or selling its Units.

Nominee - The person(s) to whom the Assets should be distributed upon the Death of the Account Holders.

Non Performing Investment- Part of the Portfolio investment of a debt fund which is not making Interest payment or Principal amount.

Objective of Investment- The purpose statement consisting of the goal & the avenues of Investment released by the Fund.

Offer Documents/ Prospectus- It is the Official document issued by MF prior to launch of a Fund describing the Characteristics of the proposed fund to all its prospective investors. It contains information required by SEBI pertaining to issues such as investment objective & polices, Services & fees.

Offering Period- The period during which the initial offer to subscribe for the Units of a Scheme is open.

Open-Ended Fund - Funds that do not have any fixed Maturity & are continuously open for subscription & redemption. The key features is Liquidity. One can convenient Buy & Sell the units held at NAV Price.

Opening NAV- The NAV disclosed by the Fund for the first time after the closer of an IPO.

121

Operating Expenses- The cost of doing Business. Operating expenses are deducted from revenues, & the result is, hopefully profits.

Offshore Funds- The Funds Set up abroad to channels foreign investment in the Indian Capital Material.

Portfolio- An Individual s or entity combined holdings of Stocks, Bonds, or Other Securities & Assets.

Profile-Summarizes key information about Mutual Fund Cost, investment objectives, risks, & performance. Although every MF has a prospectus, not every MF has a profile.

Prospectus-It contains information about MF Costs, investment Objective, Risks & Performance. Prospectus is provided by MF Company, Brokers.

Purchase Fee- A Shareholder Fee that some Funds Charge when Investor purchase MF Shares. Not the same as (& may be in addition to) a Front- end Load.

Redemption Fee-A Shareholder Fee that some fund charge when Investor Redeem (or sell) MF Shares. Redemption Fees (which must be paid to the Fund) are not same as (& may be in fund) a Back-end Load (which is typically paid to a Broker). The SEC generally limits Redemption Fees to 2%.

Sales Charge / Load- The amount that Investors pay when they purchase (front-end load) or redeem (Back-end Load) Shares in a MF, similar to a

Commission. The SEC S rules do not limit size of sales load a fund may Charge, but NASD rules state that MF Sales loads cannot exceed 8.5% & must be lower depending on other fees & charges assessed.

Shareholder Service Fees- Fees paid to persons to respond to investor inquiries & provide investors with information about their investments. See also 12b-1 Fees.

Statement of Additional Information (SAI) - It conveys information about an open /closed-end fund that is not necessarily needed by investors to make an informed investment decision.

122

Total Annual Fund Operation Expense- It is expressed as a Percentage of the Fund s average NAV. Then the Total in the Fund IS A Fund s Fee

table in a Prospectus.

Unit Investment Trust- A type of Investment Company that typically makes a One- time Public Offering of only a Specific, fixed No. of units. A Unit Investment Trust will terminate & dissolve on a date EST. when the UTI is created.

Valuation Day - Day of NAV Calculation is Called as Valuation Day.

Yield- Distribution form Investment Income, usually expressed as a percentage of NAV or Market Price. On like Total Return , yield has the single component of Investment Income does not include Capital Gains distributions or Capital appreciation of underlying.

Yield to Maturity- Used to determine the Rate of Return on Investor such as a Bond is held to its Maturity date. It takes into account purchase price, redemption value, time to Maturity, coupon yield & a time between Interest Payments.

Zero Coupon Bond- A Bond where no Periodic Interest payments are made. The Investor purchase the Bond at a discount price & receives one payment at Maturity. The Maturity value an Investor receives is equal to the Principal invested plus Interest earned Compound Semi-Annually at the Income from Zero-Coupon on Bonds is subject to Taxes annually even though no payments will be made.

123

124

Cost of Living

Items

1997

(Rs.)

2017

(Rs.)

Colgate toothpaste(100 gm tube )

18.90

104.00

Hamam Soap

7.85

52.00

Masala

Dosa

14.00

224.00

Petrol(per litre)

25.48

259.12

L P G Cylinder

137.85

830.85

Zodiac men s shirt 510.00

2620.27

Source : Readers Digest Nov 1997

Cost of Living

Items

1997

(Rs.)

2017

(Rs.)

Colgate toothpaste(100 gm tube )

18.90 104.00

Hamam Soap

7.85 52.00

Masala

Dosa

14.00 224.00

Petrol

(per litre) 25.48 259.12

L P G Cylinder 137.85 830.85

Zodiac men s shirt

510.00 2620.27

Source : Readers Digest Nov 1997

125

Cost of Living

Items

1997

(Rs.)

2017

(Rs.)

Colgate toothpaste(100 gm tube )

18.90 104.00

Hamam Soap

7.85 52.00

Masala

Dosa 14.00 224.00

Petrol(per litre)

25.48 259.12

L P G Cylinder 137.85 830.85

Zodiac men s shirt 510.00 2620.27

Source : Readers Digest Nov 1997

126

Escalating costs of Higher Education* (in Rs.)

MBA

MEDICINE

ENGINEERING

MBA

MEDICINE

ENGINEERING

MBA

MEDICINE

ENGINEERING

YEAR

2000

YEAR 2010

YEAR

2020

3.2 lacs

5.0 lacs

2.4 lacs

10.9 lacs

17.0 lacs

8.2 lacs

5.7 lacs

8.9 lacs

4.3 lacs

*

At an average annual inflation of 6% p.a.

Escalating costs of Higher Education*

(in Rs.)

MBA

MEDICINE

ENGINEERING

MBA

MEDICINE

ENGINEERING

YEAR

1990

YEAR

2000

3.2 lacs

5.0 lacs

2.4 lacs

1.0 lacs

1.5 lacs

0.3 lacs

127

Guess! How much your little one s

wedding will cost you?

Estimate of marriage expenses

Rs. 67.99 lacs Rs. 35.82 lacs Rs. 20.0 lacs

Rs. 33.99 lacs Rs. 17.9 lacs Rs. 10.0 lacs

Rs. 16.99 lacs Rs. 8.95 lacs Rs. 5.0 lacs

Rs. 6.80 lacs Rs. 3.58 lacs Rs. 2.0 lacs

Year 2020 Year 2010 Year 2000

*

At an average annual inflation of 6% p.a.

128

15.01

22.8

28.31

35.12

8% 10% 11% 12%

REGULAR SAVINGSTHE SIMPLEST WAY TO COMBAT INCREASING HOUSEHOLD

EXPENDITURE

Rs. 1000 saved every month for 30 years can grow toa sizeable amount of wealth

depending on the return generated on these savings

Rs. In Lacs

% Per annum

One - time 8 %

10%

12%

investment (in Rs.) (at the end of 15 yrs.)*

200,000 6,34,434 8,35,450 10,94,713 100,000 3,17,217 4,17,725 5,47,357 50,000 1,58,608 2,08,862 2,73,678 20,000 63,443 83,545 1,09,471 10,000 37,722 41,772 54,736

What your savings can generate ?

--------------- Rate of return -------------

--

129

Start Investments Early

: Charu is 2 yrs. Old. Her parents Invest Rs. 5,000/- every month for the next 5 yrs. Total Investment is Rs. 3 Lacs. Rahul is 12 yrs. Old. His parents invest Rs. 5,000/- every month for the next 5yrs. Total Investment is Rs. 3 Lacs.Who do you think has more money at the age of 17 ?

Charu= 10.6 Lacs Rahul= 3.9 Lacs

That means Delay of 10 Yrs. Cost Rahul 6.7 Lacs lost.

INFLATION ROBS YOUR PURCHASING POWER

(Assuming Inflation @10% P.A.)

12,90033,500

87,000

226,000

10 years 20 years 30 years 40 years

Rs. 5,000 today

130

First, consider your .

Financial goals Risk-taking ability Expected Return Investment Period

Financial Planning

Financial Goals

identifying various needs for money

Converting needs into specifics

amount of money

time frame for requirement of money

Planning saving & investment to achieve these goals

0 2

5

8

11

14

17

2 year old Charu s parents invests Rs. 5,000 monthly for 5 years. They do not withdraw any money.

12 year Rahul s parents invest a similar amount i.e. Rs. 5,000. They invests for 5 years and they too do not withdraw any money

Rs. 10.6 lacs

Rs. 3.9 lacs

THE POWER OF COMPOUNDING

131

Professional Financial Planners

Understands investment universe

Understands risk and return profile of various investment alternatives

Assist clients in choosing the right investment mix keeping in mind client s

- saving ability - risk appetite - Cash flow requirements - Tax status

Investors Needs

PPrrootteeccttiioonn NNeeeedd

IInnvveessttmmeenntt NNeeeedd

To protect living Financial needs served standards, current and through investments survival requirements and savings - Regular Income - Children education - Retirement Income - Housing - Insurance Cover - Children professional

growth

132

BIBLIOGRAPHY

133

BIBLIOGRAPHY

Books & Documents Referred:

AMFI WORKBOOK ON MUTUAL FUNDS

ECONOMIC TIMES (ET)

BSE MANUALS

NSE MANUALS

Websites Referred:

www.mutualfundindia.com

www.amfindia.com

www.indiainfoline.com

www.mutualfundind.com

www.vantageindia.com

www.capitalmarket.com

www.bseindia.com

www.google.com

www.valueresearchonline.com

www.moneycontrol.com

www.nseindia.com

www.personalfn.com

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