Mutual Funds Final Report

MUTUAL FUNDS INVESTMENTS
IBS HYDERABAD
2011
Project Prepared by: NEELAM MANDOWARA (10BSPHH010444) HARSH MODI (10BSPHH010265) MANSI MATELA (10BSPHH010) MILAN DHODIA (10BSPHH010) INDER GARG (10BSPHH010280) KUNAL BASU (10BSPHH010352)
10/9/2011
MUTUAL FUNDS INVESTMENTS 2011
ACKNOWLEDGEMENT
We take this proud privilege to acknowledge gracefully the help we received from different sources in preparation of this report. We are highly obliged to Mr. R. K. JAIN, our professor and faculty for Security Analysis at IBS Hyderabad for giving us a chance to work in this project and providing us a comfortable work environment and his continued guidance throughout the project. This would not have been possible without his sincerity and dedication towards the subject ad helping us all the way through.
I would also like to extend my thanks to all my colleagues for the assistance, support and the suggestions, throughout which have been valuable to me, and for providing a friendly work atmosphere with healthy competition throughout the project.
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MUTUAL FUNDS INVESTMENTS 2011 Contents

ACKNOWLEDGEMENT .............................................................................................................. 2 What are Mutual Funds? ................................................................................................................. 5 Investors in mutual funds ................................................................................................................ 5 Types of Mutual Funds Schemes in India....................................................................................... 6 Motive behind different schemes .................................................................................................. 11 Business Model of Mutual Funds ................................................................................................. 18 Revenue Expense Model of Mutual Funds ................................................................................... 19 Advantages of Mutual Funds ........................................................................................................ 20 Disadvantages of Mutual Funds.................................................................................................... 22 Risks in Mutual Funds investments .............................................................................................. 24 Evolution of Mutual Fund Industry .............................................................................................. 27 First Phase 1964-87................................................................................................................ 27 Second Phase 1987-1993 (Entry of Public Sector Funds) ..................................................... 27 Third Phase 1993-2003 (Entry of Private Sector Funds) ....................................................... 27 Fourth Phase since February 2003 ......................................................................................... 28 Choosing a Fund ........................................................................................................................... 30 Risk capacity ............................................................................................................................. 30 Liquidity.................................................................................................................................... 30 Specific needs ........................................................................................................................... 30 Track record .............................................................................................................................. 31 Transacting Mutual Funds ............................................................................................................ 31 Close-ended schemes ................................................................................................................ 31 Open ended schemes ................................................................................................................. 31 Buying close ended units post IPO ........................................................................................... 31 TAX .............................................................................................................................................. 32 Appreciation/Depreciation of the NAV ........................................................................................ 33 Total Return Method ................................................................................................................. 33 Reinvesting Dividend................................................................................................................ 33 Investment Inflows and Outflows in Mutual Funds ..................................................................... 35 Investor Profile in the Mutual Fund Industry ........................................................................... 37 Regulations in Mutual fund Industry ............................................................................................ 38 Regulatory Authorities .................................................................................................................. 39 Challenges and Issues ................................................................................................................... 40 Page | 3

Recent trends in Mutual Fund Industry ........................................................................................ 42 Current NEWS in Mutual Fund Industry ...................................................................................... 45 Performance Measurement: A Comparative Analysis .................................................................. 47 Standard Deviation.................................................................................................................... 48 Beta ........................................................................................................................................... 49 The Treynors Ratio .................................................................................................................. 51 Sharpe Ratio .............................................................................................................................. 52 Jensens Measure ...................................................................................................................... 53 Future Outlook of Mutual Funds Industry .................................................................................... 55 Research Papers ............................................................................................................................ 57 References ..................................................................................................................................... 60
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MUTUAL FUNDS INVESTMENTS 2011 What are Mutual Funds?

A Mutual Fund can be considered a trust, a connecting bridge or a financial intermediary that pools the savings of a number of investors who share a predetermined investment objective such as capital appreciation and dividend earning. A Mutual Fund can comprise of many investments other than stocks and bonds (including annuities, real estate, and precious metals), but the majority of mutual funds invest in stocks and/or bonds. One can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities or asset classes that match the stated objective of that scheme. Each investor owns shares of the mutual fund company, which represents a portion of the holdings of the fund and thus on investing becomes a shareholder or unit holder of the fund. The fund manager is responsible for investing the gathered money into specific securities (stocks or bonds), collect the income from investments and capital appreciation realized by the scheme & distribute the gains to the unit holders in proportion to the number of units owned by them. Mutual funds are considered as one of the best available investment option when compared to others as they are very cost efficient and also easy to invest in, thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own.
Investors in mutual funds

Investor need to be aware of who can buy mutual funds units or shares. Mutual Funds in India are open to Investment broadly by : o o o o FIIs NRIs Corporates/Institutions/Others Individuals 1% 4% 58% 37%
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They can also be categorized as followings: Residents including o o o o o o o Resident Indian Individual. Indian Companies Indian trusts/charitable trusts Banks Non-Banking Finance companies Insurance companies Provident funds
Non Residents Including o o Non resident Indians Overseas corporate bodies
Foreign entities o o Foreign Institutional Investors registered with SEBI Foreign citizens/entities are however now allowed to invest in India.
Types of Mutual Funds Schemes in India

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
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Classification Based on type of Structure: 1. Open - Ended Schemes: An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. 2. Close - Ended Schemes: These schemes have a pre-specified or stipulated maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unit holder and other market factors. Alternatively some close-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell
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units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor. 3. Interval Schemes: Interval Schemes are that scheme, which combines the features of open-ended and closeended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. Classification by type of nature 1. Equity fund: These funds invest a maximum part of their corpus into equity holdings. The structure of the fund may vary different for different schemes and the fund managers outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows: Diversified Equity Funds Mid-Cap Funds Sector Specific Funds Tax Savings Funds (ELSS) Equity investments are meant for a longer time horizon, thus Equity funds rank high on the riskreturn matrix. 2. Debt funds: The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as: o Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government. o Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities. o MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
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o Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures. o Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds. 3. Balanced funds: As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns. Classification by type of investment objectives 1. Growth Schemes: Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation. 2. Income Schemes: Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. 3. Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50). 4. Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
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Other Schemes 1. Tax Saving Schemes: Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate. 2. Index Schemes: Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index. 3. Sector Specific Schemes: These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. Types of Returns There are three ways, where the total returns provided by mutual funds can be enjoyed by investors: 1. Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution. 2. If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 3. If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.
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MUTUAL FUNDS INVESTMENTS 2011 Motive behind different schemes

1. Equity Funds Equity funds are considered to be high risk funds as compared to other types, but they also provide higher returns than other funds. It is advisable that an investor looking to invest in an equity fund should invest for long term i.e. for 3 years or more. There are different types of equity funds each falling into different risk bracket. In the order of decreasing risk level, there are following types of equity funds: Aggressive Growth Funds - In Aggressive Growth Funds, fund managers aspire for maximum capital appreciation and invest in less researched shares of speculative nature. Because of these speculative investments Aggressive Growth Funds become more volatile and thus, are prone to higher risk than other equity funds. Growth Funds - Growth Funds also invest for capital appreciation (with time horizon of 3 to 5 years) but they are different from Aggressive Growth Funds in the sense that they invest in companies that are expected to outperform the market in the future. Without entirely adopting speculative strategies, Growth Funds invest in those companies that are expected to post above average earnings in the future. Speciality Funds - Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of speciality funds: a. Sector Funds: Speciality Funds have stated criteria for investments and their portfolio comprises of only those companies that meet their criteria. Criteria for some speciality funds could be to invest/not to invest in particular regions/companies. Speciality funds are concentrated and thus, are comparatively riskier than diversified funds.. There are following types of speciality funds: b. Foreign Securities Funds: Foreign Securities Equity Funds have the option to invest in one or more foreign companies. Foreign securities funds achieve international
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diversification and hence they are less risky than sector funds. However, foreign securities funds are exposed to foreign exchange rate risk and country risk. c. Mid-Cap or Small-Cap Funds: Funds that invest in companies having lower market capitalization than large capitalization companies are called Mid-Cap or Small-Cap Funds. Market capitalization of Mid-Cap companies is less than that of big, blue chip companies (less than Rs. 2500 crores but more than Rs. 500 crores) and Small-Cap companies have market capitalization of less than Rs. 500 crores. Market Capitalization of a company can be calculated by multiplying the market price of the company's share by the total number of its outstanding shares in the market. The shares of Mid-Cap or Small-Cap Companies are not as liquid as of Large-Cap Companies which gives rise to volatility in share prices of these companies and consequently, investment gets risky. d. Option Income Funds: While not yet available in India, Option Income Funds write options on a large fraction of their portfolio. Proper use of options can help to reduce volatility, which is otherwise considered as a risky instrument. These funds invest in big, high dividend yielding companies, and then sell options against their stock positions, which generate stable income for investors. Diversified Equity Funds - Except for a small portion of investment in liquid money market, diversified equity funds invest mainly in equities without any concentration on a particular sector(s). These funds are well diversified and reduce sector-specific or company-specific risk. However, like all other funds diversified equity funds too are exposed to equity market risk. One prominent type of diversified equity fund in India is Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum of 90% of investments by ELSS should be in equities at all times. ELSS investors are eligible to claim deduction from taxable income (up to Rs 1 lakh) at the time of filing the income tax return. ELSS usually has a lock-in period and in case of any redemption by the investor before the expiry of the lock-in period makes him liable to pay income tax on such income(s) for which he may have received any tax exemption(s) in the past. Equity Index Funds - Equity Index Funds have the objective to match the performance of a specific stock market index. The portfolio of these funds comprises of the same companies that form the index and is constituted in the same proportion as the index. Equity index funds that follow broad indices (like S&P CNX Nifty, Sensex) are less risky than equity index funds that
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follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index etc). Narrow indices are less diversified and therefore, are more risky. Value Funds - Value Funds invest in those companies that have sound fundamentals and whose share prices are currently under-valued. The portfolio of these funds comprises of shares that are trading at a low Price to Earning Ratio (Market Price per Share / Earning per Share) and a low Market to Book Value (Fundamental Value) Ratio. Value Funds may select companies from diversified sectors and are exposed to lower risk level as compared to growth funds or speciality funds. Value stocks are generally from cyclical industries (such as cement, steel, sugar etc.) which make them volatile in the short-term. Therefore, it is advisable to invest in Value funds with a long-term time horizon as risk in the long term, to a large extent, is reduced. Equity Income or Dividend Yield Funds - The objective of Equity Income or Dividend Yield Equity Funds is to generate high recurring income and steady capital appreciation for investors by investing in those companies which issue high dividends (such as Power or Utility companies whose share prices fluctuate comparatively lesser than other companies' share prices). Equity Income or Dividend Yield Equity Funds are generally exposed to the lowest risk level as compared to other equity funds. 2. Debt / Income Funds Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds. Debt funds are low risk profile funds that seek to generate fixed current income (and not capital appreciation) to investors. In order to ensure regular income to investors, debt (or income) funds distribute large fraction of their surplus to investors. Although debt securities are generally less risky than equities, they are subject to credit risk (risk of default) by the issuer at the time of interest or principal payment. To minimize the risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies and are considered to be of "Investment Grade". Debt funds that target high returns are more risky. Based on different investment objectives, there can be following types of debt funds as shown below.
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Diversified Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. Focused Debt Funds - Debt funds that invest in all securities issued by entities belonging to all sectors of the market are known as diversified debt funds. The best feature of diversified debt funds is that investments are properly diversified into all sectors which results in risk reduction. Any loss incurred, on account of default by a debt issuer, is shared by all investors which further reduces risk for an individual investor. High Yield Debt funds - As we now understand that risk of default is present in all debt funds, and therefore, debt funds generally try to minimize the risk of default by investing in securities issued by only those borrowers who are considered to be of "investment grade". But, High Yield Debt Funds adopt a different strategy and prefer securities issued by those issuers who are considered to be of "below investment grade". The motive behind adopting this sort of risky strategy is to earn higher interest returns from these issuers. These funds are more volatile and bear higher default risk, although they may earn at times higher returns for investors. Assured Return Funds - Although it is not necessary that a fund will meet its objectives or provide assured returns to investors, but there can be funds that come with a lock-in period and offer assurance of annual returns to investors during the lock-in period. Any shortfall in returns is suffered by the sponsors or the Asset Management Companies (AMCs). These funds are generally debt funds and provide investors with a low-risk investment opportunity. However, the security of investments depends upon the net worth of the guarantor (whose name is specified in advance on the offer document). To safeguard the interests of investors, SEBI permits only those funds to offer assured return schemes whose sponsors have adequate networth to guarantee returns in the future. In the past, UTI had offered assured return schemes (i.e. Monthly Income Plans of UTI) that assured specified returns to investors in the future. UTI was not able to fulfill its promises and faced large shortfalls in returns. Eventually, government had to intervene and took over UTI's payment obligations on itself. Currently, no AMC in India offers assured return schemes to investors, though possible. Fixed Term Plan Series - Fixed Term Plan Series usually are closed-end schemes having short term maturity period (of less than one year) that offer a series of plans and issue units to
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investors at regular intervals. Unlike closed-end funds, fixed term plans are not listed on the exchanges. Fixed term plan series usually invest in debt / income schemes and target short-term investors. The objective of fixed term plan schemes is to gratify investors by generating some expected returns in a short period. 3. Gilt Funds Also known as Government Securities in India, Gilt Funds invest in government papers (named dated securities) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors. However, like all debt funds, gilt funds too are exposed to interest rate risk. Interest rates and prices of debt securities are inversely related and any change in the interest rates results in a change in the NAV of debt/gilt funds in an opposite direction. 4. Money Market / Liquid Funds Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types. However, even money market / liquid funds are exposed to the interest rate risk. The typical investment options for liquid funds include Treasury Bills (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). 5. Hybrid Funds As the name suggests, hybrid funds are those funds whose portfolio includes a blend of equities, debts and money market securities. Hybrid funds have an equal proportion of debt and equity in their portfolio. There are following types of hybrid funds in India: o Balanced Funds - The portfolio of balanced funds include assets like debt securities, convertible securities, and equity and preference shares held in a relatively equal proportion. The objectives of balanced funds are to reward investors with a regular income, moderate capital appreciation and at the same time minimizing the risk of capital erosion. Balanced funds are appropriate for conservative investors having a long term investment horizon. o Growth-and-Income Funds - Funds that combine features of growth funds and income funds are known as Growth-and-Income Funds. These funds invest in companies having potential
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for capital appreciation and those known for issuing high dividends. The level of risks involved in these funds is lower than growth funds and higher than income funds. o Asset Allocation Funds - Mutual funds may invest in financial assets like equity, debt, money market or non-financial (physical) assets like real estate, commodities etc.. Asset allocation funds adopt a variable asset allocation strategy that allows fund managers to switch over from one asset class to another at any time depending upon their outlook for specific markets. In other words, fund managers may switch over to equity if they expect equity market to provide good returns and switch over to debt if they expect debt market to provide better returns. It should be noted that switching over from one asset class to another is a decision taken by the fund manager on the basis of his own judgment and understanding of specific markets, and therefore, the success of these funds depends upon the skill of a fund manager in anticipating market trends. 6. Commodity Funds Those funds that focus on investing in different commodities (like metals, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds. A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. "Precious Metals Fund" and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds. 7. Real Estate Funds Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Specialized Real Estate Funds. The objective of these funds may be to generate regular income for investors or capital appreciation. 8. Exchange Traded Funds (ETF) Exchange Traded Funds provide investors with combined benefits of a closed-end and an openend mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time. Recently introduced in India, these funds are quite popular abroad.
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9. Fund of Funds Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs, are known as Fund of Funds. Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets. Fund of Funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. However, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund scheme. Such a Fund scheme is not yet introduced in India mutual fund markets.
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MUTUAL FUNDS INVESTMENTS 2011 Business Model of Mutual Funds

First lets see how mutual funds are set up. There are four parties involved in setting up a mutual fund. 1. Sponsor: The one who set up a mutual fund in the form of a trust by registering with SEBI and is like a promoter of a company. 2. Trustee: The one who have a fiduciary responsibility towards unit holders and check whether investments are within limits. 3. Fund Managers / AMC: The one who actually manage the funds by making investments and are approved by SEBI to do so. They do the due diligence, invest, report and give returns. 4. Custodian: The one who takes custody of securities and other assets of a mutual fund and is registered with SEBI. Once Mutual Fund is set up, we should know their basic operation as shown in below figure. We can see that Investors (Unit Holders) pool in their money with Mutual Fund Managers who then select securities to invest in accordance with the objectives stated and generate return for investors. Agents and Distributors are the third parties involved in this complete process who are spread all over the country for promoting and collecting application forms from potential investors. Investors can also invest directly with Mutual Funds.
Dividend and Capital Give back to Gain
Investors
Via Pool their Agents/Distributors money withpool their or directly, money with
Return
Fund Managers
Invest in
Creates
Securities
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MUTUAL FUNDS INVESTMENTS 2011 Revenue Expense Model of Mutual Funds Revenue
Entry Fee: Till August 2009, Mutual Funds used to charge entry fee to the investors but after that it was banned by SEBI. This fee was used to be around 2.25% of NAV. As a back door imposition of entry load, SEBI in Aug 2011 imposes initial transaction fees as explained below Initial Transaction Fee: SEBI passed a circular in Aug 2011 stating that new investors will pay Rs. 150 and existing investors will pay Rs. 100 for investment of >= Rs. 10,000 . The payment will be to the distributor. Expense Ratio / Annual Maintenance Charges: Depend on the type of fund and size of fund. As per SEBI regulations, maximum charges for Equity funds is 2.5% and Debt funds is 2.25% of total AUM in a year. The charges decrease with increase in fund corpus and finally capped at 1.75% for Equity funds and 1.5% for Debt funds each with a corpus of exceeding Rs. 900 crores. These charges are automatically deducted from investors' NAV on daily basis. For index funds and ETFs, the expense ratio is capped at 1.5% irrespective of corpus accumulated. On an average Expense Ratio varies between 1.25% and 1.5%. Exit Fee / Backend Load: Around 1% of total redemption value is charged if the investor withdraw within 1 year. This is to bring down the frequency of withdrawal from funds.
Expenses
Brokerage or Trading Fee: It also includes the Securities Transaction Tax in it. Brokerage fee is not incurred in expense ratio, instead it goes to the cost of the security. But there are chances that Mutual Funds might have to incorporate this into their expense ratios. (source: CNBC-TV18) Fund's Advisor Fee Marketing and Advertising Costs Administrative Fees Distribution Fee / Agent Commission
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MUTUAL FUNDS INVESTMENTS 2011 Advantages of Mutual Funds

1. Professional Management Market is filled by three types of investors uninformed, informed and highly informed hence the basic advantage of mutual fund is that the former two types of investors get an opportunity to manage their fund by the latter hence in nutshell, qualified investment professionals who seek to maximize returns and minimize risk monitor investor's money It is also very difficult for new entrants to understand and analyze the stocks, and investors neither have time tot rack markets nor skills hence comes in the role of mutual funds and by virtue of being in the market, the fund manager is ideally placed to research various investment options, and invest accordingly for the investor. 2. Small Investment Capability of an Individual To have good stocks or bonds in the portfolio high investment is required to get higher returns for example to buy government securities or to build a decent portfolio of blue-chip companies minimum requirement is 25000 which may be not affordable for number of small investors. A mutual fund, however, gives small investors an ownership of the same investment pie at an outlay of Rs 1,000-5,000. This is because a mutual fund pools in funds of several investors, and invests the resultant large sum in a number of securities. Therefore, on a small outlay, investor gets to participate in the investment prospects of a number of securities. 3. Diversification One of the most stated facts for portfolio management is: diversify. In other words, dont put all your eggs in one basket. The rationale for this is that even if one pick in the portfolio does not perform well, the others can check the erosion in the portfolio value. Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio and hence mitigate risk. 4. Affordability As mutual funds deal with large pool of money hence as economies of scale is attained transaction cost decreases hence mutual funds pay lesser transaction costs in the market and such benefits are passed on to the investors.
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5. Transparency The investor gets regular information on the value of the investment made and disclosure on the specific investments made under the scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook. 6. Well Regulated All Mutual Funds are registered with SEBI (Securities Exchange Board of India) and they function within the provisions of strict regulations designed to protect the small retail investors. The regulatory body has clearly defined rules, which govern mutual funds. These rules are related to the formation, administration and management of mutual funds and also prescribe disclosure and accounting requirements, such a high level of regulations seeks to protect the interest of investors. 7. Liquidity A distinct advantage of a mutual fund over other investments is that there is always a market for its unit/ shares. It's easy to get ones money out of a mutual fund any time in an open-ended mutual fund and redemptions can be made by filling a form attached with the account statement of an investor. Hence this quality of mutual funds makes the investments in the same highly liquid yet profitable. 8. Choices of Schemes Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. An investor can also choose schemes depending upon his/her risk appetite, For example, an investor can invest his money in a Growth Fund (equity scheme) and Income Fund (debt scheme) depending on his risk taking capabilities and thus create a balanced portfolio easily or simply buy a Balanced Scheme. 9. Tax benefits Last but not the least, mutual funds offer significant tax advantages. Dividends distributed by them are tax-free in the hands of the investor. They also give the advantages of capital gains taxation.
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For holding units beyond one year, one gets the benefits of indexation that is indexation benefits increase the purchase cost by a certain portion, depending upon the yearly costinflation index (which is calculated to account for rising inflation), thereby reducing the gap between the actual purchase costs and selling price. This reduces tax liability. Mutual funds also provide tax-saving schemes and pension schemes which give added advantage of benefits as under Section 88; one can avail of a 20 per cent tax exemption on an investment of up to Rs 10,000 in the scheme in a year.
Disadvantages of Mutual Funds

1. No assured returns and no protection of capital Mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value. Mutual funds are not insured or guaranteed by any government body (unlike a bank deposit, where up to Rs 1 lakh per bank is insured by the Deposit and Credit Insurance Corporation, a subsidiary of the Reserve Bank of India). There are strict norms for any fund that assures returns and it is now compulsory for funds to establish that they have resources to back such assurances. This is because most closedend funds that assured returns in the early-nineties failed to stick to their assurances made at the time of launch, resulting in losses to investors. 2. Restrictive gains Diversification helps, if risk minimization is the objective. However, the lack of investment focus also means that we gain less than if we had invested directly in a single security. For example, say, Reliance appreciated 50 per cent. A direct investment in the stock would appreciate by 50 per cent. But the investment in the mutual fund, which had invested 10 per cent of its corpus in Reliance, will see only a 5 per cent appreciation. 3. Fees and commissions Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investment (as long as he holds the units), irrespective of the performance of the fund
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Some funds also charge sales commissions or "loads" to compensate brokers, financial consultants, or financial planners. Even if the investor doesnt use a broker or other financial adviser, he will pay a sales commission if he buys shares in a Load Fund 4. Management risk When an investor invests in a mutual fund, he/she depends on the fund's manager to make the right decisions regarding the fund's portfolio. If the manager does not perform as promised, investor might not make as much money on his investment as he had expected. Of course, if one had invested in Index Funds, he/she foregoes management risk, because these funds do not employ managers. 5. Evaluating Funds In mutual funds it is difficult for investors interested in researching and evaluating the different funds, unlike stocks, mutual funds do not offer investors the opportunity to compare the P/E ratio, sales growth, earnings per share, etc. A mutual fund's net asset value gives investors the total value of the fund's portfolio less liabilities, but how do investor know if one fund is better than another.
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MUTUAL FUNDS INVESTMENTS 2011 Risks in Mutual Funds investments

Every investment has risk associated with them; a risk is defined as any downside deviation from the expected return and is measured by standard deviation. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. Risk has the potential for higher return and it also has the greater potential for losses or negative returns. Risk- Return Tradeoff for mutual funds The risk return trade-off indicates that an investor is willing to take higher risk only if he can expect higher returns and vise versa. For example, a bank FD , provides moderate return with minimal risk. But capital protected funds and profit-bonds give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion. Thus investors choose mutual funds as their primary means of investing, as Mutual funds are considered to have low risk but not risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can expect higher returns.
The school of thought when investing in mutual funds suggests that the longer the investment time horizon of the investor less is he/she affected by short-term volatility. Hence, shorter the investment time horizon, the more concerned the investor is with short-term volatility and higher is the risk. Different mutual fund categories have inherently different risk characteristics, the risks are based on the investments an investor holds, as show in figure below:
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For example, a bond fund faces interest rate risk and income risk. Bond values are inversely proportional to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund. Similarly, a sector stock fund (which invests in a single industry, such as telecommunications) is at risk that its price will decline due to developments in its industry. A stock fund that invests across many industries is more sheltered from this risk defined as industry risk. Types of risks associated with Mutual Funds 1. Call Risk The chance that a bond issuer to call its high yielding bond before the bonds maturity because of falling interest rates in the market 2. Credit Risk The possibility that a bond issuer will fail to repay interest and principal in a timely manner also called as default risk
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3. Interest Rate Risks The possibility that a bond fund value will decline because of an increase in interest rates 4. Manager Risk The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives 5. Market Risk The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall 6. Principal Risk The possibility that an investment will lose its value from the original or invested amount
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MUTUAL FUNDS INVESTMENTS 2011 Evolution of Mutual Fund Industry

The concept of a mutual fund originated in 1870s with Robert Fleming establishing the first investment trust in Scotland in 1890. The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank of India. The history of mutual funds in India can be broadly divided into four distinct phases
First Phase 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised
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Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds.
Fourth Phase since February 2003

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

700000 600000 500000 Rs (in Crores) 400000 300000 200000 100000 0 Mar-65 Nov-66 Jul-68 Mar-70 Nov-71 Jul-73 Mar-75 Nov-76 Jul-78 Mar-80 Nov-81 Jul-83 Mar-85 Nov-86 Jul-88 Mar-90 Nov-91 Jul-93 Mar-95 Nov-96 Jul-98 Mar-00 Nov-01 Jul-03 Mar-05 Nov-06 Jul-08 Mar-10 Mar- Mar- Mar- Jan- Feb- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar65 87 93 03 03 03 04 05 06 07 08 09 10 11 Rs (in crores) 25 4564 47000 12180 87190 79464 13961 14955 23186 32638 50515 41730 61397 59225
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MUTUAL FUNDS INVESTMENTS 2011 Choosing a Fund

Risk capacity
Risk and return are always commensurate with each other. If you are willing to take a higher risk with your money, go in for an equity scheme. Equity shares are the riskiest investments since they are unsecured and are the last to receive money in case the company winds up. However, if the company does well, they are given the highest share of the profits. If you are willing to take risks but would like to moderate it, go in for a balance scheme. These schemes invest an equal portion of their funds in equity shares and debt. This helps balance risks with debt being the cushion in case of a downfall in the equity investments. If you are absolutely not willing to take any risks with your money, a debt scheme, money market scheme and gilt scheme are ideal for you. These schemes stay away from equity shares almost completely and offer an average returns.
Liquidity
If you want your money to be available to you easily in time of need, go for an open-ended scheme. However, if you are okay with your money not being available to you quickly and easily and would rather remain invested, a close-ended scheme is suitable. Another way of looking at liquidity is the size of the money collected (corpus) by the scheme and the type of investments of that scheme. If the corpus is very small, there is a risk of the Fund Manager being forced to sell during a rush for redemptions. However, if there is a large corpus, the Fund Manager can handle this situation easily. By the type of investments, one means that a money market scheme will be more liquid than an equity scheme. Money market instruments are sellable easily and very quickly. Hence money market schemes can return your money within 2 working days whereas an equity scheme will take between 4 to 7 working days.
Specific needs
Over and above risk taking ability and liquidity needs, an investor may have specific needs such as saving of taxes (for which he can invest in a tax saving Mutual Fund scheme) or wanting to invest in a stock market index (for which he should invest in an index scheme). Mutual Funds have devised a number of schemes catering to these specific needs.
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Track record
Check the schemes performance since its inception and compare it with similar schemes. By similar schemes, one means, compare an equity scheme with another equity scheme and not with, say a debt scheme. The instrument invested in being different in both these schemes will make a comparison have no meaning. Performance comparison is done by comparing the annualized percentage growths in the schemes NAV over a period of time. The higher the percentage of appreciation, the better is the performance.
Transacting Mutual Funds

Close-ended schemes
An existing close-ended scheme invested who has purchased his units during the schemes IPO and does not want to stay invested till maturity of the scheme, can sell his units on the stock exchange to a person wanting to buy units of that scheme. While purchasing units during the IPO, the investor doesnt have to incur any costs for purchase. However, while purchasing units from the stock exchange, the investor has to pay his broker a brokerage fee for purchase of his units. Similarly, while selling units on the stock exchange, the investor has to pay his broker a brokerage fee for sale of his units. While purchasing units, the investor has to also incur costs of stamp duty to transfer the units in his name. However, if the investor purchases units in the dematerialized form, no stamp duty is payable.
Open ended schemes

Units of open ended Mutual Fund schemes are first available during the schemes IPO at face value (i.e. Rs. 10 per unit) and then the Mutual Fund offers sale and repurchase facilities thereafter ( at the current NAV).While investing during the schemes IPO, the investor does not incur any cost for investment.
Buying close ended units post IPO

Contact your broker to find out the market price of the Mutual Fund scheme on the stock exchange and the availability of units. On ensuring that the buy price is acceptable and there are sellers, place the order with your broker for purchase of the units. The broker will execute your order and hand over the unit certificates to you (if you have bought the units in the physical segment) or will intimate you that the units have been credited to your dematerialization account (if you have bought the units in the dematerialized segment). In case of
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receiving units in the physical form, fill in the transfer deed and lodge it along with the unit certificates with the Registrar of the Mutual Fund. In case of purchase in the dematerialized form, nothing further has to be done. In case of an open-ended Mutual Fund scheme, ask your broker to find out the NAV of the scheme and entry load, if any, on the day you are submitting your application form. The NAV and load, if any, is also available on the website of the Mutual Fund or a personal finance site. Submit the filled in application form along with the cheque to either your broker or directly to the Mutual Funds banker (the names of the bankers and form collection centres are mentioned on the application form). Your application is processed after which you receive an account statement
indicating the number of units allotted to you, the purchase date, the cost of your investment ( your entry NAV) and the current value of your investment (i.e. the NAV on date the account statement was made).
TAX
There are no tax implications while investing in Mutual Funds except while investing in Tax saving schemes of Mutual Funds. These schemes are specifically designed to offer tax rebate to investors under section 88 of the Income Tax Act. Rs 1 lakh can be invested under this section without any sublimits. Investment in pension funds under section 80CCC can still be up to a maximum of Rs 10,000 and treated as a part of investments of Rs 1 lakh under section 80CCE.For individuals who are looking for more returns from their investments, can move away from low-return infrastructure bonds. Earlier they were bound to purchase for Rs 30,000 for getting maximum tax benefits. If they are close-ended, they are listed after the initial 3 year lock in. For instance, on 31st March 2008, X invested Rs. 10,000 in Prudential ICICI Mutual Funds Tax Saving Scheme. X will receive a tax rebate of Rs. 2,000 for the Financial year ended 31 st March 2001 and will have to stay invested in Prudential-ICICI Mutual Funds scheme up to 31st March 2011. If he sells, transfers or pledges his units during this time he will be taxed on his investment of Rs. 10,000 in the same year that he sells, transfers or pledges his units.
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MUTUAL FUNDS INVESTMENTS 2011 Appreciation/Depreciation of the NAV

NAV is the market value of each unit of the Mutual Fund. This value is what the investor gets back on exiting from his investment. To find out the scheme performance, work out the annualized %age appreciation in the NAV between the periods for which performance is to be evaluated. An example to clarify this is stated below:
Total Return Method

In case investment in a scheme where the investor has opted for dividend payout he should use the Total Return method of evaluating his Mutual Fund performance. The Total Return method is
elaborated with an example below: You bought units of a mutual fund 1 Jan 2010 Appreciation in the NAV( 21.00 14.00 = 7.00) Total Appreciation value is 1000 x 7.00 = 7,000.00 Total Appreciation to your credit = 8,000.00 (Appreciation in NAV + dividends, 7000 + 1000) %age Appreciation = 57.14% Since Investment is held for 1 year there is no question of having to annualize the return.
Reinvesting Dividend
When an investor opts to have the dividend declared and reinvested back into the scheme he gets additional units to the extent of the dividend declared. Reinvestment of the dividend happens at the prevailing NAV. This changes the cost of his investment. Return in this case has to take into account both these aspects. This is enumerated with example below: On 30th September 2000, the same Mutual Fund declared a dividend of 10% (1000 units x 10%). You have chosen to have this 62.5 units dividend reinvested back into the scheme at the prevailing Nav of Rs.16.00. Rs. 16.00 ( i., e NAV on 30th September 2010. You receive additional units (Dividend due/NAV on 30th Sep2010). The NAV of each unit of hi was on RS.21.00, on 31st Dec10. Appreciation in the NAV (RS.7.00, Rs.21-14) Total Appreciation value is 1000 x 7.00 = 7,000.00 Total Appreciation to your credit = 8,000.00
(Appreciation in NAV + dividends, 7000 + 1000) Appreciation in NAV of new Units i., e units received on reinvested (21-16).
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Total Appreciation in value of new Rs.312.50 (Rs.5 x 62.5 Units) Total Appreciation (Original Units + New Units) Rs.7,000.00 + Rs.312.50 (Rs.5 x 62.5 Units) Total Appreciation in value of Rs.7312.50 Total Cost of Investment Rs.15,000.00 (Rs.14,000.00 + Rs.1000.00) Return on Investment = Rs.7,312.50/15,000.00 x 100 = 48.75% Since investment is held of one year there is no question of having to annualize the return.
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MUTUAL FUNDS INVESTMENTS 2011 Investment Inflows and Outflows in Mutual Funds
There are 44 Mutual Funds Houses registered with SEBI in India which generate and invest this corpus of funds.
Average Asset Under Management (In Rs. Crore)

800000 700000 600000 500000 400000 300000 200000 100000 0 2008-09 2009-10 2010-11 Apr-Jun 11
The Average Assets Under Management (AAUM) of the Indian mutual fund industry has witnessed a decrease on a year on year basis, on account of substantial outflows from equity, liquid and income schemes.
AUM Category Wise

350000 300000 250000 200000 150000 100000 50000 0 Liquid/M oney Market AUM (Rs. Cr) 74699.86 % Share 12.51% Gilt Debt Oriented Equity Oriented Balanced Fund of ETFs(othe Funds Gold ETF r than investing Gold) Overseas 4400.2 0.74% 2516.43 0.42% 2520.41 0.42%
3507.29 294217.44 197562.81 17552.4 0.59% 49.28% 33.09% 2.94%
As of March 31, 2011
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In the above table we can see that Debt Oriented Mutual Funds were the most preferred type of mutual fund holdings. Equity oriented funds are just behind debt Oriented funds. Gold ETFs has been glittering and attracting investors attention during the year. The category witnessed a highest growth of 176.73% in AUM to a total of Rs. 4,400 crore in the year. The category attracted inflows of Rs. 2,248 crore during the period and yielded an annual return of 25.77% while the physical gold prices rose 27.35%. The category Other ETFs, a collection of equity exchange traded funds (ETFs) also witnessed higher growth of 162.90% during the year. Whereas AUM of Equity category, on a year-on-year basis, fell to Rs. 1,97,562 crore. Turbulences in the equity market hurt the investor sentiments which resulted in more redemption on equity side.
The GDP to AUM ratio
GDP to AUM Ratio

14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2008-09 2009-10 2010-11 9.27% 11.76% 10.29%
The GDP to AUM Ratio is around 10% for India which is very low compared to other developed nations with this ratio being from 20 % to 70 %. The industry needs to focus on inclusion of the rural sector in mutual fund industry as mentioned in detail below. This also gives us an insight that the industry has a lot of scope to grow and is far from saturation.
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Investor Profile in the Mutual Fund Industry
Investor Classification Corporate Banks/FIs FIIs High Networth Individuals* Retail Total AUM (Rs. Cr) 263773.38 26199.59 2969.81 141808.54 162225.48 596976.8 % of Total 44.18% 4.39% 0.50% 23.75% 27.17%
* Defined as individuals investing Rs 5 lakhs and above As of March 31st 2011
As seen in the above table, corporate is the major investors in the mutual fund industry. Followed by the retail investors, thus the industry must focus on spreading awareness among the general population in order to gain a larger pie from the retail investors. HNIs are not far behind in terms of contributing to the mutual fund investments. Banks, Financial Institutions and Foreign Institutional Investors are minimal investors.
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MUTUAL FUNDS INVESTMENTS 2011 Regulations in Mutual fund Industry

Mutual Funds in India are governed by the SEBI (Mutual Fund) Regulations 1996 as amended from time to time. Over the years established world class standards in Accounting, Valuation, NAV computation and disclosure. Valuation: CRISIL a third party research and rating agency developed Bond Valuer in consultation with AMFI to provide uniform methodology for valuation of bonds, since 2000. Full disclosure of portfolio twice a year Most Funds provide monthly disclosure. Publication of Half Yearly unaudited results & Audited Annual Accounts. Restrictions on business activities of the asset management company: The asset management company shall, - not act as a trustee of any mutual fund; not undertake any business activities other than in the nature of management and advisory services provided to pooled assets including offshore funds, insurance funds, pension funds, provident funds, if any of such activities are not in conflict with the activities of the mutual fund. The asset management company shall not invest in any of its scheme, unless full disclosure of its intention to invest has been made in the offer documents, in case of schemes launched after the notification of Securities and Exchange Board of India (Mutual Funds). The mutual fund shall appoint a Custodian to carry out the custodial services for the schemes of the fund and sent intimation of the same to the Board within fifteen days of the appointment of the Custodian. No scheme shall be launched by the asset management company unless such scheme is approved by the trustees and a copy of the offer document has been filed with SEBI. The offer document shall contain disclosures which are adequate in order to enable the investors to make informed investment decision
Simplification of Offer Documents & Key Information Memorandum recently further simplified.
Certification Test for Agent Distributors, code of conduct for AMCs & Distributors. Uniform Cut-off Time for applicability of NAVs. Benchmark indices for comparing performance of Mutual funds. Comprehensive Risk Management System.
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MUTUAL FUNDS INVESTMENTS 2011 Regulatory Authorities

In India, SEBI acts as regulator for the Mutual Fund Industry. To safeguard the investors from potential irregularities, it formulates policies and regulates the mutual funds. It notified regulations in 1993 and is fully revised in 1996. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations. SEBI approved Asset Management Company (AMC) manages the funds by making investments in securities. The investment made securities are not as strictly governed as in countries like US, or UK. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. According to SEBI Regulations, two thirds of the directors of Trustee Company or board of trustees must be independent. The Association of Mutual Funds in India (AMFI) is a Non-profit organization formed by the industry players. It reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry. It would play a very important in overcoming some of the challenges currently faced by the MF Industry. AMFI also focuses its attention on upgrading professional standards and in promoting best industry practices in diverse areas.
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MUTUAL FUNDS INVESTMENTS 2011 Challenges and Issues

1. Regulations As the industry moves on from its nascence to adolescence, it is joint responsibility of the industry players, the regulators and also the investors to ensure that it further transits to maturity as smoothly as possible. A strong regulatory platform is a key challenge in any business environment, more so in the Indian context at this point on the growth curve of the industry. While we do have a strong regulatory platform in place, more can be done based on the experience of mature markets like the US and UK, where investor protection has assumed top priority. The industry is well governed with a spate of reactive regulations and its now time to introduce more proactive, growth enhancing regulations. 2. Administration and Distribution The penetration of the mutual funds is very low except in the urban regions. The penetration in the tier II and Tier III cities needs to be increased by way of investor awareness. Rural participation in mutual funds has been poor and continues to be the same. They need adequate support in terms of banking infra structure, distribution services and technological solutions to ensure a sustainable cost-benefit model of growth. 3. Low Levels of Customer Awareness India has one of the lowest levels of awareness and financial literacy which poses a big challenge to the mutual fund industry players. This lack of knowledge hampers the growth of the Mutual Fund Industry, as it discourages the savings being directed to the industry corpus. The differences between investing in Mutual Funds and Stock Market Directly must be highlighted to the customer. The customer must be informed about customization options which can be used by him to invest in mutual funds according to his capacity and how important regularity is when investing in mutual funds. 4. The technological backbone Fund houses have introduced technological innovations such as transacting through the internet, net asset value updates on mobile phones, unit balance alerts via SMS messages, transacting through ATM cards etc. However, these innovations currently cater to the already pampered urban class of investors.
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The internet revolution in our country is yet to penetrate to the grass root levels. The per capita usage of internet in our country is still very low compared not only to the developed countries but also as compared to our developing peers. Mobile telephony comparatively has grown exponentially. It is a challenge to strike the right balance while choosing to invest in technological advancements. The industry is now at a stage where to progress to the next level of growth, it needs more support from other sectors in the economy. It is necessary to join hands with other sectors of the economy such as banking and telecommunications. 5. Diminishing talent pool As the Industry plans to spread awareness and penetrate deeper in the market, it would require an army of professionals. But the industry is facing an acute shortage of talented resources which is showing its impact. The pool of talented people is diminishing and staff costs are soaring. The key challenge is to find a permanent solution to tide over this acute shortage. One possible solution could be for the industry is to tie up with universities and colleges to offer programmes dedicated to the nancial services and the mutual fund industry which would cover various critical aspects of the industry. 6. Growth versus Governance The Indian Mutual Fund industry was strong in the midst of adversities in the capital markets due to the strong regulatory framework in place. An increasing responsibility is being placed on the Trustees to ensure that the operations of the funds are managed to the full benefit of the investors. As the number of players in the market increases, competition may force fund houses to comply not only with the laid down regulations and concentrate more on growth but endeavor in creating excellence in governance as well.
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MUTUAL FUNDS INVESTMENTS 2011 Recent trends in Mutual Fund Industry

The Indian Mutual Fund has passed through three phases. The first phase was between 1964 and 1987 with Unit Trust of India the only player with a total asset of Rs. 6,700 crores at the end of 1988. The second phase was between 1987 and 1993 during this period 8 Funds were established (6 by banks and one each by LIC and GIC). The total assets under management had grown to 61,028 crores at the end of 1994 and the number of schemes was 167. The third phase began with the entry of private and foreign sectors in the Mutual Fund industry in 1993. Kothari Pioneer Mutual Fund was the first Fund to be established by the private sector in association with a foreign Fund. As at the end of financial year 2000 32 Funds were functioning with total assets under management equal to Rs. 1, 13,005 crores and by the end of august 2000, there were 33 Funds with 391 schemes and assets under management of Rs 1, 02,849 crores. Major Fund houses to operate in India are: o o o o o o o o o o o o o Fortis Birla Sun Life HDFC ING Vysya ICICI Mutual Funds DSP Black Rock Fidelity Franklin SBI Mutual Funds TATA Kotak Mahindra Unit trust of India Reliance, etc.
The Indian Mutual fund industry has witnessed considerable growth since its inception in 1963. The assets under management (AUM) have surged to Rs 4,173 bn in Mar-09 from just Rs 250 mn in Mar65. In a span of 10 years (from 1999 to 2009), the industry has registered a CAGR of 22.3%, albeit encompassing some shortfalls in AUM due to business cycles. The impressive growth in the Indian Mutual fund industry in recent years can largely be attributed to various factors such as rising household savings, comprehensive regulatory framework,
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favourable tax policies, and introduction of several new products, investor education campaign and role of distributors. In recent pasts SEBI has introduced various regulatory measures in order to protect the interest of small investors that augurs well for the long term growth of the industry. The tax benefits allowed on mutual fund schemes (for example investment made in Equity Linked Saving Scheme (ELSS) is qualified for tax deductions under section 80C of the Income Tax Act) has also helped mutual funds to evolve as the preferred form of investment among the salaried income earners. Moreover the mutual fund industry has introduced an array of innovative products such as liquid/money market funds, sector-specific funds, index funds, gilt funds, capital protection oriented schemes, special category funds, insurance linked funds, exchange traded funds, etc. It also has introduced Gold ETF fund in 2007 with an aim to allow mutual funds to invest in gold or gold related instruments. Further, the industry has launched special schemes to invest in foreign securities. The wide variety of schemes offered by the Indian Mutual fund industry provides multiple options of investment to common man. Indian mutual funds industry is witnessing a rapid growth on the back of infrastructural development, increase in personal financial assets, and rise in foreign participation. With the growing risk appetite, rising income, and increasing awareness, mutual funds in India are becoming a preferred investment option compared to other investment vehicles, like Fixed Deposits (FDs) and postal savings that are considered safe, but provide comparatively low returns, says our new research report Indian Mutual Fund Market Analysis. The share of mutual funds in households financial savings has also witnessed a substantial increase of 7.7% in 2008 as against 1.3% in 2001. The investor-wise pattern of asset-holding as well as investors accounts reveals that individual investors accounts for almost 96.75% of total investors and contribute Rs 1552.8 bn which is 37.0% of the total net assets as on March 31, 2009. The comparatively lower share of net assets of individual investors in total net assets is mainly due to lower penetration of mutual fund as an investment instrument among working population (age group 18-59 years) and a majority of investors in this age group are not aware of mutual funds or are investing in mutual funds through Systematic Investment Plan (SIP) only. Corporate and institutional investors on the other hand which accounts for only 1.2% of the total number of investors in Mutual funds industry, contribute as much as 56.3% to the total net assets of the industry as on March 31, 2009.
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Despite a rise in net FII inflows in the domestic mutual funds, FIIs constitute a very small percentage of investors accounts (0.0003%) and contribute Rs 49.83 bn to the total net assets (1% of total net assets of the Indian Mutual fund industry as on March 31, 2009). The Assets Under Management (AUM) of the Indian mutual fund industry as on March 31, 2011 (as per AMFI Monthly data) has witnessed a decrease of 3.54% to Rs. 5,92,250 crore on a year on year basis, on account of substantial outflows from equity, liquid and income schemes. Even though there were inflows of Rs. 27,912 crore into FMPs(Fixed Maturity Plans) that were mopped up by way of NFOs( New Fund Offers) during the month of March 2011, the financial year end requirements by banks and corporates led to redemptions from income and liquid funds. A sharp fall in equity markets as well as spiked yields on the long term debt side during the financial year forced the investors to opt for other alternate asset classes like gold and silver. Maximum growth was observed in AUM of Gold ETFs by 176.7%, while AUM of FOF Overseas dropped the most with 12.2%. The financial yearend AUM of the industry for March 2011 stood at Rs. 5.92 lakh crore, down from Rs. 6.13 lakh crore in March 2010. The graph indicates Growth of Assets over the Year
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MUTUAL FUNDS INVESTMENTS 2011 Current NEWS in Mutual Fund Industry

Mutual funds are an under tapped market in India: Despite being available in the market for over two decades now with assets under management equaling Rs 7,81,71,152 Lakhs as of 28 February 2010 given by Association of Mutual Funds, less than 10% of Indian households have invested in mutual funds. A recent report on Mutual Funds Investments in India published by research and analytics firm, Boston Analytics, suggests investors are holding back from putting their money in mutual funds due to their perceived high risk and a lack of information on how mutual funds work. This report is based on a survey of approximately 10,000 respondents in 15 Indian cities and towns as of March 2010.There are 43 Mutual Funds at present. Budget 2011: In the budget speech of Finance Minister of India, he has said Currently, only FIIs and sub-accounts registered with the SEBI and NRIs are allowed to invest in mutual fund schemes. To liberalize the portfolio investment route, it has been decided to permit SEBI-registered Mutual Funds to accept subscriptions from foreign investors who meet KYC requirements for equity schemes. This would enable Indian Mutual Funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market. Total MUF of dips by 4.3% in August 2011: Total Assets Under Management (AUM) of the mutual fund (MF) industry that climbed up 8.2% in July 2011, dipped by 4.3% (by Rs 31,449 crore) to Rs 6.96 lakh crore in August 2011. Liquid and Income Funds that faced huge inflow of funds during the month of July, witnessed net outflows to a tune of Rs 6925 crore and Rs 10066 crore respectively in August 2011. AUM of Other ETFs fell by 13.8%, Equity Linked Savings Scheme (ELSS) by 7.9% and Equity Funds by 6.9% among others. NAVs end with positive returns: as published on Fri. 09-09-2011 on moneycontrol.com it says Equity diversified NAVs ended positive with advance: decline ratio of 219:24, Among the Sector fund banking, pharma and technology funds advance, while FMCG and MNC funds decline, Long and Short term debt funds ended higher, their advance to decline ratio stood at 77:0 & 123:1 respectively. CRISIL Rating: Large equity and ultra short term debt funds were the best performers in the equity and debt categories, respectively, as per the latest CRISIL mutual fund ranking released for the quarter ended march 2011. The debt funds and equity category had returns close to 2% and negative 7%, respectively during the quarter ended March 2011 as compared to 1.35% and negative return of 0.57% respectively during the quarter ended December 2010.
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Capital Inflow and Outflow in Mutual Funds Industry: Mutual funds were net sellers for the second consecutive year in the equity spectrum to the tune of Rs 17703.90 crore during the financial year 2011 after being the net seller of Rs. 10161.60 crore in the financial year 2010.The net outflow during the period was a result of gross purchases Rs 151450 crore and gross sales Rs 168695 crore. On the debt front, mutual funds were seen as net buyers over years. MF bought debt securities worth a net Rs. 237981 crore during the financial year 2011. The net inflow during the month was a result of gross purchases Rs 737783 crore and gross sales Rs 501548 crore. SEBI plans to introduce new regulations for MF sales: Capital Market regulator is planning to introduce a set of regulations to keep a check on the mis-selling of mutual fund schemes by the distributors. Taking the first step towards forming these regulations, the Securities and Exchange Board of India (Sebi) sent a note to all asset management companies (AMCs) in March 2011, asking them to ensure that their distributors follow certain due diligence while selling MF schemes.
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MUTUAL FUNDS INVESTMENTS 2011 Performance Measurement: A Comparative Analysis

The performance measurement of Mutual Funds is usually done on a risk- return basis. Both risk as well as return is needed to provide a sufficient measure of the performance of a particular mutual fund. There are many statistical measures used to evaluate the performance of mutual funds and almost all of them measure either the risk associated or the returns expected, or sometimes both. In the comparative analysis, we have taken the Index Growth funds of 12 AMCs. This analysis will give us an idea of how the mutual funds are performing against the index and among themselves as well. For this purpose, we have taken the following 12 Asset Management Companies:
1. Birla Sunlife Mutual Funds 2. DSP Black Rock Mutual Funds 3. Fidelty Mutual Funds 4. Franklin Templeton Mutual Fund Investments 5. HDFC Mutual Funds 6. ICICI Prudential Mutual Funds 7. Kotak Mahindra Mutual Funds 8. Sundaram Mutual Funds 9. Tata Mutual Funds 10. SBI Mutual Funds 11. UTI Mutual Funds 12. Reliance Mutual Funds
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Standard Deviation
Standard deviation denotes the degree to which the returns deviate around the average. This measure is directly proportional to the risk, i.e. higher the standard deviation, greater is the risk. Around 75% of funds actual returns range within plus or minus one standard deviation of their monthly averages. A simple comparison of standard deviations of different funds with similar investment strategies can give an idea of which fund is better off in terms of maximization of returns received. The following table shows the calculated Standard Deviations of the selected Index Funds: Standard Deviation () BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.082578 0.092158 0.078072 0.078456 0.082721 0.095839 0.080817 0.095782 0.085181 0.090359 0.087260 0.105154
The table shows the highest standard deviation in case of Reliance, i.e. 10.5%, followed by ICICI (9.5%), thus showing a high degree of risk associated with them. The others are more or less of the same risk class having their standard deviations between the range of 7.8% - 9%
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Beta
Beta gives a measure of the relationship between the returns from a fund and the market (NIFTY in this case). Usually monthly returns from the fund are taken for a considerable number of years and are correlated with the corresponding monthly returns of the index. Beta gives the sensitivity of a funds return to fluctuations in the respective market considered. The formula for calculating Beta is:
Where, Cov(i,m) is the covariance of the funds returns with the markets returns and Var(m) is the variance of the market returns. An average well diversified portfolio will have a beta of 1.0, i.e. it fluctuates in a similar fashion as the market index does. Funds having beta more than 1.0, show above average volatility and thus a sign of greater risk. Portfolio having beta less than 1.0 is considered to be a defensive portfolio that invests primarily in slow moving stocks. The following table shows the calculated Beta () of the selected Index Funds: Beta () BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.805352 0.925317 0.854562 0.864371 0.911220 0.966426 0.888937 1.046436 0.945825 0.962436 0.910732 0.565029
It is clear from the table that almost all the funds, except Reliance and Sundaram, have Beta in the range of 0.8 0.96, while reliance has the lowest of 0.5 and Sunadaram has the highest beta of 1.04. However, risk cannot be evaluated alone, without taking into consideration the respective returns.
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The following table shows the calculated Return (Ri) of the selected Index Funds: Returns BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 21.3731% 8.4228% 21.5091% 20.4608% 23.7833% 26.5990% 17.2754% 16.6556% 16.8040% 17.3123% 17.5851% 11.8808%
Looking at both the returns as well as the risks associated, we can conclude that ICICI Index funds are the best bet for an investor, as it has given the highest returns over the past 5 years of 26% (CAGR), and have a beta of 0.96. a beta close to 1.0 indicates that it fluctuates in synch with the market, but however, gives a much higher return. DSPBR has the lowest returns and a high beta, making it he most unattractive bet for an investor. Reliance Mutual funds Index fund has a low beta as well as a low return of 11.8%. A highly risk averse investor would be willing to invest in such a type of portfolio.
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The Treynors Ratio
This ratio was developed by Jack Treynor. It measures the returns from a fund earned over and above of that which could have been earned on a riskless investment per unit of market risk. It is basically a riskadjusted measure of return based on systematic risk. The formula for calculating Treynors Ratio is: (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the Portfolio
While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. The following table shows the calculated Treynors Ratio of the selected Index Funds: Treynor's Index (Ti) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.200721 0.034744 0.190754 0.176462 0.203851 0.221343 0.135752 0.109397 0.122603 0.125768 0.135904 0.118097
Since all the selected funds have a positive Teynors Ratio, we can conclude that all of them have been able to outperform the market. All the funds have provided adequate return to investor per unit risk taken, with ICICI being the best among others and DSPBR the worst. Treynors Ratio is also known as Reward to Volatility Ratio.
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Sharpe Ratio
This ratio was developed by William F Sharpe. It also is a measure of the returns from a fund earned over and above the expected return from the portfolio. It relates risk and return of the portfolio and assesses the performance as return per unit of total risk. The difference between the Sharpe ratio and the Teynors ratio is that the former takes into consideration the total risk associated with a portfolio, while the latter considers only the systematic risk. The formula for calculating Sharpe ratio is: (Expected Return from the Portfolio - Average Return of the Risk-Free Rate) / Standard Deviation of the Portfolio
While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavorable performance. The following table shows the calculated Sharpes Ratio of the selected Index Funds: Sharpes Ratio (Si) BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 1.148202 1.182093 1.288668 1.297091 1.296891 1.187196 1.294980 1.286248 1.307270 1.253997 1.228771 0.632617
A higher Sharpes ratio means a higher volatility of portfolio return. The positive Sharpe Ratio of all the selected funds shows that the risk taken by an investor of the respective funds have been rewarded by adequate returns. Sharpes ratio is also thus known as Risk to Reward Ratio.
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Jensens Measure
This was developed by Michael Jensen. This is also a risk adjusted performance measure. It is a measure of the returns from a fund in excess to the one predicted by the Capital Asset Pricing (CAPM) Model. The difference between the actual returns and the ones predicted by CAPM Model for a particular period denotes Alpha (). The formula for calculating Jensens Alpha is:
Where, Ra is the average return of the portfolio for a particular period, Rf is the risk free rate, Beta of the portfolio and Rm is the market return for that particular period.
is the
If the fund fares better than predicted, it has a positive alpha & vice-versa. Higher alpha represents superior performance of the fund and vice versa. The following table shows the calculated Jensens Alpha () of the selected Index Funds: Jenson's Alpha () BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.066835 -0.076791 0.062402 0.050765 0.078473 0.100132 0.016019 -0.008722 0.004606 0.007734 0.016550 0.000206
A higher positive Alpha () indicates better performance. Again ICICI emerges as the best investment option as it has the highest alpha among the selected funds, which indicates that it is providing a highly excessive return than the market. Also, DSPBR and Sundaram have a negative alpha, and Reliance has an alpha of 0.0002, which is very near to Zero. This indicates that DSPBR and Sundaram have been giving lesser returns than the market while reliances returns have been comparable to the market return.
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The following table gives a comparative picture of all the selected funds vis--vis the measures used to evaluate their performance. Standard Deviation () BIRLA SUNLIFE DSPBR FIDELITY FRANKLIN HDFC ICICI KOTAK SUNDARAM TATA SBI UTI RELIANCE 0.083 0.092 0.078 0.078 0.083 0.096 0.081 0.096 0.085 0.090 0.087 0.105 Required Return (Ri) 21.37% 8.42% 21.51% 20.46% 23.78% 26.60% 17.28% 16.66% 16.80% 17.31% 17.59% 11.88% Beta () 0.81 0.93 0.85 0.86 0.91 0.97 0.89 1.05 0.95 0.96 0.91 0.57 Sharpe Ratio (Si) 1.148 1.182 1.289 1.297 1.297 1.187 1.295 1.286 1.307 1.254 1.229 0.633 Jenson's Alpha () 0.067 -0.077 0.062 0.051 0.078 0.100 0.016 -0.009 0.005 0.008 0.017 0.000 Treynor's Index (Ti) 0.201 0.035 0.191 0.176 0.204 0.221 0.136 0.109 0.123 0.126 0.136 0.118
The whole analysis depicts a very high preference for ICICI Index funds as all the measures used give a positive picture for this fund as far as high returns and low risks are concerned. Also, in the past five years, the fund has constantly outperformed the market and has been able to give higher returns as compared to the other funds. Also DSPBR has shown the worst performance over the years, and is not a good option for a rational investor to invest in such a portfolio. It has shown a low return of just 8%, a negative alpha of -0.077, and a high standard deviation as well. Thus it is not advisable to invest in DSPBR. Another observation has been made for Reliance Index Funds. Over the years, this fund has been performing almost at par with the market. Also, a low beta of 0.57 shows a low volatility to market fluctuations and thus a lower risk. Thus reliance index funds are a safe bet for a risk- averse investor. The other funds taken in the analysis have a similar performance pattern in terms of risk and return.
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MUTUAL FUNDS INVESTMENTS 2011 Future Outlook of Mutual Funds Industry

The Indian Mutual Funds Industry has been showing rapid growth in the past driven by favorable economic and demographic factors. Although the industry witnessed a slight fall in value of AUM during recession, we think that the industry has bright future prospects. Here we will discuss the growth drivers and the possible changes in industry in future. Growth Drivers 1. GDP We see that the key macroeconomic driver GDP growth rate is being scaled down by forecasters due to the rising inflation rates. According to a quarterly survey conducted by RBI, the projection of real GDP growth rate for 2011-12 is 7.9%. But according to Moodys official release Sept 2011, India's medium- to long-term economic potential continues to be buoyed by its demographic profile, robust savings and investment rates and rising international competitiveness of its corporations. Thus we think that the economic outlook of India will be positive in future. 2. Savings Rate and Disposable Income According to India Economic Outlook 2011-12, domestic savings rate as a ratio of GDP is around 33.8% in 2010-11 and supposed to be at 34% in 2011-12. Also if we see the below figure, we can say that the disposable income will increase in future due to the increase in middle and rich class by 55.3% and 88.6% respectively by 2015-16. This coupled with increasing savings rate will lead to more savings amount available for investment in financial securities.
120.00 100.00 80.00 60.00 40.00 20.00 0.00
% of Total No. of Household (mn)

1.33 13.07 29.43 34.04 2.51 20.30
Per household annual income (INR lakh at 200910 price levels)

Rich >17 Middle 3.4 - 17
56.08 2009-10
43.15 2015-16
Asprirers 1.5 3.4 Deprived <1.5
Source: NCAER
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3. Regulations The participation of retail investors will also increase due to the removal of entry load done by SEBI as it brings more transparency to the cost structure of mutual funds. Previously investors used to see the distributors as default choice but now they know that they have to pay a fee to distributors so they will think twice before selecting one distributor. In fact investors will be more interested to go for direct investment to the mutual fund too. The transparency of fees not only will increase the confidence of investors but also will increase the competition among the distributors and thus the overall quality of the industry. 4. Union Budget 2011-12 The other factor that supports our view of growing mutual funds industry is the Union Budget 2011-12. The finance minister has permitted the SEBI registered Mutual Funds to accept investments from KYC-compliant foreign investors for equity schemes. This will widen the foreign investor base of mutual funds and also the quality based on the strategy-oriented mindset there. Changes Anticipated 1. Increase Awareness To tap the opportunity of growing savings as mentioned above, Mutual funds need to increase awareness among retail investors and thus increase their participation in Mutual funds. The funds can come up with some combined education programs at various centers educating retail investors over the risk and return, advantages and disadvantages and the process involved in investing in mutual funds. 2. New Innovative Products & Greater Penetration Funds can create more innovative products to attract investors and penetrate into tier 2 and 3 cities to reach retail investors. But the one area where it will be more difficult for mutual funds to gain access is the rural regions due to lack of awareness, inferior distribution and limited banking services and thus this area will take time to conquer. 3. Own Distribution Services In the case of industry model, it can be that mutual funds will start selling more directly to investors or start their own distribution services instead of depending on agents. This will not only save commission fees for funds but also the transaction fees for investors. It will further increase the growth of mutual funds.
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4. Industry Consolidation We can also find industry consolidation owing to the approval of SEBI for merger of mutual funds. But the rate of consolidation will not be so high due to certain tax issues that increase the cost of merger. A merger involves redemption of certain equity oriented schemes which attract Security Transaction Tax (currently the STT in mutual funds schemes is 0.25% of value). Overall, we anticipate bright future prospects for Indian Mutual Fund Industry based on the drivers we mentioned above. In the case of the various schemes available, we think that Debt schemes and Money Market funds will see more increase in the near future and those too open-ended mutual funds. This is because of the growing risk aversion nature of the investors due to the recent recession. But off course the distribution of funds among various schemes will not be totally onesided as we always have investors who are risk-takers. And this scenario will be seen in near future only as once the investors gain confidence they will be willing to take more risks.
Research Papers
In this section, we have covered briefly the research papers over Indian mutual funds industry. Please note that we have avoided the articles which are just literature or theory. Here we have shown papers which have done some experiment, analysis, survey, etc. Downside Risk Analysis of Indian Equity Mutual Funds: A Value at Risk Approach by Soumya Guha Deb & Ashok Banerjee, 2009 Soumya & Ashok attempt to show the importance of VAR as a single downside risk measure for Indian equity mutual funds which is being ignored currently. They used three parametric models (random walk, moving average and exponentially weighted moving average) and one non parametric model (historical simulation) to predict the VAR and also tested its robustness through back testing. The study shows considerable downside risk in terms of VAR to the tune of 40% to 90% at 99% level of confidence. Market Timing Ability of Selected Mutual Funds in India: A Comparative Study by B Phaniswara Raju & K Mallikarjuna Rao, Mar 2009 Raju and Rao explored the market timing ability of selected Indian mutual fund managers using two models Treynor and Mazuy & Henriksson and Merton. The results indicate that a majority of the selected mutual fund scheme managers are not seriously engaged in any market timing activities and are relying mainly on stock selection skills. Further, fund managers of private sector exhibited better market timing as per Henriksson and Merton model. The same results have been found in studies done in
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developed capital markets. On Stock Selection Skills and Market Timing Abilities of Mutual Fund Managers in India by Sanjay Sehgal & Manoj Jhanwar, May 2008 Sehgal & Jhanwar evaluated the performance of selected equity-based mutual funds. They demonstrated how the performance results related to both selectivity and market timing skills get modified if use multi-factor benchmark instead of standard one-factor CAPM benchmark. They also found that increasing the observation frequency such as using daily returns improve the selectivity and timing ability evidence of Indian fund managers. Short-Term Persistence in Mutual Funds Performance: Evidence from India by Sanjay Sehgal & Manoj Jhanwar, Apr 2008 The authors tried to analyse whether there exists short term persistence in equity mutual funds performance. They used both one factor and multi factor models and that too using both daily and monthly data. With monthly data, they found no strong evidence of persistence but with daily data, they found that winner portfolio does provide gross abnormal returns of 10% per annum on post-formation basis. Overall the study is in conformity with efficient market hypothesis. The author states that their results have implications for Hedge funds and other managed portfolios who consistently look for extranormal returns. Market Timing and Stock Selection Ability of Mutual Funds in India: An Emirical Investigation by Soumya Guha Deb, Ashok Banerjee and B B Chakrabarti, June 2007 The paper explored the market timing ability and stock selection ability of Indian mutual fund managers during Jan 2000 to June 2005. The authors used both traditional and conditional models with monthly and weekly data frequency. The results indicated very little evidence of market timing ability but good evidence of stock selection ability. It was in line with the global findings. Also authors found that most of the positive timers were open-ended funds, though closed ended fund managers should have more market timing ability as they have more control over the cash inflows to their schemes. A Study of Fund Selection Behavior of Individual Investors Towards Mutual Funds With Reference to Mumbai City by Ms. Kavitha Ranganathan, 2006 Ms. Ranganathan explored the behavioral finance behind the fund selection process using surveys, factor analysis, etc. She found that the statistically significant fund related factors that investors look for are Fund performance, expense ratio, portfolio, reputation and credibility of fund manager, credit ratings, flexibility. She further divided these factors among three types of investors professional, imageconscious and cautious. Does Mutual Fund Management in India Correspond to its Investment Objective Classification?
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by Luis Ferruz Agudo & Cristina Ortiz Lazaro, Dec 2005 Agudo & Cristina used NAV to infer some kind of pattern to classify mutual funds using factor and cluster analysis. Then they compare whether the classification they done fit with the stated investmentobjective classification. Factor analysis indicates that risk is a major factor that determines the evolution of return or NAV of mutual funds in India. But the Cluster Analysis gave opposite results indicating that the mutual funds do not really follow the strategies they explain in their prospects. An Empirical Study on Factors Influencing the Mutual Fund/Scheme Selection by Retail Investors by Ms. T.R. Rajeswari & Prof. V.E. Rama Moorthy, 2002 Rajeswari & Moorthy also analysed the behavioral finance aspects and conducted a survey with Factor analysis. According to the results, investors look for safety first in Mutual Funds products, followed by good returns, tax benefits, liquidity and capital appreciation in the order. The survey also revealed that the investors are first influenced by intrinsic product qualities and then the fund management efficiency and general image of fund. Also the infrastructural facilities and reputation influence the decision of investors.
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MUTUAL FUNDS INVESTMENTS 2011 References

http://www.mutualfundsindia.com/ind_upd.asp http://www.mutualfundsnavindia.com/getnav.php http://indian-mutualfund.blogspot.com/search/label/MF%20News http://www.adityabirlamoney.com/news/505202/10/22,24/Mutual-Funds-Reports/Total-AUM-ofMF-Industry-Dips-by-4-3-in-August-11 http://blogs.reuters.com/india-expertzone/2011/03/03/budget-2011-good-news-for-mutual-fundindustry/ http://www.corepro.in/corewealth/index.php/2011/07/current-senario-of-mutual-fund-industry/ http://www.rncos.com/Report/IM307.htm http://www.crisil.com/pdf/capitalmarket/CRISIL-mf-ranking-booklet-mar-2011.pdf http://www.hdfcsec.com/research/ResearchDetails.aspx?report_id=2976425 http://www.in.kpmg.com/tl_files/pictures/mutual-fund-web.pdf www.mutualfundsindia.com/mfbasic.asp http://www.mutualfundsindia.com/faq.asp http://www.investopedia.com/university/mutualfunds/#axzz1XUMecmWT http://www.mutualfundsresource.com/mutualfunds/types.html http://www.appuonline.com/mf/knowledge/concept.html http://www.sebi.gov.in/faq/mf_faq.html http://businesstoday.intoday.in/story/sebi-imposes-rs-150-transaction-fee-on-new-mfinvestments/1/18127.html http://www.livemint.com/2009/08/24001154/Indian-mutual-fund-industry-to.html http://www.rediff.com/business/slide-show/slide-show-1-perfin-how-to-calculate-mutual-fundscosts/20110425.htm http://www.moneycontrol.com/news/mf-news/sebi-mulls-to-make-mfs-brokerage-feepartexpenses_565927.html http://banking.contify.com/story/indias-real-gdp-growth-rate-cut-to-79-for-fiscal-2011-12-rbiforecasters-survey-2011-08-12 http://articles.economictimes.indiatimes.com/2011-09-06/news/30119291_1_gdp-growth-growthestimates-indian-economy http://www.india-briefing.com/news/key-points-indias-economic-outlook-20112012-4948.html/
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http://www.thehindubusinessline.com/markets/stock-markets/article1501295.ece http://indian-mutualfund.blogspot.com/2011/04/mf-schemes-merger-hits-taxation-hurdle.html Ebscohost Database
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MUTUAL FUNDS INVESTMENTS

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Contents

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 What are Mutual Funds?

Investors in mutual funds

MUTUAL FUNDS INVESTMENTS 2011

Non Residents Including o o Non resident Indians Overseas corporate bodies

Types of Mutual Funds Schemes in India

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Motive behind different schemes

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Business Model of Mutual Funds

Dividend and Capital Give back to Gain

MUTUAL FUNDS INVESTMENTS 2011 Advantages of Mutual Funds

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

Disadvantages of Mutual Funds

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Risks in Mutual Funds investments

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Evolution of Mutual Fund Industry

First Phase 1964-87

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

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

MUTUAL FUNDS INVESTMENTS 2011

Fourth Phase since February 2003

MUTUAL FUNDS INVESTMENTS 2011

Asset Under Mnagement

MUTUAL FUNDS INVESTMENTS 2011 Choosing a Fund

MUTUAL FUNDS INVESTMENTS 2011

Transacting Mutual Funds

Open ended schemes

Buying close ended units post IPO

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Appreciation/Depreciation of the NAV

Total Return Method

MUTUAL FUNDS INVESTMENTS 2011

Average Asset Under Management (In Rs. Crore)

AUM Category Wise

3507.29 294217.44 197562.81 17552.4 0.59% 49.28% 33.09% 2.94%

As of March 31, 2011

MUTUAL FUNDS INVESTMENTS 2011

The GDP to AUM ratio

GDP to AUM Ratio

MUTUAL FUNDS INVESTMENTS 2011

* Defined as individuals investing Rs 5 lakhs and above As of March 31st 2011

MUTUAL FUNDS INVESTMENTS 2011 Regulations in Mutual fund Industry

MUTUAL FUNDS INVESTMENTS 2011 Regulatory Authorities

MUTUAL FUNDS INVESTMENTS 2011 Challenges and Issues

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Recent trends in Mutual Fund Industry

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011

MUTUAL FUNDS INVESTMENTS 2011 Current NEWS in Mutual Fund Industry