PROJECT REPORT

ON
MUTUAL FUND
TRENDS
IN
INDIA

A Project Report on
MUTUAL FUND TRENDS IN INDIA
M.Com (Banking & Finance)
Semester I
(2014-15)
SUBMITTED
IN FULLFILLMENT OF THE REQUIREMENTS
FOR
MASTERS OF COMMERCE (BANKING & FINANCE)
BY
CHIRAG GOHIL
ROLL NO. 14310A0003
VIDYALANKAR SCHOOL OF INFORMATION TECHNOLOGY
VIDYALANKAR MARG, WADALA (E), MUMBAI 400 037

NEED FOR THE STUDY

The main purpose of doing this project was to know about mutual
fund, its functioning and the trends of Mutual Funds. This project
helps to know in details about mutual fund industry right from its
inception stage, growth and future prospects. It also helps in
understanding different schemes of mutual funds. Because my
study depends upon trends in MF in India and their schemes like
equity, income, balance as well as the returns associated with
those schemes. The study of these schemes also shows the
trends pertaining to MF in India. Ultimately this would help in
understanding the benefits of MF to investors.

OBJECTIVE
1. To give a brief idea about the benefits available from Mutual
Fund investment.
2. To give an idea of the types of schemes available.
3. To discuss about the market trends of Mutual Fund investment.
4. To study some of the mutual fund schemes.
5. To study some mutual fund companies and their funds.
6. Observe the fund management process of mutual funds.
7. Explore the recent developments in the MFin India.
8. To give an idea about the regulations of mutual funds.
9. To know the trends (recent trends precisely) pertaining to MF in
India.

LIMITATIONS
1. The lack of information sources for the analysis part.
2. The data provided by the prospects may not be 100% correct
as they too have their limitations.
3. The study is limited to selected mutual fund schemes.

INTRODUCTION OF MUTUAL FUND

There are a lot of investment avenues available today in the
financial market for an investor with an investable surplus. He can
invest in Bank Deposits, Corporate Debentures, and Bonds where
there is low risk but low return. He may invest in Stock of
companies where the risk is high and the returns are also
proportionately high. People began opting for portfolio managers
with expertise in stock markets who would invest on their behalf.
Thus we had wealth management services provided by many
institutions. However they proved too costly for a small investor.
These investors have found a good shelter with the mutual funds.

CONCEPT OF MUTUAL FUND:

A mutual fund is a common pool of money into which investors
place their contributions that are to be invested in accordance
with a stated objective. The ownership of the fund is thus joint or
mutual; the fund belongs to all investors. A single investors
ownership of the fund is in the same proportion as the amount of
the contribution made by him or her bears to the total amount of
the fund.
MF are trusts, which accept savings from investors and invest the
same in diversified financial instruments in terms of objectives set
out in the trusts deed with the view to reduce the risk and
maximize the income and capital appreciation for distribution for
the members. A Mutual Fund is a corporation and the fund
managers interest is to professionally manage the funds provided
by the investors and provide a return on them after deducting
reasonable management fees. The objective sought to be
achieved by Mutual Fund is to provide an opportunity for lower
income groups to acquire without much difficulty financial assets.

They cater mainly to the needs of the individual investor whose

means are small and to manage investors portfolio in a manner
that provides a regular income, growth, safety, liquidity and
diversification opportunities.
DEFINITION:
MF are collective savings and investment vehicles where savings
of small (or sometimes big) investors are pooled together to
invest for their mutual benefit and returns distributed
proportionately. A mutual fund is an investment that pools your
money with the money of an unlimited number of other investors.
In return, you and the other investors each own shares of the
fund. The funds assets are invested according to an investment
objective into the funds portfolio of investments. Aggressive
growth funds seek long-term capital growth by investing primarily
in stocks of fast-growing smaller companies or market segments.
Aggressive growth funds are also called capital appreciation
funds.

WHY SELECT MUTUAL FUNDS?

The risk return trade-off indicates that if investor is willing to take
higher risk then correspondingly he can expect higher returns and
vise versa if he pertains to lower risk instruments, which would be
satisfied by lower returns. For example, if an investors opt for
bank FD, which provide moderate return with minimal risk. But as
he moves ahead to invest in capital protected funds and the
profit-bonds that 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 MF as
their primary means of investing because MF provides
professional management, diversification, convenience and
liquidity. That doesnt mean mutual fund investments 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. Hedge fund involves a very high risk since it is mostly
traded in the derivatives market which is considered very volatile.

HISTORY OF MF IN INDIA:
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. The history of MF in India can be
broadly divided into four distinct phases:
1. 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 hadRs.6,700 crores
of assets under management.
2. SECOND PHASE 1987-1993 (ENTRY OF PUBLIC SECTOR
FUNDS): 1987 marked the entry of non- UTI, public sector
MFset 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 December1990. At the

end of 1993, the mutual fund industry had assets under

management of Rs.47, 004crores.
3. 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 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 MFsetting up funds in India and also the industry has
witnessed several mergers and acquisitions. As at the end of
January 2003, there were 33 MFwith 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.
4. 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 Ltd, 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. As
at the end of September, 2004, there were 29 funds, which
manage assets of Rs.153108 crores under 421schemes.

GROWTH IN ASSETS UNDER

MANAGEMENT
The graph given below indicates the growth of assets under
management over the years:

ADVANTAGES OF MUTUAL FUNDS:

If MFs are emerging as the favorite investment vehicle, it is
because of the many advantages they have over other forms and
the avenues of investing, particularly for the investor who has
limited resources available in terms of capital and the ability to
carry out detailed research and market monitoring.
The following are the major advantages offered by MF to
all investors:

1. Portfolio Diversification: Each investor in the fund is a part

owner of all the funds assets, thus enabling him to hold a
diversified investment portfolio even with a small amount of
investment that would otherwise require big capital.
2. Professional Management: Even if an investor has a big
amount of capital available to him, he benefits from the
professional management skills brought in by the fund in the
management of the investors portfolio. The investment
management skills, along with the needed research into
available investment options, ensure a much better return than
what an investor can manage on his own. Few investors have
the skill and resources of their own to succeed in todays fast
moving, global and sophisticated markets.
3. Reduction/Diversification of Risk: When an investor invests
directly, all the risk of potential loss is his own, whether he
places a deposit with a company or a bank, or he buys a share
or debenture on his own or in any other from. While investing in
the pool of funds with investors, the potential losses are also
shared with other investors. The risk reduction is one of the
most important benefits of a collective investment vehicle like
the mutual fund.
4. Reduction of Transaction Costs: What is true of risk as also
true of the transaction costs? The investor bears all the costs of
investing such as brokerage or custody of securities. When
going through a fund, he has the benefit of economies of scale;
the funds pay lesser costs because of larger volumes, a benefit
passed on to its investors.
5. Liquidity: Often, investors hold shares or bonds they cannot
directly, easily and quickly sell. When they invest in the units of
a fund, they can generally cash their investments any time, by
selling their units to the fund if open-ended, or selling them in

the market if the fund is close-end. Liquidity of investment is

clearly a big benefit.
6. Convenience and Flexibility: Mutual fund management
companies offer many investor services that a direct market
investor cannot get. Investors can easily transfer their holding
from one scheme to the other; get updated market information
and so on.
7. Tax Benefits: Any income distributed after March 31, 2002 will
be subject to tax in the assessment of all Unit holders.
However, as a measure of concession to Unit holders of openended equity-oriented funds, income distributions for the year
ending March 31, 2003, will be taxed at a concessional rate of
10.5%. In case of Individuals and Hindu Undivided Families a
deduction up to Rs. 9,000 from the Total Income will be
admissible in respect of income from investments specified in
Section 80L,including income from Units of the Mutual Fund.
Units of the schemes are not subject to Wealth-Tax and Gift-Tax.
8. Choice of Schemes: MF offer a family of schemes to suit your
varying needs over a lifetime.
9. Well Regulated: All MF are registered with SEBI and they
function within the provisions of strict regulations designed to
protect the interests of investors. The operations of MF are
regularly monitored by SEBI.10. Transparency: You get regular
information on the value of your investment in addition to
disclosure on the specific investments made by your scheme,
the proportion invested in each class of assets and the fund
managers investment strategy and outlook.
DISADVANTAGES OF MUTUAL FUNDS:

1. No Control over Costs: The investor who invests in mutual

funds has any control of the overall costs of investing. The
investor pays investment management fees as long as he
remains with the fund, albeit in return for the professional
management and research. Fees are payable even if the value
of his investments is declining. A mutual fund investor also
pays fund distribution costs, which he would not incur indirect
investing. However, this shortcoming only means that there is a
cost to obtain the mutual fund services.
2. No Tailor-Made Portfolio: Investors who invest on their own
can build their own portfolios of shares and bonds other
securities. Investing through fund means he delegates this
decision to the fund managers. The very-high-net-worth
individuals or large corporate investors may find this to be a
constraint in achieving their objectives. However, most mutual
fund managers help investors overcome this constraint by
offering families of funds- a large number of different schemeswithin their own management company. An investor can
choose from different investment plans and constructs portfolio
to his choice.
3. Managing A Portfolio Of Funds: Availability of large amount
of funds actually means too much choice for the investor. He
may again need advice on how to select a fund to achieve his
objectives, quite similar to the situation when he has individual
shares or bonds to select.
4. The Wisdom Of Professional Management: Thats right,
this is not an advantage. The average mutual fund manager is
no better at picking stocks than the average nonprofessional,
but charges fees.

5. No Control: Unlike picking your own individual stocks, a

mutual fund puts you in the passenger seat of somebody elses
car.
6. Dilution: MF generally have such small holdings of so many
different stocks that insanely great performance by funds top
holdings still doesnt make much of a difference in MF total
performance.
7. Buried Costs: Many MF specialize in burying their costs and in
hiring salesmen who dont make those costs clear to their
clients.

TYPES OF MF 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 MF 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 MF scheme to choose from.
It is easier to think of MF in categories, mentioned below.
BY 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: A closed-end fund has a stipulated
maturity period which generally ranging from 3 to 15years. The
fund is open for subscription only during a specified period.
Investors can invest in the scheme at the time of the initial
public issue and thereafter they can buy or sell the units of the
scheme on the stock exchanges where they are listed. In order
to provide an exit route to the investors, some close-ended
funds give an option of selling back the units to the Mutual
Fund through periodic repurchase at NAV related prices. SEBI
Regulations stipulate that at least one of the two exit routes is
provided to the investor.
3. Interval Schemes: Interval Schemes are that scheme, which
combines the features of open-ended and close-ended

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.

BY NATURE:

1. Equity Fund: These funds invest a maximum part of their

corpus into equities 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:
a. Diversified Equity Funds,
b. Mid-Cap Funds,
c. Sector Specific Funds,
d. Tax Savings Funds,
e. (ELSS) Equity investments are meant for a longer time
horizon, thus Equity funds rank high on the risk-return
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:
a. 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.
b. Income Funds: Invest a major portion into various debt
instruments such as bonds, corporate debentures and
Government securities.
c. 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.
d. Short Term Plans (STPs): Meant for investment horizon for
three to six months. These funds primarily invest in short
term papers like.
e. Certificate of Deposits (CDs) and Commercial Papers (CPs).
Some portion of the corpus is also invested in corporate
debentures.
3. 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.
4. 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. Further

the MF can be broadly classified on the basis of investment
parameter viz, each category of funds is backed by an
investment philosophy, which is pre-defined in the objectives of
the fund. The investor can align his own investment needs with
the funds objective and invest accordingly.

BY INVESTMENT OBJECTIVE:

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 apart 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.
5. Load Funds: A Load Fund is one that charges a commission for
entry or exit. That is, each time you buy or sell units in the
fund, a commission will be payable. Typically entry and exit
loads range from 1% to 2%. It could be worth paying the load,
if the fund has a good performance history.
6. No-Load Funds: A No-Load Fund is one that does not charge a
commission for entry or exit. That is, no commission is payable
on purchase or sale of units in the fund. The advantage of a no
load fund is that the entire corpus is put to work.
OTHER SCHEMES

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. 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. For 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.

NET ASSET VALUE (NAV):

Since each owner is a part owner of a mutual fund, it is necessary

to establish the value of his part. In other words, each share or
unit that an investor holds needs to be assigned a value. Since
the units held by investor evidence the ownership of the funds
assets, the value of the total assets of the fund when divided by
the total number of units issued by the mutual fund gives us the
value of one unit. This is generally called the Net Asset Value
(NAV) of one unit or one share. The value of an investors part
ownership is thus determined by the NAV of the number of units
held.

Calculation of NAV: Let us see an example. If the value of a

funds assets stands at Rs. 100 and it has 10investors who have
bought 10 units each, the total numbers of units issued are 100,
and the value of one unit is Rs. 10.00 (1000/100). If a single
investor in fact owns 3 units, the value of his ownership of the
fund will be Rs. 30.00(1000/100*3). Note that the value of the
funds investments will keep fluctuating with the market-price
movements, causing the Net Asset Value also to fluctuate. For
example, if the value of our funds asset increased from Rs. 1000
to 1200,the value of our investors holding of 3 units will now be
(1200/100*3) Rs. 36. The investment value can go up or down,
depending on the markets value of the funds assets.

MUTUAL FUND FEES AND EXPENSES:

Mutual fund fees and expenses are charges that may be incurred
by investors who hold mutual funds. Running a mutual fund
involves costs, including shareholder transaction costs,
investment advisory fees, and marketing and distribution
expenses. Funds pass along these costs to investors in a number
of ways.
1. TRANSACTION FEES:

 Purchase Fee: It is a type of fee that some funds charge

their shareholders when they buy shares. Unlike a frontend sales load, a purchase fee is paid to the fund (not to a
broker) and is typically imposed to defray some of the
funds costs associated with the purchase.
Redemption Fee: It is another type of fee that some
funds charge their shareholders when they sell or redeem
shares. Unlike a deferred sales load, a redemption fee is
paid to the fund (not to a broker) and is typically used to
defray
fund
costs
associated
with
shareholders
redemption.
Exchange Fee: Exchange fee that some funds impose on
shareholders if they exchange (transfer) to another fund
within the same fund group or "family of funds."

2. PERIODIC FEES
Management Fee: Management fees are fees that are paid
out of fund assets to the funds investment adviser for
investment portfolio management, any other management
fees payable to the funds investment adviser or its affiliates,
and administrative fees payable to the investment adviser
that are not included in the "Other Expenses" category. They
are also called maintenance fees.
Account Fee: Account fees are fees that some funds
separately impose on investors in connection with the
maintenance of their accounts. For example, some funds
impose an account maintenance fee on accounts whose
value is less than a certain dollar amount.

3. OTHER OPERATING EXPENSES

Transaction Costs: These costs are incurred in the
trading of the funds assets. Funds with a high turnover
ratio or investing in illiquid or exotic markets usually face
higher transaction costs. Unlike the Total Expense Ratio
these costs are usually not reported.
Loads: Definition of a load funds exhibit a "Sales Load"
with a percentage charge levied on purchase or sale of
shares. A load is a type of Commission (remuneration).
Depending on the type of load a mutual fund exhibits,
charges may be incurred at time of purchase, time of
sale, or a mix of both. The different types of loads are
outlined below.
Front-end load: Also known as Sales Charge, this is a
fee paid when shares are purchased. Also known as a
"front-end load," this fee typically goes to the brokers that
sell the funds shares. Front-end loads reduce the amount
of your investment. For example, lets say you have
Rs.10,000 and want to invest it in a mutual fund with a
5% front-end load. The Rs.500 sales load you must pay
comes off the top, and the remaining Rs.9500 will be
invested in the fund. According to NASD rules, a front-end
load cannot be higher than 8.5% of your investment.
Back-end load: Also known as Deferred Sales Charge,
this is a fee paid when shares are sold. Also known as a
"back-end load," this fee typically goes to the brokers that
sell the funds shares. The amount of this type of load will
depend on how long the investor holds his or her shares
and typically decreases to zero if the investor holds his or
her shares long enough.

 Level load / Low load: Its similar to a back-end load in

that no sales charges are paid when buying the fund.
Instead a back-end load may be charged if the shares
purchased are sold within a given timeframe. The
distinction between level loads and low loads as opposed
to back-end `loads is that this time frame where charges
are levied is shorter.
No-load Fund: As the name implies, this means that the
fund does not charge any type of sales load. But, as
outlined above, not every type of shareholder fee is a
"sales load." A no-load fund may charge fees that are not
sales loads, such as purchase fees, redemption fees,
exchange fees, and account fees.

SELECTION PARAMETERS FOR MUTUAL FUND:

1. Your Objective: The first point to note before investing in a

fund is to find out whether your objective matches with the
scheme. It is necessary, as any conflict would directly affect

your prospective returns. Similarly, you should pick schemes

that meet your specific needs. Examples: pension plans,
childrens plans, sector-specific schemes, etc. your risk capacity
and capability: This dictates the choice of schemes. Those with
no risk tolerance should go for debt schemes, as they are
relatively safer. Aggressive investors can go for equity
investments. Investors that are even more aggressive can try
schemes that invest in specific industry or sectors.
2. Fund Managers and scheme track record: Since you are
giving your hard earned money to someone to manage it, it is
imperative that he manages it well. It is also essential that the
fund house you choose has excellent track record. It also
should be professional and maintain high transparency in
operations. Look at the performance of the scheme against
relevant market benchmarks and its competitors. Look at the
performance of a longer period, as it will give you how the
scheme fared in different market conditions.
3. Cost factor: Though the AMC fee is regulated, you should look
at the expense ratio of the fund before investing. This is
because the money is deducted from your investments. A
higher entry load or exit load also will eat into your returns. A
higher expense ratio can be justified only by superlative
returns. It is very crucial in a debt fund, as it will devour a few
percentages from your modest returns. Also, Morningstar rates
mutual funds. Each year end, many financial publications list
the years best performing mutual funds. Naturally, very eager
investors will rush out to purchase shares of last years top
performers. Thats a big mistake. Remember, changing market
conditions make it rare that last years top performer repeats
that ranking for the current year. Mutual fund investors would
be well advised to consider the fund prospectus, the fund
manager, and the current market conditions. Never rely on last
years top performers.

4. Types of Returns on Mutual Fund: Ways by which the total

returns provided by MF can be enjoyed by investors:

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.
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. If fund holdings
increase in price but are not sold by the fund manager,
the funds 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.

RISK FACTORS OF MUTUAL FUNDS:

1. The Risk-Return Trade-Off: The most important relationship

to understand is the risk-return trade-off. Higher the risk
greater the returns / loss and lower the risk lesser the
returns/loss. Hence it is up to you, the investor to decide how
much risk you are willing to take. In order to do this you must
first be aware of the different types of risks involved with your
investment decision.
2. Market Risk: Sometimes prices and yields of all securities rise
and fall. Broad outside influences affecting the market in
general leads to this. This is true, may it be big corporations or
smaller mid-sized companies. This is known as Market Risk. A
Systematic Investment Plan (SIP) that works on the concept
of Rupee Cost Averaging (RCA) might help mitigate this risk.
3. Credit Risk: The debt servicing ability (May it be interest
payments or repayment of principal) of a company through its
cash flows determines the Credit Risk faced by you. The credit
risk is measured by independent rating agencies like CRISIL
who rate companies and their paper. AnAAA rating is
considered the safest whereas a D rating is considered poor
credit quality. A well-diversified portfolio might help mitigate
this risk.
4. Inflation Risk: Things you hear people talk about:"Rs. 100
today is worth more than Rs. 100 tomorrow.""Remember the
time when a bus ride costed 50 paise?""Mehangai Ka Jamana
Hai."The root cause is Inflation. Inflation is the loss of
purchasing power over time. A lot of times people make
conservative investment decisions to protect their capital but
end up with a sum of money that can buy less than what the
principal could at the time of the investment. This happens
when inflation grows faster than the return on your investment.
A well-diversified portfolio with some investment in equities
might help mitigate this risk.

5. Interest Rate Risk: In a free market economy interest rates

are difficult if not impossible to predict. Changes in interest
rates affect the prices of bonds as well as equities. If interest
rates rise the prices of bonds fall and vice versa. Equity might
be negatively affected as well in a rising interest rate
environment. A well-diversified portfolio might help mitigate
this risk.
6. Political / Government Policy Risk: Changes in government
policy and political decision can change the investment
environment. They can create a favorable environment for
investment or vice versa.
7. Liquidity Risk: Liquidity risk arises when it becomes difficult
to sell the securities that one has purchased. Liquidity Risk can
be partly mitigated by diversification, staggering of maturities
as well as internal risk controls that lean towards purchase of
liquid securities.

WORKING OF MF
The mutual funds collect money directly or through brokers from
investors. The money is invested in various instruments
depending on the objective of the scheme. The income generated
by selling securities or capital appreciation of these securities is
passed on to the investors in proportion to their investment in the
scheme. The investments are divided into units and the value of
the units will be reflected in Net Asset Value or NAV of the unit.
NAV is the market value of the assets of the scheme minus its
liabilities. Per unit NAV is the net asset value of the scheme
divided by the number of units outstanding on the valuation date.
Mutual fund companies provide daily net asset value of their
schemes to their investors. NAV is important, as it will determine
the price at which you buy or redeem the units of a scheme.
Depending on the load structure of the scheme, you have to pay
entry or exit load.
STRUCTURE OF A MUTUAL FUND:
India has a legal framework within which Mutual Fund have to be
constituted. In India open and close-end funds operate under the
same regulatory structure i.e. as unit Trusts. A Mutual Fund in
India is allowed to issue open-end and close-end schemes under a
common legal structure. The structure that is required to be
followed by any Mutual Fund in India is laid down under SEBI
(Mutual Fund) Regulations, 1996.The Fund Sponsor: Sponsor is
defined under SEBI regulations as any person who, acting alone or
in combination of another corporate body establishes a Mutual
Fund. The sponsor of the fund is akin to the promoter of a
company as he gets the fund registered with SEBI. The sponsor
forms a trust and appoints a Board of Trustees. The sponsor also

appoints the Asset Management Company as fund managers. The

sponsor either directly or acting through the trustees will also
appoint a custodian to hold funds assets. All these are made in
accordance with the regulation and guidelines of SEBI.
As per the SEBI regulations, for the person to qualify as a sponsor,
he must contribute at least 40% of the net worth of the Asset
Management Company and possesses a sound financial track
record over 5 years prior to registration. MF as Trusts: A Mutual
Fund in India is constituted in the form of Public trust Act, 1882.
The Fund sponsor acts as a settler of the Trust, contributing to its
initial capital and appoints a trustee to hold the assets of the trust
for the benefit of the unit-holders, who are the beneficiaries of the
trust. The fund then invites investors to contribute their money in
common pool, by scribing to units issued by various schemes
established by the Trusts as evidence of their beneficial interest in
the fund. It should be understood that the fund should be just a
pass through vehicle. Under the Indian Trusts Act, the trust of
the fund has no independent legal capacity itself, rather it is the
Trustee or the Trustees who have the legal capacity and therefore
all acts in relation to the trusts are taken on its behalf by the
Trustees. In legal parlance the investors or the unit-holders are
the beneficial owners of the investment held by the Trusts, even
as these investments are held in the name of the Trustees on a
day-to-day basis. Being public trusts, Mutual Fund can invite any
number of investors as beneficial owners in their investment
schemes. Trustees: A Trust is created through a document called
the Trust Deed that is executed by the fund sponsor in favor of the
trustees. The Trust- the Mutual Fund may be managed by a
board of trustees- a body of individuals, or a trust company- a
corporate body. Most of the funds in India are managed by Boards
of Trustees. While the boards of trustees are governed by the
Indian Trusts Act, where the trusts are a corporate body, it would
also require to comply with the Companies Act, 1956. The Board
or the Trust company as an independent body, acts as a protector

of the of the unit-holders interests. The Trustees do not directly

manage the portfolio of securities. For this specialist function,
they appoint an Asset Management Company. They ensure that
the Fund is managed by ht AMC as per the defined objectives and
in accordance with the trusts deeds and SEBI regulations.

THE ASSET MANAGEMENT COMPANIES:

The role of an Asset Management Company (AMC) is to act as the
investment manager of the Trust under the board supervision and
the guidance of the Trustees. The AMC is required to be approved
and registered with SEBI as an AMC. The AMC of a Mutual Fund
must have a net worth of at least Rs. 10 Crores at all times.
Directors of the AMC, both independent and non-independent,
should have adequate professional expertise in financial services
and should be individuals of high morale standing, a condition
also applicable to other key personnel of the AMC. The AMC
cannot act as a Trustee of any other Mutual Fund. Besides its role
as a fund manager, it may undertake specified activities such as
advisory services and financial consulting, provided these
activities are run independent of one another and the AMCs
resources (such as personnel, systems etc.) are properly
segregated by the activity. The AMC must always act in the
interest of the unit-holders and reports to the trustees with
respect to its activities.
Custodian and Depositories: Mutual Fund is in the business of
buying and selling of securities in large volumes. Handling these
securities in terms of physical delivery and eventual safekeeping
is a specialized activity. The custodian is appointed by the Board

of Trustees for safekeeping of securities or participating in any

clearance system through approved depository companies on
behalf of the Mutual Fund and it must fulfill its responsibilities in
accordance with its agreement with the Mutual Fund. The
custodian should be an entity independent of the sponsors and is
required to be registered with SEBI. With the introduction of the
concept of dematerialization of shares the dematerialized shares
are kept with the Depository participant while the custodian holds
the physical securities. Thus, deliveries of a funds securities are
given or received by a custodian or a depository participant, at
the instructions of the AMC, although under the overall direction
and responsibilities of the Trustees.
Bankers: A Funds activities involve dealing in money on a
continuous basis primarily with respect to buying and selling
units, paying for investment made, receiving the proceeds from
sale of the investments and discharging its obligations towards
operating expenses. Thus the Funds banker plays an important
role to determine quality of service that the fund gives in timely
delivery of remittances etc.
Transfer Agents: Transfer agents are responsible for issuing and
redeeming units of the Mutual Fund and provide other related
services such as preparation of transfer documents and updating
investor records. A fund may choose to carry out its activity inhouse and charge the scheme for the service at a competitive
market rate. Where an outside Transfer agent is used, the fund
investor will find the agent to be an important interface to deal
with, since all of the investor services that a fund provides are
going to be dependent on the transfer agent.

REGULATORY STRUCTURE OF MF IN INDIA:

The structure of MF in India is guided by the SEBI. Regulations,
1996.Theseregulations make it mandatory for mutual fund to
have three structures of sponsor trustee and asset Management
Company. The sponsor of the mutual fund and appoints the
trustees. The trustees are responsible to the investors in mutual
fund and appoint the AMC for managing the investment portfolio.
The AMC is the business face of the mutual fund, as it manages
all the affairs of the mutual fund. The AMC and the mutual fund
have to be registered with SEBI.
SEBI REGULATIONS:
As far as MF are concerned, SEBI formulates policies and
regulate the MF to protect the interest of the investors.
SEBI notified regulations for the MF in 1993. Thereafter, MF
sponsored by private sector entities who were allowed to
enter the capital market.

 The regulations were fully revised in 1996 and have been

amended thereafter from time to time.
SEBI has also issued guidelines to the MF from time to time
to protect the interests of investors.
All MF whether promoted by public sector or private sector
entities including those promoted by foreign entities are
governed by the same set of Regulations. The risks
associated with the schemes launched by the MF sponsored
by these entities are of similar type. There is no distinction
in regulatory requirements for these MF and all are subject
to monitoring and inspections by SEBI.
SEBI Regulations require that at least two thirds of the
directors of trustee company or board of trustees must be
independent i.e. they should not be associated with the
sponsors.
Also, 50% of the directors of AMC must be independent. All
MF are required to be registered with SEBI before they
launch any scheme.
Further SEBI Regulations, inter-alia, stipulate that MFs
cannot guarantee returns in any scheme and that each
scheme is subject to 20 : 25 condition [I.e. minimum 20
investors per scheme and one investor can hold more than
25% stake in the corpus in that one scheme].
Also SEBI has permitted MFs to launch schemes overseas
subject various restrictions and also to launch schemes
linked to Real Estate, Options and Futures, Commodities,
etc.

ASSOCIATION OF MFIN INDIA (AMFI):

With the increase in mutual fund players in India, a need for
mutual fund association in India was generated to function as a
non-profit organization. Association of MF in India (AMFI) was
incorporated on 22nd August, 1995. AMFI is an apex body of all
Asset Management Companies (AMC) which has been registered
with SEBI. Till date all the AMCs are that have launched mutual
fund schemes are its members. It functions under the supervision
and guidelines of its Board of Directors. Association of MF India
has brought down the Indian Mutual Fund Industry to a
professional and healthy market with ethical lines enhancing and
maintaining standards. It follows the principle of both protecting
and promoting the interests of MF as well as their unit holders.
The Objectives of Association of MF in India: The Association of MF

of India works with 30 registered AMCs of the country. It has

certain defined objectives which juxtaposes the guidelines of its
Board of Directors.
THE OBJECTIVES OF AMFI ARE AS FOLLOWS:
This mutual fund association of India maintains high
professional and ethical standards in all areas of operation of
the industry.
It also recommends and promotes the top class business
practices and code of conduct which is followed by members
and related people engaged in the activities of mutual fund
and asset management. The agencies who are by any means
connected or involved in the field of capital markets and
financial services also involved in this code of conduct of the
association.
AMFI interacts with SEBI and works according to SEBIs
guidelines in the mutual fund industry.
Association of Mutual Fund of India represents the
Government of India, the Reserve Bank of India and other
related bodies on matters relating to the Mutual Fund
Industry.
It develops a team of well qualified and trained Agent
distributors. It implements a programme of training and
certification for all intermediaries and other engaged in the
mutual fund industry.
AMFI undertakes all India awareness programme for
investors in order to promote proper understanding of the
concept and working of mutual funds.
At last but not the least association of mutual fund of India
also disseminate information on Mutual Fund Industry and
undertakes studies and research either directly or in
association with other bodies. AMFI Publications: AMFI
publish mainly two types of bulletin. One is on the monthly
basis and the other is quarterly. These publications are of

great support for the investors to get intimation of the

knowhow of their parked money.

UNIT TRUST OF INDIA MUTUAL FUND

Unit Trust of India was created by the UTI Act passed by the
Parliament in 1963. For more than two decades it remained the
sole vehicle for investment in the capital market by the Indian
citizens. In mid- 1980s public sector banks were allowed to open
mutual funds. The real vibrancy and competition in the MF
industry came with the setting up of the Regulator SEBI and its
laying down the MF Regulations in 1993.UTI maintained its pre-

eminent place till 2001, when a massive decline in the market

indices and negative investor sentiments after Ketan Parekh scam
created doubts about the capacity of UTI to meet its obligations to
the investors. This was further compounded by two factors;
namely, its flagship and largest scheme US 64 was sold and repurchased not at intrinsic NAV but at artificial price and its
Assured Return Schemes had promised returns as high as 18%
over a period going up to two decades. In order to distance
Government from running a mutual fund the ownership was
transferred to four institutions; namely SBI, LIC, BOB and PNB,
each owning 25%. UTI lost its market dominance rapidly and by
end of 2005, when the new share-holders actually paid the
consideration money to Government its market share had come
down to close to 10%. A new board was constituted and a new
management inducted. Systematic study of its problems role and
functions was carried out with the help of a reputed international
consultant. Once again UTI has emerged as a serious player in the
industry. Some of the funds have won famous awards, including
the Best Infra Fund globally from Lipper. UTI has been able to
benchmark its employee compensation to the best in the market.
Besides running domestic MF Schemes UTI AMC is also a
registered portfolio manager under the SEBI (Portfolio Managers)
Regulations.
This company runs two successful funds with large international
investors being active participants. UTI has also launched a
Private Equity Infrastructure Fund along with HSH Nord Bank of
Germany and Shinsei Bank of Japan Vision: To be the most
Preferred Mutual Fund. Mission: The most trusted brand, admired
by all stakeholders. The largest and most efficient money
manager with global presence The best in class customer service
provider The most preferred employer The most innovative and
best wealth creator A socially responsible organization known for
best corporate governance Assets Under Management: UTI Asset
Management Co. Ltd Sponsor: State Bank of India Bank of

Baroda Punjab National Bank Life Insurance Corporation of

India Trustee: UTI Trustee Co. Limited. Reliability UTIMF has
consistently reset and upgraded transparency standards. All the
branches, UFCs and registrar offices are connected on a robust IT
network to ensure cost-effective quicksand efficient service. All
these have evolved UTIMF to position as a dynamic, responsive,
restructured, efficient and transparent entity, fully compliant with
SEBI regulations.
SCHEMES
EQUITY FUND:
A. UTI Energy Fund (Open Ended Fund): Investment will be
made in stocks of those companies engaged in the following
are: a) Petro sector - oil and gas products & processing b) All
types of Power generation companies. c) Companies related to
storage of energy. d) Companies manufacturing energy
development equipment related (like petro and power) e)
Consultancy & Finance Companies
B. UTI Transportation and Logistics Fund (Auto Sector
Fund) (Open Ended Fund): Investment Objective is capital
appreciation through investments in stocks of the companies
engaged in the transportation and logistics sector. At least 90%
of the funds will be invested in equity and equity related
instruments. At least 80% of the funds will be invested in
equity and equity related instruments of the companies
principally engaged in providing transportation services,
companies principally engaged in the design, manufacture,
distribution, or sale of transportation equipment and companies
in the logistics sector. Up to 10% of the funds will be invested
in cash/money market instruments.
C. UTI Banking Sector Fund (Open Ended Fund): An openended equity fund with the objective to provide capital

appreciation through investments in the stocks of the

companies/institutions engaged in the banking and financial
services activities.
D.UTI Infrastructure Fund (Open Ended Fund): An openended equity fund with the objective to provide Capital
appreciation through investing in the stocks of the companies
engaged in the sectors like Metals, Building, Materials, oil and
gas, power, chemicals, engineering etc. The fund will invest in
the stocks of the companies which form part of Infrastructure
Industries.
E. UTI Equity Tax Savings Plan (Open Ended Fund): An openended equity fund investing a minimum of 80% in equity and
equity related instruments. It aims at enabling members to
avail tax rebate under Section 80C of the IT Act and provide
them with the benefits of growth.
F. UTI Growth Sector Fund Pharma (Open Ended Fund):
An open-ended fund which exclusively invests in the equities of
the Pharma & Healthcare sector companies. This fund is one of
the growth sector funds aiming to invest in companies engaged
in business of manufacturing and marketing of bulk drug,
formulations and healthcare products and services.
G.UTI Growth Sector Fund Services (Open Ended Fund):
An open-ended fund which invests in the equities of the
Services Sector companies of the country. One of the growth
sector funds aiming to provide growth of capital over a period
of time as well as to make income distribution by investing the
funds in stocks of companies engaged in service sector such as
banking, finance, insurance, education, training, telecom,
travel, entertainment, hotels, etc.
H.UTI Growth Sector Fund Software (Open Ended Fund):
An open-ended fund which invests exclusively in the equities of

the Software Sector companies. One of the growth sectors

funds aiming to invest in equity shares of companies belonging
to information technology sector to provide returns to investors
through capital growth as well as through regular income
distribution.
I.

UTI Master Equity Plan Unit Scheme (Close Ended Fund):

The scheme primarily aims at securing for the investors capital
appreciation by investing the funds of the scheme in equity
shares of companies with good growth prospects.