Mutual Fund

Origin
The origin of the Indian mutual funds industry dates back to 1963 when the Unit Trust of India (UTI) came into existence at the initiative of the Government of India and the Reserve Bank of India. Since then the mutual funds sector remained the sole fiefdom of UTI till 1987 when a slew of non-UTI, public sector mutual funds were set up by nationalized banks and life insurance companies. The year 1993 saw sweeping changes being introduced in the mutual fund industry with private sector fund houses making their debut and the laying down of comprehensive mutual fund regulations. Over the years, the Indian mutual funds industry has witnessed an exponential growth riding piggyback on a booming economy and the arrival of a horde of international fund houses.

Concept
Mutual fund is vehicle that enables a number of investors to pool their money and have it jointly managed by a professional money manager. A Mutual Fund is a pool of money, collected from investors, and is invested according to certain investment objectives. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them. Mutual Fund companies are known as asset management companies. They offer a variety of diversified schemes. Mutual Fund acts as investment companies. They pool the savings of investors and invest them in a well-diversified portfolio of sound investments. Mutual funds can be broken down into two basic categories: equity and bond funds. Equity funds invest primarily in common stocks, while bond funds invest mainly in various debt instruments.

Within each of these sectors, investors have a myriad of choices to consider, including: international or domestic, active or indexed, and value or growth, just to name a few. We will cover these topics shortly. First, however, we're going to focus our attention on the nuts and bolts of how mutual funds operate.

Mutual Fund Operation Flow Chart

Organisation

Or ganisation of a Mutual Fund

Mutual funds
Mutual fund is vehicle that enables a number of investors to pool their money and have it jointly managed by a professional money manager

Sponsor
Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund.

Trustee
Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

Asset Management Company (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 crores at all times.

Transfer Agent
The AMC if so authorised by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records.

History of the Indian Mutual Fund

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

Second Phase 1987-1993 (Public Sector Funds):

SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by 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 47000 crores.

Third Phase 1993-2003 (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 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 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 total assets of Rs. 1, 21,805 crores.

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. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. With the bifurcation of the 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 421 schemes.

The graph indicates the growth of assets over the years.

Growth in Assets under Management

Characteristics of a Mutual Fund

The following are the characteristics of the mutual funds: A mutual fund belongs to the investors who have pooled their funds. The ownership of the mutual fund is in the hands of the investors. Investment professionals and other service providers, who earn a fee for their services, from the fund, manage the mutual fund. The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated every day. The investors share in the fund is denominated by units. The value of the units changes with change in the portfolios value, every day. The value of one unit of investment is called as the Net Asset Value or NAV. The investment portfolio of the mutual fund is created according to the stated investment objectives of the fund.

Case Study

On

Introduction
Reliance Mutual Fund (RMF) is one of Indias leading Mutual Funds, with Assets under Management of Rs. 36,927 crores as on 31st December 2006 and an investor base of over 2.8 million. Reliance Mutual Fund, a part of the Reliance - Anil Dhirubhai Ambani Group, is one of the fastest growing mutual funds in the country. It offers investors a wellrounded portfolio of products to meet varying investor requirements and has presence in 95 cities across the country.Reliance Mutual Fund constantly endeavors to launch innovative products and customer service initiatives to increase value to investors.

Reliance Mutual Fund schemes are managed by Reliance Capital Asset Management Ltd., a wholly owned subsidiary of Reliance Capital Ltd. Reliance Capital Ltd. is one of Indias leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital Ltd. has interests in asset management, life and general insurance, private equity and proprietary investments, stock broking and other financial services. with Reliance Mutual Fund Limited (RMF) (RCL), has as been the established as a trust under the Indian Trusts Act, 1882 Reliance Capital Settler/Sponsor and Reliance Capital Trustee Co. Limited (RCTCL), as the Trustee. It has been registered with the Securities & Exchange Board of India (SEBI) on dated June 30, 1995. The name of Reliance Capital Mutual Fund has been changed to Reliance Mutual Fund effective 11th. March 2004.

REGISTERED OFFICE

Reliance Capital Asset Management Limited EO1, Reliance Greens, Village Motikhavdi, P.O. Digvijaygram, District Jamnagar - 361 140. Gujarat. Tel No.: 0288 3011556. Fax No.: 02880 3011598.

Reliance Capital Asset Management Limited CORPORATE OFFICE Reliance Capital Asset Management Limited Express Building, 4th & 6th Floor, 14-'E' - Road, Above Satkar Hotel, Opp. Churchgate Station, Churchgate, Mumbai 400 020. Tel No.: +91 22 3041 4800. Fax No.:+91 22 3041 4818 / 3041 4899.

Trade World, 'B' Wing, 7th Floor, Kamal Mill Compound, Lower Parel, Mumbai 400013

Reliance Capital Asset Management Limited Mittal Chambers, Gr. Flr, Near Bajaj Bhawan, Nariman Point, Mumbai 400021. Tel No.: 022 56386700 / 22854880. Fax No.: 022 22853702.

Advantages of a Mutual Fund to Investors:-

Every investment has advantages and disadvantages. But it's important to remember that features that matter to one investor may not be important to you. Whether any particular feature is an advantage for you will depend on your unique circumstances. For some investors, mutual funds provide an attractive investment choice because they generally offer the following benefits:

Professional Management: The primary advantage of funds (at least theoretically) is the professional management of your

money. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to make and monitor investments.

Portfolio Diversification: A proven principle of sound investment is that of diversification, which is the idea of not putting all eggs in one basket. By investing in many companies, the mutual funds protect themselves from drop in value of shares. Majority of people consider diversification as the major strength of mutual funds. Reduction of Risk: Risk in investment is as to recovery of the principal amount and as to return on it. Mutual funds, on both fronts provide a comfortable situation for investors. The expert supervision, diversification, and liquidity of units ensured in mutual funds minimize the risks. Economies of Scale: Mutual funds having large funds at their disposal avail economies of scale. The brokerage fee or trading commission may be reduced substantially. The reduced transaction costs obviously increases the income available for investors. Liquidity: A distinct advantage of mutual fund over other investments is that, there is always a market for its units/shares. Moreover, Securities & Exchange Board of India requires that mutual funds in India have to ensure liquidity.

Safety of Investment: Besides depending on the expert supervision of fund managers, the legislation in a country (SEBI) also provide for safety of investments. Mutual funds have to broadly follow the laid down provisions for their regulation. SEBI acts as a watch dog and attempts whole heartedly to safeguard investors interests. Choice: Mutual funds come in a wide variety of types. Some mutual funds invest exclusively in a particular sector (e.g. energy funds), while others might target growth opportunities in general. There are thousands of funds, and each has its own objectives and focus. The key is for you to find the mutual funds that most closely match your own particular investment objectives.

Convenience: When you own a mutual fund, you don't need to worry about tracking the dozens of different securities in which the fund invests; rather, all you need to do is to keep track of the fund's performance. It's also quite easy to make monthly contributions to mutual funds and to buy and sell shares in them.

Simplicity: Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and the minimum investment is small. Most companies also have automatic purchase plans whereby as little as $100 can be invested on a monthly basis. Tax Shelter: Depending on the schemes of mutual funds, tax shelter is also available under section 80C. The returns from the mutual funds are also eligible for favorable tax treatment.

Disadvantages of Mutual Fund:There are more benefits to mutual fund investing, but you should also be aware of the drawbacks associated with mutual funds. They are as follows:

Professional Management: Did you notice how we qualified the advantage of professional management with the

word "theoretically"? Many investors debate over whether or not the so-called professionals are any better than you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the manager still takes his/her cut.

No control over costs: Since investors do not directly monitor the funds operations they cannot control the cost effectively. Regulators therefore usually limit the expenses of mutual funds. Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after they bought shares.

Dilution: Although diversification reduces the amount of risk involved in investing in mutual funds, it can also be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the mutual fund itself would not double in value because that security is only one small part of the fund's holdings. By holding a large number of

different investments, mutual funds tend to do neither exceptionally well nor exceptionally poorly.

Taxes: When making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability. No Insurance: Mutual funds, although regulated by the government, are not insured against losses. That means that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is possible that you could even lose your entire investment. Trading Limitations: Although mutual funds are highly liquid in general, most mutual funds cannot be bought or sold in the middle of the trading day. You can only buy and sell them at the end of the day, after they've calculated the current value of their holdings. Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of all mutual funds fail to beat the major market indexes, and a growing number of critics now question whether or not professional

money managers have better stock-picking capabilities than the average investor.

Fees

and

Expenses:

Most

mutual

funds

charge

management and operating fees that pay for the fund's management expenses (usually around 1.0% to 1.5% per year). In addition, some mutual funds charge high sales commissions, fees, and redemption fees. And some funds buy and trade shares so often that the transaction costs add up significantly. Some of these expenses are charged on an ongoing basis, unlike stock investments, for which a commission is paid only when you buy and sell.

Types of Mutual Funds:Mutual funds come in many varieties. For example, there are index funds, stock funds, bond funds, money market funds, and more. Each of these may have a different investment objective and strategy and a different investment portfolio. Different mutual funds may also be subject to different risks, volatility, and fees and expenses.

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry:

By Structure
Open-Ended Funds

All mutual funds fall into one of two broad categories: open-end funds and closed-end funds. Most mutual funds are open-end. The reason why these funds are called "openend" is because there is no limit to the number of new shares that they can issue. New and existing shareholders may add as much money to the fund as they want and the fund will simply issue new shares to them. Open-end funds also redeem, or buy back, shares from shareholders. In order to determine the value of a share in an open-end fund at any time, a number called the Net Asset Value (described below) is used. You purchase shares in open-end mutual funds from the mutual fund itself or one of its agents; they are not traded on exchanges.

Closed-End Funds Closed-end funds behave more like stock than open-end funds; that is to say, closed-end funds issue a fixed number

of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end funds are not obligated to issue new shares or redeem outstanding shares. The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). Since you must take into consideration not only the fund's net asset value but also the discount or premium at which the fund is trading, closed-end funds are considered to be more suitable for experienced investors. You can purchase shares in a closed-end fund through a broker, or agents, or also just as you would purchase a shares.

By Investments
The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes

normally invest a majority of their corpus in equities. Growth schemes are ideal for investors who have a long-term outlook and are seeking growth over a period of time. The primary investment objective of the Scheme is to achieve long-term growth of capital by investment in equity and equity related securities through a research based investment approach. The aim of Income Funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and Government securities.Income Funds are ideal for capital stability and regular income. Capital appreciation in such funds may be limited, though risks are typically lower than that in a growth fund.

Reliance Money Market Funds

The aim of Money Market Funds is 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. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market.These are ideal for corporate and individual investors as a means to park their surplus funds for short periods. Reliance Balanced Funds The aim of Balanced Funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in equities and fixed income securities in the proportion indicated in their offer documents. This proportion affects the risks and the returns associated with the balanced fund - in case equities are allocated a higher proportion, investors would be exposed to risks similar to that of the equity market. Balanced funds with equal allocation to equities and fixed income securities are ideal for investors looking for a combination of income and moderate growth.

Other Schemes

These tax

schemes rebates to

offer the

investors under specific provisions of the Indian Income Tax laws, as the Government offers tax incentives for investment in specified avenues.Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction under Section 80c of the Indian Income Tax Act, 1961.

Index Funds attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE S&P CNX 50.The objective of Nifty Plan is to replicate the composition of the Nifty, with a view to endeavor to generate returns, which could approximately be the same as that of Nifty.

Why

the

Mutual

Funds

are

so

popular:

Mutual funds provide an easy way for small investors to make long-term, diversified, professionally managed investments at a reasonable cost.If an investor only has a small amount of money with which to invest, then he/she will most likely not be able to afford a professional money manager, a diversified basket of stocks, or have access to low trading fees. With a mutual fund, however, a large group of investors can pool their resources together and make these benefits available to the entire group. Mutual funds are also popular because they provide an excellent way for anyone to direct a portion of their income towards a particular investment objective.Whether you're looking for a broad-based fund or a narrow industry-focused niche fund, you're almost certain to find a fund that meets your needs. Although the various style and category types are virtually endless, here's a quick summary of some of the various choices available to equity investors:

How Mutual Fund reduces risk of investors:

Mutual Funds invest in a portfolio of securities. This means that all funds are not invested in the same investment avenue. It is well known that risk and returns of various options do not move uniformly. E.g. If a Reliance Company share is moving upwards, a Kotak Mahindra companys shares could be moving downwards; if the debt markets may be moving up, the equity market is moving down. Therefore, holding a portfolio that is diversified across investment avenues is a wise way to manage risk. When such a portfolio is liquid and marked to market, it enables investors to continuously evaluate the portfolio and manage their risks more efficiently.

Types of returns from a Mutual Fund

Mutual Funds give returns in two ways - Capital Appreciation or Dividend Distribution .Capital Appreciation: An increase in the value of the units of the fund is known as capital appreciation. As the value of individual securities in the fund increases, the fund's unit price increases. An investor can book a profit by selling the units at prices higher than the price at which he bought the units. Dividend Distribution: The profit earned by the fund is distributed among unit holders in the form of dividends. Dividend distribution again is of two types. It can either be re-invested in the fund or can be on paid to the investor.

How Funds Can Earn Money for You:

You can earn money from your investment in three ways:

Dividend Payments a fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund then pays its shareholders nearly all of the income it has earned in the form of dividends.

Capital Gains Distributions the price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.

Increased NAV if the market value of a fund's portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

Choosing a Mutual Fund

Each individual has different financial goals, based on lifestyle, financial independence and family commitments and level of incomes and expenses and many other factors. Thus before investing your money you need to analyze the following factors: Investment objective Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments and level of income and expenses among many other factors. Therefore, the first step should be to assess your needs. You can begin by defining the investment objectives, which could be regular income, buying a home or finance a wedding or educate your children or a combination of all these needs. Also your risk appetite and cash flow requirements need to be taken into account.

Choose the right Mutual Fund Once the investment objective is clear in your mind the next step is choosing the right Mutual Fund scheme. Before choosing a mutual fund the following factors need to be considered: NAV performance in the past track record of performance in terms of returns over the last few years in relation to appropriate yardsticks and other funds in the same category. Risk in terms of volatility of returns Services offered by the mutual fund and how investor friendly it is.

Transparency, which is reflected in the quality and frequency of its communications.

Tips to consider when choosing mutual funds:

You don't need to own a lot of different mutual funds. A handful should be enough to achieve diversification, because each of them in turn invests in dozens of stocks, bonds, etc. Investing in just one Mutual Fund scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. Keep in mind that just because a fund had excellent performance last year does not necessarily mean that it will duplicate that performance. For example, market conditions can change and this years winning fund might be next years loser. The above advice should get you started on the right path. You will probably discover other things to consider as you investigate further.

Current scenario of Indian Mutual Funds

Mutual India funds have in been

attracting investment from retail investors for a few years now. Gone are the UTI mutual fund days of guaranteed returns and controlled economy. Today's funds are completely linked to the market and they are open ended and fully redeemable. Unfortunately, the investment community in India still looks at them like they way a day trader looks at stocks. They get in and get out quickly hoping to make a quick killing. The only people who get rich in that process are the fund managers. You can see in the figure also that that the side of the fund managers is more heavier then the side of the share holders.We believe that the mutual fund industry has only grown in terms of size or choices available, but is still a long distance from being regarded as a mature one. Because no doubt, now there are benefits to the share holders in mutual funds but not as much as we all are thinking Indian mutual funds are giving.

Future of Mutual Funds in India

Mutual funds are the one of the fastest growing segment of the financial services sector in India. Analysts believe that the mutual funds and banks would be able to corner sizeable funds from savings bank accounts in metros such as Delhi, Mumbai, Kolkata, Chennai and Bangalore. But semi-urban and rural centers would continue to be out of reach for the new schemes--at least for some more time. Surely, investors are not going to say no to the banker or financial advisor who will make that extra buck for you. By December 2004, Indian mutual fund industry reached Rs 1, 50,537 crores. It is estimated that by 2010 March-end, the total assets of all scheduled commercial banks should be Rs.40, 90,000 crores.The annual composite rate of growth is expected 13.5% during the rest of the decade. In the last 5 years we have seen annual growth rate of 8.5%. According to the current growth rate, by year 2010, mutual fund assets will be double the current markets.

You can see in the figure also that the side of the share holders is a bit heavier then the side of the. fund managers. Thats what the future of indian mutual funds is going to be. Its really going to be brighter as the way the progress is been made, and the pains taken for the improvement are really going to be paid up by well developed indian mutual fund. The numbers of investors are also going to grow with the massive speed, which no one would have thought. There are going to be very high expectations with the working and the functioning of the mutual funds.

Conclusion
We would like to conclude by discussing the immense learning experience in the company while preparing the project. While compiling this project, it was a great challenge since it gave us a chance to interact with highly qualified people having professional approach towards their work. This helped us to develop a professional approach towards work, which gave us the right mantra for meeting deadlines. To state on the concluding front for the

Mutual Funds, it can be

said that Mutual funds are a method for investors to diversify risk and to benefit from professional money management. Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party Since the mutual fund has come of age the world over with more and more area and products under risk, i.e. more the risk more is the benefit & less the risk, less is the benefit. Now, as the competition has started, there will be more healthy competition in mutual fund market; where by the market will get broader and deeper as time passes away. The company will compete

for brand value in the market. This all will result in improvement of services and with rising advertising, demand is bond to increase. . Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost and in well balanced risks.. Lastly, we would like to say that this project gave us lot of helpful basic knowledge about Mutual Funds in detailed manner and also all the workings, operations related to it.

Thank you

Major Mutual Fund Companies in India

.ABN AMRO Mutual Fund:- April 15, 2004 Birla Sun Life Mutual Fund:Bank of Baroda Mutual Fund:- October 30, 1992 HDFC Mutual Fund:- June 30, 2000 HSBC Mutual Fund:- May 27, 2002 ING Vysya Mutual Fund:- February 11, 1999 Prudential ICICI Mutual Fund:- October 13, 1993 State Bank of India Mutual Fund:Tata Mutual Fund:Kotak Mahindra Mutual Fund:- December 1998 Unit Trust of India Mutual Fund:- Jan 14, 2003 Reliance Mutual Fund: - March 11, 2004. Standard Chartered Mutual Fund:- March 13, 2000 Franklin Templeton India Mutual Fund:Morgan Stanley Mutual Fund:Alliance Capital Mutual Fund:- December 30, 1994