INDIANMUTUALFUND INDUSTRY

Topics
Mutualfunds Mutual funds Objective,players Products Fundmanagement Research Investorservices Fundperformancemeasures Fund performance measures

MutualFunds Mutual Funds

InvestmentCompanieswheremoneyispooledandinvestedby p professionals. Manyplayers Varietyofproductstomeeteveryinvestorsrequirementandriskappetite. Features Safety&Security Diversifiedinvestment ProfessionalManagement TaxBenefits T B fit Liquidity CapitalandIncomegeneratingreturns Regulated

MutualFunds Mutual Funds

MutualfundsareInvestmentvehicleswhichcollect Mutual funds are Investment vehicles which collect moniesfromtheinvestorsforspecificdurationoftime andattheendofthedurationtheinvestedmoniesis liquidatedandtheinvestorsamountisreturnedwith li id t d d th i t ti t d ith returnsearned. TheInvestmentCompaniesinUKarecalledTrustsand inUSAtheyarecalledMutualFunds. IndiareplicatedtheUKmodelwhenitsetuptheUnit TrustofIndia. Trust of India

EvolutionofMutualFund Evolution of Mutual Fund

Th Fi t I TheFirstInvestmentTrustwastheScottish t tT t th S tti h AmericanInvestmentCo.setupatNetherlandin 1873. Thiscompanycollectedmoniesunderclosedended schemesandinvestedthemoneyinStockMarket. The returns were therefore directly related to the Thereturnswerethereforedirectlyrelatedtothe stockmarketfluctuations. Morethan50suchcompanies. Th t k Thestockmarketcrisisin1890madeallthese k t i i i 1890 d ll th InvestmentCompaniesgobust.
contd.

EvolutionofMutualFund Evolution of Mutual Fund contd.

ThefirstinUSNewYorkStockTrustin1889. FirstMutualFundMassachusettsInvestorsTrustwassetupinBostonin1924 First Mutual FundMassachusetts Investors Trust was set up in Boston in 1924 Thiswasopenendedfund ThefundinvestedinStockMarket StockMarketcrashof1929wasastumblingblock RevivedagainpostWorldWarII SteadyGrowthasMarketsrevived. Theinvestorswantedshareofthestockmarketgrowth. MoneymarketinstrumentsduringslackstockmarketconditionsandMutual Fundsstartedofferingthesimilarreturns. g Varietyofproductsincreased

MutualFundsinIndia Mutual Funds in India

MutualFundindustrystartedinIndiaasan y initiativeoftheGovernmenttotapthesavingsof thepublicandchannelisethesameintheCapital Market. Market UnitTrustofIndiawassetupbyanActof Parliamentin1963 Itstarteditsoperationsin1964withthelaunch ofUS64. I ItwasnotonlyaMutualFundbutalsoactedasa l M lF db l d FinancialInstitution ItwasaPublicsectorFinancialInstitution It was a Public sector Financial Institution

PhasesofMutualFund Phases of Mutual Fund

PhaseI(19641987) ThesettingupofUnitTrustofIndia. Startedoperationsin1964. Witnessedaslowandsteadygrowth. Launchedvariousschemestosuitinvestorsneeds Mastershare firstschemelistedontheSEs MonthlyIncomeSchemesVerypopular Assuredreturnsscheme Functionedasamonopolytill1987 p y Had6700CroresofAUMin1988

contd.

PhasesofMutualFund contd. Phases of Mutual Fundcontd.

PhaseII(19871993) Ph II (1987 1993) PublicSectorinstitutionswerepermittedto setupMutualfunds. set up Mutual funds
Banks,LICandGICenteredasMutualfundplayers By1993therewere8playerswithUTI. SimilarproductswerelaunchedbyalltheMutualFunds. Similar products were launched by all the Mutual Funds UTIcontinuedtobetheleaderwithmaximumAUM

ThetotalsavingsinMutualfundgrewtoAUMRs.47004Crores

PhasesofMutualFund contd Phases of Mutual Fundcontd

PhaseIII(1993 2003) Privateplayers,bothDomesticandforeignenteredthemarket KothariPioneerfirstsetupin1993 MorganStanley,JardineFleming,JPMorganetc Periodoftremendousgrowth ProfessionalismandTechnology Highcompetitiveness SEBI(MFRegulations)regulatedalltheMFsinIndiafrom1996 ThetotalAUMrosetoRs121,805Crores

PhasesofMutualFund contd Phases of Mutual Fundcontd

PhaseIV(2003onwards) Ph IV (2003 d) RestructuringofUTI TheUTIActrepealed UTIbifurcatedintoSpecifiedUndertakingofUnit UTI bif di S ifi d U d ki fU i TrustofIndia(SUUTI)andUTIMF AllMutualFundsnowunderSEBIRegulator Periodofconsolidation&growth TotalAUMason31st M h 2006 R 231862 T t l AUM 31 March,2006Rs231862crores TotalAUMason28th,February,2007stoodatRs 353319crores

Organizationalstructure FourTiered structure

AllMutualFundsunderSEBIMutualFunds All Mutual Funds under SEBI Mutual Funds Regulations(1996) AllMutualFundssettingupinIndia All Mutual Funds setting up in India
SponsortosetupaMutualFundundertheIndianTrustAct 1882 SponsorappointstheBoardofTrusteesorTrusteecompany TheTrusteecompanyortheBoardofTrusteesenterintoan agreementto agreement to setupanAssetManagementCompany TheTrusteeCompanyalsoappointsCustodian

FundSponsors Fund Sponsors

Sponsor sets up the Mutual Fund under the Indian Trust Act 1882 and registers under SEBI Mutual Fund Regulation Act 1996 Who is eligible to be a Sponsor? Body Corporate either singly or i partnership B d C t ith i l in t hi Sound track record of fairness & integrity Being in financial business for at least 5 years Positive P i i net worth f at l h for least 5 years preceding the registration di h i i Net worth > than the AMC initial contribution PAT is positive for 3 years The sponsor should hold at least 40% of the net worth of the AMC

BoardofTrustees Board of Trustees

TheSponsorappointstheTrusteeCompanyorDirectorsofthe TrusteeCompany Trustee Company TrustDeed&appointmentofDirectors/Trusteesapproved bySEBI 2/3oftheDirectorsindependentoftheSponsors 2/3 f th Di t i d d t f th S CannotbeDirectors/TrusteesofanyotherMutualFund Directors/Trusteetomaintainarmlengthrelationship TrusteesofaFundcanformaTrusteeCompanyunderSEBI TrusteescanberemovedwithSEBIapproval MonitoringtheAMCsfunctionsandactivities. ProtecttheinterestoftheInvestors

AssetManagementCompany
AMChastobeapprovedbySEBIunder SEBI(MFRegulations)1996 AMCshouldhave:
NetWorthofRs.10Crores SoundTrackrecord 50%ofDirectorsindependentofSponsors&Trustee

AMClaunchesFunds,managesthefundthroughinvestments, portfoliomanagementetc.asperSEBIguidelines portfolio management etc.as per SEBI guidelines AMCreceivesannualManagementfeefromtheFunditservices.

AssetManagementCompany Obligations&Functions bl
AMCfloatsfunds/schemes AMC floats funds/schemes Managementoftheschemeasperthescheme provisions AllotmentoftheunitstotheInvestorsthroughSoA All t t f th it t th I t th hS A etc SubmissionofCompliancereportstotheTrustees Properdisclosurestoinvestors ProperNAVcalculationby8pmeveryday HandlingtheInvestorServicethroughinhouseor g g R&TAgents

Custodians

Safekeepersoftheshares&securities p purchasedbytheMutualFund y Participatingintheapprovedclearing y systemonbehalfoftheMutualFund IndependentofSponsors&AMCand g registeredwithSEBI ThedematerializedsharesoftheFund keptwiththeDepositories.

Other Entities
Bankers
Buying&sellingofunits,receiptofmoniesfromthe investors,issueofincome/dividends/interests, redemptions,maturitypayment. Bankingtransactionsforthepaymentstovariousentities Banking transactions for the payments to various entities viz.distributors,publicity,R7Tetcinc/woperationsofthe scheme Bankingtransactionsforpurchase&saleofshares, securitiesandotherassets Receiptofthemoniesinvestedinaschemefloatedand Receipt of the monies invested in a scheme floated and payments Issueofcheques,Drafts,ECSpaymentsonbehalfofthe AMC Alsohandledistributorsfunctions

OtherEntities contd. d
TransferAgents InhouseorexternalagenciesregisteredwithSEBI Issueofunitsandredemption Handlingallinvestorservices H dli ll i i Specialpayoutslikedividends,bonusissuesetc InterfaceoftheFundwiththeInvestors Interface of the Fund with the Investors

OtherEntities contd. d
Distributors Networkofdistributorstocanvassforthesaleofthefunds floatedbyaMutualFund Individual,Brokers,Corporate,Banks , , p , Brokerage/commissionfortheunitssoldthroughthem Canbedistributorsformorethan1MF Advisetheinvestorsonalltheavailableinformationand Advise the investors on all the available information and investmentavenues MandatorytobeAMFICertifiedw.e.fNovember,2001

AsnapshotofMutualFund OrganizationalStructure O i ti l St t
Fund Sponsor Trustees AMC

Banks B k

Mutual Fund

Custodian C t di

Agents/ Distributors

R &T

Depositories

 Participants in the Indian Mutual Fund ParticipantsintheIndianMutualFund Industry

1. BankSponsored 2. Institutions 3. PrivateSector a. Indian:b. PredominantlyIndianJointVentures c.PredominantlyForeignJointVentures B.

ParticipantsOfMutualFund Industry Industry InIndia

NewPlayersenteringtheMFIndustry

RecentDevelopmentsInThe MutualFundIndustry M t lF dI d t
LaunchofNewInnovativeProducts Feeslinkedtoperformance Employee&Broker/AgentCertification p y / g AdditionalDisclosures&ImprovedService Standards StricterComplianceStandards ShiftfromGuaranteedProductstoNon GuaranteedProducts d d ConsolidationintheMutualFundIndustry

Typesofproducts Types of products

Bystructure By structure BynatureofInvestments ByInvestmentObjective Obj i Byriskprofile

MutualFundClassification Mutual Fund Classification

By structure Bystructure
Openend Close end Closeend

ByInvestmentobjective
Growth(equity) Growth (equity) Income(debt), Balanced and Money Market schemes BalancedandMoneyMarketschemes

Others
Index schemes, Sector specific, xchange Traded Funds, Floating rate Indexschemes,Sectorspecific,ExchangeTradedFunds,Floatingrate schemes

RisingServiceStandards Rising Service Standards

Efficiency and reliability of servicing is Efficiencyandreliabilityofservicingis improvingwith
Paperlesssystems:Nocertificatehandling ECSfollowedbyElectronicFundsTransfer Increasingtechnologylinkagesacrossoffices, banks,registrars,etc.

Transparencytoboost confidence
Monthly Portfolio Disclosures y Investor Communication through Monthly Bulletins Quarterly Accounts Inter-Fund comparison of Returns Consistency in Performance due to comparison to Benchmarks, Peers

FutureGrowthDrivers Future Growth Drivers

Service Standards ServiceStandards InvestorAwarenesslevel
A i i f Arisingfromincreasedcompetitionleadingto i d titi l di t increasedadvertisementsandpublicity

F dM FundManagementcosts t t FundManagersabilitytomanagerisk RegulationandBestPractices

Performance AUM,NAV Performance AUM, NAV

AssetsUnderManagement g ComputationofNetAssetValue Valuationofinvestmentportfolio Dailydisclosures Loadstructure entryandexitloads Performancereturnsofvariousfunds
Absolutereturns Relativereturns Relative returns Riskadjustedreturns Peergroupcomparisons

NetAssetValue Net Asset Value

Investment company holds assets in the form Investmentcompanyholdsassetsintheform ofequitysharesanddebtinstruments Taking the closing prices of stocks and YTM on TakingtheclosingpricesofstocksandYTMon debtportfoliodailymarketvalueiscomputed NAV MVAt LIABt/NSOt NAV=MVA LIAB
MVAisthemarketvalueofassets LIABisliabilities NSOnumberofshares/unitsoutstanding

MFResearch MF Research
Equityresearchandrecommendations Equity research and recommendations Debtresearch Trackingmacroeconomicdata ki i d Policyimpacts

FundManagement Fund Management

Conservative Conservative Aggressive PortfolioStrategies f li S i Equityfundmanagement Debtfundmanagement Balancedfundmanagement Balanced fund management ULIPSandsectorfundsmanagement

PerformanceMeasures Performance Measures

Differentperformancemeasures p ChangeinNAV Total Return TotalReturn ReturnonInvestment

PerformanceMeasures Performance Measures

Absolutereturns
Simplereturns IfaschemeNAVhasgoneupfromRs10to12and assumingnodividendthereturnwillbe20%(12 assuming no dividend the return will be 20% ( 12 10/10) Useforschemeswhichareinexistenceforlessthana year(SEBI) ear (SEBI) Morethanoneyearusecompoundedreturns Annualisation returnfortheperiodwhichisnot p equaltooneyear aschemegives4monthsreturnas 5%theannualreturnbe5%*12/4=15% (used for MMF and liquid schemes) (usedforMMFandliquidschemes)

PerformanceMeasures Performance Measures

Role of dividend Roleofdividend WhendividendispaidNAVgoesdownas thereisanoutflow there is an outflow ExdividendNAV Iftheschemehasagrowthoptionwhereno dividendsaredeclared,thenearningswillbe fullyreflectedintheNAV

PerformanceMeasures Performance Measures

Total return Totalreturn Similartosimplereturnbutifthereisdividend distribution,addittoNAVandcompute distribution add it to NAV and compute returns
S SupposeNAVhasgrownfromRs10to12andRe1 NAV h f R 10 t 12 d R 1 isdeclaredasdividend Simple return is (12 10/10) 20% Simplereturnis(1210/10)=20% Totalreturnis(12+110)/10=30%

PerformanceMeasures Performance Measures

Compoundedreturn

Assumeanydividenddeclaredisreinvestedinthescheme. A di id d d l d i i t d i th h Thennumberofunitswillincreasetotheextentofno.of dividendsdeclared unitholdingwillincrease Openingunits*openingNAV Opening units * opening NAV Closingunits*closingNAV CAGR(A/P)(1/t) 1 A=closingwealth A l i lth P=openingwealth T=timeperiod (SEBI h (SEBI schemeismorethanoneyearuseCAGR) i h CAGR)

PerformanceMeasures Performance Measures

Rollingreturn o g etu
Returnsduringlast7days,lastonemonth,three months Debtinvestmentearnsdailyinterestincome Volatilityindailyinterestratesleadtovolatilereturns 30 day rolling returns show the extent of volatility 30dayrollingreturns showtheextentofvolatility Loadadjustedreturns Exit load Exitload Relativereturns Withreferencetobenchmarkindex

MeasuresofReturn Measures of Return

Return of a fund is calculated as the change in Returnofafundiscalculatedasthechangein NAVduringthegivenperiod Adjusting to rights bonus or dividend Adjustingtorights,bonusordividend Returnisusuallycalculatedonanaverage basisthanpointtopointbasis b i h i i b i NAVseriesshouldbeatleastbeof30periods (samplesize30) (1/3)

MeasuresofReturn Measures of Return

The essential idea behind performance Theessentialideabehindperformance evaluationistocompareitwiththereturns obtainedrelativetootherreturnanactive investmentmanagerprovides Inotherwords,useofabenchmarkthatis comparableinrelativesense Eg.,compareasectorfundwithsectoralindex orreturnwithapopularindexinthecountry (2/3) likeBSESensex,etc

MeasuresofReturn Measures of Return

While return is an important aspect of Whilereturnisanimportantaspectof performance,wemustalsoaccountforthe portfolios exposure to risk portfoliosexposuretorisk Benchmarkportfoliosneedtohaveasimilar levelsofrisktomakethecomparison levels of risk to make the comparison meaningful M Measuretheperiodicreturns(monthly, h i di ( hl (3/3) quarterly)

Regulations
Overviewofregulation Overview of regulation AMFIandSEBIregulations Sellingpractices S lli i Investmentrestrictions KeyInformationMemorandum

OverviewofRegulation Overview of Regulation

The basic aim of regulation is to protect Thebasicaimofregulationistoprotect investorsinterest Regulators
SecuritiesExchangeBoardofIndia(SEBI) AssociationofMutualFundsinIndia(AMFI)

SEBI
SEBIAct S SEBIsapprovalisrequiredtostartamutual li i d l fundoperations SEBIalsoensuresthattrustees,boardof directorsandassetmanagementcompanies arepersonsofintegrityandreputationwith fairdealingstotheircredit.

AMFI
Setupin1995torepresentMutualFundcollectively Research&creatingstandardsforMFsinIndia Bestprofessional&ethicalstandards InteractswithSEBIonvariousissuesrelatedtothe industry. SEBIdiscussesmajorpolicyrelatedissueswithAMFI Investoreducationthroughseminars,workshops Investor education through seminars, workshops Quarterlyupdatesetc Mandatorycertificationprogramconductedfor DistributorsandIntermediaries Distributors and Intermediaries CertificationfortheMutualFundemployees

KeyInformationMemorandum Key Information Memorandum

SEBI has also prescribed the contents of Key SEBIhasalsoprescribedthecontentsofKey InformationMemorandum,whichisessentiallya summaryoftheOfferDocument. y Asofferdocumentismostcomprehensivesource ofinformationforaprospectiveinvestor,itisnot of information for a prospective investor, it is not distributedwidelyandisonlyavailableon request.Thisisbecauseoftheexpenseinvolved q p andbecausemostindividualinvestorsfindit cumbersometostudysuchadetaileddocument.

KeyInformationMemorandum Key Information Memorandum

SEBIhasprescribedtheformatfortheKIMthatincludesthe followingcriticalareas: following critical areas: InvestmentObjectives. Assetallocationpatternofthescheme. Plans and options Plansandoptions Benchmarkindexanddividendpolicy SourceoftheobtainingdailyNAV Mechanism to provide unit holders with information such as Mechanismtoprovideunitholderswithinformationsuchas accountsstatements,annualfinancialresultsandhalf yearly portfoliodisclosure. NameoffundmanagerandTrusteeCompany. a e o u d a age a d ustee Co pa y Investorgrievancecontract,etc

NewChallenges New Challenges

FundofFunds Fund of Funds Multimanagerfunds(Optimix) HedgeFunds d d Realtyfunds GoldExchangeTradedFunds PortfolioManagementServices Portfolio Management Services

Summary
MutualfundIndustryevolutionandgrowth Mutual fund Industry evolution and growth Constituentsandorganizationalstructure Typesofschemes T f h Valuation,Netassetvalueandperformance measures Regulations Newchallenges

Thank You