A REPORT

ON
RECEN TREND IN MUTUAL FUNDS AND TAX SAVING INSTRUMENT
IN THE YEAR 2008-10

BY

RAJENDRA REDDY V.S.N.

NAME OF THE ORGANIZATION: RADIM INVESTMENT SERVICES

UNDER THE GUIDENCE OF

COMPANY GUIDE FACULTY GUIDE

Mr. AKSHAY KUMAR Prof . ANAND PATIL

Managing Partner Magnus School Of Business
Executive Summary:

This project is on study of recent trends in mutual funds .It is about

how the mutual funds are performing and customer perception on mutual funds
also what are all the tax saving instruments available for saving the tax. And how
the people are planning to avoid the paying tax.
This project has been a great learning experience for me; at the same time it gave me
enough scope to implement my analytical ability. This project as a whole can be divided
into two parts:
The first part gives an insight about the mutual funds and its various aspects. It is purely
based on whatever I learned at Radim investment services. One can have a brief
knowledge about mutual funds and all its basics through the project. Other than that the
real servings come when one moves ahead. Some of the most interesting questions
regarding mutual funds have been covered. Some of them are: why has it become one
of the largest financial intermediaries? How investors do chose between funds? Most
popular stocks among fund managers, most lucrative sectors for fund managers, a
special report on Systematic Investment Plan, does fund performance persists and the
topping of all the servings in the form of portfolio analysis tool and its application.
All the topics have been covered in a very systematic way. The language has been kept
simple so that even a layman could understand. All the data have been well analyzed
with the help of charts and graphs.
The second part consists of data analysis, collected through a survey done on 100
people. The data collected has been well organized and presented. Hope the research
findings and conclusions will be of use. It has also covered investors perception and
behavior about the mutual funds
OBJECTIVE

To get full information on mutual fund industry both growth aspects of industry and
investor

SCOPE OF STUDY:

The scope of the project is confined to some factors which can be measured and the
research through questionnaire of sample size of 50 and these study can provide the
investor perception and the behavior about the mutual funds and also analyze the tax
planning of the people.

SAMPLE DESIGN:

The researcher has selected 100 investors as a representative of the population by

using convenience sampling method.

TOOLS OF DATA COLLECTION:

For the purpose of the present study, data from two sources has been gathered namely,
primary and secondary

PRIMARY DATA: The primary data is collected through a structured questionnaire

SECONDARY DATA: The secondary data was collected from

 Web sites

 Magazines, fact sheets

 Text books

LIMITATIONS OF THE PROJECT:

 Interaction with the company professional was limited, due to their busy schedule

 Time to undertake such an extensive study was limited.

 Lack of awareness
METHODOLOGY:

1. We did survey on mutual funds through the questionnaire.

2. We have visited the companies and got the numbers of the H.R. persons

3. We have gone through telecalling for fixing the appointments to give demos
about the mutual funds.

4. We met the auditors and C.A. s to know whether they have any interest in sub
broker channel.

5. We went to apartments for met the associate members to give the demo on
mutual funds
COMPANY PROFILE:

RADIM INVESTMENT SERVICES was founded in April – 2007, as a partnership

firm with two individuals, AKSHAY KUMAR.R.S a management student from Magnus
Business School and RAGHAVENDRA.K.S. a PG-diploma holder in Management from
IGNOU. We focus in customer first –attitude, professionally certified business unit.
Radim is the most active organization in India; RADIM has highly efficient
professionalism and one of the fastest growing retail-network in Karnataka.

Radim has been founded with the aim of providing quality and need – based advisory
services and aim to achieve the goal of the investor on his needs. We help people to
choose right fund house, right scheme and proper asset allocation strategy based on
risk – profile of the investor.

STRENGTH:

RESEARCH – BASED – APPROACH: Research is the foundation in which Radim

advice is based. With the consistent efforts towards quality information it has created a
delight in Customer Satisfaction. The organization finds its Strength in the young team,
talented and qualified professionals. Our business philosophy is to ensure excellent
insurance and investment solutions by offering customized products, supported by the
best technology.

Currently managing more than 300 clients and average 5 crores of equity AUM.

OUR BUSINESS STREAMS

 MUTUAL FUNDS

 LIFE INSURANCE

 GENERAL INSURANCE

 CCOMPANY FIXED DEPOSITS

 POST OFFICE SAVINGS

 ABOUT MUTUAL FUNDS

CONCEPT

Individuals or institutions when have surplus money, i.e. savings, would like to invest
with the common and logical motive of growing money by getting returns on the
investments. There are various avenues to park money towards fulfillment of your
objective of return on investment.

One can invest money either where you can get assured returns & hence the risk is low
but returns also are low compared to the high risk investments.

The other way is through investing in shares i.e. equity market. Generally the returns on
equity investments are higher than debt investment but risk also is higher. To get good
returns one really needs to understand the economy and performance of companies
where you are investing money. For a common man it may be cumbersome while
managing own profession, job or business.

Hence the concept of mutual fund has evolved to manage the funds i.e. on behalf of the
investor; fund managers will be taking decisions to maximize the investor’s returns.

The concept of mutual funds in India dates back to the year 1963. The era between
1963 and 1987 marked the existence of only one mutual fund company in India with Rs.
67bn assets under management (AUM), by the end of its monopoly era, the Unit Trust
of India (UTI). By the end of the 80s decade, few other mutual fund companies in India
took their position in mutual fund market.

The new entries of mutual fund companies in India were SBI Mutual Fund, Canbank
Mutual Fund, Punjab National Bank Mutual Fund, Indian Bank Mutual Fund, Bank of
India Mutual Fund.

The succeeding decade showed a new horizon in Indian mutual fund industry. By the
end of 1993, the total AUM of the industry was Rs. 470.04 bn. The private sector funds
started penetrating the fund families. In the same year the first Mutual Fund Regulations
came into existence with re-registering all mutual funds except UTI. The regulations
were further given a revised shape in 1996.
Kothari Pioneer was the first private sector mutual fund company in India which has
now merged with Franklin Templeton. Just after ten years with private sector player
penetration, the total assets rose up to Rs. 1218.05 bn. Today there are 34 mutual fund
companies in India.
MUTUAL FUND INDUSTRY

The Phases of Growth

The Indian mutual industry has come a long way since the inception of UTI in
1963.According to AMFI, the evolution of the industry can be classified broadly into four
phases, which mark its transition from a period when UTI ruled the roost to a period of
competition and increased awareness among investors.

i) First Phase (1964-87) – UTI all the way

This phase begin with the inception of the Unit Trust of India (UTI). It remained the only
mutual fund player in the country till 1987. UTI started its operation in July 1964 “with a
view to encouraging savings and investments and participation in income, profits and
gains accruing to the corporation from acquisition, holding, management and disposal
of securities.” In short, it was set up by Indian government with a view to augment small
savings in the country and to channelize these savings to the capital markets. UTI
witnessed a slow and steady growth over the 1970s and the 1980s and by the end of
1988 it had an AUM of Rs.67bn. It still continues to be the largest player in the domestic
mutual fund industry with an AUM of Rs. 23,500 cr as on March 31, 2008.

ii) Second Phase (1987-1993) – Enter Public sector Mutual Funds

Public sector mutual funds set up by public sector banks, Life insurance Corporation of
India (LIC) and the General insurance Corporation of India (GIC) entered in the market
in 1987. The first non mutual fund was the SBI Mutual Fund established in June 1987,
followed by Canbank Mutual Fund in December 1987, Punjab National Bank Mutual
Fund in August 1989, India Bank Mutual Fund in Nov 1989, Bank of India Mutual Fund
in June 1990 and Bank of Baroda Mutual Fund in Oct 1992. LIC set up its mutual Fund
in Jun e 1989 while GIC established its Mutual Fund in Dec 1990. During this period,
the total asset of the industry grew to about Rs. 610bn with the total number of
schemes increasing to about 167 by the end of 1994.

1992- Amou Assets Mobilisa

93 nt Under tion as
Mobil Manage % of
ised ment gross
 Domestic
Savings
11,05
UTI 38,247 5.2%
7
Public
1,964 8,757 0.9%
Sector

iii) Third Phase of (1993-2003) – Private players enter the scene

This phase marked the entry of private sector funds. The phase also signaled the
intensification of competition. Both domestic and foreign players entered the market,
offering a wide variety of schemes to investors. Kothari Pioneer Mutual Fund was the
first private sector fund to establish in association with the foreign fund. Private players
like Morgan Stanley, Jardine Fleming, JP Morgan, George Soros and Capital
International entering the market. The total AUM by the end of Jan 31, 2003 increased
to $ 34,927mn from $23,260mn in March 1995 with a CAGR of 6.92%.

iv) Fourth Phase (since Feb 2003)– UTI’s restructuring and beyond
In Feb 2003 UTI ACT 1963 was replaced and UTI was bifurcated into two separate
entities: Specified undertaking of Unit Trust of India, which is still under the Govt. of
India and the UTI Mutual Fund Ltd. This was done in the wake of the sever payment
crisis that UTI suffered on account of its assured return schemes of US-64 that finally
resulted in an adverse impact on the India capital markets. US-64 was the first scheme
launched by UTI with a significant equity exposure and the returns of which were not
linked to the market. However, the industry has overcome that shock and is hoped to
have learnt its lesson.
 Major Mutual Fund Companies in India:

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of Kotak

Mahindra Bank Limited (KMBL). It is presently having more than 1,99,800 investors in
its various schemes. KMAMC started its operations in December 1998. Kotak Mahindra
Mutual Fund offers schemes catering to investors with varying risk - return profiles. It
was the first company to launch dedicated gilt scheme investing only in government
securities.

ii) HDFC Mutual Fund

HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies
Act, 1956, on December 10, 1999, and was approved to act as an Asset Management
Company for the HDFC Mutual Fund by SEBI vide its letter dated June 30, 2000. HDFC
Mutual Fund was setup with two sponsors namely Housing Development Finance
Corporation Limited and Standard Life Investments Limited.
iii) Unit Trust of India Mutual Fund

UTI Asset Management Company Private Limited, established in Jan 14, 2003,
manages the UTI Mutual Fund with the support of UTI Trustee Company Private
Limited. UTI Asset Management Company presently manages a corpus of over
Rs.20000 Crores. The sponsors of UTI Mutual Fund are Bank of Baroda (BOB), Punjab
National Bank (PNB), State Bank of India (SBI), and Life Insurance Corporation of India
(LIC). The schemes of UTI Mutual Fund are Liquid Funds, Income Funds, Asset
Management Funds, Index Funds, Equity Funds and Balance Funds.

iv) Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential Plc. of America, one of the
largest life insurance companies in the US of A. Prudential ICICI Mutual Fund was
setup on 13th of October, 1993 with two sponsors, Prudential Plc. and ICICI Ltd. The
Trustee Company formed is Prudential ICICI Trust Ltd. and the AMC is Prudential ICICI
Asset Management Company Limited incorporated on 22nd of June, 1993.

v) Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882.
The sponsor of RMF is Reliance Capital Limited and Reliance Capital Trustee Co.
Limited is the Trustee. It was registered on June 30, 1995 as Reliance Capital Mutual
Fund which was changed on March 11, 2004. Reliance Mutual Fund was formed for
launching of various schemes under which units are issued to the Public with a view to
contribute to the capital market and to provide investors the opportunities to make
investmentsindiversifiedsecurities.

vi) ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India)
Pvt. Ltd. as the Trustee Company. The AMC, ABN AMRO Asset Management (India)
Ltd. was incorporated on November 4, 2003. Deutsche Bank AG is the custodian of
ABN AMRO Mutual Fund.

vii) Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life
Financial. Sun Life Financial is a global organization evolved in 1871 and is being
represented in Canada, the US, the Philippines, Japan, Indonesia and Bermuda apart
from India. Birla Sun Life Mutual Fund follows a conservative long-term approach to
investment. Recently it crossed AUM of Rs. 10,000 crores.

viii) Bank of Baroda Mutual Fund (BOB Mutual Fund)

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992
under the sponsorship of Bank of Baroda. BOB Asset Management Company Limited is
the AMC of BOB Mutual Fund and was incorporated on November 5, 1992. Deutsche
Bank AG is the custodian.

ix) HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital
Markets (India) Private Limited as the sponsor.

x) ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee
Company. It is a joint venture of Vysya & ING. The AMC, ING Investment Management
Pvt. Ltd. was incorporated on April 6, 1998.

xi) Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial
Corporation Ltd. as the sponsor. Sahara Asset Management Company Private Limited
incorporated on August 31, 1995 works as the AMC of Sahara Mutual Fund. The paid-
up capital of the AMC stands at Rs 25.8 crore.
xii) State Bank of India Mutual Fund
State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch
offshore fund, the India Magnum Fund with a corpus of Rs. 225 cr. approximately.
Today it is the largest Bank sponsored Mutual Fund in India. They have already
launched 35 Schemes out of which 15 have already yielded handsome returns to
investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crores as AUM.
Now it has an investor base of over 8 Lakhs spread over 18 schemes.

xiii) Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsors for
Tata Mutual Fund are Tata Sons Ltd., and Tata Investment Corporation Ltd. The
investment manager is Tata Asset Management Limited and Tata Trustee Company Pvt.
Ltd. Tata Asset Management Limited's is one of the fastest in the country with more
than Rs. 7,703 Crores (on April 30, 2005).

xiv) Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by
Standard Chartered Bank. The Trustee is Standard Chartered Trustee Company Pvt.
Ltd. Standard Chartered Asset Management Company Pvt. Ltd. is the AMC which was
incorporated with SEBI on December 20, 1999.

xv) Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company with a
global AUM of US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial
services groups in the world. Investors can buy or sell the Mutual Fund through their
financial advisor or through mail or through their website. They have Open end
Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid
schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes,
Closed end Income schemes and Open end Fund of Funds schemes to offer.

xvi) Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the market
in securities, investment management and credit services. Morgan Stanley Investment
Management (MISM) was established in the year 1975. It provides customized asset
management services and products to governments, corporations, pension funds and
non-profit organizations. Its services are also extended to high net worth individuals and
retail investors. In India it is known as Morgan Stanley Investment Management Private
Limited (MSIM India) and its AMC is Morgan Stanley Mutual Fund (MSMF).
xvii) Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its
sponsor. The Trustee Company is Escorts Investment Trust Limited. Its AMC was
incorporated on December 1, 1995 with the name Escorts Asset Management Limited.

xviii) Alliance Capital Mutual Fund

Alliance Capital Mutual Fund was setup on December 30, 1994 with Alliance Capital
Management Corp. of Delaware (USA) as sponsor. The Trustee is ACAM Trust
Company Pvt. Ltd. and AMC, the Alliance Capital Asset Management India Private Ltd.
with the corporate office in Mumbai.

xix) Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance
Company Ltd. was setup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the
Trustee Company and AMC is Cholamandalam AMC Limited.

xx) LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It
contributed Rs. 2 Crores towards the corpus of the Fund. LIC Mutual Fund was
constituted as a Trust in accordance with the provisions of the Indian Trust Act, 1882. .
The Company started its business on 29th April 1994. The Trustees of LIC Mutual Fund
have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the
Investment Managers for LIC Mutual Fund.

xxi) GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a

Government of India undertaking and the four Public Sector General Insurance
Companies, viz. National Insurance Co. Ltd (NIC), The New India Assurance Co. Ltd.
(NIA), The Oriental Insurance Co. Ltd (OIC) and United India Insurance Co. Ltd. (UII)
and is constituted as a Trust in accordance with the provisions of the Indian Trusts Act,
1882.

The Players in the Mutual Fund Industry

The players in the Indian Mutual Funds Industry are similar to some extent to the
players in other financial services industry. The players are as follows:

SEBI
The Securities Exchange Board of India (SEBI) is the regulatory authority for all the
mutual funds sponsored by the public/private sector banks, financial institutions, private
sector companies, non- banking finance companies and foreign institutional investors.
SEBI has laid down the rules and regulations regarding the obligations of the entities
involves in a mutual fund, its establishment and launch of different schemes,
investments and valuation, financial reporting, conduct and operations of mutual funds.

Asset Management Company (AMC)

Its role is highly significant in the mutual funds operation. They are the fund managers
i.e. they invest the investors money in various securities after proper research and
analysis. They also look after the administrative functions of a mutual fund for which
they charge management fee.

Intermediaries
They act as a link between the mutual fund companies and the investors. The
intermediaries include brokers, sub- brokers, and investment houses. The other
intermediary- registrar and transfer agents perform activities, which are associated with
maintaining records concerning units already issued or to be issued by the company.
The registrar also performs other activities such as dividend payment, investor
grievance, etc.

Investors
Investors subscribe to the units issued by the mutual funds in the hope of getting a
return commensurate with the risk involved. SEBI protects the interest of the investors
through the guidelines laid down under SEBI (Disclosure and Investor Protection)
Guidelines, 2000. The mutual fund investor mainly includes individual, HUF, corporate
and trusts.

Types of Mutual Funds

There are many types of mutual funds available to the investor. However, these different
types of funds can be grouped into certain classifications for better understanding.
Structure of a Mutual Fund
SOURCE: http://amfiindia.com

ASSOCIATION OF MUTUAL FUNDS IN INDIA:-

 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 Mutual
Funds 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 Mutual Funds 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
mutual funds as well as their unit holder

The objectives of Association of Mutual Funds in India:-

The Association of Mutual Funds 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 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 that 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 in India do represent 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 program of training and certification for all intermediaries and other engaged in
the mutual fund industry.

 AMFI undertakes all India awareness programmed for investor’s in order to

promote proper understanding of the concepts and working of mutual funds.

 At last but not the least association of mutual fund of India also disseminate
information’s on Mutual Fund Industry and undertakes studies and research
either directly or in association with other bodies.
Regulatory Aspects:

Schemes of mutual funds:-

• The Asset management company shall launch no schemes unless the trustees
approve such scheme and a copy of the offer has been filed with the Board.
• Every mutual fund shall along with the offer documents of each scheme pay filing
fees.
• The offer document shall contain disclosures which are adequate in order to
enable the investors to make informed investment decision including the
disclosure non maximum investments proposed to be made by the scheme in
the listed securities of the group companies of the sponsor. A close-ended
scheme shall be fully redeemed at the end of the maturity period. “Unless a
majority of the unit holders otherwise decide for its rollover by passing a
resolution”.

• The mutual fund and asset management company shall be liable to refund the
application money to the applicants:-

• If the mutual fund fails to receive the minimum subscription amount referred to in
clause (i) of sub- regulation.

• If the moneys received from the applicants for units are in excess of subscription
as referred to in clause (ii) of sub-regulation.

The asset management company shall issue to the applicant whose:

 Application has been accepted, unit certificates or a statement of accounts

 Specifying the number of units allotted to the applicant as soon as possible
 But not later than six weeks from the date of closure of the initial
 Subscription list and or from the date of receipt of the request from the unit
 Holders in any open ended scheme.

Rules Regarding Advertisement:-

The offer document and advertisement materials shall not be misleading or contain any
statement or opinion, which are incorrect or false.

Investment objectives and valuation policies:-

The price at which the units may be subscribed or sold the price at which such unit may
at any time be repurchased by the mutual fund shall be made available to the investors.
General Obligation:-
  Every asset management company for each scheme shall keep and maintain
proper book of accounts, records and document, for each scheme so as to
explain its transaction and to disclose at any point of time the financial position of
each scheme and in particular give a true and fair view of the state of affairs of
the fund and intimate to the board the place where such books of accounts,
records and documents are maintained.

 The financial year for all the scheme shall end as of March 31 of each year.
Every mutual fund or the asset management company shall prepare in respect of
each financial year an annual report and annual statement of accounts of the
schemes and the fund as specified in Eleventh Schedule.

 Every mutual fund shall have the annual statement of accounts audited by an
auditor who is not in any way associated with the auditor of the asset
management comp

Procedure for Action In Case Of Default:-

On and from the date of the suspension of the certificate or the approval, as the case
may be, the mutual fund, trustees or asset management company, during the period of
suspension and shall be subject to the direction of the Board with regard to any records,
documents, or securities that may be in its custody or control relating to its activities as
mutual funds, trustees or the asset management company.

Some facts for the growth of mutual funds in India:-

o 100% growth in the last 6 years.

o Number of foreign AMC’s is in the queue to enter the Indian markets like
Fidelity Investments, US based, with over US$1trillion assets under
management worldwide.

o Our saving rate is over 23%, highest in the world. Only channelizing these
savings in mutual funds sector is required.

o We have approximately 29 mutual funds which is much less than US

having more than 800. There is a big scope for expansion.

o 'B' and 'C' class cities are growing rapidly. Today most of the mutual funds
are concentrating on the 'A' class cities. Soon they will find scope in the
growing cities.
 o Mutual fund can penetrate rural like the Indian insurance industry with
simple and limited products.

o SEBI allowing the MF's to launch commodity mutual funds.

ORGANISATION AND MANAGEMENT OF MUTUAL FUNDS:-

In India Mutual Fund usually formed as trusts, three parties are generally involved viz.
• Settler of the trust or the sponsoring organization.
• The trust formed under the Indian trust act, 1982 or the trust company
registered under the Indian companies act, 1956
• Fund mangers or The merchant-banking unit
• Custodians.

MUTUAL FUNDS TRUST:-

Mutual fund trust is created by the sponsors under the Indian trust act, 1982
Which is the main body in the creation of Mutual Fund trust
The main functions of Mutual Fund trust are as follows:
♦ Planning and formulating Mutual Funds schemes.
♦ Seeking SEBI’s approval and authorization to these schemes.
♦ Marketing the schemes for public subscription.
♦ Seeking RBI approval in case NRI’s subscription to Mutual Fund is Invited
♦ Attending to trusteeship function. This function as per guidelines can be
assigned to separately established trust companies too. Trustees are required
to submit a consolidated report six monthly to SEBI to ensure that the
guidelines are fully being complied with trusted are also required to submit an
annual report to the investors in the fund.
FUND MANAGERS (OR) THE ASSES MANAGEMENT COMPANY (AMC)
AMC has to discharge mainly three functions as under:
I. Taking investment decisions and making investments of the funds through
market dealer/brokers in the secondary market securities or directly in the
primary capital market or money market instruments

II. Realize fund position by taking account of all receivables and realizations,
moving corporate actions involving declaration of dividends,etc to compensate
investors for their investments in units; and

III. Maintaining proper accounting and information for pricing the units and arriving
at net asset value (NAV), the information about the listed schemes and the
transactions of units in the secondary market. AMC has to feed back the
trustees about its fund management operations and has to maintain a perfect
information system.
CUSTODIANS OF MUTUAL FUNDS:-
Mutual funds run by the subsidiaries of the nationalized banks had their
respective sponsor banks as custodians like canara bank, SBI, PNB, etc. Foreign
banks with higher degree of automation in handling the securities have assumed
the role of custodians for mutual funds. With the establishment of stock Holding
Corporation of India the work of custodian for mutual funds is now being handled
by it for various mutual funds. Besides, industrial investment trust company acts
as sub-custodian for stock Holding Corporation of India for domestic schemes of
UTI, BOI MF, LIC MF, etc

Fee structure:-
Custodian charges range between 0.15% to 0.20% on the net value of the
customer’s holding for custodian services space is one important factor which
has fixed cost element.
RESPONSIBILITY OF CUSTODIANS:-
♦ Receipt and delivery of securities
♦ Holding of securities.
♦ Collecting income
♦ Holding and processing cost
♦ Corporate actions etc

FUNCTIONS OF CUSTOMERS
♦ Safe custody
♦ Trade settlement
♦ Corporate action
♦ Transfer agents

RATE OF RETURN ON MUTUAL FUNDS:-

An investor in mutual fund earns return from two sources:
♦ Income from dividend paid by the mutual fund.
♦ Capital gains arising out of selling the units at a price higher than the
acquisition price

Formation and regulations:

1. Mutual funds are to be established in the form of trusts under the Indian trusts
act and are to be operated by separate asset management companies (AMC s)
2. AMC’s shall have a minimum Net worth of Rs. 5 crores;
3. AMC’s and Trustees of Mutual Funds are to be two separate legal entities and
that an AMC or its affiliate cannot act as a manager in any other fund;
4. Mutual funds dealing exclusively with money market instruments are to be
regulated by the Reserve Bank Of India
 5. Mutual fund dealing primarily in the capital market and also partly money
market instruments are to be regulated by the Securities Exchange Board Of
India (SEBI)
6. All schemes floated by Mutual funds are to be registered with SEBI
Schemes:-
1. Mutual funds are allowed to start and operate both closed-end and open-end
schemes;
2. Each closed-end schemes must have a Minimum corpus (pooling up) of Rs
20 crore;
3. Each open-end scheme must have a Minimum corpus of Rs 50 crore
4. In the case of a Closed –End scheme if the Minimum amount of Rs 20
crore or 60% of the target amount, which ever is higher is not raised then the
entire subscription has to be refunded to the investors;
5. In the case of an Open-Ended schemes, if the Minimum amount of Rs 50
crore or 60 percent of the targeted amount, which ever is higher, is no raised
then the entire subscription has to be refunded to the investors.

Investment norms:-
1. No mutual fund, under all its schemes can own more than five percent of any
company’s paid up capital carrying voting rights;
2. No mutual fund, under all its schemes taken together can invest more than 10
percent of its funds in shares or debentures or other instruments of any single
company;
3. No mutual fund, under all its schemes taken together can invest more than 15
percent of its fund in the shares and debentures of any specific industry, except
those schemes which are specifically floated for investment in one or more
specified industries in respect to which a declaration has been made in the offer
letter.
4. No individual scheme of mutual funds can invest more than five percent of its
corpus in any one company’s share;
 5. Mutual funds can invest only in transferable securities either in the money or in
the capital market. Privately placed debentures, securitized debt, and other
unquoted debt, and other unquoted debt instruments holding cannot exceed 10
percent in the case of growth funds and 40 percent in the case of income funds.

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
investor’s ownership of the fund is in the same proportion as the amount of the
contribution made by him bears to the total amount of the fund.

A mutual fund uses the money collected from investors to buy those assets, which are
specifically permitted by its stated investment objective. Thus, an equity fund would buy
mainly equity assets-ordinary shares, preference shares, warrants, etc. a bond fund
would mainly buy debt instruments, such as debentures, bonds, or government
securities. It is these assets, which are owned by the investors in the proportion of their
investments.

When an investor subscribes to a mutual fund, he or she buys a part of the assets or
the pool of funds that are outstanding at that time. It is no different from buying “shares”
of a joint stock company, in which case the purchase makes the investor a part owner of
the company and its assets. In fact, in the USA, a mutual fund is constituted as an
investment company and an investor “buys in to the fund” meaning he buys the shares
of the fund. In India, a mutual fund id constituted as a trust an investor subscribes to the
“units” issued by the fund, which is where the term Unit Trust comes from. . Mutual
funds issues units to the investors in accordance with quantum of money invested by
them. Investors of Mutual funds are known as Unit Holders.

Investments in securities are spread across a wide cross-section of industries and

sectors and thus the risk is reduced. Diversification reduces the risk because all stocks
may not move in the same direction in the same proportion at the same time. The
profits and losses are shared by the investors in proportion to their investments. Mutual
funds normally come out with a number of schemes with different investments
objectives which are launched from time to time. A mutual fund is required to be
registered with Securities and Exchange Board of India which regulates securities
markets before it can collect funds from public.

However, whether the investor gets funds shares or units is only a matter of legal
distinction. In any case, a mutual fund shareholder or unit holder is a part owner of the
fund’s assets. The term unit-holder includes the mutual fund account-holder or closed-
end fund shareholder. A unit holder in Unit Trust of India US-64 scheme is the same as
a UTI Master shareholder or an investor in an alliance
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 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 investor’s part ownership is the determined by the NAV of
the number of units held.

Example: If the value of a fund’s assets stands at Rs 1000 and it has 10 investors who
have bought 10 units each, the total numbers of units issued are 100, and the value of
one unit is Rs 10 (1000/100). If a single investor in fact owns 3 units, the value of his
ownership of the fund will be Rs 30 (1000/100*3). Note that the value of the fund’s
investments will keep fluctuating with the market price movements, causing the NAV
also fluctuate. For example, if the value of our funds assets increased from Rs 1000 to
Rs 1200, the value of our investors holding of 3 units (1200/100*3) Rs 36. The
investment value can go up and down, depending on the market value of the fund’s
assets.

The flow chart below describes broadly the working of a mutual fund:
SOURCE: AMFI

Advantages of Mutual Funds

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

i) Portfolio Diversification
Mutual Funds spread the investment across different securities (stocks, bonds, money
market instruments, real estate, fixed deposits etc.) by investing in a number of
companies across a broad cross-section of industries and sectors (auto, textile,
information technology etc.). This kind of a diversification may add to the stability of
your returns and reduces the risk with far less money than you can do on your own. For
example during one period of time equities might underperform but bonds and money
market instruments might do well enough to offset the effect of a slump in the equity
markets.

ii) Convenient Administration

Investing in a Mutual Fund reduces paperwork and helps you avoid many problems
such as bad deliveries, delayed payments and follow up with brokers and companies.

iii) Professional Management

Qualified investment professionals who seek to maximize returns and minimize risk
monitor investor's money. The investment professional has experience in making
investment decisions. It is the Fund Manager's job to (a) find the best securities for the
fund, given the fund's stated investment objectives; and (b) keep track of investments
and changes in market conditions and adjust the mix of the portfolio, as and when
required.

iv) Liquidity
In open-end schemes, the investor gets the money back promptly at net asset value
related prices from the Mutual Fund. In closed-end schemes, the units can be sold on a
stock exchange at the prevailing market price or the investor can avail of the facility of
direct repurchase at NAV related prices by the Mutual Fund.

v) Affordability
Investors individually may lack sufficient funds to invest in high-grade stocks. A mutual
fund because of its large corpus allows even a small investor to take the benefit of its
investment strategy.

vi) Variety
Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two
ways: first, it offers different types of schemes to investors with different needs and risk
appetites; secondly, it offers an opportunity to an investor to invest sums across a
variety of schemes, both debt and equity.
vii) Tax Benefits
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.

viii) Transparency
Open-ended mutual funds disclose their Net Asset Value (NAV) daily and the entire
portfolio monthly. This level of transparency, where the investor himself sees the
underlying assets bought with his money, is unmatched by any other financial
instrument.

Disadvantages of Mutual Funds

While the benefits of investing through mutual funds far outweigh the disadvantages, an
investor and his advisor will do well to be aware of few shortcomings of using the
mutual fund as an investment vehicle.

i) No Tailor-made-Portfolios
Investing through funds means, the investor delegates the decision of investing through
which securities to fund manager. The very high-net-worth individuals or large
corporates may find this as a constraint in achieving their objectives. However this
constraint can be overcome to some extent by offering families of schemes to investor,
within the same fund.

ii) No control over costs

Investor pays the investment management fees as long as he remains within the fund.
Fees are usually payable as a percentage of the value of his investments, whether the
fund value is rising or declining. The investor also pays the fund distribution cost, which
he would not incur in direct investment.

iii) Managing a Portfolio of Funds

Availability of a large number of options from mutual funds can actually mean too much
choice for the investor. He may again need advice on how to select a fund to achieve
his objectives.

Mutual Fund Classification

SOURCE: http://amfiindia.com

Categories of mutual funds:

  By Structure

i) Open-ended Funds
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. Hence, the unit capital of the schemes keeps changing
each day. Such schemes thus offer very high liquidity to investors and are becoming
increasingly popular in India. Please note that an open-ended fund is NOT obliged to
keep selling/issuing new units at all times, and may stop issuing further subscription to
new investors. On the other hand, an open-ended fund rarely denies to its investor the
facility to redeem existing units.

ii) Closed-ended Funds

A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15
years. 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.
Closed-ended schemes are usually more illiquid as compared to open-ended schemes
and hence trade at a discount to the NAV. This discount tends towards the NAV closer
to the maturity date of the scheme.

iii) Interval Funds

Interval funds combine the features of open-ended and close-ended schemes. They
may be traded on the stock exchange or may be open for sale or redemption during
pre-determined intervals at NAV based prices.

 By Investment Objective

i) Growth Funds
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. It has been
proven that returns from stocks, have outperformed most other kind of investments held
over the long term. Growth schemes are ideal for investors having a long-term outlook
seeking growth over a period of time.

ii) Income Funds

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.

iii) 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. In a rising
stock market, the NAV of these schemes may not normally keep pace, or fall equally
when the market falls. These are ideal for investors looking for a combination of income
and moderate growth.

iv) 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.

v) Gilt Fund
These funds invest exclusively in government securities. Government securities have
no default risk. NAVs of these schemes also fluctuate due to change in interest rates
and economic factors as is the case with income or debt oriented schemes.

vi) Index Funds

Index Funds replicate the portfolio of a particular index such as the BSE sensitive index,
S&P NSE 50 index(Nifty).These schemes invest in the securities in the same weight
age comprising of an index. NAV’s of such schemes would rise or fall in accordance
with the rise or fall in the index, though not exactly by the same percentage due to
some factors known as “Tracking Error” in technical terms. Necessary disclosure in
this regard is made in the offer document of the mutual fund scheme. There are also
exchange traded index funds launched by the mutual funds which are traded on the
stock exchanges.

 On the basis of Load

i) 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.

ii) 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

i) Tax Saving Schemes

These schemes offer tax rebates to 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 u/s 88 of the Income Tax Act, 1961. The Act also
provides opportunities to investors to save capital gains u/s 54EA and 54EB by
investing in Mutual Funds, provided the capital asset has been sold prior to April 1,
2000 and the amount is invested before September 30, 2000.

ii) Industry Specific Schemes

Industry Specific Schemes invest only in the industries specified in the offer document.
The investment of these funds is limited to specific industries like InfoTech, FMCG, and
Pharmaceuticals etc.

iii) Sectoral Schemes

Sectoral Funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as 'A' Group shares or initial public offerings. In
these funds or schemes the investor invests in the securities of only those sectors or
industries which are specified in the offer documents. E.g. Pharmaceuticals, software,
Fast Moving Consumers goods (FMCG), petroleum stocks, etc. the return on these
funds is dependent on the performance of the respective sector/industries. While these
funds may give higher returns, they are more risky compared to the diversified funds.
Investors need to keep a watch on the performance of these sectors and must exit at an
appropriate time. They may seek an advice of an expert.

Spreading the Mutual Fund Culture

Though the Indian Mutual Fund industry has a huge potential, it is yet to be realized. To
realize its growth potential, industry will have to focus on its reach in the retail segment.
According to Chairman of AMFI there are about 180 million households in India, of
which just 11.8 millions invest in mutual funds, making it penetration of 6.7% in the
urban areas 13.7% of the households invest in mutual funds; in rural areas this
percentage is just 3.8%. So there is a need to focus on rural penetration for future
growth. To achieve its growth, educating the customer about the mutual funds as a
saving vehicle will be critical. More efforts are required from the regulators and the
industry to manage the wealth of individuals to further propel the growth of the industry
by popularizing the use of mutual funds. The govt. should properly regulate and monitor
the regulation so that a favorable climate can be created. Regulations should be
tightened to curb unethical practices. They should also develop a comprehensive risk
management system so that it can induce more investment. The industry should focus
on product innovation and maintain transparency, flexibility, service and innovation to
realize its potential.

Offer Document

When an AMC or a Fund Sponsor wishes to launch a new mutual fund scheme, they
are required to formulate the details of the schemes and register it with SEBI before
announcing the scheme and inviting the investors to subscribe to the fund. Launch of a
new mutual fund scheme is called a New Fund Offer (NFO). The document containing
the details of the new fund offer that the AMC or the Sponsor prepares and circulates to
the prospective investors is called the Offer Document.
Offer Document issued by mutual funds serve the same purpose of inviting investors
and giving them the information about the new fund offer. The offer document of the
closed-end fund is issued only once at the time of issue, as the units are normally not
re-purchasable for investors. But, the open-end fund could issue and repurchase units
on an ongoing basis. This means that the offer document of the open-end funds is valid
for all the time, until amended, though it will be first issued at the time of launch of the
scheme. SEBI requires the offer document of the open-end fund to be revised every two
years.

Options Offered to Investors:

 Dividend Option: The investor can choose to receive a part of the profits of
the mutual fund at some intervals before their redemption. This option is
 Dividend Option. Investors who choose dividend option can again have 2 sub
options:

 Dividend Payout Option: Investors who choose the dividend payout option
on their investments will receive dividends as and when such dividends are
declared by the scheme. Dividends are paid out to the investors in the form of
warrants or are directly credited to the investor’s bank account.

 Dividend Re-investment Option: Investors who opt for the dividend

reinvestment option do not take the amount of dividend out of the scheme. They
re-invest the dividends that are declared by the mutual funds back into the
mutual funds itself, at a NAV that is prevalent immediately after the declaration of
dividend or the NAV at the time of re-investment. This NAV is known as ex-div
NAV.

 Growth Option: The investors who do not want to receive any part of profits
of the mutual fund before its redemption. Rather they want to retain the profits
made in the pool and want their returns to grow by being compounded.
Whenever they need to get some money or profits back, they would sell a part of
their units. This is Growth Option.

Investor Earning Opportunities:

Dividend Payout Dividend Growth Option
Reinvestment

Dividend Yes Yes No

Change in NAV Yes Yes Yes

Lock-in Period Options:

Mutual funds usually do not have lock-in periods, during which investors cannot exit the
fund. Mutual funds may create products with lock-in periods. Repurchase information
can be found in the offer document. There are 2 normal situations when investors are
restricted from exiting the fund:
 An open-ended fund may announce an initial offer period, during which time it
will only sell units. There may be no repurchase during that period. The fund will
announce a date from which further sales and repurchases will take place.

 Some specific funds scheme can be designed to have a minimum period of

investment.
 Example: Investments in special “Equity Linked Savings Scheme” are eligible for
tax rebates. In order to enjoy the tax rebate, the investor is required to stay
invested for a period of 3 years.

In extra-ordinary situations, mutual funds can, with notice to the investors

through a national daily, impose temporary lock-in periods. Investors have to
check the offer document to see if the mutual fund has sought such a right for
itself.

Regulations regarding Cutoff Timings:

 All funds except liquid funds

• Purchases:

In respect of valid applications received upto 3 p.m. by the Mutual Fund,

same day’s closing NAV shall be applicable.
In respect of valid applications received after 3 p.m. by the Mutual Fund,
the closing NAV of the next business day shall be applicable.

• Redemption:

In respect of valid applications received upto 3 p.m. by the Mutual Fund,

same day’s closing NAV shall be applicable.
In respect of valid applications received after 3 p.m. by the Mutual Fund,
the closing NAV of the next business day shall be applicable.

 Liquid fund

• Purchases:

In respect of valid applications, closing NAV of the day immediately before

the day on which funds are available for utilization by the fund shall be
applicable. However, in respect of any application received after 1 p.m. by
the Mutual Fund and the funds are available for utilization by the fund on
the same day, closing NAV of the same day shall be applied.

• Redemption

In respect of valid applications received upto 10:00 a.m. by the Mutual

Fund, previous day’s closing NAV shall be applicable. In respect of valid
applications received after 10:00 a.m.by the Mutual Fund, same day’s
NAV shall be applicable.
Net Asset Value
Net Asset Value (NAV) represents a fund's per share market value. This is the
price at which investors buy (bid price) fund shares from a fund company and sell
them (redemption price) to a fund company. Dividing the total value of all the cash
and securities in a fund’s portfolio, less any liabilities, by the number of shares
outstanding, derives it. The NAV computation is undertaken once at the end of each
trading day based on the closing market prices of the portfolio's securities.

NAV: Net Assets of the Scheme/ Number of Units Outstanding

Or
(Market Value of Investment + Receivables + Other Accrued Income + Other
Assets – Accrued Expenses – Other Payables – Other Liabilities)/Number of
Units Outstanding on the Valuation Date

For the purpose of NAV calculation, the day on which NAV is calculated by a fund is
known as the Valuation Date. NAV of all schemes must be calculated and published
at least every Wednesday for Closed-end schemes and daily for Open-end
schemes. The day’s NAV must be posted on AMFI website by 8:00 p.m. that day.
This applies to both Open-end & Closed-end schemes.

The fund’s NAV is affected by these 4 factors:

• Purchase & Sale of investment securities
• Valuation of all investment securities held
• Other assets & liabilities
• Units sold or redeemed

Pricing Of Units

Although NAV per unit defines the fair value of the investor’s holding in the fund, the
fund may not repurchase the investor’s units at the same price as NAV. There can be
entry or exit loads. The Sale price is NAV + Entry Load and the Repurchase price is
NAV – Exit Load. SEBI requires that fund must ensure that repurchase price is not
lower than 93% of NAV (95% in the case of a closed-end fund). On the other side, the
fund may sell new units at a price that is different from the NAV, but the sale price
cannot be higher than 107% of NAV. Also, the difference between the repurchase price
and the sale price of the unit is not permitted to exceed 7% of the sale price.
Sale Price: Applicable NAV * (1 + Entry Load)
Repurchase Price: Applicable NAV * (1 – Exit Load)

Fees & Expenses:

An AMC may charge the scheme with Investment Management & Advisory Fees that
are fully disclosed in the offer document subject to the following limits:
 1.25% of the first Rs.100 Crores of weekly average net assets outstanding in the
accounting year, and @ 1% of weekly average net assets in excess of Rs.100
Crores.

 For no load schemes, the AMC may charge an additional management fee up to
1% of weekly average net assets outstanding in the accounting year.

Initial Issue Expenses

 Initial Issue Expenses will be permitted for Closed Ended Scheme only and such
scheme will not charge entry load.

 Initial Issue Expenses of launching schemes (not to exceed 6% of initial

resources raised under the scheme)

Total Expenses:
Total Expenses charged by the AMC to a scheme, excluding issue or redemption
expenses but including investment management & advisory fees, are subject to
the following limits:
On the first Rs.100 Crores of daily or average weekly net assets 2.5%
On the next Rs.300 Crores of daily or average weekly net assets 2.25%
On the next Rs.300 Crores of daily or average weekly net assets 2.0%
On the balance of daily or average weekly net assets 1.75%

For Bond Funds:

On the first Rs.100 Crores of daily or average weekly net assets 2.25%
On the next Rs.300 Crores of daily or average weekly net assets 2.0%
On the next Rs.300 Crores of daily or average weekly net assets 1.75%
On the balance of daily or average weekly net assets 1.5%

Investment Plans
The term “investment plans” generally refers to the portfolio flexibility that the funds to
investors offering different ways to invest or reinvest. The different investment plans are
an important consideration in the investment decision, because they determine the level
of flexibility available to the investor. Also, the investment plan offered by a fund allows
the investors freedom with respect to investing one time or at regular intervals, making
transfers to different schemes within the same fund family, or receiving income at
specified intervals or accumulating distributions. These are some of the investment
plans offered by mutual funds in India:

• Automatic Reinvestment Plans (ARP):

Many funds offer 2 options under the same scheme- the Dividend Option & the
Growth Option. The ARP allows the investor to reinvest the amount of dividends
or other distributions made by the fund in the same fund & receive additional
units, instead of receiving them in cash.

• Systematic Investment Plan (SIP):

These require the investor to invest a fixed sum periodically, thereby letting the
investor save in a disciplined and phased manner. The mode of investment
could be though direct debit to the investor’s salary or bank account. A modified
version of SIP is the Voluntary Accumulation Plan (VAP) that allows the investor
flexibility with respect to the amount and frequency of investment.

• Systematic Withdrawal Plan (SWP):

Such plans allows the investor to make systematic withdrawals from his fund
investment account on a periodic basis, thereby providing the same benefit as
regular income. The investor must withdraw a specific minimum amount with
the facility to have withdrawal amounts sent to his residence by a cheque or
credited directly into the bank account. The amount withdrawn is treated as
redemption of units at the applicable NAV as specified in the offer document.
The investor is usually required to maintain a minimum balance in his fund
account under this plan.

• Systematic Transfer Plan (STP):

These plans allow the investor to transfer on a periodic basis a specified
amount from one scheme to another with the same fund family- meaning two
schemes managed by the same AMC and belonging to the same mutual fund.
A transfer will be treated as redemption of units from the scheme from which
the transfer is made, and as investment in units of the scheme into which the
transfer is made. Such redemption or investment will be at the applicable NAV
 for the respective schemes as specified in the offer document. The investor is
usually required to maintain a minimum balance in his fund account under this
plan for which the transfer is made.

Performance Evaluation

PARAMETERS OF MUTUAL FUND EVALUATION:

 Risk
 Returns
 Liquidity
 Expense Ratio
 Composition of Portfolio

Risks Associated With Mutual Funds

Investing in mutual funds as with any security, does not come without risk. One of the
most basic economic principles is that risk and reward are directly correlated. In other
words, the greater the potential risk, the greater the potential return. The types of risk
commonly associated with mutual funds are:

Market Risk:

Market risk relate to the market value of a security in the future. Market prices fluctuate
and are susceptible to economic and financial trends, supply and demand, and many
other factors that cannot be precisely predicted or controlled.

Political Risk:

Changes in the tax laws, trade regulations, administered prices etc. is some of the
many political factors that create market risk. Although collectively, as citizens, we have
indirect control through the power of our vote, individually as investors, we have virtually
no control.

Inflation Risk:

Inflation or purchasing power risk, relates to the uncertainty of the future purchasing
power of the invested rupees. The risk is the increase in cost of the goods and services,
as measured by the Consumer Price Index.
Interest Rate Risk:

Interest Rate risk relates to the future changes in interest rates. For instance, if an
investor invests in a long term debt mutual fund scheme and interest rate increase, the
NAV of the scheme will fall because the scheme will be end up holding debt offering
lowest interest rates.

Business Risk:

Business Risk is the uncertainty concerning the future existence, stability and
profitability of the issuer of the security. Business Risk is inherent in all business
ventures. The future financial stability of a company can not be predicted or guaranteed,
nor can the price of its securities. Adverse changes in business circumstances will
reduce the market price of the company’s equity resulting in proportionate fall in the
NAV of mutual fund scheme, which has invested in the equity of such a company.

Economic Risk :

Economic Risk involves uncertainty in the economy, which, in turn can have an
adverse effect on a company’s business. For instance, if monsoons fall in a year, equity
stocks of agriculture bases companies will fall and NAVs of mutual funds, which have
invested in such stocks, will fall proportionately.
There are 3 different methods with the help of which we can measure the risk.
 HOW LONG TO KEEP INVESTMENT TO GET MAXIMUM RETURNS

Technically open-ended funds you can withdraw your investments even within a
week, but to get desired returns positive time frame is required are:

Funds Time Period

Equity Funds 3 Years (plus)

Balanced Funds 18 months to 3 Years

MIP’s 1 Year (plus)

Income Funds 6 months to 1 Year

Liquid Funds few days to 6 months

WHAT RETURNS CAN I EXPECT IF I KEEP MY MONEY FOR SUGGESTED TIME

FRAMES

Funds Returns

Sector funds 22% to 25% p.a

Balance funds 15% to 18% p.a

MIP’s Pension Plans 12% to 15% p.a

Income Funds 10% to 12% p.a

Liquid Funds 7% to 9% p.a

 The above-mentioned returns in the table are indicative and not assured. All
investments in MUTUAL FUNDS are securities and are subject to market risk and the
NAVs of the schemes may go up and down depending upon the factors and forces
affecting the security market including the fluctuations in the internal rates .The past
performance of the MUTUAL FUNDS is not indicative of future performance.

Tax Provisions

 Income earned by any mutual fund registered with SEBI (Mutual Fund)
Regulation, 1996 is fully exempt from tax under section 10 (23D) of the IT act.

 However, income distributed to unit-holders by a closed-end or debt fund is liable

to a dividend distribution tax at a rate stipulated by the Government. This tax is
not applicable to distributions made by open-end-equity-oriented funds (funds
with more than 50% of their portfolio in Equity).

 Dividend Distribution Tax is payable by the fund on its distributions and out of its
income, the investor pays indirectly since the fund’s NAV and the value his
investment will come down by the amount of tax paid by the fund.

Example: If a closed-end or a debt fund declares a dividend distribution of

Rs.100, Rs.10.20 (Tax Rate 10.2%) will be the tax in the hands of the fund. While
the investor will get Rs.100, the fund will have Rs.10.20 less to invest. The fund’s
current cash flow diminish by Rs.10.20 paid as tax, and its impact will be
reflected in the lower value of the fund’s NAV and hence investor’s investment on
a compound basis in future periods.
 Since the tax is on distributions, it makes income schemes less attractive in
comparison to growth schemes, as the objective of income schemes is to pay
regular dividends.

 The fund cannot avoid the tax even if the investor chooses to reinvest the
distribution back into the fund.

Example: The fund will still pay Rs.10.20 tax on the announced distribution, even
if the investor chooses to reinvest his dividends in the concerned scheme.

Tax Benefits to the Investor

 Dividends Received from Mutual Funds:

• Income distributed by a fund is exempted in the hands of investors

• No TDS on any income distribution by mutual fund

  Capital Gains on Sale of Units: If the investor sells his units and earn ‘Capital
Gains’, the investor is subject to the Capital Gains Tax as under:

• If units are held for more than 12 months, they will be treated as short
term capital asset, otherwise as long term capital asset.

• Tax law definition of Capital Gains: Sale Consideration – (Cost of

Acquisition + Cost of Improvements + Cost of Transfer)

• If the units were held for over one year, the investor gets the benefit of
“Indexation”, which means his purchase price is marked up by an
inflation index, so his capital gain amount is less than otherwise.
Purchase Price of a long term capital asset after indexation is
computed as:

• Cost of Acquisition or Improvement:

Actual Cost of Acquisition or Improvement * Cost Inflation Index for
year of transfer/ Cost Inflation Index for year of Acquisition or
Improvement or for 1981, whichever is later.

Restrictions on Investments

 A mutual fund scheme shall not invest more than 15% of its NAV in debt
instruments issued by a single issuer, which are rated not below investment
grade by a credit rating agency authorized to carry out such activity under the
Act. Such investment limit may be extended to 20% of the NAV of the scheme
with the prior approval of the Board of Trustees and the Board of Asset
Management Company.
 A mutual fund scheme shall not invest more than 10% of its NAV in unrated debt
instruments issued by a single issuer and the total investment in such
instruments shall not exceed 25% of the NAV of the scheme. All such
investments shall be made with the prior approval of the Board of Trustees and
the Board of Asset Management Company.
 No mutual fund under all its schemes should own more than 10% of any
company's paid up capital carrying voting rights.
 Such transfers are done at the prevailing market price for quoted instruments on
spot basis. The securities so transferred shall be in conformity with the
investment objective of the scheme to which such transfer has been made.
  A scheme may invest in another scheme under the same asset management
company or any other mutual fund without charging any fees, provided that
aggregate inter scheme investment made by all schemes under the same
management or in schemes under the management of any other asset
management company shall not exceed 5% of the net asset value of the mutual
fund.
 The initial issue expenses in respect of any scheme may not exceed 6% of the
funds raised under that scheme.
 Every mutual fund shall buy and sell securities on the basis of deliveries and
shall in all cases of purchases, take delivery of relative securities and in all cases
of sale, deliver the securities and shall in no case put itself in a position whereby
it has to make short sale or carry forward transaction.
 Every mutual fund shall, get the securities purchased or transferred in the name
of the mutual fund on account of the concerned scheme, wherever investments
are intended to be of long-term nature.
 No mutual fund scheme shall make any investment in;
• Any unlisted security of an associate or group company of
the sponsor; or
• Any security issued by way of private placement by
an associate or group company of the sponsor; or
• The listed securities of group companies of the
sponsor which is in excess of 30% of the net assets
(of all the schemes of a mutual fund)

 No mutual fund scheme shall invest more than 10 per cent of its NAV in the
equity shares or equity related instruments of any company. Provided that, the
limit of 10% shall not be applicable for investments in index fund or sector or
industry specific scheme.
A mutual fund scheme shall not invest more than 5% of its NAV in the equity shares or
equity related investments in case of open-ended scheme and 10% of its NAV in case
of close-ended scheme.

Asset Allocation Principles

Asset allocation means determining the percentage of your investment to be held in

equities, bonds and money market/cash instruments. It has been observed that 90% of
a managed portfolio comes from right levels of asset allocation between stocks and
bonds/cash.
 Benjamin Graham’s 50/50 Balance

Benjamin Graham advocates 50/50 split between equities & bonds, the common
approach to start with. When value of equities goes up, balance can be restored
by liquidating part of the equity portfolio and vice versa. This is the basic
defensive or conservative investment approach. But it is good to get half a return
of a rising market and to avoid the full losses of a falling market.
 50/50 Portfolio of Mutual Funds

Bogle suggested the following combinations

1. A Basic Managed Portfolio: 50% in diversified Equity Value Funds
25% in a Government Securities Fund
25% in High Grade Corporate Bond Funds
2. A Basic Indexed Portfolio: 50% in Total Stock Market/Index Funds
50% in Total Bond Market Value
3. A Simple Managed Portfolio: 85% in Balanced 60/40 Fund
15% in Medium Term Bond Fund
4. A Complex Managed Portfolio: 20% in Diversified Equity Fund
20% in Aggressive Growth Funds
10% in Specialty Funds
30% in Long-Term Bond Funds
20% in Short-Term Bond Funds
5. A Readymade Portfolio: Single Index Fund with 60/40 Equity/Bond holding

 Strategic Asset Allocation

Graham’s 50/50 is the basic asset allocation. Bogle recommends adjusting the
percentages for each group in terms of their lifecycle phases. During the
Accumulation Phase, an investor would be building assets by periodic
investments of capital & reinvestment of all dividends received. During the
Distribution Phase, he will stop adding assets and start receiving dividends as
income. Considered with conjunction with the investor’s age, he recommends the
following strategic allocations:

1. Investor in Accumulation Phase:

Diversified Equity & Balanced Fund 65 - 80%

Income & Gilt Funds 15 – 30%

Liquid Funds & Bank Deposits 5%

2. Investor in Distribution Phase:

Diversified Equity & Balanced Fund 15 – 30%

Income & Gilt funds 65 – 80%

Cash Funds 5%

Bogle gives a nice rule of thumb for asset allocation: Debt portion of an investor’s
portfolio should be equal to his age. For Example: A 30 year old investor will make
70/30 (Equity/Debt) Asset Allocation, and 50 year will make a 50/50 (Asset/Debt) Asset
Allocation.

 Model Portfolios (By Jacobs)

In preparing an Investment Portfolio, the advisor would have to deal with

investors at different stages of their life-cycle and with different needs. Therefore,
Jacobs gives 4 different models:

Investor Recommended Model Portfolio

Young, Unmarried Professional 50% in Aggressive Equity Funds
25% in High Yield Bond Funds, Growth & Income
Funds
25% in Conservative Money Market Funds
Young Couple with 2 Incomes & 2 10% in Money Market
Children 30% in Aggressive Equity Funds
25% in High Yield Bond Funds & Long Term
Growth Funds
35% in Municipal Bond Funds

Other Couple, Single Income 30% in Short-Term Municipal Funds

35% in Long-Term Municipal Funds
25% in Moderately Aggressive Equity
10% in Emerging Growth Equity

Recently Retired Couple 35% in Conservative Equity Funds for Capital

Preservation/Income
25% in Moderately Aggressive Equity for Modest
Capital Growth
40% in Money Market Funds

 Wealth Cycle Classification

Stage Financial Needs Investment Preferences

Accumulation Stage Investing for long term identified Growth options and long term
financial goals products. High risk appetite.
Transition Stage Near term needs for funds as Liquid and medium term
pre-specified needs draw closer investments. Lower risk appetite

Reaping Stage Higher Liquidity requirement Liquid and medium term

investments. Preference for
income and debt products

Inter-Generational Long term investment of Low liquidity needs. Ability to take

Stage inheritance risk and invest for long term

Sudden Wealth Medium to Long term Wealth preservation. Preference

Stage for low risk products.

Comparison of Investment Products

Investors tend to constantly compare one form of investment with another. There are 2
kinds of comparisons possible among different investment options.
 1. By Nature of Investment: Investor look for the Best returns on different options.
However, to determine which option is better, the comparison should be made in
terms of other benefits that the investor ought to look for in any investment.

Return Safety Volatility Liquidity

Convenience
Equity High Low High High
FI Bonds Moderate High Moderate Moderate

Corporate Moderate Moderate Moderate Low

Debentures

Company Moderate Low Low Low

Fixed
Deposits

Banks Low High Low High

Deposits

PPF Moderate High Low Moderate

Life Insurance Low High Low Low

Gold Moderate High Moderate Moderate

Real Estate High Moderate High Low

Mutual Funds High High Moderate High

2. By Performance: The comparison on the basis of performance highlights the

flexibility offered by mutual funds from the investor’s perceptive. An investor can
choose from a wide variety of funds to suit his risk tolerance, investment horizon
& investment objective.
 Investment Risk Tolerance Investment
Objective Horizon
Equity Capital Appreciation High Long Term

FI Bonds Income Low Medium-Long Term

Corporate Income High-Medium-Low Medium-Long Term

Debentures
Company Fixed Income High-Medium-Low Medium
Deposits
Bank Deposits Income Generally Low Flexible-All Times

PPF Income Low Long Term

Life Insurance Risk Cover Low Long Term

Gold Inflation Hedge Low Long Term

Real Estate Inflation Hedge Low Long Term

Mutual Funds Capital Growth, High-Medium-Low Flexible-All Times

Income

RISK RETURN GRID

Risk Focus Suitable Products Benefits offered by
Tolerance/Return MFs
Expected

Low Debt Bank/ Company FD, Liquidity, Better

Debt based Funds Post-Tax returns

Medium Partially Debt, Balanced Funds, Liquidity, Better

Partially Equity Some Diversified Post-Tax returns,
Equity Funds and Better Management,
some debt Funds, Diversification
Mix of shares and
Fixed Deposits

High Equity Capital Market, Diversification,

Equity Funds Expertise in stock
(Diversified as well picking, Liquidity,
as Sectoral) Tax free dividends

BANKS V/S MUTUAL FUNDS

BANKS MUTUAL FUNDS

Returns Low Better
Administrative High Low
Expenses

Risk Low Moderate

Investment Options Less More

Network High penetration Low but improving

Liquidity At a cost Better

Quality of Assets Not transparent Transparent

Interest calculation Minimum balance between Everyday

10th
& 30th. of every month

Guarantee Maximum Rs.1 lakh on None

deposits

Important Points:

 Don't just look at the NAV, also look at the risks-returns

 Kotak 30 has 3 stars & Kotak Opportunities has 4 stars. That does not mean
that their NAV is approximately the same. In fact, the NAV of Kotak 30 is 90.22 &
NAV of Kotak Opportunities is 40.48

However, Kotak 30 took a below average risk and delivered an above average
return, while Kotak Opportunities took an average risk to get the high returns. So,
don’t just look at the NAV also consider the risks-returns of the fund.

 Higher rating does not mean better returns

A fund with more stars does not indicate a higher return when compared with the
rest. All it means is that you will get a good return without putting your money at
too much risk.

ICICI Prudential Liquid Fund has a 4-star rating while ICICI Prudential Growth
Fund has a 3-star rating. However, the fund with the 3-star rating has a higher
NAV (109.08) than the one with the 4-star rating (11.73).

 Higher rating does not mean more risk

HDFC Top 200 has an NAV of 140.47 while UTI Infrastructure has an NAV of
36.60

This does not necessarily mean that HDFC Top 200 is offering a higher risk since
the return is higher.

In fact, according to the ratings, HDFC Top 200, a 5-star fund has a low risk while
UTI Infrastructure, a 5-star fund has an average risk.

Recent Trends in the Mutual Fund Industry

 Funds betting on Natural Resources

 • Since Indian regulations do not permit mutual funds to invest directly in
commodities, fund houses go for schemes that invest in stocks of mining
companies.

• At least five funds, keen on investing in natural resources, are set to hit the
market, as per documents filed with the stock market regulator SEBI. There are
two funds from ING and one each from Mirae Asset Management, Tata AMC
and HSBC MF.

 Systematic Transfer Plans lower Volatility Risk

• Systematic Transfer Plan (STP) helps in reaching the financial goals by investing
a fixed sum in the chosen fund for a pre-determined number of installments. STP
offers an investor the security of a liquid fund while trying to enhance returns by
investing a part of the funds in equity. This helps mitigate any risk arising from
volatility or improve the fund’s returns in a boom. Thus, an investor can match his
risk appetite with that of the equity scheme.

• Most fund houses are already offering this STP facility to investors. In the first
week of May, JP Morgan AMC launched Optimiser Systematic transfer plan,
wherein investors can invest a lump sum in JP Morgan India Liquid Fund or JP
Morgan India Liquid Plus Fund through STP. An amount predetermined by the
investor would be transferred periodically (daily, weekly, monthly or quarterly)
from this fund to any of the existing equity schemes managed by JP Morgan
Mutual Fund.

• STP is definitely going to gain ground as aspirations, possibilities and

opportunities increase among the youth. However, fund managers feel, STP is
yet to be promoted in India to its full extent. Investors need to be adequately
informed about it.

 Mutual Fund industry to tap Entertainment space

• To cash the bullish growth of the entertainment & media industry in the country
financial institutions are rolling out a slew of mutual funds focusing on these
spaces.

• Many of the funds will cover a wide range of areas within the entertainment
arena such as retail, shopping malls, mobile content providers, lifestyle beyond
the conventional media like television, film, print advertising and multiplex.
• Global media giants like Viacom, Walt Disney, BBC, J C Decaux and Astro are
already in the country or looking at it. The industry has already witnessed deals
such as Walt Disney-UTV, Blackstone-Eenadu and Adlabs-ADAG (Anil Dhirubhai
Ambani Group).

 Brand name works for Mutual Funds

• A brand image is very important for mutual funds and investors base their
decisions on known and dependable brands. Brand-building exercises are
mostly taken up by foreign players and big industrial houses which have deep
pockets, while fund houses with lower corpus can only attract investors by
showing good performance.

• Fund mobilisation trend in mutual funds space suggests that brand play an
important role in helping fund houses attract investors initially although in the
long term it boils down to the performance of the schemes.

• Country's MF industry holds immense potential for the existing as well as the
new players entering or those envisaging an entry into the space, but firms with a
strong brand presence definitely has a competitive advantage.

 Mutual Fund Industry’s AUM advances by 7.33% in April

The asset base of the industry has grown by 7.33% to Rs. 567601.98 Crores.

Compared to the last month, April has been great for the mutual fund industry as
28 AMCs out of 34 posted positive growth in their AAUM. Reliance Mutual Fund
has topped the chart with an AAUM of Rs 96,386.40 Crores. ICICI Prudential MF
and UTI MF continue to be at the second and third position respectively.

 Reliance MF offers life insurance cover through SIP investment

Reliance MF has introduced a scheme to encourage investors to save and invest

regularly through Systematic Investment Plan (SIP), to ensure that investors
achieve their financial objective even in the unfortunate event of death before
completing the SIP tenure as the balance amount towards the SIP installments
remaining unpaid shall be made good from the life insurance cover.

• The nominee would be able to continue investing in the scheme without having
to make any further contribution. The cost of life insurance premium will be borne
by the AMC.
Impact on Mutual Fund Industry of the Union Budget

 Easing in Income Tax slabs

Threshold limit of Income Tax exemption for individuals rose as follows -

Up to Rs.150,000 - NIL
Rs.150,001 to Rs.300,000 - 10%
Rs.300,001 to Rs.500,000 - 20%
Rs.500,001 to 10,00,000 - 30%
Rs.10,00,000

Impact
• This is expected to increase the disposable income in the hands of the
individuals to some extent which could translate into increased retail
investments in mutual funds.

 Increase in Short Term Capital Gain Tax

• Short Term Capital Gains Tax rose from 10% to 15%

Impact
• Since long term capital gains tax has been left unchanged, this hike in short
term capital gains tax could encourage long-term investments which augur well
to the development of the concept of “long term” in the Indian Mutual Fund
 industry, which is conspicuous by its absence but which is coveted by the fund
industry given the greater flexibility that this provides in fund’s management.

• At the same time since the short term capital gains tax is still lower than the
income tax slabs of typical capital market investors, it is not

expected to cause too many investors to turn away from mutual funds.

 Incentives for equities should be continued and the status quo on long-term
capital gain tax and STT should be maintained.

 Section 80 C deduction for tax saving should be raised from the current limit of
Rs 1 lakh and Equity Linked Saving Schemes from mutual funds should be given
the benefit of the same.

 Know your Customer (KYC) Compliance for Mutual Funds

• KYC is an acronym for “Know your Client”, a term commonly used for Client
Identification Process. SEBI has prescribed certain requirements relating to KYC
norms for Financial Institutions and Financial Intermediaries including Mutual
Funds to ‘know’ their clients. This would be in the form of verification of identity
and address, financial status, occupation and such other personal information.
Applicant must be KYC compliant while investing with any SEBI registered
Mutual Fund.

• The provisions of The Prevention of Money Laundering Act, 2002 (PMLA), has
made it mandatory for all Mutual Funds to comply with the ‘Know Your Client’
(KYC) norms of the applicants desirous of subscribing to their ‘units’. In this
regard, it has been mandated to create the necessary infrastructure in order to
handle the KYC on behalf of the Mutual Fund Industry.

• As a result, all applicants will now have to submit their PAN card copy (which
serves as Proof of Identity (PoI)) and Proof of Address (PoA) only once to the
designated Point of Service (PoS) centers spread across the country. After
confirming the credentials of the investor, the PoS issues KYC acknowledgement
letter that needs to be submitted along with the mutual fund investments.

 Norms for dedicated infrastructure funds should be finalized regarding which

announcement was made in last Union Budget.
  Existing open-ended equity schemes of mutual fund industry should be included
for the purpose of tax savings wherein a lock-in period of three years can be
introduced in separate plan of same schemes.

 Dividend distribution taxes on Money Market Mutual Funds which was increased
last year should be brought back to earlier levels.

 Service Taxes realigned for ULIP’s

• Asset management services provided under Unit Linked Insurance Plans

(ULIPs) would be brought on par with asset management services provided
under mutual funds as regards chargeability to service tax.

• Services provided by stock/commodity exchanges and clearing houses would

also be brought under the service tax net.

Impact
• The competitiveness of mutual funds vis-à-vis ULIPs in the investment basket of
investors is expected to increase somewhat.

• Transactional expense levels of mutual funds are expected to go up marginally

on account of their exposure to stock and commodity exchange which are
expected to pass on the service tax. But clarity on what would define services
here and on what amount the service tax would be levied is awaited.

TAX TREATMENT FOR THE INVESTORS (UNITHOLDERS):-

Tax benefits of investing in the Mutual Fund

As per the taxation laws in force as at the date of the Offer Document, some broad
income tax implications of investing in the units of the Scheme are stated below. The
information so stated is based on the Mutual Fund's understanding of the tax laws in
force as of the date of the Offer Document, which have been confirmed by its auditors.
The information stated below is only for the purposes of providing general information to
the investors and is neither designed nor intended tobe a substitute for professional tax
advice. As the tax consequences are specific to each investor and in view of the
changing tax laws, each investor is advised to consult his or her or its own tax
consultant with respect to the specific tax implications arising out of his or her or its
participation in the Scheme.

Implications of the Income-tax Act, 1961 as amended by the Finance Act, 2006
To the Unit holders

(a.) Tax on Income

In accordance with the provisions of section 10(35)(a) of the Act, income received by all
categories of unit holders in respect of units of the Fund will be exempt from income-tax
in their hands.
Exemption from income tax under section 10(35) of the Act would, however, not apply
to any income arising from the transfer of these units.

(b.) Tax on capital gains:

As per the provisions of section 2(42A) of the Act, a unit of a Mutual Fund, held by the
investor as a capital asset, is considered to be a short-term capital asset, if it is held for
12 months or less from the date of its acquisition by the unit holder. Accordingly, if the
unit is held for a period of more than 12 months, it is treated as a long-term capital
asset.

Computation of capital gain

Capital gains on transfer of units will be computed after taking into account the cost of
their acquisition. While calculating long-term capital gains, such cost will be indexed by
using the cost inflation index notified by the Government of India.

Individuals and HUFs, are granted a deduction from total income, under section 80C of
the Act upto Rs. 100,000, in respect of specified investments made during the year

Long-term capital gains

As per Section 10(38) of the Act, long-term capital gains arising from the sale of unit of
an equity oriented fund entered into in a recognized stock exchange or sale of such unit
of an equity oriented fund to the mutual fund would be exempt from income-tax,
provided such transaction of sale is chargeable to securities transaction tax.

Pursuant to an amendment made in the Finance Act, 2006, effective 1 April 2006,
companies would be required to include such long term capital gains in computing the
book profits and minimum alternated tax liability under section 115JB of the Act.

Short -term capital gains

As per Section 111A of the Act, short-term capital gains from the sale of unit of an
equity oriented fund entered into in a recognized stock exchange or sale of such unit of
an equity oriented fund to the mutual fund would be taxed at 10 per cent, provided such
transaction of sale is chargeable to securities transaction tax.

The said tax rate would be increased by a surcharge of:

 10 per cent in case of non-corporate Unit holders, where the total income
exceeds Rs.1,000,000,
 10 per cent in case of resident corporate Unit holders, and
 2.5 per cent in case of non-resident corporate unit holders irrespective of the
amount of taxable income.

Further, an additional surcharge of 2 per cent by way of education cess would be

charged on amount of tax inclusive of surcharge.

In case of resident individual, if the income from short term capital gains is less than
the maximum amount not chargeable to tax, then there will be no tax payable.

Further, in case of individuals/ HUFs, being residents, where the total income excluding
short-term capital gains is below the maximum amount not chargeable to tax1, then the
difference between the current maximum amount not chargeable to tax and total
income excluding short-term capital gains, shall be adjusted from short-term capital
gains. Therefore only the balance short term capital gains will be liable to income tax at
the rate of 10 percent plus surcharge, if applicable and education cess.

Non-residents
In case of non-resident unit holder who is a resident of a country with which India has
signed a Double Taxation Avoidance Agreement (which is in force) income tax is
payable at the rates provided in the Act, as discussed above, or the rates provided in
the such agreement, if any, whichever is more beneficial to such non-resident unit
holder.

Investment by Minors
Where sale / repurchase is made during the minority of the child, tax will be levied on
either of the parents, whose income is greater, where the said income is not covered by
the exception in the proviso to section 64(1A) of the Act. When the child attains majority,
such tax liability will be on the child.

Losses arising from sale of units

As per the provisions of section 94(7) of the Act, loss arising on transfer of units, which
are acquired within a period of three months prior to the record date (date fixed by the
Fund for the purposes of entitlement of the unit holder to receive the income from units)
and sold within a period of nine months after the record date, shall not be allowed to the
extent of income distributed by the Fund in respect of such units.
 As per the provisions of section 94(8) of the Act, where any units ("original units") are
acquired within a period of three months prior to the record date (date fixed by the Fund
for the purposes of entitlement of the unit holder to receive bonus units) and any bonus
units are allotted (free of cost) based on the holding of the original units, the loss, if any,
on sale of the original units within a period of nine months after the record date, shall be
ignored in the computation of the unit holder's taxable income. Such loss will however,
be deemed to be the cost of acquisition of the bonus units.

Each Unit holder is advised to consult his / her or its own professional tax advisor
before claiming set off of long-term capital loss arising on sale / repurchase of units of
an equity oriented fund referred to above, against long-term capital gains arising on
sale of other assets.

Short-term capital loss suffered on sale / repurchase of units shall be available for set
off against both long-term and short-term capital gains arising on sale of other assets
and balance short-term capital loss shall be carried forward for set off against capital
gains in subsequent years.

Carry forward of losses is admissible maximum upto eight assessment years.

(c.) Tax withholding on capital gains

Capital gains arising to a unit holder on repurchase of units by the Fund should attract
tax withholding as under:

No tax needs to be withheld from capital gains arising to a FII on the basis of the
provisions of section 196D of the Act.

In case of non-resident unit holder who is a resident of a country with which India has
signed a double taxation avoidance agreement (which is in force) the tax should be
deducted at source under section 195 of the Act at the rate provided in the Finance Act
of the relevant year or the rate provided in the said agreement, whichever is beneficial
to such non-resident unit holder. However, such a nonresident unit holder will be
required to provide appropriate documents to the Fund, to be entitled to the beneficial
rate provided under such agreement.

No tax needs to be withheld from capital gains arising to a resident unit holder on the
basis of the Circular no. 715 dated 8 August 1995 issued by the CBDT.

Subject to the above, the provisions relating to tax withholding in respect of gains
arising from the sale of units of the various schemes of the fund are as under:

No tax is required is to be withheld from long term capital gains arising from sale of
units in equity oriented fund schemes, that are subject to securities transaction tax.
 In respect of short-term capital gains arising to foreign companies (including Overseas
Corporate Bodies), the Fund is required to deduct tax at source at the rate of 10.46 per
cent (10 per cent tax plus 2.5 per cent surcharge thereon plus additional surcharge of 2
per cent by way of education cess on the tax plus surcharge). In respect of short-term
capital gains arising to non-resident individual unit holders, the Fund is required to
deduct tax at source at the rate of 11.22 per cent (10 per cent tax plus 10 per cent
surcharge thereon2 plus additional surcharge of 2 per cent by way of education cess on
the tax plus surcharge).

(d.) Wealth Tax

Units held under the Schemes of the Fund are not treated as assets within the
meaning of section 2(ea) of the Wealth Tax Act, 1957 and therefore, not liable to wealth-
tax.

(e.) Securities Transaction Tax

Nature of Transaction Current tax rate Tax rate effective (%) 1 June 2006 (%) Delivery
based purchase transaction in equity shares or units of equity oriented fund entered in a
recognized stock exchange 0.1 0.125 Delivery based sale transaction in equity shares
or units of equity oriented fund entered in a recognized stock exchange 0.1 0.125 Non-
delivery based sale transaction in equity shares or units of equity oriented fund entered
in a recognized stock exchange. 0.02 0.025 Sale of units of an equity oriented fund to
the mutual fund 0.2 0.25 Value of taxable securities transaction in case of units shall be
the price at which such units are purchased or sold.
A deduction in respect of securities transaction tax paid is not permitted for the purpose
of computation of business income or capital gains.

However, if the total income of an assesses includes any business income arising from
taxable securities transactions, he shall be entitled to a rebate3 from income-tax of an
amount equal to the securities transaction tax paid by him in respect of the taxable
securities transactions entered during the course of his business.

ABOUT ELSS ( EQUITY LINKED SAVING SCHEME):

Equity linked saving schemes are a kind of mutual funds like diversified equity funds
with Tax benefits. It is just like other tax saving instruments like National Savings
Certificate and Public Provident Fund. Main advantage with ELSS is lock-in period is
only 3 years while for NSC it is 6 years and for PPF it is 15 years. At the same time risk
factor is high in ELSS.

As per Income Tax act 80c investment up to Rs 1,00,000 are eligible for deduction from
the gross total income hence reducing the total taxable income. For example if your
total annual income is Rs 3,00,000 and you invest Rs 1,00,000 in ELSS then your
taxable income will become Rs 2,00,000.
Previously there was an upper limit for investing in tax saving instruments like ELSS of
5,00,000. Only individuals with less than 5,00,000 annual income are allowed to invest
in tax saving instruments. But last year financial budget removed this restriction and
now any individual can invest in ELSS irrespective of their income level.

Advantages of ELSS over NSC and PPF

 Main advantage of ELSS is its short lock-in period. Maturity period of NSC is 6
years and PPF is 15 years.
 Since it is an equity linked scheme earning potential is very high.
 Investor can opt for dividend option and get some gains during the lock-in period
 Investor can opt for Systematic Investment Plan
 Some ELSS schemes also offer personal accident death cover insurance
 Provides 30 to 40% returns compared to 8% in NSC and PPF

Disadvantages of ELSS

 Risk factor is high compared to NSC and PPF

 Premature withdrawal is not allowed but it is allowed in other instruments in
some specific conditions.

Diversified Equity Schemes and ELSS

Both Equity linked saving scheme and diversified equity scheme operates in same way.
Both are high return and high risk schemes. But there is a 3 year lock in period of ELSS
and it provides tax benefits too.

Systematic Investment Plan

Best way to invest in ELSS is through Systematic Investment Plan(SIP). With SIP you
can invest a small amount every month for a specific time period. With SIP investor can
take advantage of fluctuations in the stock market. So investor will get more units when
the market is down and get less units when the market is up. For eg if you are investing
Rs 1000 every month and you will get 100 units for when Net Asset Value (NAV) is 10
and will get 50 units when NAV is 20. So investing a fixed sum regularly helps to cover
the market fluctuations by rupee costs averaging. Also most of the Asset Management
Companies (AMC) charges less entry load for SIP compared to normal purchase.
There are many tax-saving instruments, like NSC, PPF that have a fixed maturity
Period and give fixed returns on the amount invested. Conversely, ELSS is an
Equity linked tax-saving investment instrument.

Until the financial year 2004–05, section 88 of the Income Tax Act had fixed an overall
ceiling of Rs 100,000 for investments in tax-saving instruments, including a cap of Rs
10,000 for investment in ELSS.The investor would get a rebate based on his taxable
income. However, the budget for the financial year 2005–06 has scrapped section 88
and has replaced it with section 80C.Under this section, investments up to Rs 100,000
are eligible for deduction from gross total income and the ceiling on investment in ELSS
has been removed. This investment is deducted from the total income, hence reducing
the total taxable income. Assume that you have an annual gross income of Rs 400,000
and out of this you have invested Rs 100,000in tax-saving instruments. Say out of this
in the previous financial year you invested Rs 10,000 in ELSS, while in the current
financial year you invest the entire Rs 100,000, which is ten times the previous year’s
limit of Rs10, 000, in ELSS.

The most positive feature of this budget is that section 80C is applicable to all
Individuals regardless of their income level. Until last year, individuals with a gross
Total income of Rs 5,00,000 and above did not get any tax benefit under section 88.
However, tax benefits on ELSS investments are now open to all individuals
Irrespective of their income level.

what is the difference between diversified equity schemes and ELSS?

Both ELSS and diversified equity schemes have the same risk profile. They are high
risk - high return investment avenues. The major difference is in terms of the mandatory
lock-in period of three years applicable to ELSS. It is always advisable for investments
in equity linked instruments to be for the long term, as it is only over this time frame that
equities have the potential to unlock value and outperform other comparable assets.
The lock-in period fixed for ELSS supports this view and also allows the fund manager
to plan a strategy that will be beneficial in the long-term. Various researches on mutual
funds have found that ELSS funds have shown impressive performances over three
years. The average three year Compounded Annualized Growth Rate (CAGR)
performance of leading five tax-saving funds and diversified equity funds is
58.7 per cent* and 57.08 per cent* as of December 31, 2005 respectively. And if you
consider the tax benefits associated with ELSS, their performance looks even
better than that of diversified equity funds.

In addition, some ELSS schemes offer additional benefit of Personal Accident Death
Insurance cover.

What are the benefits of investing in ELSS over other tax-saving

instruments?
  Investments in ELSS enable an investor to claim deductions under section 80C
up to Rs 100,000.

 Since this is an equity-linked scheme, the earning potential is very high (although
at a higher risk) as compared to other tax-saving instruments. The Systematic
Investment Plan (SIP) is an effective way of investing in ELSS as the concept of
rupee cost averaging and the power of compounding work well.

 The lock-in period is the shortest, three years, as compared to other tax saving
instruments. The maturity period for NSC and PPF is six years and 15 years
respectively.

 According to current tax laws, long-term capital gains on investment in equity

oriented funds and the dividends received on these investments are tax-free
under section 10(38) and section 10(35) respectively in the hands of the investor.

Parameter PPF NSC ELSS

Returns 8% 8% 25 – 30%#

Interest Receipt On Maturity On Maturity Depend on

Performance
Tenure 15 years 6 years Minimum 3 years

Tax Benefit Sec 80c & Sec 10 Sec 80c Sec 80c

Minimum investment Rs.500 per annum Rs. 100 Rs.500

Maximum Investment Rs. 70000 per Rs.100000 per NO Upper Limit

annum annum

 There is no upper limit on investment is ELSS. However, investments of only

upto Rs 100,000 are allowed to be claimed as deductions under section 80C.

 The performance of the top five funds in India over a period of three years. Past
performance may or may not be sustained in the future. Investors may note that
though as of now the Finance Act, 2005 does not tax any withdrawals from
ELSS, it may be possible that as and when the proposed EET system becomes
fully operational, any redemptions from ELSS may be subjected to tax. In order
to work out the roadmap for smoothly moving towards the EET system, the Bill
has proposed to set-up a committee of experts. Such committee will examine
the mix of savings instruments that would qualify under the new system and
 propose suitable tax incidence. Investors should note the above before making
any investment under ELSS.

What about liquidity in ELSS investments? Can I redeem my

investment before the lock-in period ends?

No. The amount cannot be withdrawn before the maturity period. However, ELSS is
Definitely beneficial as compared to other tax-saving instruments, as the lock-in period
is just three years compared to the maturity period of six years (NSC) and 15 years
(PPF) respectively. Also, the earning potential of ELSS is high, although at higher risk.
Premature withdrawal from other tax saving instruments is allowed on specific
Conditions. Investors can opt for the dividend option in ELSS; dividends are tax free,
thus ensuring some liquidity and the opportunity to capture gains during the lock-in
period.

Investment strategy for ELSS funds?

 Your risk appetite should at all times determine the total investments in tax-
saving funds. Don't go overboard in the segment simply because of the
opportunity to rake in impressive returns, thereby ignoring the risk involved.

 Use the SIP route for investing in tax-saving funds. Not only does it do away with
the need for timing markets, but it also reduces the strain on your wallet at the
end of the financial year when most investors conduct their tax-planning
exercise.

Data Analysis and Interpretation:

Mutual Funds Life-Insurance Bank Deposits Post office

40% 30% 20% 10%

Interpretation:

The above table and chart reveals the factor about the investments of the investors.
Majority of the investments belongs to 40% of the investors invested in mutual funds

1. How stable is your current income source?

Current income source No.of respondents percentage

Very unstable 10 10
Moderately unstable 20 20
Moderately stable 50 50
Very Stable 20 20
Interpretation

The above table and chart reveals the factor about the how the current income source
of the investors. Majority of the investors belongs to 50% i.e. 50 investors of their
current income source is moderately stable

Which statement best characterizes your expected earnings over the next 10
years:
I expect my future earnings:

A. to decrease 5%

B. to increase at the rate of inflation 60%

 C. to increase at a somewhat faster pace than inflation 20%

D. to increase at a much faster pace than inflation 15%

The above table and chart reveals the investor’s expected future earnings from their
investments. Majority of the investors i.e. 60% investors expecting their future earnings
to increase at the rate of inflation.

How many dependents do you have (including spouse, children and elderly
parents you support)?

A. 0 10%
B. 1-2 70%
C. 3-4 15%
D. More than 4 05%
Interpretation

The above table and chart reveals the investors dependents. Majority of the investors
i.e. 70% of the investors have dependents 1 to 2 while others have 3 to 4 i.e. 15% and
0 i.e.10% and 5% i.e. more than 4

. Do you have sufficient liquid assets set aside in case of emergency? (Liquid assets
= cash + checking account + savings account + money market.

A. Yes, I have an adequate emergency fund. 80%

B. No, I do not have a sufficient emergency fund 20%

Interpretation

The above table chart reveals that the investors have liquid assets. Majority of the
investors i.e. 80% have emergency assets. While others have i.e. 20% have no liquid
assets.

Approximately what portion of your investable funds are in a tax-deferred

retirement plan?

A. Less than 25% 25

B. 26-50% 50
 C. 51-75% 20

Interpretation

The above table above graph reveals how many investors have invested in tax deferred
investment plan in their investable funds. Majority of the i.e.50% investors are i.e.26-
50% funds Invested in tax deferred plan.

When you think of your investments, which statement best characterizes your
feelings?
 A. I want to be as sure as possible that my savings will not go down significantly.
30%

B. I prefer taking on a small amount of risk in order to gain higher expected returns.
35%

C. I prefer taking on substantial risk in order to gain higher expected returns.

35%

The above table and chart reveals that the investor think about the returns from their
investments. Majority of the i.e. 35% of the investors are like to take small amount of
risk in order to gain higher expected returns as well as the next 35% of the investors are
like to take substantial risk in order to gain higher expected returns. While others are
felling that their savings will not go down significantly.
When do you plan to begin withdrawing money from your investment accounts?

A. 3-5 years 50%

B. 6-10 years 10%
C. 11-15 years 10%
D. More than 15 years 30%

The above table and chart reveals that when the investor with drawing money from their
investments. Majority of the investors i.e. 50% wants to with draw money from their
investments 3 to 5 years while others wants to with draw above five years.
Do you prefer investments that provide steady returns without large fluctuations
in value?

A. Yes, definitely 60%

B. Yes, for the most part 15%

C. No, not really 20%

D. No, definitely not 05%

Interpretation

The above table and chart reveals that the prefer investments that provide steady
returns with out large fluctuations in value. Majority of the investors i.e. 60% are thinking
provide steady returns. While others are i.e. 20% no, not really, and 15% yes, for the
most part and 5% no, definitely not.
How experienced are you at investing in individual stocks?

A. Very inexperienced 70%

B. Moderately inexperienced 05%

C. Moderately experienced 20%

D. Very experienced 05%

Interpretation

The above table and chart reveals that the investors are experienced at investing in
individual stocks. Majority of the i.e. 70% investors very inexperience at investing in
individual stocks. While others are 20% moderately experienced and 5% moderately
inexperienced and 5% of the investors are very experienced

Under which Income Tax bracket you come?

A. 10% 10%

B. 20% 60%

C. 30% 30%

Interpretation

The above table and chart reveals that the investors come under which income tax
bracket. Majority of the i.e. 60% investors come under 20% tax bracket. While others
30% are in to 30% And others 10% investors are come under 10% tax bracket.
What kind of investment u like? M.Fs.- 70% SHARES – 20% NA – 10%

Interpretation

The above table and chart reveals that the investors what kind of investment like to
invest. Majority of the i.e. 70% investors likes to invest in mutual funds. While others are
20% investors like to invest in shares and the others are don’t like to invest in mutual
funds and shares
What kind of life-insurance u like? Whole life - 36% money back – 10% NA – 4%

Interpretation

The above table and chart reveals that what kind of insurance the investors like.
Majority of the i.e. 70% of the investors like to take whole life insurance. While others
20% are wants to take money back insurance and others 10% are don’t want to take
any insurance.
Do u need a financial advisor? NO – 75% YES – 25%

Interpretation

The above table and chart reveals that the investors need financial advisor. Majority of
the i.e. 75% of the investors don’t want financial advisor while others i.e. 25% of the
investors need financial advisor.
Conclusion

After going through a two months summer training and survey, I have come to know
about different aspects of mutual funds and mutual funds industry. India is an emerging
market

This study and survey on mutual funds is a small eye hole to see the picture of mutual
funds industry in India. This provides almost clear view to the readers.

Mutual funds industry is enlarging its size in India. JVs, foreign JVs and acquisitions are
in trend. AUM has gone to $8 trillion, number of investors is rising, and number of AMCs
is going up. These changes are likely to happen. Indian monetary policy is supporting
new business. Private sector is aggressively participating in mutual funds business.
Numbers of schemes are much more than earlier.

With such shining sides, double digit inflation rate, bearish stock market, squeezing
liquidity and other dark sides putting pressure on consumers saving. This situation
pushes investors back from investment. They wait and hold cash rather than investing.
This study found that investors are willing to invest with high rate of return. They know
high return always adhere to high risk but market still is not in correction mode. It will
take time.

Industry need to revise its business strategy. Investor’s perception is not prioritized yet.
Instead of completing targets, advisors working under institutions should consider the
requirement of investors. We need to change pattern of selling mutual funds schemes
I hope this study will help readers to identify industry’s unidentified areas where they
need to work out.
Recommendations:

The most vital problem spotted is of ignorance. Investors should be made aware of the
benefits. Nobody will invest until and unless he is fully convinced. Investors should be
made to realize that ignorance is no longer bliss and what they are losing by not
investing.
Mutual funds offer a lot of benefit which no other single option could offer. But most of
the people are not even aware of what actually a mutual fund is? They only see it as
just another investment option. So the advisors should try to change their mindsets. The
advisors should target for more and more young investors. Young investors as well as
persons at the height of their career would like to go for advisors due to lack of
expertise and time.
The advisors may try to highlight some of the value added benefits of MFs such as tax
benefit, rupee cost averaging, and systematic transfer plan, rebalancing etc. these
benefits are not offered by other options singlehandedly. So these are enough to drive
the investors towards mutual funds. Investors could also try to increase the spectrum of
services offered.

One should diversify the investments between a few funds (the actual number depends
entirely on the amount of investment). This strategy ensures that the portfolio is not
dependent on the performance of one single fund. However, one needs to avoid over-
diversification as that would achieve nothing.

Investor can also plan like one mutual fund of diversified equity plan, second mutual
fund of balanced type and third one you can plan of debt type etc. In this manner the
money will get diversified, risk is reduced and the investor will get excellent profit.
Research Findings:

 At the survey conducted upon 100 people, 40 people are already invested in
mutual funds. And 30 people are invested in insurance 20 people invested in
bank F.D.s and the remaining 10 people are invested in post office bonds.

 Now, when those 60 people were asked about the reason of not investing in
mutual funds, Some people don’t have awareness about the mutual funds. Some
people don’t have interest for invest into mutual funds. These are the reasons I
got from the investors who are not invested in mutual funds.

 In that 40 people who are invested already in mutual funds, some people don’t
know the total details about the mutual funds the reason got from them simply for
saving the tax.

 Some of the people don’t know how to plan their financial planning but they don’t
want to take advices from the financial advisory services.

 Some of the investors don’t have awareness about the funds but they are
invested in mutual funds finally they are getting loss
ACHIEVEMENTS:

four policies sold in that

Three LIC policies sold which is JEEVAN ANAND Sum Assured is5 LACS

And one is bajaj Allianz which is NUG THAT IS ULIP Policy Sum Assured is 1 lac
REFERENCES:

www.Amfyindia.com

www.moneycontrol.com

www.bse.com

www.valueresearchonline .com