1

INDEX
SR No Particulars Page No
SECTION I INTRODUCTION TO MUTUAL FUND
1. Introduction 04
Concept of a Mutual Fund 05
Definition 06
Earning of Investors From A Mutual Fund 07
2. Industry Profile. 08
3. History Of Mutual Funds 10
First Phase 1964-87. 10
Second Phase 1987-1993 11
Third Phase 1993-2003 11
Fourth Phase since February 2003 13
2003-2004: A retrospect 13
4. Growth Of Mutual Fund Business In India 15
5. Pros & Cons Of Investing In Mutual Funds 16
Advantages Of Investing In A Mutual Fund 16
Drawbacks Of Mutual Funds 19
6. Net Annual Value 23
7. Concept Of SIP, STP, SWP 25
1) Systematic Investment Plan (SIP) 25
2) Systematic Transfer Plan (STP) ? 27
3) Systematic Withdrawal Plan (SWP) ? 27
8. A 10-Step Guide To Evaluating Mutual Funds 29
Evaluation Of Canara Robeco Infrastructure-G Fund 36

SECTION II COMPARATIVE STUDY
1. Types Of Mutual Fund Schemes 43
By Structure 43
a) Open-ended schemes 43
b) Close-ended schemes 45
By Investment Objective 47
a) Growth / Equity Oriented Schemes 47
b) Income / Debt Oriented Scheme 50
c) Balanced Fund 53
2

d) Money Market or Liquid Fund 53
Other types of funds 54
a) Pooled Funds 54
b) Insurance Segregated Funds 55
c) Specific Sectoral & Thematic funds /schemes 56
UTI Thematic Fund 57
2. Mutual Funds: The Risk And Returns 58
3. Fund Management Style & Structuring Of Portfolio 60
a) Factors affecting Management style of a scheme 60
b) Equity Portfolio Management Fund Management Style 63:
Equity Classes 65
Use of Derivatives in Equity Portfolio Risk Management 70
Successful Equity Portfolio Management 72
Portfolio of ICICI Prudential Balanced Growth 73
c) Debt Portfolio Management 75
Instruments in Indian Debt Market 75
Debt Investment Strategies 77
Use of Derivatives for Debt Portfolio Management 80
4. What Are Exchange Traded Funds? 81
How does an ETF work? 83
Benefits and Limitations of ETF 83
Categories of ETFs 85
Comparison of ETF with Mutual Fund 86
5. Top Performers 87
6. Performance Of Funds Under Different Schemes 88
7. The Investors Rights & Obligations 97
CONCLUSION 99
REFERENCE 100






3








INTRODUCTION
TO
MUTUAL FUND
4


INTRODUCTION


The one investment vehicle that has truly come of age in India in the past
decade is mutual funds. Today, the mutual fund industry in the country
manages around Rs 6,00,000 crores (As of June , 2008) of assets, a large part
of which comes from retail investors. And this amount is invested not just in
equities, but also in the entire gamut of debt instruments. Mutual funds have
emerged as a proxy for investing in avenues that are out of reach of most
retail investors, particularly government securities and money market
instruments.

Specialization is the order of the day, be it with regard to a schemes
investment objective or its targeted investment universe. Given the plethora
of options on hand and the hard-sell adopted by mutual funds vying for a
piece of your savings, finding the right scheme can sometimes seem a bit
daunting. Mind you, its not just about going with the fund that gives you the
highest returns. Its also about managing riskfinding funds that suit your
risk appetite and investment needs.

So, how can you, the retail investor, create wealth for yourself by investing
through mutual funds? To answer that, we need to get down to brass tacks
what exactly is a mutual fund?
Very simply, a mutual fund is an investment vehicle that pools in the monies
of several investors, and collectively invests this amount in either the equity
market or the debt market, or both, depending upon the funds objective.
This means you can access either the equity or the debt market, or both,
without investing directly in equity or debt

5

Concept of a Mutual Fund
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities.
The income earned through these investments and the capital appreciation
realized is shared by its unit holders in proportion to the number of units
owned by them. Thus a Mutual Fund is the most suitable investment for the
common man as it offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost.
The flow chart below describes broadly the working of a mutual fund:-


Savings form an important part of the economy of any nation. With savings
invested in various options available to the people, the money acts as the
driver for growth of the country. Indian financial scene too presents multiple
avenues to the investors. Though certainly not the best or deepest of markets
in the world, it has ignited the growth rate in mutual fund industry to provide
reasonable options for an ordinary man to invest his savings.
I
6

nvestment goals vary from person to person. While somebody wants
security, others might give more weightage to returns alone. Somebody else
might want to plan for his childs education while somebody might be saving
for the proverbial rainy day or even life after retirement. With objectives
defying any range, it is obvious that the products required will vary as well.
DEFINITION:
Mutual funds are collective savings and investment vehicles where
savings of small (or sometimes big) inve.stors are pooled together to invest
for their mutual benefit and returns distributed proportionately. Pooling of
money ensures that small investors get the benefit of advice and expertise
that is normally available only to very large investors.
A mutual fund is an investment that pools your money with the money of
an unlimited number of other investors. In return, you and the other investors
each own shares of the fund. The fund's assets are invested according to an
investment objective into the fund's portfolio of investments. Aggressive
growth funds seek long-term capital growth by investing primarily in stocks
of fast-growing smaller companies or market segments. Aggressive growth
funds are also called capital appreciation funds.
Mutual Funds are investment companies that make investments on behalf of
individuals and institutions that share common financial goals. The
suitability of a particular mutual fund for an individual investor depends on
the type and nature of the fund's investments and amount of diversification.
Funds are rated widely as to risk and return, and such ratings can be used to
establish a match with investor goals and suitability.

7

"Mutual Funds schemes are managed by respective Asset Management
Companies sponsored by financial institutions, banks, private companies or
international firms. The biggest Indian AMC is UTI while Alliance, Franklin
Templeton etc are international AMC's.
Investors earn from a Mutual Fund in three ways:
1. Dividends and Interest. A fund may receive income in the form of
dividends and interests on the securities it owns. Bonds pay interest, and
some stocks pay dividends. The mutual fund company will pass this income
on to its shareholders. You generally will be taxed yearly on this amount
unless the fund holds tax free securities.
2. Capital Gains/Losses on Securities in a Fund. Prices of the securities in
a fund may increase. When the fund then sells the security, the fund has a
capital gain. At the end of the year, most mutual funds will distribute these
capital gains minus any capital losses (reduced price) to the investors. These
capital gains will be taxed each year they are received.
3. Net Asset Value (NAV) of the Mutual Fund. If the company does not
sell but holds securities that have increased in value, the value of the shares
of the mutual fund (NAV) increase and there is a profit. This also is a capital
gain. However, you will not be taxed on this capital gain until the year you
sell the fund.
Though still at a nascent stage, Indian MF industry offers a plethora of
schemes and serves broadly all type of investors. The range of products
includes equity funds, debt, liquid, gilt and balanced funds. There are also
funds meant exclusively for young and old, small and large investors.
Moreover, the setup of a legal structure, which has enough teeth to safeguard
investors interest, ensures that the investors are not cheated out of their
hard-earned money. All in all, benefits provided by them cut across the
boundaries of investor category and thus create for them, a universal appeal.
8


INDUSTRY PROFILE

The mutual fund industry is a lot like the film star of the finance business.
Though it is perhaps the smallest segment of the industry, it is also the most
glamorous in that it is a young industry where there are changes in the
rules of the game everyday, and there are constant shifts and upheavals. The
mutual fund is structured around a fairly simple concept, the mitigation of
risk through the spreading of investments across multiple entities, which is
achieved by the pooling of a number of small investments into a large
bucket. Yet it has been the subject of perhaps the most elaborate and
prolonged regulatory effort in the history of the country.
The Indian mutual fund industry is one of the fastest growing sectors in the
Indian capital and financial markets. The mutual fund industry in India has
seen dramatic improvements in quantity as well as quality of product and
service offerings in recent years. Mutual funds assets under management
grew by 96% between the end of 1997 and June 2003 and as a result it rose
from 8% of GDP to 15%. The industry has grown in size and manages total
assets of more than $30351 million. Of the various sectors, the private sector
accounts for nearly 91% of the resources mobilised showing their
overwhelming dominance in the market. Individuals constitute 98.04% of
the total number of investors and contribute US $12062 million, which is
55.16% of the net assets under management.
9

Steady growth of mutual fund business in India in the four decades from
1964, when UTI was set up is given in the table below:
Period (Year) Aggregate
Investment
In Crores of
Rupees
Period (Year) Aggregate
Investment
In Crores of
Rupees
1964-69 65 1992-93 46988.02
1969-74 172 1993-94 61301.21
1974-79 402 1994-95 75050.21
1979-84 1261 1995-96 81026.52
1986-87 4563.68 1996-97 80539.00
1987-88 6738.81 1997-98 68984.00
1988-89 13455.65 1998-99 63472.00
1989-90 19110.92 1999-00 107966.10
1990-91 23060.45 2000-01 90587.00
1991-92 37480.20 2001-02 94571.00

Mutual Fund Industry in its true spirit rooted in a free market and oriented
towards competitive functioning with the dedicated goal of service to the
investors can be said to have settled in India only in 1993. However the
industry took its roots much earlier with the setting up of the Unit Trust in
India (UTI) in 1964 by the Government of India. During the last 36 years,
UTI has grown to be a dominant player in the industry with assets of over
Rs.72,333.43 Crores as on March 31, 2000. The UTI is governed by a
special legislation, the Unit Trust of India Act, 1963. In 1987 public sector
banks and insurance companies were permitted to set up mutual funds and
accordingly since 1987, 6 public sector banks have set up mutual funds. Also
the two Insurance companies LIC and GIC established mutual funds.
Securities Exchange Board of India (SEBI) formulated the Mutual Fund
(Regulation) 1993, which for the first time established a comprehensive
regulatory framework for the mutual fund industry. Since then several
mutual funds have been set up by the private and joint sectors.
10

HISTORY OF MUTUAL FUNDS
The mutual fund industry started in India in a small way with the UTI Act
creating what was effectively a small savings division within the RBI. Over
a period of 25 years this grew fairly successfully and gave investors a good
return, and therefore in 1989, as the next logical step, public sector banks
and financial institutions were allowed to float mutual funds and their
success emboldened the government to allow the private sector to foray into
this area. The initial years of the industry also saw the emerging years of the
Indian equity market, when a number of mistakes were made and hence the
mutual fund schemes, which invested in lesser-known stocks and at very
high levels, became loss leaders for retail investors. From those days to
today the retail investor, for whom the mutual fund is actually intended, has
not yet returned to the industry in a big way. But to be fair, the industry too
has focused on brining in the large investor, so that it can create a significant
base corpus, which can make the retail investor feel more secure.
The mutual fund industry in India started in 1963 with the formation of Unit
Trust of India, at the initiative of the Government of India and Reserve Bank
the. The history of mutual funds in India can be broadly divided into four
distinct phases.

First Phase 1964-87:

Unit Trust of India (UTI) was established on 1963 by an Act of Parliament.
It was set up by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In 1978
UTI was de-linked from the RBI and the Industrial Development Bank of

11

India (IDBI) took over the regulatory and administrative control in place of
RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end
of 1988 UTI had Rs.6,700 crores of assets under management.

Second Phase 1987-1993 (Entry of Public Sector Funds):
1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI Mutual Fund was the
first non- UTI Mutual Fund established in June 1987 followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian
Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda
Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while
GIC had set up its mutual fund in December 1990.
At the end of 1993, the mutual fund industry had assets under management
of Rs.47, 004 crores.
Third Phase 1993-2003 (Entry of Private Sector Funds)
With the entry of private sector funds in 1993, a new era started in the Indian
mutual fund industry, giving the Indian investors a wider choice of fund
families. Also, 1993 was the year in which the first Mutual Fund Regulations
came into being, under which all mutual funds, except UTI were to be
registered and governed. The erstwhile Kothari Pioneer (now merged with
Franklin Templeton) was the first private sector mutual fund registered in
July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more
comprehensive and revised Mutual Fund Regulations in 1996. The industry
now functions under the SEBI (Mutual Fund) Regulations 1996.
12

The number of mutual fund houses went on increasing, with many foreign
mutual funds setting up funds in India and also the industry has witnessed
several mergers and acquisitions. As at the end of January 2003, there were
33 mutual funds with total assets of Rs. 1, 21,805 crores. The Unit Trust of
India with Rs.44, 541 crores of assets under management was way ahead of
other mutual funds.
Fourth Phase since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963
UTI was bifurcated into two separate entities. One is the Specified
Undertaking of the Unit Trust of India with assets under management of
Rs.29,835 crores as at the end of January 2003, representing broadly, the
assets of US 64 scheme, assured return and certain other schemes. The
Specified Undertaking of Unit Trust of India, functioning under an
administrator and under the rules framed by Government of India and does
not come under the purview of the Mutual Fund Regulations.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and
LIC. It is registered with SEBI and functions under the Mutual Fund
Regulations. With the bifurcation of the erstwhile UTI which had in March
2000 more than Rs.76,000 crores of assets under management and with the
setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund
Regulations, and with recent mergers taking place among different private
sector funds, the mutual fund industry has entered its current phase of
consolidation and growth. As at the end of September, 2004, there were 29
funds, which manage assets of Rs.153108 crores under 421 schemes.


13

The Graph Indicates The Growth Of Assets Over The Years.


2003-2004: A retrospect:

This year was extremely eventful for mutual funds. The aggressive
competition in the business took its toll and two more mutual funds bit the
dust. Alliance decided to remain in the ring after a highly public bidding war
did not yield an acceptable price, while Zurich has been sold to HDFC
Mutual. The growth of the industry continued to be corporate focused
barring a few initiatives by mutual funds to expand the retail base. Large
money brought with it the problems of low retention and consequently low
profitability, which is one of the problems plaguing the business. But at the
same time, the industry did see spectacular growth in assets, particularly
14

among the private sector players, on the back of the continuing debt bull run.
Equity did not find favor with investors since the market was lack-luster and
performances of funds, barring a few, were quite disappointing for investors.
The other aspect of this issue is that institutional investors do not usually
favor equity. It is largely a retail segment product and without retail depth,
most mutual funds have been unable to tap this market. The tables given
below are a snapshot of the AUM story, for the industry as a whole and for
debt and equity separately.









15

GROWTH OF MUTUAL FUND BUSINESS IN INDIA
The Indian Mutual fund business has passed through three phases. The first
phase was between 1964 and 1987, when the only player was the Unit Trust
of India, which had a total asset of Rs. 6,700/- crores at the end of 1988. The
second phase is between 1987 and 1993 during which period 8 funds were
established (6 by banks and one each by LIC and GIC). The total assets
under management had grown to Rs. 61,028/- crores at the end of 1994 and
the number of schemes were 167. The third phase began with the entry of
private and foreign sectors in the Mutual fund industry in 1993. Kothari
Pioneer Mutual fund was the first fund to be established by the private sector
in association with a foreign fund. The share of the private players has risen
rapidly since then.
Within a short period of seven years after 1993 the growth statistics of
the business of Mutual Funds in India is given in the table below:

Amount
(Rs Crores)
Percentage
(%)
UTI 72,333.43 67.00
Public Sector 10,444.78 9.68
Private Sector 25,167.89 23.32
Total 1,07,946.10 100.00

16

PROS & CONS OF INVESTING IN MUTUAL FUNDS

For investments in mutual fund, one must keep in mind about the Pros and
cons of investments in mutual fund.

The Advantages of Investing in a Mutual Fund:
Professional Management :
The investor avails of the services of experienced and skilled
professionals who are backed by a dedicated investment research team
which analyses the performance and prospects of companies and selects
suitable investments to achieve the objectives of the scheme.
Diversification:
Mutual Funds invest in a number of companies across a broad cross-
section of industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the same
proportion. You achieve this diversification through a Mutual Fund with
far less money than you can do on your own.
Convenient Administration :
Investing in a Mutual Fund reduces paperwork and helps you avoid many
problems such as bad deliveries, delayed payments and unnecessary
follow up with brokers and companies. Mutual Funds save your time and
make investing easy and convenient.
Return Potential:
Over a medium to long-term, Mutual Funds have the potential to provide
a higher return as they invest in a diversified basket of selected securities.
Low Costs:
Mutual Funds are a relatively less expensive way to invest compared to
directly investing in the capital markets because the benefits of scale in
17

brokerage, custodial and other fees translate into lower costs for
investors.
Liquidity:
In open-ended schemes, you can get your money back promptly at net
asset value related prices from the Mutual Fund itself. With close-ended
schemes, you can sell your units on a stock exchange at the prevailing
market price or avail of the facility of direct repurchase at NAV related
prices which some close-ended and interval schemes offer you
periodically.
Transparency:
You get regular information on the value of your investment in addition
to disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager's
investment strategy and outlook.
Flexibility:
Through features such as regular investment plans, regular withdrawal
plans and dividend reinvestment plans, you can systematically invest or
withdraw funds according to your needs and convenience.
Choice of Schemes:
Mutual Funds offer a family of schemes to suit your varying needs over a
lifetime.
Well Regulated:
All Mutual Funds are registered with SEBI and they function within the
provisions of strict regulations designed to protect the interests of
investors. The operations of Mutual Funds are regularly monitored by
SEBI.


18

Affordability
A single person cannot invest in multiple high-priced stocks for the sole
reason that his pockets are not likely to be deep enough. This limits him
from diversifying his portfolio as well as benefiting from multiple
investments. Here again, investing through MF route enables an investor
to invest in many good stocks and reap benefits even through a small
investment. 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.
Tax Benefits
Last but not the least, mutual funds offer significant tax advantages.
Dividends distributed by them are tax-free in the hands of the investor.
They also give you the advantages of capital gains taxation. If you hold
units beyond one year, you get the benefits of indexation. Simply put,
indexation benefits increase your purchase cost by a certain portion,
depending upon the yearly cost-inflation index (which is calculated to
account for rising inflation), thereby reducing the gap between your
actual purchase cost and selling price. This reduces your tax liability.
Whats more, tax-saving schemes and pension schemes give you the
added advantage of benefits under Section 88. You can avail of a 20 per
cent tax exemption on an investment of up to Rs 10,000 in the scheme in
a year



19

Drawbacks Of Mutual Funds
Fluctuating Returns:
Mutual funds are like many other investments without a guaranteed
return: there is always the possibility that the value of your mutual fund
will depreciate. Unlike fixed-income products, such as bonds and
Treasury bills, mutual funds experience price fluctuations along with the
stocks that make up the fund. When deciding on a particular fund to buy,
you need to research the risks involved - just because a professional
manager is looking after the fund, that doesn't mean the performance will
be stellar.

Another important thing to know is that mutual funds are not guaranteed
by the U.S. government, so in the case of dissolution, you won't get
anything back. This is especially important for investors in money market
funds. Unlike a bank deposit, a mutual fund will be insured by
the Federal Deposit Insurance Corporation (FDIC).
Diversification:
Although diversification is one of the keys to successful investing, many
mutual fund investors tend to over diversify. The idea of diversification is
to reduce the risks associated with holding a single security; over
diversification (also known as diworsification) occurs when investors
acquire many funds that are highly related and, as a result, don't get the
risk reducing benefits of diversification. At the other extreme, just
because you own mutual funds doesn't mean you are automatically
diversified. For example, a fund that invests only in a particular industry
or region is still relatively risky.
20


Cash, Cash and More Cash:

As you know already, mutual funds pool money from thousands of
investors, so everyday investors are putting money into the fund as well
as withdrawing investments. To maintain liquidity and the capacity to
accommodate withdrawals, funds typically have to keep a large portion of
their portfolios as cash. Having ample cash is great for liquidity, but
money sitting around as cash is not working for you and thus is not very
advantageous.
Costs:
Mutual funds provide investors with professional management, but it
comes at a cost. Funds will typically have a range of different fees that
reduce the overall payout. In mutual funds, the fees are classified into two
categories: shareholder fees and annual operating fees.
The shareholder fees, in the forms of loads and redemption fees are paid
directly by shareholders purchasing or selling the funds. The annual fund
operating fees are charged as an annual percentage - usually ranging from
1-3%. These fees are assessed to mutual fund investors regardless of the
performance of the fund. As you can imagine, in years when the fund
doesn't make money, these fees only magnify losses.
Misleading Advertisements:
The misleading advertisements of different funds can guide investors
down the wrong path. Some funds may be incorrectly labeled as growth
funds, while others are classified as small cap or income funds. The
Securities and Exchange Commission (SEC) requires that funds have at
21

least 80% of assets in the particular type of investment implied in their
names. How the remaining assets are invested is up to the fund manager.
Evaluating Funds:
Another disadvantage of mutual funds is the difficulty they pose for
investors interested in researching and evaluating the different funds.
Unlike stocks, mutual funds do not offer investors the opportunity to
compare the P/E ratio, sales growth, earnings per share, etc. A mutual
fund's net asset value gives investors the total value of the fund's portfolio
less liabilities, but how do you know if one fund is better than another?
Furthermore, advertisements, rankings and ratings issued by fund
companies only describe past performance. Always note that mutual fund
descriptions/advertisements always include the tagline "past results are
not indicative of future returns". Be sure not to pick funds only because
they have performed well in the past - yesterday's big winners may be
today's big losers.
Dilution:
It's possible to have too much diversification. Because funds have small
holdings in so many different companies, high returns from a few
investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big.
When money pours into funds that have had strong success, the manager
often has trouble finding a good investment for all the new money.
Taxes :
When making decisions about your money, fund managers don't consider
your personal tax situation. For example, when a fund manager sells a
22

security, a capital-gains tax is triggered, which affects how profitable the
individual is from the sale. It might have been more advantageous for the
individual to defer the capital gains liability.
Restrictive gains :
Diversification helps, if risk minimization is your objective. However, the
lack of investment focus also means you gain less than if you had
invested directly in a single security.
Assume, Reliance appreciated 50 per cent. A direct investment in the
stock would appreciate by 50 per cent. But your investment in the mutual
fund, which had invested 10 per cent of its corpus in Reliance, will see
only a 5 per cent appreciation.

Management risk :
When you invest in a mutual fund, you depend on the fund's manager to
make the right decisions regarding the fund's portfolio. If the manager
does not perform as well as you had hoped, you might not make as much
money on your investment as you expected. Of course, if you invest in
Index Funds, you forego management risk, because these funds do not
employ managers.

23

NET ANNUAL VALUE

Entry Load is applied as a percent of the Net Asset Value (NAV). Net Assets
of a scheme is that figure which is arrived at after deducting all scheme
liabilities from its asset. NAV is calculated by dividing the value of Net
Assets by the outstanding number of Units.

Net Annual Value
Assets Rs. Crs. Liabilities Rs. Crs.
Shares 345 Unit Capital 300
Debentures 23 Reserves & Surplus 85.7
Money Market
Instruments
12
Accrued Income 2.3 Accrued Expenditure 1.5
Other Current Assets 1.2 Other Current Liabilities 0.5
Deferred Revenue
Expenditure
4.2
387.7 387.7

Units Issued (Cr.) 30
Face Value (Rs.) 10
Net Assets (Rs.) 385.7
NAV (Rs.) 12.86
All Figures in Rs. Cr
The above table shows a typical scheme balance sheet. Investments are
entered under the assets column. Adding all assets gives the total of Rs.
387.7 cr. From this if we deduct the liabilities of Rs. 2 cr. i.e. Accrued
24

Expenditure and Other Current Liabilities, we get Rs. 385.7 cr as Net Assets
of the scheme. The scheme has issued 30 crs. units @ Rs. 10 each during the
NFO. This translates in Rs. 300 crs. being garnered by the scheme then. This
is represented by Unit Capital in the Balance Sheet. Thus, as of now, the net
assets worth Rs. 385.7 cr are to be divided amongst 30 crs. units. This means
the scheme has a Net Asset Value or NAV of Rs. 12.86. The important point
that the investor must focus here is that the Rs. 300 crs. garnered by the
scheme has increased to Rs. 387 crs., which translates into a 29.23% gain,
whereas, the return for the investor is 28.57% (12.86-10/ 10 = 28.57%).
25

CONCEPT OF SIP , STP, SWP.
CONCEPT OF SYSTEMATIC INVESTMENT PLAN
An SIP is a vehicle offered by mutual funds to help you save regularly. It is
just like a recurring deposit with the post office or bank where you put in a
small amount every month. The difference here is that the amount is invested
in a mutual fund. The minimum amount to be invested can be as small as Rs
500 and the frequency of investment is usually monthly or quarterly.
How does an SIP works?
An SIP allows you to take part in the stock market without trying to second
guess its movements. AN SIP means you commit yourself to investing a
fixed amount every month. Let's say it is Rs 1,000. When the NAV is high,
you will get fewer units. When it drops, you will get more units.
Date NAV Approx number of units
you will get at Rs 1,000
Jan 1 10 100
Feb 1 10.5 95.23
Mar 1 11 90.90
Apr 1 9.5 105.26
May 1 9 111.11
Jun 1 11.5 86.95
Within six months, you would have 5,894 units by investing just Rs 1,000
every month. Over the long run, you make money. Let's say you invested in
Prudential ICICI Technology Fund during the dotcom and tech boom. Say
26

you began with Rs 1,000 and kept investing Rs 1,000 every month. This
would be the result:
Investment period Mar 2003-Mar 2008
Monthly investment Rs 1,000
Total amount invested Rs 61,000
Value of investment of
Mar 7, 2005
Rs 1,09,315
Return on investment 23.87%
Had you bought the units on March 13, 2003 at Rs 10.88 per unit (that was
the NAV then), you would have lost because the NAV was just 7.04 on
March 7, 2008. But because you spaced out your investment, you won.
How does an SIP scores?
It makes you disciplined in your savings. Every month you are forced to
keep aside a fixed amount. This could either be debited directly from your
account or you could give the mutual fund post-dated cheques. As you see
above, it helps you make money over the long term. Since you get more
units when the NAV drops and fewer when it rises, the cost averages out
over time. So you tide over all the ups and downs of the market without any
drastic losses.
Also, a number of mutual funds do not charge an entry load if you opt for an
SIP. This fee is a percentage of the amount you are investing. And if you do
not exit (sell your units) within a year of buying the units, you do not have to
pay an exit load (same as an entry load, except this is charged when you sell
your units).
27

If, however, you do sell your units within a year, you would be charged an
exit load. So it pays to stay invested for the long-run.
The best way to enter a mutual fund is via an SIP. But to get the benefit of an
SIP, think of at least a three-year time frame when you won't touch your
money. Remember, it's your money so don't blindly play around with it.
CONCEPT OF SYSTEMATIC TRANSFER PLAN (STP) ?

In SIP investors money moves out of his savings account into the scheme of
his choice. Lets say an investor has decided to invest Rs 5,000 every month,
such that Rs. 1,000 gets invested on the 5th, 10th, 15th, 20th and 25th of the
month. This means that the Rs. 5000, which will get invested in stages till
25th will remain in the savings account of the investor for 25 days and earn
interest @ 3.5%.
If the investor moves this amount of Rs. 5000 at the beginning of the month
to a Liquid Fund and transfers Rs. 1000 on the given dates to the scheme of
his choice, then not only will he get the benefit of SIP, but he will earn
slightly higher interest as well in the Liquid Funds as compared to a bank FD
As the. money is being invested in a Liquid Fund, the risk level associated is
also minimal. Add to this the fact that liquid funds do not have any entry/
exit loads. This is known as STP.

CONCEPT OF SYSTEMATIC WITHDRAWAL PLAN (SWP) ?

SWP stands for Systematic Withdrawal Plan. Here the investor invests a
lumpsum amount and withdraws some money regularly over a period of
time. This results in a steady income for the investor while at the same time
his principal also gets drawn down gradually. Say for example an investor
aged 60 years receives Rs. 20 lakh at retirement. If he wants to use this
money over a 20 year period, he can withdraw Rs. 20,00,000/ 20 = Rs.
28

1,00,000 per annum. This translates into Rs. 8,333 per month. (The investor
will also get return on his investment of Rs. 20 lakh, depending on where the
money has been invested by the mutual fund). In this example we have not
considered the effect of compounding. If that is considered, then he will be
able to either draw some more money every month, or he can get the same
amount of Rs. 8,333 per month for alonger period of time. The conceptual
difference between SWP and MIP is that SWP is an investment style
whereas MIP is a type of scheme. In SWP the investors capital goes down
whereas in MIP, the capital is not touched and only the interest is paid to the
investor as dividend.

29

A 10-STEP GUIDE TO EVALUATING MUTUAL FUNDS

Mutual funds are a convenient way to invest in the stock markets (as also
debt and money markets). Indian investors are already beginning to realise
this. That's the good news; the bad news is that a lot of investors seem to
think that any mutual fund will do the 'trick'. The trick over here is to clock
higher returns any which way. While generating an above-average return is
every fund manager's mantra, it is not achieved that easily and when it is
achieved it is not necessarily done in the right manner.

Which brings us to the question - what must investors do to ensure that they
are invested in the right fund? With so many funds in the industry and many
more being launched every month, this is not an easy task. Multiplicity (as
also duplicity) of mutual funds apart, there are many elements within a fund
that an investor needs to consider carefully before short-listing his
investment options. To facilitate the decision-making process, we present a
10-step guide to investing in mutual funds.

1. Fund sponsor's integrity
In this age of financial irregularities and misconduct, it is a tough call to
come across fund houses that haven't been embroiled in some controversy or
the other. While major financial scams involving mutual funds are yet to
make their presence felt in a India, it is quite common in developed markets
like the US. That is why it is important to go for a mutual fund sponsor with
an impeccable track record in terms of compliance and investor welfare.
Equally important is requisite experience with a well-established track
record in fund/asset management.
30


2. A competent fund management team
The team managing the fund should have considerable experience in dealing
with market ups and downs. It should be competent enough to take the right
investment decisions based on experience under varying market conditions.
More importantly, these investment decisions must be in adherence to the
investment mandate (so mid cap funds must be invested in mid caps and
large cap funds must be invested in large caps and funds that must be fully
invested in equities at all times must not go into cash).

At the end of the day, it is the fund management team's responsibility to
deliver performance over the long-term across market cycles vis-a-vis peers
and the benchmark index.

3. Well-defined investment philosophy
For many fund houses, the investment philosophy revolves around whatever
goes with the Chief Investment Officer (CIO). In other words, the CIO
defines the investment philosophy of the fund house. Actually it should be
the other way round, the fund house must have a well-defined investment
process that the CIO must abide by at all times. Sure he can introduce an
element of individualism based on his experience, but this cannot override
the fund house's philosophy. This will ensure that the investor's interests are
aligned to the fund house and not a maverick fund manager/CIO.

Another important aspect of the fund house philosophy is related to asset
mobilisation. How is the fund house accumulating new assets (either from
existing investors or fresh investors)? Is it doing this by launching senseless
NFOs (new fund offers) or is it concentrating on improving performance of
31

its existing funds and drawing investors over there? If it's the former (i.e. the
NFO route), then the AMC has got it wrong in our view; getting investors to
invest in existing funds by establishing performance over the long-term (at 3
years for equity funds) is the right way to accumulate assets. As and when
existing funds have established their performance over 3-5 years, the next
NFO can be launched.

4. Get the fund nature right
A mutual fund can be classified in two categories i.e. open-ended funds or
close-ended depending on whether new investors will or will not be allowed
to invest.

a) Open-ended Fund
An open-ended fund never closes its doors to investors (unless the fund
house decides to do so under exceptional circumstances like for instance,
when the fund's net asset base grows too large to be managed effectively).
On the same lines, existing investors can exit from an open-ended fund
whenever they please (the only exception to this is the tax-saving fund or the
equity-linked saving scheme - ELSS as it is known). It is evident that
liquidity is the key advantage of investing in open-ended funds.


b) Close-ended Fund
A close-ended fund on the other hand opens the door to investors only
during the NFO period. After that, it is closed for further investment over a
pre-determined tenure (usually 3 or 5 years). Upon maturity of the tenure,
the fund may or may not convert into an open-ended fund.
32


5. Get the fund category right
Funds can be classified into different categories based on where they invest
your money.

a) Equity funds
These funds invest in the stock markets and are suitable for investors with a
high risk appetite. Over the short-term, investors could lose considerable
money depending on the performance of stock markets. Over the long-term
(at least 10 years) equities are known to generate above-average returns
(particularly in the Indian context) vis-a-vis other assets like bonds, gold and
real estate.

b) Debt funds
These funds invest in debt markets (corporate bonds, government securities,
money market instruments). More than capital appreciation, debt/debt funds
are a good way to safeguard your assets over the long-term and to diversify
across asset classes.

c) Balanced funds
Balanced funds (or hybrid funds) invest in equity and debt markets.
However, to retain their equity-oriented nature (from a tax perspective)
balanced funds are required to invest a minimum of 65% of net assets in
equities. In our view, with nearly 2/3rd of assets in equities, balanced funds
are virtually equity funds in disguise. There was a time when balanced funds
needed to maintain just 51% of assets in equities, then was the time they
were really 'balanced'.
33


Another mutual fund offering in this category is the monthly income plan
(MIP). MIPs invest mainly in debt markets (usually 75%-80% of assets); the
balance is invested in equity markets. For investors primarily concerned
about capital preservation (although over the short-term MIPs can erode
capital) with the secondary objective to clock capital appreciation, MIPs are
worth a look.

6. Fees and charges (recurring)
Asset management companies (AMCs) charge investors a fee for providing
fund management expertise. fund management costs money; there are
salaries to be paid to fund managers and their team of investment analysts,
then there are fees to be paid to the custodian and the registrar among other
service providers. These expenses (as indicated by the Expense Ratio) are
incurred by the fund on a recurring basis (annually). Such expenses are not
to be considered lightly, higher expenses erode returns and over the long-
term can make a lot of difference to the fund's performance.

7. The load (one-time)
In addition to the recurring expenses, most funds also levy a one-time
upfront charge at the time of investment. This is known as the entry load. To
understand how this works take an investor who invests in a mutual fund
with an NAV (net asset value) of Rs.10.00. If the entry load is 2% the
investor will have to pay Rs.10.20 to buy a single unit. The additional
payment of Rs 0.20 (per unit) goes towards meeting the mutual fund agent's
commission. Some funds also have a practice of imposing an exit load. For
instance, if the investor sells his unit at an NAV of Rs 20.00 and incurs a 2%
exit load, he will receive Rs 19.60.
34


8. The tax implications
The mutual fund tax structure is certainly not meant for lay investors. Even
accomplished tax experts antagonise over it and wish that the finance
minister simplifies it, rather than complicating it in every budget.
Put simply, there are several dichotomies in the mutual fund tax structure.

i) Investing in equity and debt funds have different tax implications.
ii) Within debt funds, liquid funds and other debt funds have different tax
implications.
iii) Within debt funds, investments by individuals/Hindu Undivided Families
(HUFs) and corporates have varying tax implications.
iv) Within debt funds, investments made from a long-term and a short-term
perspective have varying tax implications. As you would have figured by
now, investing in mutual funds can be a 'taxing' proposition.

9. Evaluate the fund's portfolio
Service levels of fund houses vary. Some fund houses regularly update
investors on details like stock allocation, sectoral allocation, asset allocation,
Portfolio Turnover Ratio and Expense Ratio among other details. Most fund
houses provide a lot of these details at monthly/quarterly frequency through
mutual fund factsheets. However, this information is not quite as
standardised as it should be, so the investor has to be careful while making a
comparison. Making a comparison would typically include evaluating a
fund's portfolio in terms of diversification across top 10 stocks and leading
sectors (in case of equity funds) to ensure that the fund is not taking on more
risk than necessary. It is evident that this is no mean task and requires
considerable effort and patience on the investor's part.
35


10. Evaluate the fund's performance
Every fund is benchmarked against an index like the BSE Sensex, Nifty,
BSE 200 or the CNX 500 to cite a few names. Investors should compare
fund performance over varying time frames vis-a-vis both the benchmark
index and peers. Carefully evaluate the fund's performance across market
cycles particularly the downturns. A well-managed fund should not fall too
hard (relative to the benchmark and peers) during a market downturn even if
it does not feature at the top during a stock market rally.

36

Evaluation Of Canara Robeco Infrastructure-G Fund
Current Stats & Profile











Fund Performance



Annual Returns

2008 2007 2006 2005 2004

Fund Return -58.76 90.94 34.16 -- --

Rank In
Category
140/193 9/162 78/145 -- --

Category
Average
-55.15 59.45 34.73 46.58 26.38

S&P CNX Nifty -51.79 54.77 39.83 36.34 10.68
Sensex -52.45 47.15 46.70 42.33 13.08
Latest NAV 19.72 (15/09/09)
52-Week High 19.72 (15/09/09)
52-Week Low 9.09 (27/10/08)
Fund Category Equity: Diversified
Type Open End
Launch Date November 2005
Risk Grade Above Average
Return Grade High
Net Assets (Cr) 168.79 (31/08/09)
Benchmark BSE 100
37


Quarterly Returns

Q1 Q2 Q3 Q4

2009 -0.45 57.60 -- --

2008 -29.59 -20.48 -8.01 -19.94

2007 -8.20 25.64 24.74 32.72

2006 25.26 -16.65 13.47 13.25

2005 -- -- -- --


Fund Portfolio









Fund Details

Fund Details

VR Category Equity: Diversified
Type Open End
Entry Load
Nil
Exit Load
1% for redemption within 365 days
Portfolio Characteristics As on 31/08/09

Average Mkt Cap (Rs Cr) 24,716.31

Market Capitalization % of Portfolio
Giant 38.83
Large 26.05
Mid 28.42
Small 5.06
Tiny 1.09
Investment Valuation Stock Portfolio
Portfolio P/B Ratio 3.37
Portfolio P/E Ratio 32.20

38




Canara Robeco Infrastructure fund analysis

Canara Robeco Infrastructure fund may be small, but it packs quite a
punch...
Don't overlook this fund simply because of its tiny size - Rs 115.47 crore
(May 31, 2009). With a 3-year annualised return of 15.36 per cent (as on
May 31, 2009), the fund is the third-best performer in its category of 13 and
has outshone the category average by 4.33 per cent.
Top Holding As on 31/08/09
Name of Holding Instrument % Net Assets
Reliance Industries Equity 8.26
Bharti Airtel Equity 6.71
NTPC Equity 4.94
BHEL Equity 4.5
Idea Cellular Equity 4.33
GAIL Equity 4.23
Aditya Birla Nuvo Equity 4.09
Tata Power Equity 3.74
State Bank of India Equity 3.69
Mahindra Holidays & Resorts
In Equity 3.6
BPCL Equity 3.48
Mundra Port & SEZ Equity 3.25
HPCL Equity 2.99
Gujarat State Petronet Equity 2.85
Tulip Telecom Equity 2.66
Indian Oil Corp. Equity 2.35
ONGC Equity 1.93
Gujarat Gas Co. Equity 1.91
IRB Infrastructure Dev Equity 1.77
Punjab National Bank Equity 1.7
39

Granted, the fund's start was lousy with a return of 34.16 per cent in 2006
(category average: 54.20%). Blame it on the huge exposure to debt and cash.
But in 2007, the fund compensated its investors well with a return of 90.94
per cent (category average: 82.83%). It successfully rode on the rally in
Construction, Engineering, Energy and Diversified sector stocks. It allocated
around 70.50 per cent of its portfolio to these sectors while the category
allocated an average of around 54 per cent.
But as markets tanked in 2008, the fund lowered its exposure to the
Construction sector from 18.18 per cent (December 2007) to around 7.26 per
cent (May 2008) and to the Engineering sector from 15.53 per cent
(December 2007) to 9.32 per cent (July 2008). This did not cushion the fall
dramatically and the fund fell by almost 59 per cent (category average -
60%) that year.
Despite the agility that a small fund offers, this one opts for a large-cap bent,
refrains from frequent churning and tilts towards a buy-and-hold approach.
Some of stocks that have been held almost since inception are Larsen &
Toubro, Tata Power, BHEL, McNally Bharat Engineering and Reliance
Industries.
Fund manager Anand Shah who took over the fund in April 2008, has one
philosophy - to buy stocks which have a secular growth story. We focus on
good companies, not on the market. We focus on long-term growth
opportunities in India, not on the market direction, is how he puts it.
While this is touted by a lot of fund managers, in all fairness, Shah does put
his money where his mouth is. In December 2008, when the average equity
exposure of funds to this asset class was 72.72 per cent, this fund had it at 83
per cent and it rose to 88 per cent over the next two months. By March 2009,
40

the average was 70 per cent but it was at 90 per cent for Canara Robeco
Infrastructure. By May 2009, the fund was fully invested at 96 per cent.
Naturally, this put him in an enviable position to benefit from the latest
market rally (March 9 - May 31, 2009). The fund returned 91.56 per cent, an
outperformance of the infrastructure fund's category average by a margin of
around 10 per cent. Stocks like L&T, BHEL, Jindal Steel & Power, Tata
Power, Reliance Infrastructure and Gujarat State Petronet saw a decrease in
holdings between April and May. The reason being profit-booking amidst
sharp appreciation in prices. Even if we are bullish on a sector or stock, if
there is a significant appreciation in price which we do not feel is justified,
we will book profits, he says.
Though the fund's mandate is very broad. the sectors excluded are FMCG,
Pharma and Infotech. Even banking financial services are included, but not
those whose focus area is the retail business. Those that are strong players in
the infrastructure sector and lend to infrastructure players are the ones we
look at, says Shah.
Right now the fund is betting heavily on Energy with a 30 per cent allocation
(category average: 17.77%) and Telecom at 16 per cent (category average:
3.68%). Exposure to Metals has stayed constant over the past five months as
the fund manager is negative on the sector and does not see a revival there in
the near future.
This fund maintains a compact portfolio. Though the number of stocks has
ranged from 29 to 49, by and large Shah stick to a number of around 35
stocks.


41

Asset Management Company
Canara Robeco Asset Management Company Ltd

Person

Mr.R.Swaminathan

Address

Construction House, 4th Floor,


5, Walchand Hirachand Marg,


Ballard Estate


Mumbai


400001

Phone

(022) 66585000 /18, 66585085-86

Fax

(022) 56585011 - 5014

Email

canbank@canararobeco.com
( www.valueresearchonline.com)
42




CAMPARATIVE
STUDY

43


TYPES OF MUTUAL FUND SCHEMES
A wide variety of Mutual Fund Schemes exist to cater to the needs such as
financial position, risk tolerance and return expectations etc. The table below
gives an overview into the existing types of schemes in the Industry.



By Structure
c) Open-ended schemes
Open-ended or open mutual funds are much more common than closed-
ended funds and meet the true definition of a mutual fund a financial
intermediary that allows a group of investors to pool their money together to
meet an investment objective to make money! An individual or team of
professional money managers manage the pooled assets and choose
investments, which create the funds portfolio. They are established by a
fund sponsor, usually a mutual fund company, and valued by the fund
44

company or an outside agent. This means that the funds portfolio is valued
at "fair market" value, which is the closing market value for listed public
securities. An open-ended fund can be freely sold and repurchased by
investors.
Buying and Selling:
Open funds sell and redeem shares at any time directly to shareholders.
To make an investment, you purchase a number of shares through a
representative, or if you have an account with the investment firm, you
can buy online, or send a check. The price you pay per share will be
based on the funds net asset value as determined by the mutual fund
company. Open funds have no time duration, and can be purchased or
redeemed at any time, but not on the stock market. An open fund issues
and redeems shares on demand, whenever investors put money into the
fund or take it out. Since this happens routinely every day, total assets of
the fund grow and shrink as money flows in and out daily. The more
investors buy a fund, the more shares there will be. There's no limit to the
number of shares the fund can issue. Nor is the value of each individual
share affected by the number outstanding, because net asset value is
determined solely by the change in prices of the stocks or bonds the fund
owns, not the size of the fund itself. Some open-ended funds charge an
entry load (i.e., a sales charge), usually a percentage of the net asset
value, which is deducted from the amount invested.
Advantages:
Open funds are much more flexible and provide instant liquidity as funds
sell shares daily. You will generally get a redemption (sell) request
processed promptly, and receive your proceeds by check in 3-4 days. A
majority of open mutual funds also allow transferring among various
funds of the same family without charging any fees. Open funds range
in risk depending on their investment strategies and objectives, but still
45

provide flexibility and the benefit of diversified investments, allowing
your assets to be allocated among many different types of holdings.
Diversifying your investment is key because your assets are not impacted
by the fluctuation price of only one stock. If a stock in the fund drops in
value, it may not impact your total investment as another holding in the
fund may be up. But, if you have all of your assets in that one stock, and
it takes a dive, youre likely to feel a more considerable loss.
Risks:
Risk depends on the quality and the kind of portfolio you invest in. One
unique risk to open funds is that they may be subject to inflows at one
time or sudden redemptions, which leads to a spurt or a fall in the
portfolio value, thus affecting your returns. Also, some funds invest in
certain sectors or industries in which the value of the in the portfolio can
fluctuate due to various market forces, thus affecting the returns of the
fund.

d) Close-ended schemes
Close-ended or closed mutual funds are really financial securities that are
traded on the stock market. Similar to a company, a closed-ended fund issues
a fixed number of shares in an initial public offering, which trade on an
exchange. Share prices are determined not by the total net asset value
(NAV), but by investor demand. A sponsor, either a mutual fund company or
investment dealer, will raise funds through a process commonly known as
underwriting to create a fund with specific investment objectives. The fund
retains an investment manager to manage the fund assets in the manner
specified.
Buying and Selling:
Unlike standard mutual funds, you cannot simply mail a check and buy
closed fund shares at the calculated net asset value price. Shares are
46

purchased in the open market similar to stocks. Information regarding
prices and net asset values are listed on stock exchanges, however,
liquidity is very poor. The time to buy closed funds is immediately after
they are issued. Often the share price drops below the net asset value,
thus selling at a discount. A minimum investment of as much as Rs.5000
may apply, and unlike the more common open funds discussed below,
there is typically a five-year commitment.
Advantages:
The prospect of buying closed funds at a discount makes them appealing
to experienced investors. The discount is the difference between the
market price of the closed-end fund and its total net asset value. As the
stocks in the fund increase in value, the discount usually decreases and
becomes a premium instead. Savvy investors search for closed-end funds
with solid returns that are trading at large discounts and then bet that the
gap between the discount and the underlying asset value will close. So
one advantage to closed-end funds is that you can still enjoy the benefits
of professional investment management and a diversified portfolio of
high quality stocks, with the ability to buy at a discount.
Risks:
Investing in closed-end funds is more appropriate for seasoned investors.
Depending on their investment objective and underlying portfolio,
closed-ended funds can be fairly volatile, and their value can fluctuate
drastically. Shares can trade at a hefty discount and deprive you from
realizing the true value of your shares. Since there is no liquidity,
investors must buy a fund with a strong portfolio, when units are trading
at a good discount, and the stock market is in position to rise.



47

By Investment Objective:
A scheme can also be classified as growth scheme, income scheme, or
balanced scheme considering its investment objective. Such schemes may be
open-ended or close-ended schemes as described earlier. Such schemes may
be classified mainly as follows:

e) Growth / Equity Oriented Schemes
The aim of growth funds is to provide capital appreciation over the medium
to long- term. Such schemes normally invest a major part of their corpus in
equities. Such funds have comparatively high risks. These schemes provide
different options to the investors like dividend option, capital appreciation,
etc. and the investors may choose an option depending on their preferences.
The investors must indicate the option in the application form. The mutual
funds also allow the investors to change the options at a later date. Growth
schemes are good for investors having a long-term outlook seeking
appreciation over a period of time.

Equity funds
As explained earlier, such funds invest only in stocks, the riskiest of asset
classes. With share prices fluctuating daily, such funds show volatile
performance, even losses. However, these funds can yield great capital
appreciation as, historically, equities have outperformed all asset classes. At
present, there are four types of equity funds available in the market. In the
increasing order of risk, these are:

Index funds
These funds track a key stock market index, like the BSE (Bombay Stock
Exchange) Sensex or the NSE (National Stock Exchange) S&P CNX Nifty.
Hence, their portfolio mirrors the index they track, both in terms of
48

composition and the individual stock weightages. For instance, an index fund
that tracks the Sensex will invest only in the Sensex stocks. The idea is to
replicate the performance of the benchmarked index to near accuracy.
Investing through index funds is a passive investment strategy, as a funds
performance will invariably mimic the index concerned, barring a minor
"tracking error". Usually, theres a difference between the total returns given
by a stock index and those given by index funds benchmarked to it. Termed
as tracking error, it arises because the index fund charges management fees,
marketing expenses and transaction costs (impact cost and brokerage) to its
unitholders. So, if the Sensex appreciates 10 per cent during a particular
period while an index fund mirroring the Sensex rises 9 per cent, the fund is
said to have a tracking error of 1 per cent.
To illustrate with an example, assume you invested Rs 1,000 in an index
fund based on the Sensex on 1 April 1978, when the index was launched
(base: 100). In August, when the Sensex was at 3.457, your investment
would be worth Rs 34,570, which works out to an annualised return of 17.2
per cent. A tracking error of 1 per cent would bring down your annualised
return to 16.2 per cent. Obviously, the lower the tracking error, the better the
index fund.

Diversified funds
Such funds have the mandate to invest in the entire universe of stocks.
Although by definition, such funds are meant to have a diversified portfolio
(spread across industries and companies), the stock selection is entirely the
prerogative of the fund manager.
This discretionary power in the hands of the fund manager can work both
ways for an equity fund. On the one hand, astute stock-picking by a fund
manager can enable the fund to deliver market-beating returns; on the other
hand, if the fund managers picks languish, the returns will be far lower.
49

The crux of the matter is that your returns from a diversified fund depend a
lot on the fund managers capabilities to make the right investment
decisions. On your part, watch out for the extent of diversification prescribed
and practised by your fund manager. Understand that a portfolio
concentrated in a few sectors or companies is a high risk, high return
proposition. If you dont want to take on a high degree of risk, stick to funds
that are diversified not just in name but also in appearance.

Tax-saving funds
Also known as ELSS or equity-linked savings schemes, these funds offer
benefits under Section 88 of the Income-Tax Act. So, on an investment of up
to Rs 10,000 a year in an ELSS, you can claim a tax exemption of 20 per
cent from your taxable income. You can invest more than Rs 10,000, but you
wont get the Section 88 benefits for the amount in excess of Rs 10,000. The
only drawback to ELSS is that you are locked into the scheme for three
years.
In terms of investment profile, tax-saving funds are like diversified funds.
The one difference is that because of the three year lock-in clause, tax-saving
funds get more time to reap the benefits from their stock picks, unlike plain
diversified funds, whose portfolios sometimes tend to get dictated by
redemption compulsions.

Sector funds
The riskiest among equity funds, sector funds invest only in stocks of a
specific industry, say IT or FMCG. A sector funds NAV will zoom if the
sector performs well; however, if the sector languishes, the schemes NAV
too will stay depressed.
Barring a few defensive, evergreen sectors like FMCG and pharma, most
other industries alternate between periods of strong growth and bouts of
50

slowdowns. The way to make money from sector funds is to catch these
cyclesget in when the sector is poised for an upswing and exit before it slips
back. Therefore, unless you understand a sector well enough to make such
calls, and get them right, avoid sector funds.

f) Income / Debt Oriented Scheme
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, Government securities and money market
instruments. Such funds are less risky compared to equity schemes. These
funds are not affected because of fluctuations in equity markets. However,
opportunities of capital appreciation are also limited in such funds. The
NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in
the short run and vice versa. However, long term investors may not bother
about these fluctuations.
Such funds attempt to generate a steady income while preserving investors
capital. Therefore, they invest exclusively in fixed-income instruments
securities like bonds, debentures, Government of India securities, and money
market instruments such as certificates of deposit (CD), commercial paper
(CP) and call money. There are basically three types of debt funds.

Income funds
By definition, such funds can invest in the entire gamut of debt instruments.
Most income funds park a major part of their corpus in corporate bonds and
debentures, as the returns there are the higher than those available on
government-backed paper. But there is also the risk of defaulta company
could fail to service its debt obligations.

51

Gilt funds
They invest only in government securities and T-billsinstruments on which
repayment of principal and periodic payment of interest is assured by the
government. So, unlike income funds, they dont face the spectre of default
on their investments. This element of safety is why, in normal market
conditions, gilt funds tend to give marginally lower returns than income
funds.

Liquid funds
They invest in money market instruments (duration of up to one year) such
as treasury bills, call money, CPs and CDs. Among debt funds, liquid funds
are the least volatile. They are ideal for investors seeking low-risk
investment avenues to park their short-term surpluses.

The risk in debt funds
Although debt funds invest in fixed-income instruments, it doesnt follow
that they are risk-free. Sure, debt funds are insulated from the vagaries of the
stock market, and so dont show the same degree of volatility in their
performance as equity funds. Still, they face some inherent risk, namely
credit risk, interest rate risk and liquidity risk.

Interest rate risk: This is common to all three types of debt funds,
and is the prime reason why the NAVs of debt funds dont show a
steady, consistent rise. Interest rate risk arises as a result of the inverse
relationship between interest rates and prices of debt securities. Prices
of debt securities react to changes in investor perceptions on interest
rates in the economy and on the prevelant demand and supply for debt
paper. If interest rates rise, prices of existing debt securities fall to
realign themselves with the new market yield. This, in turn, brings
52

down the NAV of a debt fund. On the other hand, if interest rates fall,
existing debt securities become more precious, and rise in value, in
line with the new market yield. This pushes up the NAVs of debt
funds.

Credit risk: This throws light on the quality of debt instruments a
fund holds. In the case of debt instruments, safety of principal and
timely payment of interest is paramount. There is no credit risk
attached with government paper, but that is not the case with debt
securities issued by companies. The ability of a company to meet its
obligations on the debt securities issued by it is determined by the
credit rating given to its debt paper. The higher the credit rating of the
instrument, the lower is the chance of the issuer defaulting on the
underlying commitments, and vice-versa. A higher-rated debt paper is
also normally much more liquid than lower-rated paper. Credit risk is
not an issue with gilt funds and liquid funds. Gilt funds invest only in
government paper, which are safe. Liquid funds too make a bulk of
their investments in avenues that promise a high degree of safety. For
income funds, however, credit risk is real, as they invest primarily in
corporate paper.

Liquidity risk: This refers to the ease with which a security can be
sold in the market. While there is brisk trading in government
securities and money market instruments, corporate securities arent
actively traded. More so, when you go down the rating scalethere is
little demand for low-rated debt paper. As with credit risk, gilt funds
and liquid risk dont face any liquidity risk. Thats not the case with
income funds, though. An income fund that has a big exposure to low-
53

rated debt instruments could find it difficult to raise money when
faced with large redemptions.

g) Balanced Fund
The aim of balanced funds is to provide both growth and regular income
as such schemes invest both in equities and fixed income securities in the
proportion indicated in their offer documents. These are appropriate for
investors looking for moderate growth. They generally invest 40-60% in
equity and debt instruments. These funds are also affected because of
fluctuations in share prices in the stock markets. However, NAVs of such
funds are likely to be less volatile compared to pure equity funds.
As the name suggests, balanced funds have an exposure to both equity
and debt instruments. They invest in a pre-determined proportion in
equity and debtnormally 60:40 in favour of equity. On the risk ladder,
they fall somewhere between equity and debt funds, depending on the
funds debt-equity spiltthe higher the equity holding, the higher the risk.
Therefore, they are a good option for investors who would like greater
returns than from pure debt, and are willing to take on a little more risk in
the process.

h) Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest
exclusively in safer short-term instruments such as treasury bills, certificates
of deposit, commercial paper and inter-bank call money, government
securities, etc. Returns on these schemes fluctuate much less compared to
other funds. These funds are appropriate for corporate and individual
investors as a means to park their surplus funds for short periods.

54


Other types of funds

d) Pooled Funds
A "pooled fund" is a unit trust in which investors contribute funds that are
then invested, or managed, by a third party. A pooled fund operates like a
mutual fund, but is not required to have a prospectus under securities law.
Pooled funds are offered by trust companies, investment management firms,
insurance companies, and other organizations.
Pooled funds and mutual funds are substantially the same, but differ in their
legal form. Like a mutual fund, a pooled fund is a trust that is set up under a
"trust indenture". This specifies how the pooled fund will operate and what
the duties of the various parties to the trust indenture will be. The trust
indenture specifies an investment policy for the pooled fund and how
management fees will be charged. Pooled funds, like mutual funds, are "unit
trusts". This means that investors deposit funds into the trust in exchange for
"units" of the fund, which reflect a pro-rata share of the fund's investments.
The fund trust indenture will specify how units are issued and redeemed, as
well as, the frequency and procedures for valuations. Pooled funds can be
either "closed" or "open". An "open" pooled fund is the most common type
of pooled fund, and allows units to be redeemed at scheduled valuations. A
"closed" pooled fund does not allow redemptions, except in specific
circumstances or at termination of the trust. Closed pooled funds are usually
established to hold illiquid investments such as real estate or very specialized
investment programs, such as hedge funds. The major difference between
pooled funds and mutual funds is their legal status under securities law.
Pooled funds are not "public" investments, which means investment and
trading in pooled funds is restricted. Securities legislation define the rules for
a "public" security. Publicly issued securities must meet certain requirements
55

before issue, particularly in information disclosure through their prospectus,
or reporting by issuers. Pooled funds are exempt from prospectus
requirements under securities law, usually under the "private placement", or
"sophisticated investor", clauses in the Securities Act. This means that
investments in pooled funds must be over $150,000. Financial institutions
such as banks, trust companies or investment counselling firms are allowed
to invest their clients in their own pooled funds, by specific exemptions
granted under the Securities Act. Each pooled fund investment must be
reported to the relevant Securities Commission. Once a client is invested in a
pool fund, the result is identical to being in a mutual fund with the same
investment mandate. Fees for pooled funds can either be charged inside or
outside the fund. Valuation of pooled funds can be less frequent, as there
tends to be less activity with fewer and more sophisticated pooled fund
investors. Pooled fund fees are usually lower than mutual funds, as these
funds are created to deal with larger investors. Pooled funds are allowed to
charge their expenses from operations against the fund assets, and the trust
indenture provides for the sponsor, or trustee, to hire outside agents to
perform certain tasks, such as custody and unit record-keeping.

e) Insurance Segregated Funds
An insurance segregated fund is an insurance contract issued under insurance
legislation by an insurance company. Its value is based on the performance
of a portfolio of marketable securities, such as stocks and bonds.
As an insurance contract, a segregated fund is an obligation of an insurance
company and forms part of its assets. Insurance companies "segregate" the
portfolios which these contracts are based on, dividing these assets from
their general assets. The contracts have a minimum value, the price at which
they were issued.
56

It is important to realize that a insurance segregated fund might look and act
like a mutual fund, but that it is actually something quite different. A mutual
fund is a trust, or sometimes a company, which owns title to the actual
securities in the funds. The unitholders own the trust which in turn owns the
assets. An insurance segregated fund is an insurance contract or a "variable
rate annuity". Legally, the insurance company issues the contract the same
way it would an annuity or life insurance policy under the relevant insurance
legislation. The buyer or "policy holder" has contracted for a payment that is
based on the underlying prices of the portfolio that supports the contract but
does not have a direct claim or ownership on the securities that form the
portfolio. Although insurance companies "segregate" the assets to support
these contracts, the holder of the contract does not own these assets.
Another wrinkle of segregated funds is their tax status. Since they are
insurance contracts, they are taxed as such. Sometimes segregated funds are
used as investment options for "universal" or "whole life" life insurance
which provides a savings option as well as insurance. Life companies market
the tax shelter aspects of these contracts, which allow compounding of
investment income untaxed while inside the insurance contract.
Another sales aspect of segregated funds is their characteristics under
bankruptcy legislation in some jurisdictions. In Canada, for example, an
insurance contract is not available to creditors in a bankruptcy. This means
an RRSP that uses segregated funds would be protected from creditors in a
bankruptcy while an RRSP which invested in mutual funds would be
exposed.
In summary, although insurance segregated funds look and function like
mutual funds, they are actually insurance contracts based on the valuation of
a portfolio of marketable securities. As always, investors are wise to
consider all the aspects of insurance contracts in their legal jurisdiction prior
to investment.
57


f) Specific Sectoral & Thematic funds /schemes
These are the funds/schemes which invest in the securities of only those
sectors or industries as specified in the offer documents. e.g.
Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum stocks, etc. Thematic funds are those fund which invest in a
stocks which will benefit from a particular theme like Outsourcing,
Infrastructure etc. The returns in these funds are dependent on the
performance of the respective sectors/industries. While these funds may give
higher returns, they are more risky compared to diversified funds. Restrain
the urge to invest in sector/thematic funds no matter how compelling an
argument your agent or the fund house makes. Over the long-term, there is
little value that a restrictive and narrow theme can bring to the table. It is
best to opt for a broad investment mandate that is best championed by well-
diversified equity funds.

UTI Thematic Fund: UTI Mutual Fund has filed with the Securities and
Exchange Board of India for an omnibus fund that will have six options. The
UTI Thematic Fund is the umbrella fund.
It will have sub-funds that will focus on large-cap stocks, mid-cap stocks,
auto, banking, PSU stocks and basic industries. UTI now has a UTI Growth
Sectors Umbrella with five options that focus on investing in stocks in the
services, petro, healthcare pharmaceuticals, information technology, and
consumer products.
The new fund also proposes to provide investors four automatic triggers that
could be used for exit: value, appreciation, date and stop loss.

58


MUTUAL FUNDS: THE RISK AND RETURNS

All investments carry an element of risk and mutual funds are not immune to
it. It is a general perception that greater the risk, greater will be the returns.
And lower the risk, lower are the returns. The risks associated with mutual
funds are in tune with investments they in turn hold.

Risk refers to the possibility of investors losing their money. A simple rule
for beating short-term volatility is to invest over a longer horizon. How do
you measure the risk associated with a fund? The fund's beta value compares
a mutual fund's volatility with that of a benchmark and gives an estimate of
how much the fund could fall in a bad market and how high it can soar in a
bull run.

Two popular parameters that give a clearer insight are the standard deviation
and Sharpe ratio. Standard deviation This is a measure of how much the
actual performance of a fund over a period of time deviates from the average
performance.

While beta compares a fund's returns with a benchmark, standard deviation
measures how far a fund's recent numbers stray from its longterm average. A
low standard deviation translates into lower risk. Sharpe ratio This measures
whether the returns that a fund delivered were in sync with the kind of
volatility it exhibited. It quantifies the performance of the fund relative to the
risks it takes. The larger the ratio, the better is the fund's risk-adjusted
returns.


59

For those willing to take high risks, equity and sector funds are the picks.
Sector funds limit their stock selection to the specific sectors and are not
amply diversified. Since all the stocks are restricted to a particular sector like
FMCG, pharma or civil, if the sector takes a beating, your returns will be
directly impacted. Equity funds invest wholly in the stock markets. They
have the same volatility as the investments in the stock market.

Debt funds and bond funds follow a low risk, low return pattern. However,
bond fund faces interest rate risk and income risk. Income risk is the
possibility that a fixed income fund's dividends will decline as a result of
falling overall interest rates. There have been numerous instances of
investors locking their money in debt or income funds. On seeing nil or very
low returns, they pay up huge exit loads and get out of such schemes. Hence,
it is very important that investors first gauge their risk appetite. Once they
understand their risk tolerance level they can choose the appropriate
investment vehicle.

Balanced funds are a good alternative for those who seek something between
high risk sector funds and low risk bond funds. Balanced funds invest 80 to
90 percent of their money in equity instruments and generate decent returns.
The remaining money is locked in safe debt instruments. Investors should
build a well-diversified portfolio.

Inefficient diversification can mean too many investments from a particular
sector or segment. This can mean greater exposure to risk. Proper asset
allocation with investor risk profile in mind must be the first step to building
a portfolio. Create a well-defined strategy with investment goals and
objectives clearly chalked out.
60


FUND MANAGEMENT STYLE & STRUCTURING OF PORTFOLIO

Factors affecting Management style of a scheme

Its one thing to understand mutual funds and their working; its another to
ride on this potent investment vehicle to create wealth in tune with your risk
profile and investment needs. Here are seven factors that go a long way in
helping an AMC meet its investors investment objectives. The factors listed
below evaluate factors affecting the management style of a mutual fund
scheme.

Knowing the profile
Investors investments reflect his risk-taking capacity. Equity funds might
lure when the market is rising and peers are making money, but if you are
not cut out for the risk that accompanies it, dont bite the bait. So, check
if the investors objective matches yours. Investors will invest only after
they have found their match. If they are racked by uncertainty, they seek
expert advice from a qualified financial advisor.

Identifying the investment horizon
How long on an average does the investor want to stay invested in a fund
is as important as deciding upon your risk profile. Investors would invest
in an equity fund only if they are willing to stay on for at least two years.
For income and gilt funds, have a one-year perspective at least. Anything
less than one year, the only option among mutual funds is liquid funds.



61

Declare and Inform
Watch what you commit. Investors look out for the Offer Document and
Key Information Memorandum (KIM) before they commit their money to
a fund. The offer document contains essential details pertaining to the
fund, including the summary information (type of scheme, name of the
asset management company and price of units, among other things),
investment objectives and investment procedure, financial information
and risk factors.

The fund fact sheet
Fund fact sheets give investors valuable information of how the fund has
performed in the past. It gives investors access to the funds portfolio, its
diversification levels and its performance in the past. The more fact
sheets they examine, the better is their comfort level.

Diversification across fund houses
If Investors are routing a substantial sum through mutual funds, they
would diversify across fund houses. That way, they spread their risk.

Chasing incentives
Some financial intermediaries give upfront incentives, in the form of a
percentage of the investors initial investment, to invest in a particular
fund. Many amateur investors get lured into such incentives and invest in
such attractive schemes, which may not meet their future expectations.
The ideal investors focus would be to find a fund that matches his
investment needs and risk profile, and is a performer.



62

Tracking investments
The investors job doesnt end at the point of making the investment.
They do track your investment on a regular basis, be it in an equity, debt
or balanced fund.

Portfolio management is an important foundation of mutual fund business.
The performance of the fund measured by the risk adjusted returns produced
by the investor arises largely by successful portfolio management function.
After collecting the investors funds, effective portfolio management will
have to give returns acceptable to the investor; else, the investor may move
to better performing funds.

From the investors perspective, the need for successful portfolio
management function is obviously paramount. However, in the complex
world of financial markets, portfolio management is a specialist function.

Now how a fund manager manages the portfolio would depend on the type
of the fund he is managing. The funds can be broadly classified as equity
funds and debt funds.

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Equity Portfolio Management:
When the fund contains more than 65% equity, it is called as an equity fund.
Thus such type of a fund would need equity portfolio management.
An equity portfolio managers task consists of two major steps:

a) Constructing a portfolio of equity shares or equity linked instruments
that is consistent with the investment objective of the fund and
b) Managing or constantly re-balancing the portfolio to produce capital
appreciation and earnings that would reward the investors with
superior returns.

How To Identify Which Kind Of Stocks To Include?
The equity portfolio manager has available to him a whole universe of equity
shares and other instruments such as preference shares, warrants or
convertible debentures issued by many companies. Even within each
category of equity instruments, shares of one company may be very different
in terms of their potential than shares of other companies. So how does the
fund manager go about choosing the different types of stocks, in order to
construct his portfolio? The general answer is that his choice of shares to be
included in funds portfolio must reflect the investment objective of the fund.
more specifically, the equity portfolio manager will choose from a universe
of invisible shares in accordance with:

a) The nature of the equity instrument, or a stocks unique
characteristics, and
b) A certain investment style or philosophy in the process of choosing.
Thus, you may see a mutual funds equity portfolio include shares of diverse
companies. However, in reality, the group of stocks selected will have
64

certain unique characteristics, chosen in accordance with the preferred
investment style, such that the portfolio as a whole is consistent with the
schemes objectives.

Indian economy is going through a period of both rapid growth and rapid
transformation. Thus, the industries with the growth prospects or blue chip
shares of yesterday are no longer certain to continue to be in that category
tomorrow. New sectors like software or technology stocks have matured
and newer sectors such as biotechnology are now making an entry in the
investment markets. In this process of rapid change, the stock selection task
of an active fund manager in India is by no means simple or limited. We will
therefore, review how different stocks are classified according to their
characteristics.

Ordinary shares:
Ordinary shareholders are the owners if the company and each share entitles
the holder to ownership privileges such as dividends declared by the
company and voting rights at the meetings. Losses as well as the profits are
shared by the equity shareholders. Without any guaranteed income or
security, equity share are a risk investment, bringing with them the potential
for capital appreciation in return for the additional risk that the investor
undertakes.

Preference Shares:
Unlike equity shares, preference shares entitle the holder to dividends at the
fixed rates subject to availability of profits after tax. If preference shares are
cumulative, unpaid dividends for years of inadequate profits are paid in
subsequent years. Preference shares do not entitle the holder to ownership
privileges such as voting rights at the meetings.
65


Equity Warrants:
These are long term rights that offer holders the right to purchase equity
shares in a company at a fixed price (usually higher than the current market
price) within specified period. Warrants are in the nature of options on
stocks.

Convertible Debentures:
As the term suggests, these are fixed rate debt instruments that are converted
into specified number of equity shares at the end of the specified period.
Clearly, convertible debentures are debt instruments until converted; when
converted, they become equity shares.

EQUITY CLASSES:

Equity shares are generally classified on the basis of either the market
capitalization or the anticipated movement of company earnings. it is
imperative for the fund manager to understand these elements of the stocks
before he selects them for inclusion in the portfolio.

a) Classification in terms of Market Capitalization
Market Capitalization is equivalent to the current value of a company,
i.e., current market price per share times the number of outstanding
shares. There are Large Capitalization Companies, Mid Cap Companies
and Small Cap Companies. Different schemes of a fund may define
their fund objective as a preference for the Large or Mid or the Small Cap
Companies shares. For example, the tax plan of ICICI Prudential AMC
is essentially a mid-cap fund where as the tax plan of Reliance is large-
cap fund. Large Cap shares are more liquid and hence easily tradable.
66

Mid or Small Cap shares may be thought of as having greater growth
potential. The stock markets generally have different indices available to
track these different classes of shares.

b) Classification in terms of Anticipated Earnings
In terms of anticipated earnings of the companies, shares are generally
classified on the basis of their market price relation to one of the
following measures:

Price/Earning Ratio is the price of the share divided by the
earnings per share and indicated what the investors are willing to
pay for the companys earning potential. Young and fast growing
companies usually have high P/E ratios and the established
companies in the mature industries may have lower P/E ratios.

Dividend Yield for a stock is the ratio of dividend paid per share to
the current market price. In India, at least in the past, investors have
indicated the preference for the high dividend paying shares. What
matters to the fund managers is the potential dividend yields based
on earning prospects.

Cyclical Stocks are the shares of companies whose earnings are
correlated with the state of the economy.

Growth Stocks are shares of companies whose earnings are
expected to increase at the rates that exceed the normal market
levels.


67

Value Stocks are share of companies in mature industries and are
expected to yield low growth in earnings. these companies may,
however, have assets whose values have not been recognized by
investors in general. funds manager may try to identify such
currently undervalued stocks that in their opinion can yield superior
returns later.

Approaches to Portfolio Management (Fund Management Style):

Mutual funds can be broadly classified into two categories in terms of the
fund management style i.e. actively managed funds and passively managed
funds (popularly referred to as index funds).
Actively managed funds are the ones wherein the fund manager uses his
skills and expertise to select invest-worthy stocks from across sectors and
market segments. The sole intention of actively managed funds is to identify
various investment opportunities in the market in order to clock superior
returns, and in the process outperform the designated benchmark index. in
active fund management two basic fund management styles that are
prevalent are:
i) Growth Investment Style: wherein the primary objective of
equity investment is to obtain capital appreciation. this investment
style would make the funds manager pick and choose those shares
for investment whose earnings are expected to increase at the rates
that exceed the normal market levels. they tend to reinvest their
earnings and generally have high P/E ratios and low Dividend
Yield ratio.
ii) Value Investment Style: wherein the funds manager looks to buy
shares of those companies which he believes are currently under
68

valued in the market, but whose worth he estimates will be
recognized in the market valuation eventually.
On the contrary, passively managed funds/index funds are aligned to a
particular benchmark index like the S&P CNX Nifty or the BSE Sensex. The
endeavor of these funds is to mirror the performance of the designated
benchmark index, by investing only in the stocks of the index with the
corresponding allocation or weightage.

Investing in index funds is less cumbersome as compared to investing in
actively managed funds. Broadly speaking, investors need to consider two
important aspects i.e. the expense ratio and the tracking error (i.e. the
difference between the returns clocked by the designated index and index
fund).

Conversely, investing in actively managed funds demands a deeper review
and understanding of the fund house's investment philosophy; also the
investor needs to decide on the kind of funds he wishes to invest in - a large
cap/mid cap/small cap fund among others.

In the Indian context, the mutual fund industry is dominated by actively
managed funds; index funds occupy a smaller share of the market. Well-
managed actively managed funds have been successful in outperforming
index funds by a huge margin.

This could be attributed to the fact that the Indian markets are still in an
evolutionary phase and there exist a number of inefficiencies. These
inefficiencies are in turn utilized by competent fund managers to outperform
the index. This explains why many actively managed funds manage to
outperform the index over the long-term (3-5 years).
69

A study was conducted wherein category averages of index funds (passive
funds) were compared with those of diversified equity funds (active funds),
over varied time frames.
The active-passive tradeoff
Categories A Average category returns
1-Yr (%) 3-Yr (%) 5-Yr (%)
Index funds 40.75 32.91 32.38
Actively managed funds 29.05 38.37 41.05
S&P CNX Nifty 39.50 30.96 30.32
BSE Sensex 44.91 35.22 33.20
(Source: Credence Analytics. Growth over 1-Yr is compounded
annualised)

The results are quite interesting. Over the 1-Yr time frame, index funds
(40.75 per cent) aligned to the BSE Sensex have comfortably outscored
diversified equity funds (29.05 per cent). However over longer time frames
(3-Yr and 5-Yr), diversified equity funds have stolen the march over index
funds powered by a strong showing. Over 3-Yr, diversified equity funds
(38.37 per cent CAGR) have outperformed index funds (32.91 per
cent CAGR). The degree of outperformance further widens over 5-Yr;
diversified equity funds (41.05 per cent CAGR) fare better than index funds
(32.38 per cent).
In a nutshell, in the Indian context, index funds have proven their mettle over
shorter time frames. It's the opposite over longer time frames (3-5 years),
where actively managed funds rule the roost.
However the same should not be seen as a blanket recommendation for
actively managed funds. Not all actively managed funds are invest-worthy
and capable of generating superior returns vis--vis benchmark indices
(passively managed funds).
70

Use of Equity Derivatives for Portfolio Risk Management:

An equity portfolio manager is always exposed to the risk that market prices
of equities will decline, causing his fund NAV to drop. Until recently, a fund
manager in India had no option but to sell his stocks, if he expected a fall in
market prices. Since the year 2000, however, equity portfolio managers have
instruments available to them, which permit them to reduce the loss in
portfolio value, without selling the stocks in the cash markets.

Equity Derivatives instruments are specially designed contracts that are
traded separately on an exchange, but derive their value from the underlying
equity asset. such derivative contract may be based on individual
share/scripts, or on a given market index. the two basic types of exchange
traded derivative instruments are Futures and Options. a futures contract
allows one to buy or sell the underlying asset at a specified future date, but
being a traded instrument, the contract can be liquidated without reaching its
maturity date and so without taking or giving delivery of the underlying
asset.

Options contracts are available on both the market index and the individual
shares. a futures contracts is an outright purchase for a future date, whereas
an options contract gives its holder the right to buy or sell the Nifty or
Sensex index or the individual scrip for a future delivery at a certain strike
price, but are not obliged to exercise that option, if the price does not move
in the direction you expected. you would pay a premium for the acquisition
of this right.


71

How does a fund manager use these futures and options contracts as a
risk management instruments?

Broadly, if a funds manager holds an equity portfolio and expects the market
to decline, he can sell the index futures at the current price for future
delivery. if the market did decline, his equity portfolio value will come
down, but his futures contract will show corresponding profit, since he had
sold it at the higher past price. this is called hedging portfolio risk. in this
case, the fund manager would not have any loss due to market decline.
however, contrary to the expectations, if the market prices actually rose, our
fund manager will not gain. the rise in his equity portfolio value will be
neutralized by the loss on his futures position, since he had sold futures at
lower price relative to the current market levels.

Options, too, can be used to hedge an investment portfolio by buying put
options (or options to sell underlying asset) at a price (the premium). The
funds manager can exercise the option only if the prices fall, since he has the
right to sell at a higher price. he can forgo the premium and not exercise the
option, if the prices actually rise. This way he can still let his portfolio NAV,
while protecting the downside risk.


72

Successful Equity Portfolio Management:
Portfolio Management skills are innate in nature and strong intuitive traits
from the portfolio manager. Nevertheless, there are certain principles of
good equity management that any portfolio manager can follow to improve
his performance.
Set realistic target returns based on appropriate benchmarks.
Be aware of the level of flexibility available while managing the
portfolio.
Decide on appropriate investment philosophy, i.e., whether to
capitalize on economic cycles, or to focus on the growth sectors or
finding the value stocks.
Develop an investment strategy based on the investment objective, the
time frame for the investment and economic expectations over this
period.
Avoid over diversification. although diversification is a major
strength of mutual funds, the portfolio manager must avoid the
temptation to invest into very large number of securities so as to
maintain focus and facilitate sound tracking.
Develop a flexible approach to investing. Markets are dynamic and it
is impossible to buy stocks for all seasons
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Portfolio of ICICI Prudential Balanced Growth
Table 1














ICICI Prudential Balanced - Growth
Portfolio as on Jul 31, 2009
Company
Name
Instrument Rating No. of
Debentures
Market
Value
(Rs. in
crores)
Percentage
of Net
Assets
6.9 GOI 2019
Securities Sovereign 36.55 13.65
Steel
Authority of
India Ltd Bond AAA 14.37 5.37
Punjab
National
Bank Bond AAA 14.02 5.24
8.24
GOI 2027 Securities Sovereign 10.11 3.78
Industrial
Development
Bank of India
Ltd Bond AA+ 5.95 2.22
74

Table 2
EQUITY*
Company Name Instrument No. of
Shares
Market
Value
(Rs. in
crores)
% of
Net
Assets
ITC Ltd Equity 421315 10.50 3.92
Reliance Industries Ltd Equity 53367 10.44 3.9
Larsen & Toubro Limited Equity 63122 9.51 3.55
HDFC Bank Ltd Equity 60049 9.00 3.36
NTPC Limited. Equity 372645 8.03 3
Grasim Industries Ltd Equity 29056 7.97 2.98
Bharat Heavy Electricals Ltd Equity 35255 7.86 2.94
Nifty Equity 7.63 2.85
Sterlite Industries (India)
Ltd Equity 110545 7.13 2.66
Tata Steel Ltd. Equity 145282 6.72 2.51
Bharti Airtel Ltd Equity 161747 6.63 2.48
ICICI BANK LTD. Equity 87169 6.61 2.47
Hindustan Unilever Ltd Equity 193708 5.65 2.11
Hero Honda Motors Ltd Equity 33901 5.44 2.03
Tata Consultancy Services
Ltd. Equity 96632 5.08 1.9
Hindustan Petroleum
Corporation Ltd Equity 140438 4.90 1.83
State Bank of India Equity 24546 4.45 1.66
Bharat Petroleum
Corporation Ltd Equity 87169 4.13 1.54
Mahindra & Mahindra Ltd Equity 44552 3.83 1.43
Infosys Technologies Ltd Equity 18015 3.72 1.39


Table 3
OTHERS
Company Name Instrument Market
Value (Rs.
in crores)
% of Net
Assets
Cash Cash 6.8522 2.56
Current Assets
Current Assets 5.6462 2.11
ICICI BANK LTD. CD 5.5042 2.06
75

Debt Portfolio Management:
Debt portfolio management has to contend with the construction and
management of portfolio of debt instruments, with the primary objective of
generating income. Just as the equity fund manager has to identify suitable
stocks from a larger universe of equity shares, a debt fund manager has to
select from a whole universe of debt securities he wants to invest in.

Debt schemes of a mutual fund have a short maturity period, generally up to
one year. nevertheless, some schemes regarded as debt schemes do have
maturity period a little longer than a year, say, eighteen months. thus in the
context of debt mutual funds, depending upon the maturity period of the
scheme, the funds managers invest more in market-traded instruments
or the debt securities. the difference in market-traded instruments and
debt securities is that the former matures before one year and the later after a
year.

Instruments in Indian Debt Market:
The objective of a debt fund is to provide investors with a stable income
stream. Hence, a debt fund invests mainly in instruments that yield a fixed
rate of return and where the principal is secure. The debt market in India
offers the following instruments for investment by mutual funds.
Certificate of Deposit:
Certificate of Deposits (CD) are issued by scheduled commercial banks
excluding regional rural banks. these are unsecured negotiable promissory
notes. bank CDs have a maturity period of 91 days to one year, while those
issued by financial institutions have maturities between one and three years.
Commercial Paper:
Commercial Paper (CP) is a short term, unsecured instrument issued by
corporate bodies (public and private) to meet short term working capital
76

needs. maturity varies between 3 months and 1 year. this instrument can be
issued to the individuals, banks, companies and other corporate bodies
registered or incorporated in India. CPs can be issued to NRIs on non
repatriable and non transferable basis.
Corporate Debentures:
Debentures are issued by manufacturing companies with physical assets, as
secured instruments, in the form of certificates. They are assigned credit
rating by the rating agencies. All publicly issued debentures are listed on the
exchanges.
Floating Rate Bond (FRB):
These are short to medium term interest bearing instruments issued by
financial intermediaries and corporations. The typical maturity is of these
bonds is 3 to 5 years. FRBs issued by the financial institutions are generally
unsecured while those form private corporations are secured.
Government Securities:
These are medium to long term interest bearing obligations issued through
the RBI by the Government of India and state governments.
Treasury Bills.
T-bills are short term obligations issued through the RBI by the Government
of India at a discount. The RBI issues T-bills for tenures: now 91 days and
364 days. These treasury bills are issued through an auction procedure. The
yield is determined on the basis of bids tendered and accepted.
Public Sector Undertakings (PSU) Bonds:
PSU are medium and long term obligations issued by public sector
companies in which the government share holding is generally greater than
51%. Some PSU Bonds carry tax exemptions. The minimum maturity is 5
years for taxable bonds and 7 years for tax-free bonds. PSU bonds are
generally not guaranteed by the government and are in the form of
promissory notes transferable by endorsement and delivery.
77

Debt Investment Strategies An Aid for Debt Portfolio Management:

Let us have a look at some debt investment strategies adopted by the debt
portfolio managers.

Buy and Hold:
Historically, in India, UTI and many of the other mutual funds tended to
invest in high yielding debt securities that gave adequate returns on the
overall portfolio. The returns are considered sufficient to reward the
investors. Therefore, the funds would just encash the coupons and hold the
bonds until maturity. These fund managers will tend to avoid bond with call
provisions, to counter the prepayment risk. It has to be understood the
strategy holds good as long as the general interest rate level are stable. if
yields rise, the price of bonds will fall. Hence, while the fund may generate
sufficient current income according to original target, it will incur a capital
loss on its portfolio as and when revalued to current market price. Another
risk on the portfolio, particularly if its maturities are long, is the risk of
default by the issuer.

Duration Management:
If Buy and Hold is like Passive Fund Management, Duration Management is
like Active Fund Management. This strategy involves altering the average
duration of bonds in a portfolio depending upon the fund managers
expectations regarding the direction of interest rates. If bond yields are
expected to fall, the fund manager would buy the bonds with longer duration
and sell bonds with shorter duration, until the funds average duration
becomes longer than the markets average duration. based as the strategy is
on interest rate anticipations, it is akin to the Market Timing Strategy for
equity investments.
78


Credit Selection:
Some debt managers look to investing in a bond in anticipation of changes
on ots credit rating. an upgrade of a bonds credit rating would lend to
increase in its price, thereby leading to a superior return. the fund would
need to analyze the bonds credit quality so as to implement this strategy.
Usually, debt funds will specify the proportion of assets they will hold in
instruments of different credit quality/ratings, and hold these proportions.
Active credit selection strategy would imply frequent trading of bonds in
anticipation of changes in ratings. While being an active risk management
strategy, it does not take away the interest rate, prepayment or credit risks
that are faced by any debt fund.

Prepayment Prediction:
As noted earlier some bonds allow the issuers the option to call for
redemption before maturity. a fund which holds bonds with this provision is
exposed to the risk of high yielding bonds being called back before maturity
when interest rates decline. The fund manager would therefore strive to hold
bonds with low prepayment risk relative to yield spread or try to predict the
course of the interest rates and decide what the prepayment is likely to be,
and then increase or decrease his exposure. In any case, the risks faced by
such fund managers are the same as any other. What matters at the end is the
yield performance obtained by the fund manager.






79

Interest Rates and Debt Portfolio Management:
No matter which investment strategy is followed by a debt fund manager,
debt securities are always exposed to interest rate risk, as their price is
directly dependent on them. While they may yield fixed rates of returns, their
market values are dependent on interest rate movements, which in turn affect
the performance of fund portfolio of which they are a part. Hence, it is
essential to understand the factors that affect the interest rates. While this is
an intricate subject in itself, we have summarized below some key elements
that have a bearing on interest rate movements:

Inflation: simply put, inflation is the percentage by which prices of goods
and services in the economy increase over a period of time. This increase
may be on account of factors arising within the country change in
production levels, mechanisms for distribution of goods, etc, and/or on
account of changes in the countrys external balance of payments position. In
India, inflation is generally measured by the Wholesale Price Index although
the Consumer Price Index is also tracked. When the inflation rate rises,
money becomes dearer, leading to an increase in the general level of interest
rates.
Exchange Rate: A key factor in determining exchange rates between any
two currencies is their relative purchasing power. Over a period, the relative
purchasing power between two currencies may change based on the
performance of the respective economies. The consequent change in
exchange rates can affect interest rate levels in the country.

Policies of the Central Bank: The central bank is the apex authority for
regulation of the monetary system in a country. In India, this role is played
by the Reserve Bank. The RBIs policies have a strong bearing on interest
rate levels in the economy. If the RBI wishes to curb excess liquidity in a
80

monetary system, it could impose a higher liquidity ratio on banks and
institutions. This would restrict credit leading to an increase in interest rates.
Similarly, and increase in RBIs bank rate has the effect of increasing
interest rate levels. RBI may also undertake open operations in Treasury
Bills and Government securities with the intention of restricting / relaxing
liquidity, thereby impacting the interest rates.

Use of Derivatives for Debt Portfolio Management:
As explained above, a debt portfolio is always exposed to the interest rate
risk. Hence, derivatives contracts can be used to reduce or alter the risk
profile of the portfolios containing debt instruments. Interest rate derivatives
contracts can be exchange traded or privately traded (on the OTC market).
Thus, a portfolio manager can sell interest rate futures or buy interest rate
put options, usually on an exchange, to protect the value of his debt
portfolio. He can also buy or sell forward contracts or swaps bilaterally with
other market players on OTC market. In India, interest rate swaps and
forward rate agreements were introduced in 1999, though the market for
these contracts has not yet fully developed. In 2004, the National Stock
Exchange has introduced futures on Interest Rates. Interest rate options are
not yet available for trading on exchange.

81

What are Exchange Traded Funds?


ETFs represent shares of ownership in either fund, unit investment trusts, or
depository receipts that hold portfolios of common stocks which closely
track the performance and dividend yield of specific indexes, either broad
market, sector or international. ETFs give investors the opportunity to buy or
sell an entire portfolio of stocks in a single security, as easily as buying or
selling a share of stock. They offer a wide range of investment opportunities.
While similar to an index mutual fund, ETFs differ from mutual funds in
significant ways. Unlike Index mutual funds, ETFs are priced and can be
bought and sold throughout the trading day. Furthermore, ETFs can be sold
short and bought on margin.

Have you ever wished you could buy every stock represented in a high
profile index such as the NSE Nifty, or the BSE Sensex but the cost of
buying each stock represented in such an index was prohibitive?

Now, single securities, known as Exchange Traded Funds (ETF), can
track the performance of a growing number of different index funds
(currently the NSE Nifty). Most ETFs represent a portfolio of stocks
designed to track one specific index. ETFs can be bought and sold exactly
like a stock of an individual company during the entire trading day.
Furthermore, they can be bought on margin, sold short or bought at limit
prices. Exchange traded funds can help investors build a diversified portfolio
thats easy to track.

Exchange Traded Funds (ETFs) have been in existence in India for quite
some time now. Apart from Benchmark AMC, which specializes in ETFs,
there have been a couple of ETFs from Prudential ICICI AMC and UTI
82

AMC. But so far ETFs have not enjoyed the kind of popularity that the
conventional Mutual Funds enjoy.
One reason could be the lack of understanding of the concept of ETF
amongst the general investor.
Second, and probably the more important reason, is that ETFs by nature
track a certain index (e.g. Nifty or the Bankex). Hence, the returns one can
expect from ETFs will be equal to the rise in the index. Whereas, India is a
growing market and hence offers huge opportunities in the non-index shares
too. Therefore, it is not difficult for an active fund manager to beat the index
and offer better returns. As such ETFs (and index-funds too, by that logic)
have comparatively negligible AUMs.
Two things could, however, make ETFs popular in India
One, of course, is that as market valuations become fairly or over-
valued, it will become more & more difficult to beat the index. Then
index-based funds (both conventional MFs & ETFs) may become a
better option than actively-managed funds
Gold ETFs or Real-Estate ETFs have no comparable product in the
conventional MF sector, and hence become the only MF route to
invest in such markets.
Heres an interesting live example about 1-2 years ago the banking sector
was not very popular. But with the rise in interest rates and the general
economic growth, bank stocks were becoming quite popular. As a result the
only banking index fund viz. Benchmark AMCs the Banking BeES (there
are few banking sector funds but not bank-index funds) saw a jump of AUM
from about Rs.370 crores in June 2005 to almost Rs.7,400 crores by
December 2006. This makes it the largest MF scheme, much higher than
about Rs.5000 crores Reliance Equity Fund.


83


How does an ETF work?

In a normal fund we buy/sell units directly from/to the AMC. First the
money is collected from the investors to form the corpus. The fund manager
then uses this corpus to build and manage the appropriate portfolio. When
you want to redeem your units, a part of the portfolio is sold and you get
paid for your units. The units in a conventional MF are, therefore, called in-
cash units.
But in ETF, we have something called the authorized participants
(appointed by the AMC). They will first deposit all the shares that comprise
the index (or the gold in case of Gold ETF) with the AMC and receive what
is called the creation units from the AMC. Since these units are created by
depositing underlying shares/gold, they are called in-kind units.

Benefits and Limitations of ETF

Benefits of investing in ETFs
Convenient to trade as it can be bought/sold on the stock exchange at
any time of the day when the market is open (index funds can be
bought only at NAV based on closing prices)
One can short sell an ETF or buy on margin or even purchase one unit,
which is not possible with index-funds/conventional MFs
ETFs are passively managed, have low distribution costs and minimal
administrative charges. Hence most ETFs have lower expense ratios
than conventional MFs
Not dependent on the fund manager
Like an index fund, they are very transparent

84


Disadvantages of investing in ETFs
SIP in ETF is not convenient as you have to place a fresh order every
month
Also SIP may prove expensive as compared to a no-load, low-expense
index funds as you have to pay brokerage every time you buy & sell
Because ETFs are conveniently tradable, people tend to trade more in
ETFs as compared to conventional funds. This unnecessarily pushes
up the costs.
You cannot automatically re-invest your dividends. Secondly, you
may have to pay brokerage to reinvest dividends in ETF, whereas
dividend reinvestment in MFs is automatic and with no entry-load
Comparatively lower liquidity as the market has still not caught up on
the concept.

It may, therefore, be concluded that if an investor is looking for a long-term
and defensive investment strategy in equities by backing the index rather
than looking at active management, ETF offers an alternative to index-based
funds. It offers trading convenience & probably lower costs than index
funds. A case-to-case comparison is, however, important as some index-
funds may be cheaper. Also for SIPs, index-funds may prove better than
ETFs.
However, in the absence of conventional MFs like in Gold, ETFs is but a
natural and better choice than buying/selling physical gold.

85

Categories of ETFs
1. Stock ETFs



2. Bond ETFs
3. Commodity ETFs
Agriculture/Crop Price ETFs
Currency ETFs
Energy ETFs
Precious Metals ETFs
Real Estate ETFs-REITs



By Investment Strategy
Bearish ETFs
Ethical ETFs
Growth Stock ETFs
High-Dividend
ETFs
Leveraged ETFs
Sector Rotation
Value Line ETFs
Value Stock ETFs
By Investment
Style
Large Cap
Stocks
Mid Cap
Stocks
Small Cap
Stocks
Micro Cap
Stocks

By Industry
Aerospace & Defense
Biotechnology
Construction
Consumer Goods &
Services
Financial Services
Health Care
Industrials
Internet
Media
Metals & Mining
Oil & Gas
Pharmaceuticals
Real Estate
Retail
Semiconductors
Software
Telecommunications
Transportation
Utilities
By Region
-Indian
Stocks
-Global
Markets

86



Comparison of ETF with Mutual Fund
ETF Comparison - While similar to an index mutual fund, ETFs differ from
mutual funds in significant ways.

Attribute ETF
Index
Mutual
Fund
Individual
Stock
Diversification Yes Yes No
Traded throughout the day Yes No Yes
Can be bought on margin Yes No Yes
Can be sold short Yes No Yes
Tracks an index or sector Yes Yes No
Tax efficient as turnover is
low
Yes Possibly No
Low Expense Ratio Yes Sometimes Not a factor
Trade at any brokerage firm Yes No Yes



87

Top Performers

Top Performers as on ( 10/08/2009 )
Rank Scheme Name
Top 3 Liquid Schemes (1 Mth) % Returns
1 Sahara Liquid Fund - VP - Growth 0.5274
2 Sahara Liquid Fund - Fixed Pricing Option - G 0.5254
3 LIC MF Liquid Fund - Growth 0.4375

Top 3 Floating Rate Schemes (1 Mth) % Returns
1 Templeton FRIF - Long Term - Super IP - Groth 0.5831
2 ICICI Prudential LT FRF - Plan C - Growth 0.5746
3 Birla Sun Life Floating Rate Fund - LTP - Growth 0.5711

Top 3 Short Term Income Schemes (1 Mth) % Returns
1 PRINCIPAL Income Fund - STP - Growth 0.6553
2 Templeton India STIP - Growth 0.5763
3 LIC MF Savings Plus Fund - Growth 0.4599

Top 3 Income Schemes (1 Yr) % Returns
1 Canara Robeco Income Scheme - Growth 26.4648
2 ICICI Prudential Income Fund -Growth 24.4898
3 Fortis Flexi Debt Fund - Growth 19.8424

Top 3 Tax Schemes (1 Yr) % Returns
1 Sahara Taxgain - Growth 15.3153
2 Sundaram BNP Paribas Taxsaver - (Open En 11.7922
3 HDFC Taxsaver - Growth 9.9382

Top 3 Equity Schemes (1 Yr) % Returns
1 Tata Life Sciences and Technology Fund - Ap 29.4581
2 JM Mid Cap Fund - Growth 0.4599
3 Sundaram BNP Paribas Financial Services Op 26.4648


Top 3 Balanced Schemes (1 Yr) % Returns
1 Reliance RSF - Balanced - Growth 23.6347
2 Birla Sun Life 95 - Growth 19.1215
3 HDFC Prudence Fund - Growth 17.4833


Top 3 MIP Schemes (1 Yr) % Returns
1 Reliance MIP - Growth 26.1132
2 Birla Sun Life MIP - Savings 5 - Growth 20.8864
3 HDFC MIP - LTP - Growth 15.3153
Source: www.mutualfundindia.com
88

Performance of Funds under different Schemes

1. Equity- Diversified --- TOP 20 SCHEMES
S
No
Scheme Name
NAV as on
10-9-2009
Return (%)
1 Birla Sun Life Asset Allocation
Aggressive
23.73 -11.34
2 UTI Dividend Yield 21.24 -14.36
3 FT India Life Stage FoF 20s 27.74 -14.38
4 Templeton India Growth 92.24 -15.08
5 HSBC Equity 95.9 -15.13
6 ICICI Prudential Advisor-Very
Aggressive
29.49 -15.32
7 Sundaram BNP Paribas Select
Focus Reg
83.18 -15.58
8 ICICI Prudential Dynamic 79.06 -15.62
9 Tata Pure Equity 79.14 -15.83
10 DSPML Top 100 Equity Regular 77.51 -15.83
11 Sundaram BNP Paribas India
Leadership Regular
37.6 -16.28
12 DSPML Equity 46.72 -16.33
13 Baroda Pioneer Growth 43.29 -16.56
14 HDFC Top 200 143.02 -16.61
15 ICICI Prudential Growth 111.17 -16.67
16 UTI Equity 40.94 -16.82
17 HDFC Capital Builder 79.41 -16.89
18 Sundaram BNP Paribas Growth
Regular
88.52 -16.99
19 HSBC India Opportunities 33.99 -17.02
20 Sahara Growth 67.16 -17.04
Source: www.valueresearchonline.com
2. Equity - Sector wise
Auto
S No Scheme Name
NAV as on
10-9-2009
Return
(%)
1 UTI Thematic Transportation and
Logistics Fund - Growth
15.01 -16.79
Source: www.valueresearchonline.com
89

Sector Funds - Banking And Financial Services
S
No
Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 Sundaram BNP Paribas Financial
Services Opportunities Fund - Ret -
Growth
13.0571 -21.87
2 Reliance Banking Fund - Growth 61.6074 -26.37
3 UTI Thematic Banking Sector Fund -
Growth
26.98 -26.66
4 Religare Banking Fund - Reg - Growth 12.47 -16.33
5 JM Financial Services Sector Fund -
Growth
8.1379 -16.56
6 Sahara Banking and Financial Services
Fund - Growth
18.9971 -16.61
7 ICICI Prudential Banking and Financial
Services Fund - Retail - Growth
12.19 -16.67
8 Sundaram BNP Paribas Financial
Services Opportunities Fund - Ret -
Growth
13.0571 -21.87
9 Reliance Banking Fund - Growth 61.6074 -26.37
10 UTI Thematic Banking Sector Fund -
Growth
26.98 -26.66
Source: www.valueresearchonline.com
Pharma
S No Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 UTI Pharma & Healthcare 23.74 -3.38
2 Franklin Pharma 29.26 -4.38
3 JM Healthcare Sector 19.55 -5.31
4 Magnum Pharma 32.34 -5.72
5 Reliance Pharma 24.38 -6.64
Source: www.valueresearchonline.com




90

Technology
S
No
Scheme Name
NAV as on
10-9-2009
Return
(%)
1 Tata Life Sciences and Technology Fund -
Appr
51.8386 -3.5
2 Franklin Infotech Fund - Growth 41.2342 -9.47
3 DSP BlackRock Technology.com Fund -
Reg - Growth
23.839 -11.64
4 Birla Sun Life New Millennium - Growth 15.24 -11.97
5 ICICI Prudential Technology Fund -
Growth
10.64 -12.75
6 Birla Sun Life New Millennium 19.54 -13.25
7 Kotak Tech 8.31 -15.57
Source: www.valueresearchonline.com
FMCG
S No Scheme Name
NAV as on
10-9-2009
Return
(%)
1 Franklin FMCG Fund - Growth 43.213 -13.87
2 Birla Sun Life Buy India Fund - Growth 29.09 -14.74
3 ICICI Prudential FMCG - Growth 44.12 -21.1
Source: www.valueresearchonline.com

91


INDEX
S No Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 HDFC Index Fund - Sensex Plus Plan 172.4173 -17.97
2 LIC MF Index Fund - Sensex Advantage
Plan - Growth
27.0414 -18.48
3 ICICI Prudential Index Fund 41.5183 -19.01
4 Franklin India Index Fund - BSE Sensex
Plan - Growth
42.6929 -19.02
5 Canara Robeco Nifty Index - Growth 23.79 -19.07
6 UTI Master Index Fund - Growth 46.9068 -19.11
7 Birla Sun Life Index Fund - Growth 44.8178 -19.13
8 SBI Magnum Index Fund - Growth 38.3151 -19.17
9 ING Nifty Plus Fund - Growth 22.32 -19.18
10 Tata Index Fund - Sensex Plan - Option A 37.1323 -19.22
11 Franklin India Index Fund - NSE Nifty
Plan - Growth
35.2775 -19.3
12 UTI Nifty Fund - Growth 28.0988 -19.3
13 HDFC Index Fund - Nifty Plan 39.4545 -19.39
14 Tata Index Fund - Nifty Plan - Option A 26.7885 -19.41
15 PRINCIPAL Index Fund - Growth 30.7221 -19.67
16 HDFC Index Fund - Sensex Plan 127.1025 -20.25
17 LIC MF Index Fund - Sensex Plan -
Growth
28.2869 -20.34
18 LIC MF Index Fund - Nifty Plan - Growth 25.0619 -24.72
19 Benchmark S&P CNX 500 Fund -
Growth
15.9854 -26.58
20 JM Nifty Plus Fund - Growth 14.9134 -28.79
21 HDFC Index Fund - Sensex Plus Plan 172.4173 -28.94
22 LIC MF Index Fund - Sensex Advantage
Plan - Growth
27.0414 -29.05
Source: www.valueresearchonline.com


92

3. Equity- Tax Savings (ELSS)
S
No
Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 Sahara Taxgain - Growth 27.459 -7.19
2 Sundaram BNP Paribas Taxsaver - (Open
Ended Fund) - Growth
36.065 -7.57
3 HDFC Taxsaver - Growth 157.506 -13.73
4 HSBC Tax Saver Equity Fund - Growth 11.1412 -14.37
5 Taurus Taxshield - Growth 27.16 -15.35
6 Franklin India Taxshield - Growth 147.6045 -15.41
7 Birla Sun Life Tax Relief 96 - Growth 8.82 -15.54
8 ICICI Prudential Taxplan - Growth 94.16 -16.13
9 HDFC Long Term Advantage Fund -
Growth
96.653 -17.19
10 Tata Tax Saving Fund 42.2639 -17.21
11 SBI Magnum Tax Gain Scheme 93 -
Growth
47.79 -17.28
12 DSP BlackRock Tax Saver Fund -
Growth
12.374 -17.62
13 LIC Tax Plan - Growth 24.8285 -17.74
14 Franklin India Index Tax Fund 34.589 -17.85
15 Birla Sun Life Tax Plan - Growth 10.8 -17.95
16 Baroda Pioneer ELSS 96 20.99 -18.11
17 UTI Equity Tax Savings Plan - Growth 30.98 -18.2
18 Principal Personal Taxsaver 75.17 -18.6
19 DWS Tax Saving Fund - Growth 10.9169 -18.61
20 ING Tax Saving Fund - Growth 21.03 -19.06
21 PRINCIPAL Tax Savings Fund 61.03 -19.09
22 Escorts Tax Plan - Growth 39.146 -19.13
23 Sahara Taxgain - Growth 27.459 -19.21
24 Sundaram BNP Paribas Taxsaver - (Open
Ended Fund) - Growth
36.065 -19.25
25 HDFC Taxsaver - Growth 157.506 -19.39
26 HSBC Tax Saver Equity Fund - Growth 11.1412 -19.57
27 Taurus Taxshield - Growth 27.16 -19.75
28 Franklin India Taxshield - Growth 147.6045 -19.89
29 Birla Sun Life Tax Relief 96 - Growth 8.82 -20.28
30 ICICI Prudential Taxplan - Growth 94.16 -20.51
Source: www.valueresearchonline.com

93

4. Gilt Funds:
Medium & Long Term
S
No
Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 ICICI Prudential GFIP - PF Option -
Growth
18.1734 6.99
2 ICICI Prudential GFIP - Growth 31.4846 1.42
3 JM G Sec Regular Plan - Growth 28.911 1.01
4 DSP BlackRock Government Securities
Fund - Growth
31.2134 0.96
5 Birla Sun Life G Sec Fund - LT - Growth 24.7297 0.9
6 Escorts Gilt Plan - Growth 20.2478 0.88
7 Templeton India GSF - LTP - Growth 22.55 0.87
8 Canara Robeco Gilt PGS - Growth 24.9591 0.82
9 Templeton India GSF - Composite Plan -
Growth
32.3641 0.8
10 Templeton India GSF - PF Plan - Growth 14.2151 0
Source: www.valueresearchonline.com

Gilt Funds: Short Term
S
No
Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 ICICI Prudential GFTP - Growth 23.8234 1.25
2 ICICI Prudential GFTP - PF Option -
Growth
15.0534 1.25
3 Tata G S S M F - Growth 14.6467 1.19
4 SBI Magnum Gilt STP - Growth 18.1405 1.14
5 UTI G-Sec Fund - STP - Growth 13.4903 1.14
6 HDFC Gilt Fund - S T P - Growth 15.4847 1.13
7 Templeton India GSF - Treasury Plan -
Growth
16.0203 1.04
8 Kotak Gilt - Savings Plan - Growth 20.8531 1.01
9 Birla Sun Life G Sec Fund - STD -
Growth
17.7824 1.01
10 DSP BlackRock Treasury Bill Fund -
Growth
19.1569 1
Source: www.valueresearchonline.com
94



5. Debt - Liquid/Money Market Funds

Sr
No
Scheme Name
NAV as on 10-9-
2009
Return
(%)
1 Sahara Liquid Fund - VP - Growth 1630.9557 1.85
2 Sahara Liquid Fund - Fixed Pricing
Option - Growth
1618.8213 1.78
3 LIC MF Liquid Fund - Growth 16.3907 1.77
4 IDFC Liquid Fund - Plan D - Growth 10.1063 1.75
5 Reliance Liquid Fund - TP - Retail -
Growth
21.5132 1.74
6 Reliance Liquidity Fund - Growth 13.4975 1.73
7 UTI Money Market - Ret - Growth 25.0948 1.72
8 HDFC Cash Mgmt Fund - Savings
Plan - Growth
18.7277 1.7
9 PRINCIPAL Floating Rate Fund -
SMP - Growth
13.9821 1.69
10 HDFC Liquid Fund - Growth 17.7791 1.68
11 DWS Insta Cash Plus Fund - Growth 15.0434 1.68
12 IDFC Liquidity Manager Fund -
Growth
12.3183 1.68
13 JM High Liquidity - Growth 24.4847 1.67
14 UTI Liquid Fund - Cash Plan -
Growth
1456.8031 1.66
15 Templeton India TMA - Growth 2215.8161 1.6
Source: www.valueresearchonline.com



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6. Debt Medium Term
S
No
Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 ICICI Prudential Long-term 17.08 1.98
2 Tata Dynamic Bond A 13.19 1.79
3 ICICI Prudential Flexible Income 15.03 1.74
4 Sahara Income 14.34 1.73
5 Birla Sun Life Dynamic Bond Retail 12.79 1.72
6 ING OptiMix Active Debt Multi
Manager FoF
11.02 1.69
7 Kotak Flexi Debt Regular 12.73 1.67
8 ICICI Prudential Advisor-Very
Cautious
12.99 1.61
9 Canara Robeco Income 14.35 1.47
10 Reliance Regular Savings Debt 11.14 1.34
11 Escorts Income 24.71 1.24
12 Reliance Medium Term 16.88 1.08
13 Taurus Libra Bond 14.82 1.08
14 ING Income 20.35 1.07
15 Baroda Pioneer Income 13.32 1.03
16 Tata Income Plus 13.27 0.99
17 Tata Income Plus HI 13.31 0.96
18 ABN AMRO Flexi Debt Reg 12.74 0.88
19 IDFC SSI Medium-term 12.88 0.69
20 Templeton India Income 27.73 0.58
Source: www.valueresearchonline.com

96


7. Liquid Funds
S
No
Scheme Name
NAV as
on 10-9-
2009
Return
(%)
1 Sahara Liquid Fund - VP - Growth 1630.9557 1.98
2 Sahara Liquid Fund - Fixed Pricing
Option - Growth
1618.8213 1.79
3 LIC MF Liquid Fund - Growth 16.3907 1.74
4 IDFC Liquid Fund - Plan D - Growth 10.1063 1.73
5 Reliance Liquid Fund - TP - Retail -
Growth
21.5132 1.72
6 Reliance Liquidity Fund - Growth 13.4975 1.69
7 UTI Money Market - Ret - Growth 25.0948 1.67
8 HDFC Cash Mgmt Fund - Savings
Plan - Growth
18.7277 1.61
9 PRINCIPAL Floating Rate Fund -
SMP - Growth
13.9821 1.47
10 HDFC Liquid Fund - Growth 17.7791 1.34
11 DWS Insta Cash Plus Fund - Growth 15.0434 1.24
12 IDFC Liquidity Manager Fund -
Growth
12.3183 1.08
13 JM High Liquidity - Growth 24.4847 1.08
14 UTI Liquid Fund - Cash Plan -
Growth
1456.8031 1.07
15 Templeton India TMA - Growth 2215.8161 1.03
16 Birla Sun Life Cash Manager -
Growth
21.902 0.99
17 IDFC Liquid Fund - Growth 1261.5357 0.96
18 Escorts Liquid Plan - Growth 13.3942 0.88
19 Canara Robeco Liquid - Growth 16.3215 0.69
20 AIG India Liquid Fund - Ret -
Growth
1149.1781 0.58
Source: www.valueresearchonline.com


97


THE INVESTORS RIGHTS & OBLIGATIONS
Some of the Rights and Obligations of investors are :-

Investors are mutual, beneficial and proportional owners of the
schemes assets. The investments are held by the trust in fiduciary
capacity (The fiduciary duty is a legal relationship of confidence or
trust between two or more parties).

In case of dividend declaration, investors have a right to receive the
dividend within 30 days of declaration.

On redemption request by investors, the AMC must dispatch the
redemption proceeds within 10 working days of the request. In case
the AMC fails to do so, it has to pay an interest @ 15%. This rate may
change from time to time subject to regulations.

In case the investor fails to claim the redemption proceeds
immediately, then the applicable NAV depends upon when the
investor claims the redemption proceeds.

Investors can obtain relevant information from the trustees and inspect
documents like trust deed, investment management agreement, annual
reports, offer documents, etc. They must receive audited annual
reports within 6 months from the financial year end.



98

Investors can wind up a scheme or even terminate the AMC if unit
holders representing 75% of schemes assets pass a resolution to that
respect.

Investors have a right to be informed about changes in the
fundamental attributes of a scheme. Fundamental attributes include
type of scheme, investment objectives and policies and terms of issue.

Lastly, investors can approach the investor relations officer for
grievance redressal. In case the investor does not get appropriate
solution, he can approach the investor grievance cell of SEBI.
Theinvestor can also sue the trustees.

The offer document is a legal document and it is the investors obligation to
read the OD carefully before investing. The OD contains all the material
information that the investor would require to make an informed decision. It
contains the risk factors, dividend policy, investment objective, expenses
expected to be incurred by the proposed scheme, fund managers experience,
historical performance of other schemes of the fund and a lot of other vital
information.

It is not mandatory for the fund house to distribute the OD with each
application form but if the investor asks for it, the fund house has to give it
to the investor. However, an abridged version of the OD, known as the Key
Information Memorandum (KIM) has to be provided with the application
form.

99


CONCLUSION

With the reference of my this work I can say that mutual fund is
the one of the best investment option for investing in money market there
are different types of mutual fund like open ended and close ended with
different scheme like Growth fund, Income fund, Diversified fund, etc there
are about thousand of mutual fund scheme available in the market . but it is
very essential to evaluate a mutual fund scheme with other possible
investment option before investing in a mutual fund . In the project I try to
put light on different fund management style & structure of the scheme .
As a fund manager a person has to decide and forecast the demand
of fund in the market and design a best investment scheme for which
different strategies and approaches regarding fund to be adopted . normally
fund managers are panel of experts it can be beneficial investing in mutual
fund
I put my all possible efforts to complete the project still my
knowledge is like drop in ocean .

I will conclude project with following note :

MUTUAL FUNDS ARE SUBJECT TO MARKET RISKS
PLEASE READ THE OFFER DOCUMENT CAREFULLY
BEFORE INVESTING.

100

References


Websites:

www.valueresearchonline.com
www.mutualfundsindia.com
www.moneycontrol.com
www.nseindia.com
www.economics.indiatimes.com
www.wikepdia.org
www.google.co.in


Books:

Management & Working Of Mutual Fund- L.K.Bansal
Investment Analysis and Portfolio Management Prasanna Chandra

Company Journals & Business Journals,

Fund Factsheet- ICICI Prudential
Fund Factsheet- Canara Robeco Infrastructure-G Fund
Fund Factsheet- Birla Mutual Fund
Fund Factsheet- Reliance Mutual fund