1. MUTUAL FUNDS
THE CONCEPT OF A MUTUAL
FUND: A SUMMARY
A mutual fund is a common pool of money into which investors place their contributions
that are to be invested in accordance with a stated objective. The ownership of the fund is
thus “joint” or “mutual”; the fund belongs to all investors. A single investor’s ownership
of the fund is in the same proportion as the amount of contribution made by him or her,
bears to the total amount of the fund.
A mutual fund uses the money collected from investors to buy those assets, which are
specifically permitted by its stated investment objective. Thus, an equity fund would buy
equity assets – ordinary shares, preference shares, warrants, etc. A bond fund would buy
debt instruments such as debentures, bonds or government securities. It is in these assets,
which are owned by the investors in the same proportion as their contribution bears to the
total contribution of all the investors put together.
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2. MUTUAL FUNDS
When an investor subscribes to a mutual fund, he or she buys a part of the assets
or the pool of funds, which are outstanding at that time. It is no different from buying
“shares” of a joint stock company, in which case the purchase makes the investor a part
owner of the company and it’s assets. In fact, in U.S.A., a mutual fund is constituted as
an investment company and an investor “buys into the fund”, means he buys the shares of
the fund. In India, a mutual fund is constituted as a Trust, and the investor subscribes
to the “units” issued by the fund. In any case, a mutual fund shareholder or a unit
holder is the part owner of the fund’s assets. A unit holder in Unit Trust of India US – 64
Scheme is the same as the UTI – Mastershare – holder or an investor in Alliance or DSP
Merrill Lynch or Prudential – ICICI or Tata or Templeton or SBI or any other fund
manager’s open ended or closed ended schemes.
Since each owner is the part owner of a mutual fund, it is necessary to establish the value
of his part. In other words, each share or unit that an investor holds needs to be assigned a
value. Since the units held by investor evidence the ownership of the funds assets, the
value of the total assets of the fund when divided by the total number of units issued by
the mutual fund gives us the value of one unit. This is generally called the Net Asset
Value (NAV) of one unit or one share. The value of an investor’s part ownership is thus
determined by the NAV of the no. of units held.
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3. MUTUAL FUNDS
HISTORY OF MUTUAL FUNDS IN
INDIA
The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Reserve Bank and the Government of India. The objective
then was to attract the small investors and introduce them to the market investments.
Since then, the history of mutual funds in India can be broadly divided into three distinct
phases.
PHASE I: 1964 – 1987 (UNIT TRUST OF INDIA):
This phase spans from 1964 to 1987. In 1963, UTI was established by an act of
parliament and given a monopoly. Operationally, UTI was set up by Reserve Bank of
India, but was later delinked from the RBI. The first, and still one of the largest scheme,
launched by UTI was Unit Scheme 1964. Over the years, US – 64 attracted, ands
probably still has, the largest number of investors in any single investment scheme. It was
also at least partially the first open – end scheme in the country.
Later in 1970s and 1980s, UTI started innovating and offering different schemes
to suit the needs of different class of investors. Unit Linked Insurance Plan (ULIP) was
launched in 1971. Six new schemes were introduced between 1981 and 1984. During
1984 – 87, new schemes like Children’s Gift Growth Fund (1986) and Master share
(1987) were launched. Master share could be termed as the first diversified equity
investment scheme in India. The first Indian offshore fund, India fund, was launched in
August 1986. During 1990’s, UTI catered to the demands for income-oriented schemes
by launching Monthly Income Schemes, a somewhat unusual mutual fund product
offering, “assured returns”.
The mutual fund industry in India not only started with UTI, but still counts as its
largest player with the largest corpus of investible funds among all mutual funds
currently operating in India. Until 1980s, UTI’s operations in the stock market often
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4. MUTUAL FUNDS
determined the direction of market movements. Foreign and other situational players
have been brought in. so direct influence of UTI on the markets may be less than before,
though it remains largest player in industry. In absolute terms, the investible funds corpus
of even UTI was still relatively small at about Rs.600 crores in 1984.
1987 – 1988
AMOUNT
MOBILISED
(Rs Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OFGROSS DOMESTIC
SAVINGS
UTI
2,175.00 6,700.00 3.1%
TOTAL 2,175.00 6,700.00 3.1%
SOURCE: AMFI WORKBOOK
PHASE II: 1987 – 1993 (Entry of Public Sector Funds):
1987 marked the entry of non – UTI, public sector mutual funds, bringing in
competition. With the opening up of the economy, many public sector banks and
financial institution were allowed to establish mutual funds. The State Bank of India
established the first non – UTI mutual fund – SBI Mutual Fund – in November 1987.
This was followed by Canbank Mutual Fund (launched December 1987), LIC Mutual
Fund (launched in 1989) and Indian Bank Mutual Fund (launched in 1990) followed by
Bank of India Mutual Fund, GIC Mutual Fund and PNB Mutual Fund. These mutual
funds helped enlarge the investor community and the investible funds. From 1987 –
1992/93, the fund industry expanded nearly seven times in turns of assets under
management.
During this period, investors were shifting away from bank deposits to mutual funds, as
they started allocating larger part of their financial assets and savings (5.2%in
1992,3.1%1988) to fund investments. UTI was still the largest segment of the industry,
although with nearly 20% market share ceded to the public sector mutual funds.
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5. MUTUAL FUNDS
1992 – 1993
AMOUNT
MOBILISED
(Rs. Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OF
GROSS DOMESTIC
SAVINGS
UTI
11,057.00 38,247.00 5.2%
PUBLIC
SECTOR
1,964.00 8,757.00 0.9%
TOTAL 13,021.00 47,004.00 6.1%
SOURCE: AMFI WORKBOOK
PHASE III: 1993-1996 (Emergence of Private Sector Funds)
A new era in the mutual funds industry began with the permission granted for the
entry of private sector funds in 1993,giving the Indian investors a broader choice of ‘fund
families’ and increasing competition for the public sector funds. Quite significantly,
foreign fund management companies were also allowed to operate mutual funds, most of
them coming into India through their joint ventures with Indian promoters. These private
funds have brought in with them the latest product innovations, investment management
techniques and investor servicing technology that makes the Indian mutual fund industry
today a vibrant and growing financial intermediary.
During the year1993-94, five private sector mutual funds launched their schemes
followed by six others in 1994-95. Initially the mobilization of funds by the private
mutual funds was slow. But this segment of the fund industry now has been witnessing
much greater investor confidence in them. One influencing factor has been the
development of a SEBI driven regulatory framework for mutual funds. But another
important factor has been the steadily improving performance of several funds
themselves. Investors in India now clearly see the benefits of investing through mutual
funds and have started becoming selective.
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6. MUTUAL FUNDS
The entire mutual fund industry in India, despite initial hiccups, has since scaled
new heights in terms of mobilization of funds and number of players. Deregulation and
liberalization of the Indian economy has introduced competition and provided impetus to
the growth of the industry. Finally, most investors- small or large-have started shifting
towards mutual funds as opposed to banks or direct market investments.
More investor friendly regulatory measures have been taken both by SEBI to protect the
investor, and by the government to enhance investors’ returns through tax benefits. A
comprehensive set of regulations for all mutual funds operating in India has been
accomplished with SEBI (Mutual Fund) regulations, 1996. These regulations set uniform
standards for all funds and eventually be applied in full to Unit Trust of India as well,
even though its own UTI Act governs UTI. Infact, UTI has been voluntarily adopting
SEBI guidelines for most of its schemes. Similarly, the 1999 Union Government Budget
took a big step in exempting all mutual fund dividends from income tax in the hands of
the investors.
The mutual fund industry in 1999 seems to mark the beginning of a new phase in
its history, a phase of significant growth in terms of assets under management.
The size of the industry is growing rapidly, as seen by the figure of assets under
management, which have gone from over 68,000crores to nearly 87,000crores in just one
year. Within the growing industry, by march 1999; UTIs share of mobilization had
decreased to 55%(from 85% in 1992-93), while the share of the private sector stood at
37%. During April to October 1999, the sector accounted for 59% of mobilizations.
Mobilizations during this period of 7 months in fact exceeded the same for the whole of
1998-99.it is also clear that the enhanced share of the private sector is explained not only
by the growing appetite for mutual funds, but also by the growing acceptance of the
private sector funds.
1998 - 1999
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7. MUTUAL FUNDS
AMOUNT
MOBILISED
(Rs. Crores)
ASSETS UNDER
MANAGEMENT
(Rs. Crores)
MOBILISATION AS %
OF
GROSS DOMESTIC
SAVINGS
UTI
11,679.00 53,320.00 2.79%
PUBLIC
SECTOR
1,732.00 8,292.00 0.08%
PRIVATE
SECTOR
7,966.00 6,860.00 1.14%
TOTAL
21,377.00 68,472.00 5.1%
SOURCE: AMFI WORKBOOK
Phase IV : 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.As at the end of March 2007,
there were 30 Mutual Funds, which Managed assets of Rs. 3,26,388 crores under 756
schemes.
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8. MUTUAL FUNDS
The graph indicates the growth of assets over the years.
GROWTH IN ASSETS UNDER MANAGEMENT
Note:
Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of
the Unit Trust of India effective from February 2003. The Assets under management of
the Specified Undertaking of the Unit Trust of India has therefore been excluded from the
total assets of the industry as a whole from February 2003 onwards.
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9. MUTUAL FUNDS
ADVANTAGES AND DISADVANTAGES OF INVESTING THROUGH
MUTUAL FUNDS
If mutual funds are emerging as the favorite investment vehicle, it is because of the
many advantages they have over other forms and avenues of investing, particularly for
the investor who has limited resources available in terms of capital and ability to carry
out detailed research and the market monitoring. In mutual funds individuals can expect
higher returns and lower risk, whereas in other marketable instruments risk is much
higher as fund is invested only in one sector.
While the benefits of investing through mutual funds far outweigh the disadvantages,
an investor and his advisor will do well to be aware of the few shortcomings of using the
mutual funds investment vehicle.
ADVANTAGES of investing through OF MUTUAL FUNDS
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10. MUTUAL FUNDS
Following are the major advantages offered by mutual funds to all investors:
 Portfolio Diversification:
Each investor in the fund is the part owner of all the fund’s assets, thus enabling him to
hold a diversified investment portfolio even with a small amount of investment that
would otherwise require big capital.
 Professional Management:
The investment management skills, along with the needed research into available
investment options, ensure a much better return than what an investor can manage on his
own.
 Reduction / Diversification of Risk:
When an investor invests directly, all the risk of potential loss is his own, whether he
places a deposit with a company or a bank, or buys a share or debenture on his own or in
any other form. While investing in the pool of funds with other investors, the potential
losses are also shared with other investors. This risk reduction is one of the most
important benefits of a collective investment vehicle like the mutual fund.
 Reduction of Transaction Cost:
What is true of risk is also true of the transaction costs. The investor bears all the
costs of investing such as brokerage or custody of securities. When going through mutual
fund, he has the benefit of economies of scale; the funds pay lesser costs due to large
volumes; a benefit passed on to its investors.
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11. MUTUAL FUNDS
 Liquidity:
Often, investors hold shares or bonds they cannot directly, easily or quickly sell.
When they invest in the units of a fund, they can generally cash their investment any
time, by selling their units to the fund if open – ended, or selling them in the market if the
fund is closed – ended. Liquidity on investment is clearly a big benefit.
 Convenience and Flexibility:
Mutual fund management companies offer many investor services that a direct market
investor cannot get. Investors can easily transfer their holdings from one scheme to
another, get updated market information, and so on.
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12. MUTUAL FUNDS
DISADVANTAGES OF INVESTING THROUGH MUTUAL FUNDS
The following are some of the drawbacks of Mutual Funds:
 No Control over Costs:
An investor in a mutual fund has no control over the overall cost of investing. He
pays investment management fees as long as he remains with the fund, albeit in return for
the professional management and research. Fees are payable even while the value of his
investments may be declining. A mutual fund investor also pays fund distribution costs,
which he would not incur in direct investment. However, this shortcoming only means
that there s a cost to obtain the benefits of mutual fund services.
 No Tailor – made Portfolios:
Investors who invest on their own can build their own portfolios of shares and bonds
and other securities. Investing through funds means he has delegates this authority to the
fund managers. The very high – net – worth individuals or large corporate investors may
find this to be a constraint in achieving their objectives. However most mutual fund
managers help investors overcome this constraint by offering families of funds, a large
no. of different schemes, within their own management company. An investor can choose
from different investment plans and construct a portfolio of his own.
 Managing a Portfolio of Funds:
Availability of a large no. of funds can actually mean too much choice for an investor. He
may again need advice on how to select a fund to achieve his objectives, quite similar to
the situation when he has to select individual shares or bonds to invest in.
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13. MUTUAL FUNDS
Structure of mutual funds
 Sponsor:
Sponsor as any person who either itself or in association with another body corporate
establishes a mutual fund. Sponsor is that entity that sets up an mutual fund.He sets
up a mutual fund to earn money by doing fund management. Largely, a sponsor can
be compared to a promoter of a company
 Trustees:
Trustees manage the trust. Trustees are responsible to investors in the mutual
funds. Trustees insure that the activities of the mutual fund are in accordance
SEBI regulations, 1996. Trustees insure that the AMC’s have proper systems and
procedures in place.
 AMC:
An asset management company is the company registered under the companies
act, 1956. Sponsor creates the AMC and this is the entity, which manages the
funds of the mutual fund. The mutual fund pays a small fee to the AMC for
management of its fund. The AMC acts under the provision of trustees and is
subject to the regulation to SEBI
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14. MUTUAL FUNDS
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15. MUTUAL FUNDS
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16. MUTUAL FUNDS
TYPES OF FUNDS
A. By structure
 Open – end Funds:
An open – end fund is one that has units available for sale and repurchase at all times. An
investor can buy or redeem units from the funds itself at a price based on the Net Asset
Value (NAV) per unit. NAV per unit is the market value of the fund’s liabilities divided
by the units outstanding. The number of units outstanding goes up or down every time the
fund issues new units or repurchases existing units. In other words, the “unit capital” of
an open – end mutual fund is not fixed but variable. The fund size and its total investment
amount go up if more new subscriptions come in from new investors than redemptions by
existing investors; the fund shrinks when redemptions of units exceeds fresh
subscriptions.
An open – end fund is not obliged to keep selling/ issuing new units at all times and many
successful funds stop issuing further subscriptions from new investors after they reach a
certain size and think they cannot manage a larger fund without adversely affecting
profitability. On the other hand, an open – end fund rarely denies to its investors the
facility to redeem existing units.
 Close – end Funds:
Unlike an open – end fund, the ‘unit capital’ of a closed – end fund is fixed, as it makes a
one-time sale of fixed number of units. Later on, unlike open – end funds, close – end
funds do not allow investors to buy or redeem units directly from the funds. However, to
provide the much-needed liquidity to investors, many close – end funds get themselves
listed on stock exchange (s). Trading through a stock exchange enables investors to buy
or sell units of a close – end mutual fund from each other, through a stockbroker in the
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17. MUTUAL FUNDS
same fashion as buying or selling shares of a company. The fund units may be traded at a
discount or premium or even at par to the NAV based on the investor’s perception about
the fund’s future performance and other market factors affecting the demand for or
supply of the fund’s units. The number of outstanding units of a closed end fund does not
vary on account of trading in the fund’s units at the stock exchange.
 Load and no-load funds:
Marketing of a new mutual fund scheme involves initial expenses. These may be
recovered from the investors in different ways and different times. Three different ways
in which a funds sales expenses may be recovered from the investors are: -
 At the time of investor’s entry into the fund, by deducting a specific amount from
his initial contribution, or
 By charging the fund / scheme with a fixed amount each year, during the stated
number of years, or
 At the time of the investor’s exit from the scheme, by deducting a specified
amount from the redemption proceeds payable to the investor.
These charges made by the fund managers to the investors to cover distribution/sales /
marketing expenses are often called “loads”. The load charged to the investor at the time
of his entry into a scheme is called a “front-end or entry load”. This is the first case
above. The load amount charged to the scheme over a period of time is called a “differed
load”. This is the second case above. The load that the investor pays at the time of his exit
is called a “back-end or exit load this is the third case above. Some funds may also charge
different amounts of loads to the investors. Depending upon how many years the investor
has stayed with the fund; the longer the investor stays with the fund, less the amount of
“exit load” he is charged. This is called “contingent deferred sales charges”.
The front – end load amount is deducted from the initial contribution/ purchase amount
paid by the Incoming investor, thus reducing his initial investment amount. Similarly exit
loads would reduce the redemption proceeds paid out to the outgoing investor. if the sales
charge is made on a differed basis directly to the scheme, the amount of load may not be
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18. MUTUAL FUNDS
apparent to the investor, as the scheme’s NAV would reflect the net amount after the
deferred load.
Funds that charge front – end, back – end or deferred loads are called load funds. Funds
that make no such charges or loads for sales expenses are called “no - load funds”.
An example:
If an open –end fund’s NAV per unit is Rs.11, with a front load of 2%, the price at which
an investor can buy a unit is Rs.11.22. Expressed another way, an investment of Rs.100
would not buy 100/11=9.9units,but only 100-2=98/11=8.9units. if the redemption price is
Rs.10.70,with a back end load of 2%,the exit load charged by the fund amounts to
Re.0.21; so net sales proceeds will be 10.70-0.21=10.49. Express another way, sale of
50units would not fetch 50*10.70=Rs.535, but only 50*10.49=Rs.524.5.
From the investor’s perspective, it is important to note that loads are not charged only by
open – end funds; even a closed – end fund can charge a load to cover the initial issue
expenses. It is also important to note that there are other expenses such as the fund
manager’s fees, which are charged to the investor on an ongoing basis, thus reducing the
Net Asset Value of the fund.
Some funds charge only an entry load, and some only an exit loads. Such funds may be
thought of as partial load funds. Recently, a fund has started a new scheme with deferred
load over future years. Some funds in India waive the initial issue expenses that are borne
by the Asset Management Company or the sponsors, so the entire amount paid in by the
investor gets invested without entry load deduction. At the same time, some of these no –
front – load funds may charge exit loads from time to time. In other words, from time to
time, a no – load fund may become a load fund. Note that a no – load fund only means
that a fund that does not charge sales expenses. All funds still charge the schemes for
management fees and other recurring expenses.
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19. MUTUAL FUNDS
 Tax – exempt and Non-Tax – exempt Funds
When a fund invests in tax – exempt securities, it is called a tax – exempt fund. In India,
the current situation is that all of the dividend income received from any of the mutual
funds is tax free in the hands of the investor. However some funds have to pay a
distribution tax, before distributing income to investors. In other words, after the 1999
Union Government budget in India, for most investors, most mutual fund schemes are tax
– exempt investment avenues, making the distinction between tax – exempt and taxable
funds a thin one.
While Indian mutual funds currently offer tax–free income, any capital gains arising out
of sale of fund units are taxable. All these tax considerations are important in the decision
on where to invest as the tax – exemptions or concessions alter the returns obtained from
these investments. Hence classification of funds from the taxability perspective has great
significance for investors.
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20. MUTUAL FUNDS
MUTUAL FUND TYPES
All mutual funds would either close – end or open – end, and either load or no – load.
These classifications are general. For example – all open – end funds operate the same
way; or in case of a loan – fund a deduction is made from investors’ subscription or
redemption and only the net amount used to determine his number of shares purchased or
sold.
Once the fund classes have been reviewed, let us see the fund type in a more specific
manner. Funds are now to be distinguished from each other on the basis of their
investment objectives and the type of securities they invest in.
The major types of fund available under the general classifications as made above are:
Broad Fund Types by Nature of Investments
Mutual funds may invest in equities, bonds or other fixed income securities, or short-term
money market securities. So, we have Equity, Bond and Money Market Funds. All of
them invest in financial assets. But there are funds that invest in physical assets. In that
way we have Gold or other Precious Metals Funds, or Real Estate Funds.
Broad Fund Types by Investment Objective
Investors and the hence the mutual funds pursue different objectives while investing.
Thus, Growth Funds invest for medium to long-term capital appreciation. Income
Funds invest to generate regular income, and less for capital appreciation. Value Funds
invest in equities that are considered under – valued today, but whose value will be
unlocked in the future.
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21. MUTUAL FUNDS
Broad Funds Type by Risk Profile
The nature of a fund’s portfolio and it’s investment objective imply different levels of
risks undertaken. Funds are therefore often grouped in order of risk. Thus, Equity Funds
have a greater risk of capital loss then a Debt – Fund that seeks to protect the capital
while looking for income. Money Market Funds are exposed to fewer risks than even the
Bond Funds, since they invest in short – term fixed income securities, as compared to
longer – term portfolios of Bond Funds.
By Investment Objective
The followings are different mutual funds of different risk classification:
MONEY MARKET FUNDS
Often considered to be at the lowest rung in the order of risk level, money market funds
invest in securities of a short-term nature, which generally means securities of less than
one – year maturity. The typical, short – term, interest – bearing instruments these funds
invest in include treasury bills issued by governments, certificates of deposits issued by
banks and commercial paper issued by companies. In India, money market mutual funds
also invest in the inter – bank call money market.
The major strengths of money market funds are the liquidity and safety of the principle
that the investors can normally expect from short – term investment.
GILT FUNDS
Gilts are government securities with medium to long-term maturities, typically of over one
year (under one year instruments being money market securities). In India, we have now seen
the emergence of Government Securities or Guilt Funds that invest in government papers called
dated securities (unlike treasury bills which expire in less than a year). Since the issuer is the
government/ s of India/ states, these funds have little risk of default and hence offer better
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22. MUTUAL FUNDS
protection of capital. However, investors have to recognize the potential changes in the values
of debt securities held by the funds that are caused by changes in the market price of debt
securities quoted on the stock exchange (just like equities). Debt securities’ prices fall when
interest rate levels increase (and vice versa).
DEBT FUNDS or [INCOME FUNDS]
Next in the order of risk - level, there are the general category Debt Fund. Debt funds
invest in debt securities issued by not only the government but also the private
companies, banks and financial institutions and other entities such as infrastructure/
utilities. By investing in debt, these funds target low risk and stable income for the
investor as their key objective. However, as compared to the money market funds, they
do have a higher price fluctuation risk, since they invest in long-term securities.
Similarly, as compared to Guilt Funds, general debt funds do have a higher risk of default
by their borrowers.
Debt Funds are largely considered as Income Funds as they do not target capital
appreciation, look for high current income, and therefore distribute a substantial part of
their surplus to investors. Income funds that target returns substantially above market
levels can face more risks. Income funds falls largely in the category of Debt funds as
they invest primarily in fixed income generating debt instruments. Here again, different
investment objectives set by the fund managers would result in different risk profiles. Let
us now analyze Debt funds in this light:
 Diversified Debt Funds
A debt fund that invests in all available types of debt securities, issued by entities across
all industries and sectors is a properly diversified debt fund. While debt funds offer high
income less risk than equity funds, investors need to recognize that debt securities are
subject to risk of default by the issuer on payment of interest or principle. A diversified
debt fund has the benefit of risk reduction through diversification and sharing of any
default - related losses by a large number of investors. Hence a diversified debt fund is
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23. MUTUAL FUNDS
less risky than a narrow - focus fund that invests in debt securities of a particular sector
or industry.
 Focused Debt Funds
Some debt funds have a narrower focus, with less diversification in it’s investments.
Examples include sector, specialized and offshore debt funds. These funds are similar
to the funds described later in the equity category except that debt funds have a
substantial part of the portfolio invested in debt instruments and are therefore more
income oriented and inherently less risky than equity funds. However, the Indian
Financial Market have demonstrated that debt funds should not be automatically
considered to be less risky than equity funds, as there have been relatively large defaults
by issuer of debt and many funds have non - performing assets in their portfolios. It
should also be noted that market values of debt securities will also fluctuate more as
Indian debt markets witness more trading and interest rate volatility in the future. The
central point to be noted is that focused debt funds are prone to greater risk than
diversified debt funds.
Other examples of focused funds include those that invest only in Corporate
Debentures and only in Tax Free Infrastructure or Municipal Bonds. While these
funds are entirely conceivable now, they may take some time to appear as the real choice
of Indian investors. One category of specialized funds that invests in housing sector but
offer greater security and safety than other debt instruments are the Mortgage Backed
Bond Funds, that invests in special securities created after securitisation of and thus
secured by loan receivables of housing finance companies. As the Indian Financial
Markets witness the growth of securitisation, such funds may appear on the mutual funds
scene sooner rather than later.
 High Yield Debt Funds
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24. MUTUAL FUNDS
Usually, Debt Funds control the borrower default risk by investing in securities issued by
borrowers who are rated by credit rating agencies and are considered to be of “investment
grade”. There are, however, High Yield Debt Funds that seek to obtain higher interest
returns by investing in debt instruments that are considered “below investment grade”.
Clearly, these funds are exposed to higher risk. In the USA, funds that invest in debt
instruments that are not backed by tangible assets and rated below investment grade
(popularly known as junk bonds) are called junk bond funds. These funds tend to be more
volatile than other debt funds, although they may earn higher returns as a result of the
higher risks taken.
 Assured Return Funds – An Indian Variant.
Fundamentally, the mutual funds hold assets in trust for investors. All returns and risks
are for account of the investor. The role of the fund manager is to provide the
professional management service and to ensure the highest possible return consistent with
the investment objective of the fund. The fund manager or the trustees or the sponsors do
not give any guarantee on the minimum return to the investor. However in India,
historically, UTI and other funds have offered “assured returns” schemes to the investors.
The most popular variant of such schemes is the monthly income plans of UTI. Returns
are indicated in advance for all of the future years of these closed - end schemes. If there
is a shortfall, it is borne by the sponsors or managers – UTI in this example. Assured
returns a guaranteed monthly income plans are essentially Debt/ Income Funds. To the
extent that the guarantor has the required financial strength, assured return debt funds
certainly reduce the risk level considerably, as compared to all other debt or equity funds.
However the market regulator SEBI has been discouraging fund managers from offering
assured returns schemes. If offered, explicit guarantee is required form a guarantor whose
name is specified in advance in the offer document of the scheme.
While assured Return Funds may certainly be considered to be the lowest risk type within
the debt funds category, they are still not entirely risk – free, as the investors have to
normally lock in their funds for the term of the scheme or at least a specified period such
as three years. During this period, the financial markets may have moved and the
24

25. MUTUAL FUNDS
investors may have lost the opportunity to obtain higher returns later in other debt or
equity funds. Besides, the investor does carry some credit risk on the guarantor who must
remain solvent enough to honor his guarantee during the lock – in period.
EQUITY FUNDS
As investors move from debt fund category to equity funds they face increased risk level.
However, there are a large variety of equity funds and all of them are not equally risk
prone. Investors and their advisors need not to sort out and select the right equity fund
that suits their risk appetite. In the following section, we have presented the equity fund
types, going from the highest risk level to the lowest level within this category.
Before we look at the equity fund types in terms of risk level, we must understand where
the risks equity funds come from and how they are different from debt funds. Equity
funds invest a major portion of their corpus in equity shares issued by the companies,
acquired directly in initial public offerings or through the secondary market. Equity funds
would be exposed to the equity price fluctuations risk at the market level, at the industry
or sector level and at the company-specific level. Equity funds’ net asset values fluctuate
with all these price movements. These price movements are caused by all kinds of
external factors, political and social as well as economic. The issuers of equity shares
offer no guaranteed repayment as in case of debt instruments. Hence equity funds are
generally considered at the higher end of the risk spectrum among all funds available in
the market. On the other hand, unlike debt instruments that offer fixed amounts of
repayments, equities can appreciate in value in line with the issuer’s earnings potential,
and so offer the greatest potential for growth in capital.
Equity funds adopt different investment strategies resulting in different levels of risk.
Hence, they are generally separated into different types in terms of their investment
styles. Some of the major types of equity funds arranged in order of higher to lower risk
level:
25

26. MUTUAL FUNDS
 Aggressive growth funds
There are many types of stocks/shares available in the market; Blue Chips that are
recognized market leaders, less researched stocks that are considered to have future
growth potential and even some speculative stocks of somewhat unknown or unproven
issuers. Fund managers seek out ant invest in different types of stocks in, line with their
own perception of potential returns and appetite for risk.
As the name suggests, aggressive growth funds target maximum capital appreciation,
invest in less researched or speculative shares and may adopt speculative investment
strategies to attain their objective of high returns for the investor. Consequently, they tend
to be more volatile and riskier than other funds.
 Growth funds
Growth funds invest in companies whose earnings are expected to rise at an above average
rate. These companies may be operating in sectors like technology considered having growth
potential, but not entirely unproven and speculative. The primary objective of growth funds is
capital appreciation over a three to five year span. Growth funds are therefore less volatile than
funds that target aggressive growth.
26

27. MUTUAL FUNDS
 Specialty funds
These funds have a narrow portfolio orientation and invest in only companies that meet
pre-defined criteria. For example, at the height of South African apartheid regime, many funds
in the U.S offered plans that promised not to invest in South African companies. Some funds
may build portfolios that will exclude tobacco companies. Funds that invest in particular regions
such as the Middle East or the ASEAN countries are also an example of specialty funds. Within
the specialty funds category, some funds may be broad- based in terms of the types of
investments in the portfolio. However, most specialty funds tend to be concentrated funds,
since diversification is limited to one type of investment, clearly concentrated specialty funds
tend to be more volatile than diversified funds.
 Sector funds:
Sector funds portfolios consist of investments in only one industry or sector of the market
such as information technology, pharmaceuticals or fast moving consumer goods that have
recently been launched in India. Since sector funds do not diversify into multiple sectors, they
carry a higher level of sector and company specific risk than diversified equity funds.
 Offshore Funds:
These invest in equities in one or more foreign countries thereby achieving diversification
across the country’s borders. However they also have additional risks-such as the foreign
exchange rate risk- and their performance depends on the economic conditions of the countries
they invest in. offshore equity funds may invest in a single country (hence riskier) or many
countries (hence more diversified).
 Small-cap equity funds:
These funds invest in shares of companies with relatively lower market capitalization
than that of big, blue chips companies. They may thus be more volatile than other funds,
as smaller companies’ shares are not very liquid in the markets. We can think of these
funds as a segment of specialty funds. In terms of risk characteristics, small company
27

28. MUTUAL FUNDS
funds may be aggressive- growth or just growth type. In terms of investment style, some
of these funds may also be “value investors”.
 Option income funds:
These funds do not yet exist in India, but option income funds write options on a
significant part of their portfolio. While options are viewed as risky instruments, they
may actually help to control volatility, if properly used. Conservative option funds invest
in large, dividend paying companies, and then sell options against their stock positions.
This ensures a stable income stream in the form of premium income through selling
options and dividends. When options no individual shares become available in India,
such funds may be introduced.
 Diversified equity funds:
A fund that seeks to invest only in equities, except for a very small portion in liquid money
market securities, but is not focused on any one or few sectors or shares, may be termed a
diversified equity fund. While exposed to all equity price risks, diversified equity funds seek to
regulate the sector or stock specific risks through diversification. They have mainly market risk
exposure. Such general purpose but diversified funds are clearly at the lower risk level than
growth funds.
 Equity linked savings scheme: An Indian variant
In India, the investors have been given tax concessions to encourage them to invest in
equity markets through these special schemes. Investment in these schemes entitles the
investor to claim an income tax rebate, but usually has a lock-in period before the end of which
funds cannot be withdrawn. There are no specific restrictions on the investment objectives for
the fund managers. Investors should clearly for where the fund management company proposes
to invest and accordingly judge the level of risk involved. Generally, such funds would be in the
Diversified Equity Fund Category.
 Equity index funds:
28

29. MUTUAL FUNDS
An index funds tracks the performance of a specific stock market index. The objective to
match the performance of the stock market by tracking an index that represents the
overall market. The fund invests in shares that constitute the index and in the same
proportion as the index. Since they generally invest in a diversified market index
portfolio, these funds take only the overall market risk, while reducing the sector and
stock specific risks through diversification.
 Value funds:
The growth funds we reviewed above hold shares of companies with good or improving
profit prospects, and aim primarily at capital appreciation. They concentrate on future
growth prospects, may be willing to pay high price/earnings multiples for companies
considered to have good potential. In contrast to the growth investing, other funds follow
Value Investing approach. Value funds try to seek out fundamentally sound companies
whose shares are currently under- priced in the market. Value funds will add only those
shares to their portfolios that are selling at low-price earnings ratios, low market to book
value ratios and are undervalued by other yardsticks
Value funds have the equity market price fluctuation risks, but stand often at lower end of
the risk spectrum in comparison with the growth funds. Value stocks may be from a large
number of sectors and therefore diversified. However, value stocks often come from
cyclical industries. The only example of a value Fund in India is Templeton fund, which
has in its portfolio shares of cement/aluminum and other cyclical industries. Prices of
such shares may fluctuate more than the overall market in both bull and bear markets,
making such value funds more risky than diversified funds in the short term. However
proponents of the value investing recommend it as a long-term approach. In the long
term, Value Funds ought to be less risky than growth funds or even equity diversified
funds.
 Equity income funds:
Usually income funds are in the debt funds category, as they target fixed income
investments. However, they are equity funds that can be designed to give the investor a
29

30. MUTUAL FUNDS
high level of current income along with some steady capital appreciation, investing
mainly in shares of companies with high dividend yields. As an example, an equity
income fund would invest largely in power/utility companies’ shares of established
companies that pay higher dividends and whose price do not fluctuate as much as other
shares. These equity funds should therefore be less volatile and less risky than nearly all
other equity funds.
HYBRID FUNDS – Quasi Equity / Quasi debt
In terms of the nature of the financial securities held, there are three major mutual fund
types: money market, debt and equity. Many mutual funds mix these different types of
securities in their portfolios. Thus, most funds, equity or debt always have some money market
securities in their portfolios as these securities offer the much-needed liquidity. However money
market holdings will constitute a lower proportion in the overall portfolios of debt or equity
funds. There are funds that, however, seek to hold a relatively balanced holding of debt and
equity securities in their portfolios. Such funds are termed “hybrid funds” as they have a dual
equity/bond focus. Some of the funds in this category are described below:
 Balanced funds:
A balanced fund is one that has a portfolio comprising debt instruments, convertible
securities, and preference and equity shares. Their assets are generally held in more or
less equal proportions between debt/money market securities and equities. By investing
in a mix of this nature, balanced funds seek to attain the objectives of income, moderate
capital appreciation and preservation of capital, and are ideal for investors with a
conservative and long-term orientation.
The pyramid indicates the percent of money invested in Balanced Fund and a lesser
portion in Growth Fund. This Fund holds a lesser risk as major portion is with INCOME,
MONEY MARKET & BALANCED FUNDS.
30

31. MUTUAL FUNDS
 Growth-and-income funds:
Unlike income focused or growth focused funds we have seen, these funds seek to strike
a balance between capital appreciation and income for the investor. Their portfolios are a
mixed between companies with good dividend paying records and those with potential
for capital appreciation. These funds would less risky than pure growth funds, though
more risky than income funds.
The Pyramid gives a clear picture about the Income Fund. In this Fund major portion of
the Fund is invested in income & rest in BALANCED, MONEY MARKET &
GROWTH FUNDS.
31

32. MUTUAL FUNDS
 Asset allocation funds
Normally, an equity fund will have its primary portfolio in equities most of the time.
Similarly, a debt fund would not have major equity holdings. In other words, their “asset
allocation” is predetermined within certain parameters. However, there do exist funds
that follow variable asset allocation policies and move in and out of an asset class (equity,
debt, money market, or even non-financial assets) depending upon their outlook for
specific markets.
In many ways, these funds have objectives similar to balanced funds and may seek to
diversified into foreign equities, gold and real estate backed securities in addition to debt
instruments, convertible securities, preference and equity shares. Asset allocation funds
that follow more stable allocation policies (which hold relatively fixed proportion of
specific categories) are more like balanced funds. On the other hand, funds that follow
more flexible allocation policies (which vary their weightings depending upon the fund
manager’s outlook) are more akin to aggressive growth or speculative funds. The former
are for investors who low risk and stable return. The latter carry higher risk and potential
for higher return because of the flexibility enjoyed by the fund managers.
COMMODITY FUNDS
While all the debt/equity/money market funds invest in financial assets, the mutual fund
vehicle is suited for investment in any other- for example-physical assets. Commodities
funds specialize in investing in different commodities directly or through shares of
commodity companies or through commodity futures contracts. Socialized funds may
invest in a single commodity or a common group such as edible oils or grains, while
diversified commodity funds will spread their assets over many commodities.
32

33. MUTUAL FUNDS
A most common example of commodity funds is the so-called precious metals funds.
Gold funds invest in gold, gold futures or shares of gold mines. Other precious metals
such as platinum or silver are also available in other countries. They may take exposure
to more than one metal to get some benefit of diversification. In India, a gold fund may
hold potential, given large public holding given large public holding and interest in gold.
However commodity funds have not yet developed.
 Real estate funds:
Specialized real estate funds would invest in real estate directly, or may fund real estate
developers, or lend to them, or buy shares of housing finance companies or even buy the
securitised assets. Currently unavailable to Indian investors, such funds may soon be
offered by leading housing finance companies such as HDFC. The funds may have
growth orientation or seek to give investors regular income.
Significance of various types of funds
In this section we have developed an understanding of various mutual fund classifications
and types. It must be appreciated that no specific class or type is universally accepted as
the best option. Each type of funds comes with pros and cons and a unique risk-return
relationship. It is up to the investor to decide the type that best suits his requirements and
matches his objectives. This is covered in greater detail in subsequent chapters.
You will notice some differences in the fund types and classification among different
books or reading references. In this section, we have tried to follow one system of
classification that we have considered as the most suitable for Indian conditions. The
reader should not have too much difficulty in seeing the relatively minor differences in
classification or names of fund types. To help get a better understanding, we have
developed the enclosed chart that lists the mutual fund types in order of risk levels.
33

34. MUTUAL FUNDS
Securities and Exchange Board of India
(Mutual funds) Regulations, 1996
[Regulations 18(22), 25(16), 68(h)]
Code of Conduct
1. Mutual fund schemes should not be organized, operated, managed or the portfolio
of securities selected, in the interest of sponsors, directors of asset management
34

35. MUTUAL FUNDS
companies, members of board of trustees or directors of trustee company,
associated persons as [substituted for “or”] in the interest of special class of unit
holders rather than in the interest of all classes of unit holders of the scheme.
2. Trustees and asset management companies must ensure the dissemination to all
unit holders of adequate, accurate, explicit and timely information fairly presented
in a simple language about the investment policies, investment objectives,
financial position and general affairs of the scheme.
3. Trustees and asset management companies should avoid excessive concentration
of business with broking firms, affiliates and also excessive holding of units in a
scheme among a few investors.
4. Trustees and asset management companies must avoid conflicts of interest in
management the affairs of the scheme and keep the interest of all unit holders
paramount in all the matters.
5. Trustees and asset management companies must ensure scheme wise segregation
of bank accounts (substituted for “cash”) and securities account.
6. Trustees and asset Management Company shall carry out the business and invest
in accordance with the investment objectives stated in the offer document and
take investment decision solely in the interest of unit holders.
7. Trustees and asset management companies must not use any unethical means to
sell, market or induce any investors to buy their schemes.
8. Trustees and asset Management Company shall maintain high standard of
integrity and fairness in all their dealings and in the conduct of their business.
35

36. MUTUAL FUNDS
9. Trustees and the asset management company shall render at all times high
standards of service, exercise due diligence, ensure proper care and exercise
independent professional judgment.
10. The asset management company shall not make any exaggerated statement,
whether oral or written, either about their qualification or capability to render
investment management services or their achievements.
SCHEMES PROVIDED BY
Mr.Girish Kalra
36

37. MUTUAL FUNDS
FRANKLIN TEMPLETON India LTD.
Franklin Templeton India
Vision
To be the premier global investment management organization by offering high quality
investment solutions, providing outstanding service and attracting, motivating and retaining
talented individuals.
INTRODUCTION
Franklin Templeton's association with India dates back to more than a decade as an
investor. As part of the group's major thrust on investing in markets around the world, the India
office was set up in 1996 as Templeton Asset Management India Pvt. Limited. It flagged off the
mutual fund business with the launch of Templeton India Growth Fund in September 1996, and
since then the business has grown at a steady pace.
Since starting its operations in India, Franklin Templeton has invested a considerable
amount of time, effort and resources towards investor and distributor education, the belief
being - to be successful in the long term, the fundamentals need to be corrected, at whatever
cost! This has resulted in various advertising campaigns aimed at educating investors,
participation in seminars and distributor training programs. Franklin Templeton has played a
pivotal role in steering the industry to its current stage, and as long term players, we continue
to strive to achieve the objective of 'making mutual funds an investment of choice' for both
individual and institutional investors. In July 2002, Franklin Templeton India acquired Pioneer ITI,
37

38. MUTUAL FUNDS
another leading fund house in India to create an organization with rich investment experience
over market cycles, one of the most comprehensive product portfolios, footprint across the
country and an in-house shareholder servicing function. The huge synergies that existed in the
two organizations have helped the business grow at a rapid pace, catapulting the company to
among the top two fund houses in India.
FRANKLIN TEMPLETON INVESTMENT SCHEMES
It is their belief that individuals differ in their investment needs based on personal
financial goals. So they recommend us that we should, at the very beginning identify our
own financial goals, be it planning for our children's education or a comfortable retired
life. After defining these, one needs to plan for them in an organized manner and look at
investments that help achieve these goals. Investment experts recommend that growth
investments such as equity funds and stocks are a good choice for long term needs (five
years or more), income funds for medium-term needs and liquid funds for short-term
requirements.
38

39. MUTUAL FUNDS
The investment pyramid above illustrates a variety of investment options available.
The investments at the top of the pyramid provide greater opportunity for long-term
capital growth, while the investments at the bottom generally provide greater potential for
current income and preservation of capital. In addition to providing one with the
flexibility to create an investment plan based on individual financial goals, Mutual funds
also offer other benefits.
Franklin Templeton offers different representative asset classes to cater to the varied
investment goals of investors through the following open-ended schemes:
*Franklin India Taxshield (FIT)
The fund managers operate with an objective to provide medium to long term growth of
capital along with income tax rebate.
*Franklin India Bluechip Fund (FIBCF)
The fund manager seeks steady and consistent growth by focusing on well established,
large size companies.
*Templeton India Growth Fund (TIGF)
The fund manager aims to provide long-term capital appreciation from a portfolio
invested predominantly in value-oriented stocks.
*Franklin India Prima Plus( FIPP)
The fund manager seeks capital appreciation over the long-term by focusing on wealth
creating companies across all sectors.
*Franklin India Flexi Cap Fund (FIFCF)
The fund manager will invest in companies based on a research driven, bottom-up stock
selection process, irrespective of their market capitalization and sectors.
39

40. MUTUAL FUNDS
*Templeton India Equity Income Fund (TIEIF)
The fund managers adopt a long term disciplined approach of investing and use the
style of investing along with focus on stocks with attractive dividend yields, both in India
and overseas.
*Franklin Templeton India Balanced Fund (FIBF)
The fund manager seeks to strike an optimum balance between growth and stability,
by maintaining diversified portfolio of equities and managing interest rate movements
and credit risk on the fixed income component.
*Templeton India Pension Plan (TIPP)
TIPP is an open ended tax saving scheme whose objective is to provide investors regular
income under the Dividend Plan and capital appreciation under the Growth Plan.
40

41. MUTUAL FUNDS
Franklin India Taxshield (FIT)
Franklin India Taxshield (FIT) is an open ended Equity Linked Savings scheme with
an objective to provide medium to long term growth of capital along with income tax
rebate. The investment ranges are: Equities/Equity related instruments- Upto 100%, PSU
Bonds / Debentures- Upto 20% and Money Market Instruments- Upto 20%
Investment Focus
FIT, an open end equity linked savings scheme, is an investment which not only helps you
save on taxes but also has the potential to give you attractive returns with convenience and
flexibility
Investment Style
The fund manager seeks steady growth by maintaining a diversified portfolio of equities
across sectors and market cap ranges.
Investment Objective: Aims to provide medium to long term growth of capital along
with income tax rebate.
Date of Allotment - April 10, 1999
Fund Manager - Anand Radhakrishnan
Fund Size - Rs. 470.81 crores
Load Structure
Entry Load - 2.25%
Exit Load - NIL
Tax Benefits
Investments will qualify for tax benefit under the Section 80C as per the income tax act.
41

42. MUTUAL FUNDS
S E C TOR AL L OC ATION-TOTAL AS S E TS
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
FINANCE
CONSTRUCTION
INDUSTRIAL
CAPITALGOODS
MEDIA&
ENTERTAINMENT
CONSUMERNON-
DURABLES
CEMENT
AUTO
AMCILLARIES
POWER
HOTELS
TELECOM
SERVICES
REST
S E CTOR ALLOCATION-
TOTAL AS S E TS
Investment of this Fund is 91% with Equity, from which more amount of Fund is
invested in Industrial Capital Goods & lesser with Pharmaceuticals.
42

43. MUTUAL FUNDS
Franklin India Bluechip Fund (FIBCF)
Investment Style
The fund manager seeks steady and consistent growth by focusing on well established,
large size companies.
Investment Objective: Aims to provide medium to long term capital appreciation.
Date of Allotment : December 1, 1993
Fund Manager : K.N. Sivasubramanian / Anand Radhakrishnan
Fund Size : Rs. 2615.88 crores
Load Structure
Entry Load - 2.25%
Exit Load - NIL
43

44. MUTUAL FUNDS
S E C TOR AL L OC ATION-TOTAL AS S E TS
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
INDUSTRIALCAPITALGO
ODS
BANKS
TELECOM
SERVICESSOFTW
ARE
PETROLIUM
PRODUCTS
CONSUM
ER
NON-DURABLES
FINANCE
AUTOCOM
ENT
TEXTILEPRODUCTS
REST
The Equity holdings of the fund is 94%, from which more amount of Fund is invested
Industrial Capital Goods and lesser portion in Textile Products.
44

45. MUTUAL FUNDS
Templeton India Growth Fund (TIGF)
Investment Style
Templeton Equity Portfolio Managers adopt a long term disciplined approach
to investing and use the widely known philosophy of ‘value investing’.
Investment Objective : Seeks to provide long term capital growth.
Date of Allotment - September 10, 1996
Fund Manager - Dr. J. Mark Mobius
Fund Size - Rs. 333.61 crores
NAV Performance
Load Structure
Entry Load Greater than Rs. 5 Crs : 2.25%;
Less than Rs.5 Crs: Nil
Exit Load : Less than Rs. 5 Crs :1% if
Redeemed / switched-out within6 months of allotment;
0.5% if redeemed / switched out after months, but within 1 year of allotment.
Greater than Rs.5 Crs : 1%(if redeemed /switched-out within 1 year of allotment).
45

46. MUTUAL FUNDS
S E C TOR AL L OC ATION-TOTAL
AS S E TS
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
PETROLIUMPRODUCTS
FINANCE
TELECOMSERVICES
FERROUSMETALS
CEMENT
BANKS
OIL
SOFTWARE
NON-FERROUSMETAL
AUTO
REST
S E C TOR
ALLOCATION-TOTAL
AS S E TS
The total Equity holdings of the fund is 97%, from which more amount of Fund is
invested in Finance & Petroleum Products sector.
46

47. MUTUAL FUNDS
Franklin India Prima Plus( FIPP)
Investment Style
The fund manager seeks capital appreciation over the long-term by focusing on wealth
creating companies (companies that generate return on capital in excess of their cost of
capital) across all sectors.
Investment objective : Aims to provide growth of capital plus regular dividend.
Date of Allotment - September 29, 1994
Fund Manager - Sukumar Rajah / Anand Radhakrishnan
Fund Size - Rs. 1365.78 crores
Load Structure
Entry Load Less than Rs. 5 Crs : 2.25%;
Greater than Rs.5 Crs : Nil
Exit Load: Less than Rs. 5 Crs :1% if
redeemed/switched-out within 6 months of allotment;
Less than Rs. 5 Crs :0.5% if redeemed/ switched out after 6 months, but
within 1 year of allotment.
Greater than Rs.5 Crs : 1(if redeemed/switched-out within 1 year of
allotment)
47

48. MUTUAL FUNDS
S E C TOR AL L OC ATION-TOTAL
AS S E TS
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
BANKS
MEDIA&ENTERTAINMENT
INDUSRIALCAPITAL
GOODS
FINANCE
CONSUMERNON-
DURABLES
TELECOMSERVICES
PETROLEUMPRODUCTS
SOFTWARE
CEMENT
CONSTRUCTION
REST
S E CTOR
ALLOC ATION-TOTAL
AS S E TS
The Equity holdings is 92%, from which more amount of Fund is invested in banking
sector, whereas in Auto Ancillaries is very minute
48

49. MUTUAL FUNDS
Templeton India Equity Income Fund (TIEIF)
Investment Style
Templeton Equity Portfolio Managers adopt a long term disciplined approach of investing
and use the value style of investing along with focus on stocks with attractive dividend yields,
both in India and overseas.
Investment Objective : Seeks to provide a combination of regular income and long-term
capital appreciation by investing primarily in stocks that have a current or potentially
attractive dividend yield.
Date of Allotment - May 18, 2006
Fund Manager - Dr. J. Mark Mobius Assisted by Chetan Sehgal, Vikas Chiranwal
Fund Size - Rs. 1687.35 crores
Load Structure
Entry: Less than Rs. 5 Crs : 2.25%;
Greater than Rs.5 Crs: Nil
Exit: Less than Rs. 5 Crs :1% if redeemed/switched-out within 6 months of allotment;
0.5% if redeemed/switched out after6 months, but within 1 year of allotment
Greater than Rs.5 Crs : 1%(if redeemed/switched-out within 1 year of allotment)
49

50. MUTUAL FUNDS
S E C TOR AL L OC ATION-TOTAL
AS S E TS
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
INDUSTRIALCAPITALGOODS
BANKS
SOFTW
ARE
TELECOM
SERVICESCEM
ENT
CONSUM
ER
NON-DURABLES
M
EDIA
&
ENTERTAINM
ENT
INDUSTRIALPRODUCTS
AUTO
CONSTRUCTIO
N
REST
S E C TOR ALLOC ATION-
TOTAL AS S E TS
The investment in Equity holdings is 92%, from which major portion is invested in
Industrial Capital Goods in minor in Construction.
50

51. MUTUAL FUNDS
Franklin Templeton India Balanced Fund (FTIBF)
FT India Balanced Fund (FTIBF) is an open ended balanced scheme with an
objective to provide long term growth of capital and current income. By investing in
equity, equity related securities and fixed income instruments. The investment ranges
are: Equities/Equity related instruments- 51% to 70%, Fixed Income and Money Market
Instruments- 30% to 20%. including high quality securitised debt up to a maximum limit
of 10% of the scheme’s corpus.
Date of Allotment - December 10, 1999
Fund Managers - Anand RadhakrishnanSachin Padwal-Desai &Ninad Deshpande
Fund Size - Rs. 284.05 crores
Investment Objective
FTIBF is the right allocation between shares of wealth-creating companies and high quality
debt instruments can give you the perfect balance between growth and stability.
Investment Style
The fund manager seeks to strike an optimum balance between growth and stability, by
maintaining diversified portfolio of equities and managing interest rate movements and credit
risk on the fixed income component.
Load Structure
Entry Load -2.25%
Exit Load – NIL
51

52. MUTUAL FUNDS
S E C TOR AL L OC ATION-E QUITY
HOL DING
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
INDUSTRIALCAPITALGOODS
BANKS
SOFTW
AREFINANCE
TELECOM
SERVICES
CEM
ENT
PETRO
LEUM
PRO
DUCYS
CONSUM
ER
NON-DURABLES
AUTO
INDUSTRIALPRODUCTS
REST
S E C TOR ALLOC ATION-
E QUITY HOLDING
The Funds total investment in Equity is 64%, from which more amount of Fund is
invested in Banks & Industrial Capital Goods, whereas investment in Retailing &
Pharmaceuticals is lesser.
52

53. MUTUAL FUNDS
Templeton India Pension Plan (TIPP)
Investment Style
The fund manager seeks steady capital appreciation by maintaining diversified portfolio of
equities and seeks to earn regular income on the fixed income component by managing interest
rate movements and credit risk.
Investment Objective : TIPP is an open ended tax saving scheme whose objective is to
provide investors regular income under the Dividend Plan and capital appreciation
under the Growth Plan.
Date of Allotment - March 31, 1997.
Fund Managers - Anand Radhakrishnan , NinadDeshpande & Sachin Padwal-
Desai.
Fund Size - Rs. 157.41 crores.
Load Structure
Entry Load - 2.25%
Exit Load - 3%,if redeemed before the age of 58 years(subject to a 3 year lock-in
period)NIL, if redeemed after the age of 58 years.
Tax Benefits
Investments will qualify for tax benefit under the Section 80C as per the
income tax act.
53

54. MUTUAL FUNDS
S E C TIOR AL L OC ATION-E QUITY
HOL DING
0.00%
5.00%
10.00%
15.00%
20.00%
25.00% INDUSTRIAL
CAPITAL
BANKS
SOFTWARE
FINANCE
TELECOM
SERVICES
CEMENT
PETROLIUM
PRODUCTS
CONSUMER
NON-
AUTO
INDUSTRIAL
PRODUCTS
REST
S E C TIOR
ALLOCATION-E QUITY
HOLDING
The Equity holdings is 35% from which more amount of Fund is invested in Banks &
Industrial Capital Goods, whereas investment in Industrial products is lesser.
54

55. MUTUAL FUNDS
COMPUTING YOUR MUTUAL FUND RETURNS
Ramesh opened the morning papers and straight away went to the markets page, where
he checked out the NAV of XYZ Mutual Fund’s scheme, which he had invested . He was
happy to see that the NAV had moved from Rs. 14 to Rs. 15. His cost per unit was Rs. 10
(since he had invested in the scheme’s NFO). That gave him profit of Rs. 5 per unit.
That’s a decent 50 per cent. But Ramesh is wrong… His profit is actually much lower
because he has not taken into consideration the time period of investment. Ramesh has
stayed invested in this scheme for 2 years. If this time period is considered, his
annualized return is 25 per cent and not 50 per cent, as he believes.
Computing the return on investment on your mutual funds can be done in various ways.
ABSOLUTE RETURNS
One of the ways is called ‘absolute return’. In this method, one ignores the time
period and simply takes the difference between market value and cost as a percentage of
cost. This is the way Ramesh has computed his investment return at 50 per cen.
ANNUALIZED RETURNS
In this method, one considers the time period of investment. Here, one considers
the difference between market value and cost, divides this difference by the cost,
multiplies by 12 months/ 365 days and divides by the number of months/days one has
stayed invested. In Ramesh’s case the computation is: 5/10 x 1 year / 2 years. When
Ramesh applied this method, his returns worked out to 25 per cent.
ASSESSING PERFORMANCE
Now, whether one takes absolute returns or annualized returns, one must not
judge the performance of the mutual fund on a standalone basis one must consider the
performance vis-à-vis the fund’s competitors and the benchmark index of the fund. For
instance, for Ramesh, the benchmarks index of the fund. For instance, for Ramesh, the
55

56. MUTUAL FUNDS
benchmark index of XYZ Mutual Fund scheme was BSE Sensex, which had given an
absolute return of 60 per cent and an annualized return of 30 per cent during the same
time period that Ramesh had invested in the scheme. Clearly, the scheme had under-
performed its benchmark index.
Another way of assessing performance is by considering the average performance of all
schemes in the category. Again in Ramesh’s case, XYZ Mutual Fund scheme was an
equity diversified scheme. The average absolute return offered by all equity diversified
schemes was 45 per cent and annualized return was 22.5 per cent during the same period
as Ramesh was invested in XYZ Mutual Fund scheme. Clearly, XYZ Mutual Funds
scheme had done better than the category average. Information about returns of mutual
fund schemes and comparison between their benchmark indices and averages of the
categories they fall under are available on the internet in websites such as
mutualfundsindia.com, valueresearchonline.com, myiris.com, etc.
PRESENT PERFORMANCE
As on 12 July 07, average annualized returns offered by equity diversified
schemes for 1 year, 3 years and 5 years are 44.41 per cent, 47.14 per cent and 40.31 per
cent respectively. During the 1-year, 3-year and 5-year periods, the BSE Sensex has
given returns of 38.08 per cent, 45.06 per cent and 35.46 per cent respectively. Clearly,
equity diversified funds have outperformed this index throughout these periods.
CONCLUSION
Don’t be simplistic while assessing the performance of your mutual fund
investments. Use smart computation strategies to judge the performance of your
investments vis-à-vis benchmarks and competitors.
RETURNS OFFERED BY EQUITY DIVERSIFIED FUNDS
1 Year 3 Year 5 Years
Average 44.41 47.14 40.31
BSE Sensex 38.08 45.06 35.46
As on 12 July 07 Returns are annualized
56

57. MUTUAL FUNDS
Returns considered for the ‘growth’ option.
VISIT TO Franklin Templeton mutual fund
To understand and study the mutual funds concept in detail, I visited the Franklin
Templeton Asset Management Pvt.Ltd. at Bandra-Kulra Complex (Head Office)on 27th
August 2007. I interviewed Mr. Girish Kalra (Marketing Manager) he spared some of his
valuable time to explain in brief about the mutual fund system in their organization & he
also answered to my questions.
The following are the questions asked to Mr. Girish Kalra:-
 Karishma (I asked) : What is a Mutual Fund?
Mr.Girish replied: A Mutual Fund is an investment tool that allows small investors access to a
well-diversified portfolio of equities, bonds and other securities. The beauty
of mutual funds is that anyone with an investible surplus of a few hundred
rupees can invest and reap returns as high as those provided by the equity
markets or have a steady and comparatively secure investment as offered by
debt instruments.
 I asked : What does a Mutual Fund do with investor's money?
Mr.Girish replied: Anybody with an investible surplus can invest in mutual funds. A Mutual Fund invests
the pool of money collected from the investors in a range of securities comprising
equities, debt, etc. after charging for the AMC fees.
I asked: What is Net Asset Value (NAV)?
Mr.Girish replied: Net asset value (NAV) represents the market value of all assets per unit, held by the
fund. For an investor, it simply signifies the current value of his or her investment in
the fund.
 I asked : Is there a guaranteed return on the mutual funds?
Mr.Girish replied: No, we do not give any guarantees on the returns on any of our funds.
57

58. MUTUAL FUNDS
 I asked: What are the types of returns one can expect from a Mutual Fund?
Mr.Girish replied: Mutual Funds give returns in two ways - Capital Appreciation or Dividend
Distribution. An increase in the value of the units of the fund is known as
capital appreciation. The profit earned by the fund is distributed among unit
holders in the form of dividends is called Dividend distribution.
 I asked: Are mutual funds insured?
Mr.Girish replied: No. Mutual fund units are not insured. There is no guarantee that when you sell your
shares, you will receive what you paid for them. However, because mutual fund
investments are more risky than insured investments, they generally offer potential
for higher long-term returns.
 I asked: Why one should invest in mutual funds?
Mr.Girish replied: Mutual funds have qualified professionals who manages the fund for
investors. Mutual funds minimize risk by creating a diversified portfolio while
providing the necessary liquidity.
 I asked: Why should one invest in Franklin Templeton Mutual Funds?
Mr.Girish replied : In India, Franklin Templeton Investments is one of the largest Asset management
companies with over Rs. 26,469crores of assets for over 20 lakh investor accounts.It
offers 240 products worldwide and has 60 years of experience in international
investment management.
 I asked: TAX implications for the mutual fund
Mr.Girish replied : Tax benefit to the Fund. Templeton Mutual Fund is registered with SEBI and as such,
the entire income of the Fund is exempt from income tax under Section 10(23D) of
the Act and is entitled to receive income without any deduction of tax at source.
SURVEY REPORT
58

59. MUTUAL FUNDS
THE PERCENTAGE OF PEOPLE WHO ARE AWARE ABOUT
MUTUAL FUNDS.
98% OF P E OP LE
ARE AWARE OF
MUTUTAL F UNDS
2% OF P E OP LE
ARE NOT AWARE
OF MUTUAL
F UNDS
AMONG THE PEOPLE AWARE, PERCENTAGE OF PEOPLE
INVESTED.
54% ARE
INTVE S TE D
46% AR E NOT
INVE S TE D
PEOPLE INTERESTED IN INVESTING IN MUTUAL FUNDS
59

60. MUTUAL FUNDS
68% OF P E OP LE
INTE R E S TE D IN
INVE S TING
32% OF P E OP LE
NOT INTE R E S TE D
IN INVE S TING
PEOPLE WHO ARE INTERESTED,WHICH MUTUAL FUND DO THEY
PREFER
0%
10%
20%
30%
40%
50%
60%
70%
F R ANK LIN
TE MP LE TON
MUTUAL F UND
R E LIANC E
MUTUAL F UND
S BI MUTUAL
F UND
OTHE R F UNDS
60

61. MUTUAL FUNDS
PEOPLE PREFER MUTUAL FUND BECAUSE OF :-
64%PREFER BECAUSE
OF HIGH RETURN
36%PREFER BECAUSE
OF LOW RISK
PEOPLE PREFERING DIFFERENT MODE OF PAYEMENT
46%ONE TIME
INVESTMENT
54%SIP(MONTHLY
INCOME PLAN)
Analysis:- From the Survey it is concluded that most of the people are aware about Mutual
Funds. Among the people who are interested in investing, are mostly keen to invest in Franklin
Mutual fund on monthly basis plan.
61

62. MUTUAL FUNDS
SHRI CHINAI COLLEGE OF COMMERCE & ECONOMICS
Survey for Project on MUTUAL FUNDS.
Name:-
Designation:-
Sign:-
Contact No. :-
1) Do you know what is Mutual Funds?
Yes No
2) Have you invested in Mutual Funds?
Yes No
3) Do you plan to invest in Mutual Funds in future?
Yes No
4) Which Mutual Fund would you like to prefer for investing –
Reliance Mutual Fund. Franklin Tempelton Mutual Fund.
SBI Mutual Fund. Other Mutual Funds.
5) Why would you prefer, Mutual Funds, because of –
Higher Returns. Low Risk.
6) What types of schemes would you prefer?
SIP( Monthly Investment Plan) One Time Investment
Comment
Project Guide – Survey Conducted By -
Karishma Gondalwala
Prof. Leena Nair
T.Y.B.B.I.
REVIEW OF LITERATURE
62

63. MUTUAL FUNDS
TIMES OF INDIA
ECONOMIC TIMES
QUOTES OF FRANKLIN & TEMPLETON
63

64. MUTUAL FUNDS
Franklin
“ A famous investor once said the key to success was simple: ‘ buy straw hats in the
winter.’ And that’s what we try to do. We buy things when they are out of favor,
believing we will be rewarded for patience and foresight.”
~ Bill Lippman
[President of advisory services and portfolio
manager.]
Templeton
“ Investors are the people who buy for fundamental values. Speculators are those who
buy in the hope of selling later to someone else at high prices.”
~ Sir John Templeton
Founder and Former Chairman
[He is no longer affiliated with the Templeton
organization.]
Mutual Series
“We care about what companies would be worth if they were put up for auction and
sold. And we want to buy it for 60% of that.”
~ Michael Price
[Chairman of the board of Franklin Mutual Series
Fund.]
Conclusion
64

65. MUTUAL FUNDS
Mutual fund is in existence since 1964 but as the awareness increased the
demand also increased simultaneously. It is increasing by 10times in a span
of 5years (1987-1993).at rapid increase the future prospects of mutual fund
is tremendously huge. From Survey Report it is concluded that 98% of the
people are aware about Mutual Fund. And in our busy life’s we don’t have
time to manage & take care of our portfolio. Mutual Funds are seen to be in
boom & demand is not expected to decrease. As our money is safe as our
funds are distributed in different sectors.
BIBLIOGRAPHY
65

66. MUTUAL FUNDS
 BOOKS REFERRED
o AMFI Mutual Fund Test – Workbook.
 MAGAZINES
O OUTLOOK MONEY
O INVESTIME (VOL8)
 NEWSPAPERS
O ECONOMICS TIMES
O TIMES OF INDIA
o Pamphlets and newsletters from Franklin Templeton.
 OTHERS
o Literature from Stock Holding Corporation of India.
o Key Information Memorandum – Templeton Mutual Fund.
o Fact sheet of Templeton Mutual Fund.
 WEB SITES:
o Web site – www.franklintempletonindia.com
o Web site – www.templetonindia.com
o Web site – www.amfiindia.com
o Web site – www.rbi bulletin.com
66

67. MUTUAL FUNDS
67