Seminar on Contemporary IssueA Study On

“Mutual Funds in Indian Scenario”

In The Partial Fulfillment of MBA Degree2007-2009

Rajasthan Technical University, Kota

Submitted By: Submitted To: Rahul kapoor Ms. Kajal Sitlani

Apex Institute of Management& Science, Jaipur

AcknowledgementThe beatitude, bliss and euphoria that accompany successful

completion of any task would not be complete without the

expression of appreciation of simple virtues to the people who

made it possible. So, with reverence, veneration honor I

acknowledge all those whose guidance and encouragement has

made successful in winding up this.

I take this opportunity to thank Ms. Kajal Sitlani for her support

and encouragement which helped me in the completion of this

report.

I extend my gratitude and thankfulness to apex institute of

management & science.

Date: Submitted By:

Place: Jaipur Rahul Kapoor

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PrefaceThe underlying aim of the seminar on contemporary issue as an

integral part of M.B.A programme is to give presentation by the

students on the issue. The topic of my seminar is “Mutual fund in

Indian Scenario” contains complete information about the Mutual

funds. It contains the different types of mutual funds, the

performance earlier, the factors affecting mutual funds, budget

announcement. How much risk involve in funds? It gives

knowledge about in which funds a person should investment to

maximize his wealth.

Rahul Kapoor

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Table of Contents

S. No Contents P. No.

1. What is a Mutual Fund? 52. History of Mutual Funds industry in

India6

3. Concept 104. Organization of A Mutual Fund 125. Advantage of Mutual Funds 136. Types of Mutual Fund 177. Frequently Used Terms 258. Players In India 289. Macroeconomic Factors Affecting

Mutual Fund Industry in India29

10. Important Budget announcements for Mutual Funds

31

11. Mutual funds sector poised for growth 3212. 5 reasons why mutual funds score over

stocks35

13. Bibliography & Webliography 38

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What is a Mutual Fund?

Fund operated by an investment

company that raises money from

shareholders and invests it in stocks,

bonds, options, commodities or money

market.

Mutual funds are pools of money that are managed by an

investment company. They offer investors a variety of goals,

depending on the fund and its investment charter. Some funds, for

example, seek to generate income on a regular basis. Others seek

to preserve an investor's money.

“A pool of money managed by an investment company”

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History of Mutual Funds industry in India

The mutual fund industry in India started in 1963 with the formation

of Unit Trust of India, at the initiative of the Government of India

and Reserve Bank the. The history of mutual funds in India can be

broadly divided into four distinct phases.

First Phase – 1964-87

Unit Trust of India (UTI) was established on 1963 by an Act of

Parliament. It was set up by the Reserve Bank of India and

functioned under the Regulatory and administrative control of the

Reserve Bank of India. In 1978 UTI was de-linked from the RBI

and the Industrial Development Bank of India (IDBI) took over the

regulatory and administrative control in place of RBI. 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.

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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.

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 2003In 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

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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.

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CONCEPT

A Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. The money thus

collected is then invested in capital market instruments such as

shares, debentures and other securities. The income earned

through these investments and the capital appreciation realised

are shared by its unit holders in proportion to the number of units

owned by them. 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:

Mutual Fund Operation Flow Chart

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ORGANISATION OF A MUTUAL FUND

There are many entities involved and the diagram below illustrates

the organizational set up of a mutual fund

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ADVANTAGE OF MUTUAL FUNDS

Professional expertise

Diversification

Low cost of asset management

Liquidity

Ease of process

Well regulated

Convenient Administration

Return Potential

Transparency

Flexibility

Choice of schemes

Tax benefits

Well regulated

Professional expertise: Investing requires skill. It requires a

constant study of the dynamics of the markets and of the various

industries and companies within it. Anybody who has surplus

capital to be parked as investments is an investor, but to be a

successful investor, you need to have someone managing your

money professionally.

Just as people who have money but not have the requisite skills to

run a company (and hence must be content as shareholders) hand

over the running of the operations to a qualified CEO, similarly,

investors who lack investing skills need to find a qualified fund

manager.

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Mutual funds help investors by providing them with a qualified fund

manager. Increasingly, in India, fund managers are acquiring

global certifications like CFA and MBA which help them be at the

cutting edge of the knowledge in the investing world.

Diversification: There is an old saying: Don't put all your eggs in

one basket. There is a mathematical and financial basis to this. If

you invest most of your savings in a single security (typically

happens if you have ESOPs (employees stock options) from your

company, or one investment becomes very large in your portfolio

due to tremendous gains) or a single type of security (like real

estate or equity become disproportionately large due to large gains

in the same), you are exposed to any risk that attaches to those

investments.

In order to reduce this risk, you need to invest in different types of

securities such that they do not move in a similar fashion.

Typically, when equity markets perform, debt markets do not yield

good returns. Note the scenario of low yields on debt securities

over the last three years while equities yielded handsome returns.

Similarly, you need to invest in real estate, or gold, or international

securities for you to provide the best diversification.

If you want to do this on your own, it will take you immense

amounts of money and research to do this. However, if you buy

mutual funds -- and you can buy mutual funds of amounts as low

as Rs 500 a month! -- You can diversify across asset classes at

very low cost. Within the various asset classes also, mutual funds

hold hundreds of different securities (a diversified equity mutual

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fund, for example, would typically have around hundred different

shares).

Low cost of asset management: Since mutual funds collect

money from millions of investors, they achieve economies of scale.

The cost of running a mutual fund is divided between a larger pool

of money and hence mutual funds are able to offer you a lower

cost alternative of managing your funds.

Equity funds in India typically charge you around 2.25% of your

initial money and around 1.5% to 2% of your money invested every

year as charges. Investing in debt funds costs even less. If you

had to invest smaller sums of money on your own, you would have

to invest significantly more for the professional benefits and

diversification.

Liquidity: Mutual funds are typically very liquid investments.

Unless they have a pre-specified lock-in, your money will be

available to you anytime you want. Typically funds take a couple of

days for returning your money to you. Since they are very well

integrated with the banking system, most funds can send money

directly to your banking account.

Ease of process: If you have a bank account and a PAN card,

you are ready to invest in a mutual fund: it is as simple as that!

You need to fill in the application form, attach your PAN (typically

for transactions of greater than Rs. 50,000) and sign your cheque

and you investment in a fund is made.

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In the top 8-10 cities, mutual funds have many distributors and

collection points, which make it easy for them to collect and you to

send your application to.

Well Regulated: India mutual funds are regulated by the

Securities and Exchange Board of India, which helps provide

comfort to the investors. SEBI forces transparency on the mutual

funds, which helps the investor make an informed choice. SEBI requires the mutual funds to disclose their portfolios at least six

monthly, which helps you keep track whether the fund is investing

in line with its objectives or not.

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1. Equity Funds

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.

a. Aggressive Growth Funds - In Aggressive Growth Funds, fund

managers aspire for maximum capital appreciation and invest in

less researched shares of speculative nature.

b. Growth Funds - Growth Funds also invest for capital

appreciation (with time horizon of 3 to 5 years) but they are

different from Aggressive Growth Funds in the sense that they

invest in companies that are expected to outperform the market

in the future

c. Specialty Funds - Specialty Funds have stated criteria for

investments and their portfolio comprises of only those

companies that meet their criteria. Criteria for some specialty

funds could be to invest/not to invest in particular

regions/companies. Specialty funds are concentrated and thus,

are comparatively riskier than diversified funds.. There are

following types of specialty funds:

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i. Sector Funds: Equity funds that invest in a particular

sector/industry of the market are known as Sector Funds.

ii. Foreign Securities Funds: Foreign Securities Equity Funds

have the option to invest in one or more foreign companies.

Foreign securities funds achieve international diversification and

hence they are less risky than sector funds invest in one or

more foreign companies. Foreign securities funds achieve

international diversification and hence they are less risky than

sector funds.

iii. Mid-Cap or Small-Cap Funds: Funds that invest in companies

having lower market capitalization than large capitalization

companies are called Mid-Cap or Small-Cap Funds

iv. Option Income Funds*: While not yet available in India, Option

Income Funds write options on a large fraction of their portfolio.

Proper use of options can help to reduce volatility, which is

otherwise considered as a risky instrument. These funds invest

in big, high dividend yielding companies, and then sell options

against their stock positions, which generate stable income for

investors.

d. Diversified Equity Funds - Except for a small portion of

investment in liquid money market, diversified equity funds

invest mainly in equities without any concentration on a

particular sector(s). These funds are well diversified and reduce

sector-specific or company-specific risk.

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e. Equity Index Funds - Equity Index Funds have the objective to

match the performance of a specific stock market index. The

portfolio of these funds comprises of the same companies that

form the index and is constituted in the same proportion as the

index. Equity index funds that follow broad indices (like S&P

CNX Nifty, Sensex) are less risky than equity index funds that

follow narrow sectoral indices (like BSEBANKEX or CNX Bank

Index etc). Narrow indices are less diversified and therefore, are

more risky.

f. Value Funds - Value Funds invest in those companies that

have sound fundamentals and whose share prices are currently

under-valued.

g. Equity Income or Dividend Yield Funds - The objective of

Equity Income or Dividend Yield Equity Funds is to generate

high recurring income and steady capital appreciation for

investors by investing in those companies which issue high

dividends (such as Power or Utility companies whose share

prices fluctuate comparatively lesser than other companies'

share prices).

2. Money Market Fund

Money market / liquid funds invest in short-term (maturing within

one year) interest bearing debt instruments. These securities are

highly liquid and provide safety of investment, thus making money

market / liquid funds the safest investment option when compared

with other mutual fund types. However, even money market / liquid

funds are exposed to the interest rate risk. The typical investment

options for liquid funds include Treasury Bills (issued by

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governments), Commercial papers (issued by companies) and

Certificates of Deposit (issued by banks).

3. Hybrid funds

As the name suggests, hybrid funds are those funds whose

portfolio includes a blend of equities, debts and money market

securities. Hybrid funds have an equal proportion of debt and

equity in their portfolio. There are following types of hybrid funds in

India:

a. Balanced Funds - The portfolio of balanced funds include

assets like debt securities, convertible securities, and equity

and preference shares held in a relatively equal proportion. The

objectives of balanced funds are to reward investors with a

regular income, minimizing risk.

b. Growth-and-Income Funds - Funds and income funds are

known as Growth-and-Income Funds. These funds invest in

companies having potential for capital appreciation and those

known for issuing high dividends.

c. Asset Allocation Funds - Mutual funds may invest in financial

assets like equity, debt, money market or non-financial

(physical) assets like real estate, commodities etc.. Asset

allocation funds adopt a variable asset allocation strategy that

allows fund managers to switch over from one asset class to

another at any time depending upon their outlook for specific

markets.

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4. Debt / Income Funds

Funds that invest in medium to long-term debt instruments issued

by private companies, banks, financial institutions, governments

and other entities belonging to various sectors (like infrastructure

companies etc.) are known as Debt / Income Funds. Debt funds

are low risk profile funds that seek to generate fixed current

income (and not capital appreciation) to investors. There can be

following types of debt funds:

a. Diversified Debt Funds - Debt funds that invest in all securities

issued by entities belonging to all sectors of the market are

known as diversified debt funds. The best feature of diversified

debt funds is that investments are properly diversified into all

sectors which results in risk reduction.

b. High Yield Debt funds - As we now understand that risk of

default is present in all debt funds, and therefore, debt funds

generally try to minimize the risk of default by investing in

securities issued by only those borrowers who are considered

to be of "investment grade".

c. Assured Return Funds - Although it is not necessary that a

fund will meet its objectives or provide assured returns to

investors, but there can be funds that come with a lock-in period

and offer assurance of annual returns to investors during the

lock-in period. Any shortfall in returns is suffered by the

sponsors or the Asset Management Companies (AMCs). These

funds are generally debt funds and provide investors with a low-

risk investment opportunity.

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d. Fixed Term Plan Series - Fixed Term Plan Series usually are

closed-end schemes having short term maturity period (of less

than one year) that offer a series of plans and issue units to

investors at regular intervals. Unlike closed-end funds, fixed

term plans are not listed on the exchanges. Fixed term plan

series usually invest in debt / income schemes and target short-

term investors. The objective of fixed term plan schemes is to

gratify investors by generating some expected returns in a short

period.

5. Gilt Funds

Also known as Government Securities in India, Gilt Funds invest in

government papers (named dated securities) having medium to

long term maturity period. Issued by the Government of India,

these investments have little credit risk (risk of default) and provide

safety of principal to the investors. However, like all debt funds, gilt

funds too are exposed to interest rate risk. Interest rates and

prices of debt securities are inversely related and any change in

the interest rates results in a change in the NAV of debt/gilt funds

in an opposite direction.

6. Commodity Funds

Those funds that focus on investing in different commodities (like

metals, food grains, crude oil etc.) or commodity companies or

commodity futures contracts are termed as Commodity Funds. A

commodity fund that invests in a single commodity or a group of

commodities is a specialized commodity fund and a commodity

fund that invests in all available commodities is a diversified

commodity fund.

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7. Real Estate Funds

Funds that invest directly in real estate or lend to real estate

developers or invest in shares/securitized assets of housing

finance companies, are known as Specialized Real Estate Funds.

The objective of these funds may be to generate regular income

for investors or capital appreciation.

8. Exchange Traded Funds (ETF)

Exchange Traded Funds provide investors with combined benefits

of a closed-end and an open-end mutual fund. Exchange Traded

Funds follow stock market indices and are traded on stock

exchanges like a single stock at index linked prices. The biggest

advantage offered by these funds is that they offer diversification,

flexibility of holding a single share (tradable at index linked prices)

at the same time. Recently introduced in India, these funds are

quite popular abroad.

9. Fund of Funds

Mutual funds that do not invest in financial or physical assets, but

do invest in other mutual fund schemes offered by different AMCs,

are known as Fund of Funds. Fund of Funds maintain a portfolio

comprising of units of other mutual fund schemes, just like

conventional mutual funds maintain a portfolio comprising of

equity/debt/money market instruments or non financial assets.

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FREQUENTLY USED TERMS

Net Asset Value (NAV) - Net Asset Value is the market

value of the assets of the scheme minus its liabilities. The

per unit NAV is the net asset value of the scheme divided by

the number of units outstanding on the Valuation Date.

Sale Price - Price paid while investing in a scheme. May

include sales load. Also called Offer Price.

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Load - This is the price of buying a unit. Most funds sell units

at a premium to its underlying net asset value, and purchase

them at the net asset value. When the fund company

charges a load when it sells units, it is called entry load.

When it charges a load at the time of buying the units back

from an investor, it is called exit load.

Repurchase Price - Repurchase Price is the price at which

a close-ended scheme repurchases its units. May include

Backend load. Also called Bid Price.

Redemption Price - Redemption Price is the price at which

an open-ended scheme repurchases its units and a close-

ended scheme redeems its units on maturity. Prices here are

NAV related.

Sales Load - Sales Load is the charge collected by a

scheme when it sells its units. Also called Front End Load.

Schemes that do not charge a load are called No Load

Schemes.

Repurchase or 'Back-end' Load - Repurchase or 'Back-

end' Load is a charge collected by a scheme when it buys

back the units from the scheme.

SIP - SIP or Systematic Investment Plan refers to the

practice of investing a constant amount regularly, generally

every month. SIP ensures that the investors' acquisition

costs are approximated to the average NAV, as when the

market will go up more units will be bought and when the

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markets come down fewer units will be bought. However it

does not offer protection from losses.

SWP - This is a mirror image of an SIP only here the investor

withdraws a constant amount regularly. This is again aimed

at getting averaging effect mentioned above.

Dividend versus Growth - Among the investors who

subscribe to a scheme some might want a regular flow of

income while others might prefer their income from the

scheme to grow within the scheme itself. The dividend option

caters to the first kind of investors by offering the investors

divided at regular interval. Each time the dividend is declared

the NAV of the scheme will fall. The growth option is for the

second kind of investors.

Institutional versus Regular - There is a significant

difference between time and cost implications between

servicing one investor who has invested Rs 1 crore and

servicing 1,000 investors who have each invested Rs 10,000

although the AUM is same for both the cases. Thus funds

differentiate between the classes of investors on the above

grounds by offering different options or plans of the same

scheme to different kinds of investors. The institutional plan

being offered to the big investors and regular for the small.

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SOME BIG PLAYERS IN INDIA

ABN AMRO Mutual Fund SBI Mutual FundBenchmark Mutual Fund Standard Chartered Mutual FundBirla Mutual Fund Sundaram Mutual FundBOB Mutual Fund Tata Mutual FundCanbank Mutual Fund Taurus Mutual FundChola Mutual Fund Unit Trust of IndiaDeutsche Mutual Fund UTI Mutual FundDSP Merrill Lynch Mutual FundEscorts Mutual FundFidelity Mutual FundFranklin Templeton InvestmentsHSBC Mutual FundING Vysya Mutual FundJM Financial Mutual FundKotak Mahindra Mutual FundLIC Mutual FundMorgan Stanley Mutual FundPRINCIPAL Mutual FundPrudential ICICI Mutual FundReliance Mutual FundSahara Mutual Fund

Macroeconomic Factors Affecting Mutual Fund Industry in India

The macroeconomic factors are the major determinant of the

growth of an economy. Analyzing the macroeconomic factors gives

an idea of the current economy position and a projection of the

future of the economy based on which we decide the future of a

particular industry. The various macroeconomic factors

responsible for mutual fund industry in India are as follow:

Population

India's population is young, with 54% under the age of 25 and 80%

under 45 and the percentage of working population is rising

rapidly.

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Younger and working age population means –

* Income levels to rise

* Higher savings and consequent flows into equity markets

* Increased household consumption

* Significant increase of labor supply

* Large population and favorable demographics

Movement in Global Markets

If we see the position of BSE Senex as compared to other major

indexes in the world then we find that BSE has been the best

performer. This is the major factor which has contributed to mutual

fund emerging as a great investment vehicle for every category of

investors and made mutual fund one of the most preferable way to

generate return. Mutual fund invest in equity of various companies

for long time and long investment in equities can help investors in

generating good returns If we look the graph then we can say that

equities have the potential to deliver good return if we invest for

long term.

India – Potential 'Services Capital' of the World

With services becoming increasingly tradable, India is well placed

in terms of costs and skill sets and over the past 13 years. From

1991-2005, India's services sector growth has averaged 7.6% year

compared with 5.7% for manufacturing. Figure-3 shows the

composition of GDP from which it is clear that composition of

service and industry sector has increased in GDP over the years

Inflation has always been one of the most important

macroeconomic factor affection the country. It represents the

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general price level of the country Inflation has always lowered the

actual return from bank savings except the year 2002

* Returns on safe fixed income options such as bank deposits

have been moderating.

* Assured' return products are being phased out.

* Inflation and taxes are impacting returns.

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Important Budget announcements for Mutual Funds

STT (Securities Transaction Tax) on MF units at 0.25%

Dividend distribution tax on close ended funds to go

FII limit in MF's to be increased from $ 1m to $ 2m

Investor protection fund to be set up by SEBI

Cap for MFs on reciprocal foreign holding removed

Mutual funds to be allowed to invest $1bn in Overseas

Exchange Traded Funds, ETFs

To remove 10% foreign investment cap for Mutual Funds

Electronic bond trading net extended to mutual funds,

pension, provident funds

Tax withholding for NRI MF investors rationalized

This year’s budget is clearly oriented towards achieving a GDP

growth rate of 8% or above. What is equally commendable is the

emphasis on all three drivers of the economy – services,

manufacturing and agriculture, to achieve this growth target. The

focus on agricultural credit off-take, power and infrastructure all

underscore the broad-based and inclusive nature of economic

growth, encompassing all segments of our society; that is being

envisaged by the Union Government through this budget.

Increasing the gross budgetary support by 20% for planned

expenditure in its eight flagship programmes, announcing a

timeline for initiating work on five mega power projects, and

providing viability gap funding in PPP projects through the

formation of Indian Infrastructure Finance Limited, all augur well for

the economy in the coming year.

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Not only has the budget been successful in meeting its growth

mandate, but also in demonstrating its commitment towards fiscal

responsibility. By reducing the fiscal deficit to 4.1% of GDP for

FY05-06 and projecting a fiscal deficit of 3.8% for FY06-07 the

government has successfully addressed concerns regarding the

state of its financials.

The domestic mutual fund industry has reason to cheer with the

removal of 10% reciprocal shareholding for investments in

overseas instruments and exchange traded funds, as this will help

the industry participate in global growth opportunities. The last 12

months has shown that the Indian mutual Fund industry come of

age and a foray into overseas investment is a logical extension.

Extending tax exemption for dividends declared by close ended

funds is also a positive.

Mutual funds sector poised for growth

THE Indian mutual funds business is expected to grow significantly

in the coming years due to a high degree of transparency and

disclosure standards comparable to anywhere in the world, though

there are many challenges that need to be addressed to increase

net mobilization of funds in the sector.

Strengthening of the regulatory framework in India, there is greater

transparency and credibility in the functioning of Indian mutual

funds. "We have 34 mutual funds now offering close to 380

different types of schemes, which are as diversified and up to date

as in any other part of the world. There is complete transparency

of operations and effective communication with investors today,

the fee structure has also come down from the maximum allowed

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recently thanks to the strong competition and this is also benefiting

the investor.

As a result, gross mobilization of funds in the sector between April

and September this year was over Rs 1 lakh crore, he said. Gross

mobilization was growing at a rate of 50 to 60 per cent on a year-

on-year basis, but net mobilization was not increasing at a

satisfactory pace.

One of the main reasons was that the inflow in equities was poor,

mainly due to the depressed situation in the Indian securities

market since the peak in February 2000.

"There has been a drop in equity investments by 45 to 50 per cent

since early 2000. This is a world phenomenon as people are

keeping away from equities everywhere."

One of big challenges for the mutual fund industry in the near

future was to mount an educational campaign to bring investors

into equity funds. Another area that requires to be addressed

seriously is to spread to the semi-urban areas of India as mutual

funds are currently confined to some of India's major cities. "There

are now emerging pockets of high net worth investors in other

urban and semi-urban areas and mutual funds have to create

awareness in these areas.

"NRIs can diversify from bank deposits to mutual funds, particularly

bond and gilt funds, so that they can benefit from market related

returns without directly entering the stock market of they do not

have the time or expertise," he said. UTI's mutual fund schemes

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have had a good response in the Gulf and Barjeel Securities has

also tied with reputed mutual funds in the Indian market.

The Indian securities market had bottomed out, he said and the

coming year could only show an upswing.

The fundamentally sound situation that the Indian economy was

experiencing boded well for the near future he said, though

tackling investor sentiment was the main task at hand, as it had

been severely dented by developments, particularly the delays

associated with disinvestment of some public sector companies.

5 reasons why mutual funds score over stocks

The way investors are taking to mutual fund 'new fund offers,' one

would think mutual funds were going out of style. This probably

leads a lot of risk-taking individuals into believing that mutual funds

are a great way to invest else so many investors would not be

putting their hard-earned money in them.

To be sure, mutual funds are a great way to invest in equities, but

there are some reasons for the same, more fundamental than just

soaring investor interest.

For retail investors, who have money, but don't have time and

expertise, mutual funds are perhaps the only way to invest in stock

markets. Also the mutual fund route is certainly a lot more 'surer'

and less riskier than investing directly in stocks.

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1. Power of knowledge

When you don't have it, outsource it -- that is a mantra a lot of

corporate are chanting. There is no reason why investors should

not do the same. Investing in equities requires a fair understanding

of global and domestic economics, interest rates, political events,

stock market among a host of other factors.

If you don't have a view on these factors, then you must find

someone who has one. That's where mutual funds come in.

2. Diversification

A lot of investors take to stocks because they find them very

exciting. During a rally, stocks move up a lot faster than mutual

funds. They clock blistering growth and set the cash registers

ringing, so to speak. Mutual funds on the other hand are steady

and therefore perceived as boring.

The point investors miss out on is that mutual funds work towards

risk mitigation before they work towards clocking growth. By

diversifying across a number of stocks and sectors, investors lower

the risk during a market downturn that usually follows a blistering

market rally.

3. Solid structure

Mutual funds have a solid 3-tier structure in place that works in the

investor's interest. The promoter/sponsor sets up a mutual fund,

but does not exercise direct control over it.

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For this, it sets up a board of trustees. The trustees in turn set up

an asset management company (AMC). The latter looks after the

day-to-day administration, sales, marketing and fund management.

This way there is very little link between the sponsor/promoter and

the mutual fund schemes. This ensures that mutual fund schemes

are managed professionally without any 'interference'.

On the other hand, Indian companies still have some way to go

before they can be managed as professionally as mutual funds.

The promoter's 'involvement' is considered normal and any

negative news at the promoter's level often percolates down to the

stock.

4. Offering solutions

How many times have we heard this before - mutual funds are

very flexible? There is a reason for that. Today mutual funds have

evolved at a level that gives investors solutions for retirement

planning, planning for child's education/marriage, even buying a

house to outline a few goals.

There are mutual funds tailor-made to help investors achieve these

financial goals.

With stocks it's a little different. Stocks do not offer solutions apart

from a very broad solution of providing capital appreciation. You

can't provide for retirement or for a child's education through

stocks, rather you must build a customised portfolio of stocks and

debt and actively manage it to help you meet a financial goal. That

is exactly what mutual funds do.

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5. Tax neutral

You might say that even in the mind of the finance minister, there

is no difference between stocks and equity-oriented funds, at least

not where tax benefits are concerned. Long-term capital gains on

both stocks and equity-oriented funds are tax-free. Likewise, short-

term gains on both are taxed at 10% plus surcharge and education

cess.

Also dividends from both are tax-free in the hands of investors. So

investors do not stand to lose out on any tax benefit by investing in

equity funds vis-à-vis stocks.

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Bibliography

News paper “Times of India” & “Hindustan Times”.

Webliography

www.reliancemutual.com

www.livemint.com

www.amfiindia.com

www.sbimf.com

www.moneycontrol.com

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